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. Last Updated: 07/27/2016

Seoul Wary of Signing Gas Deals

SEOUL, South Korea -- South Korea, wary of Russia's unfulfilled promises on piped natural gas, will keep signing new liquefied natural gas deals with other suppliers until Seoul is convinced that a pipeline from the north will be built.

South Korea, the world's second-biggest buyer of LNG, must renew contracts for up to 11 million tons of LNG in the next five years, about half its current imports, but may take fewer cargoes if it gets cheaper Russian pipeline gas.

Last month's initial deal between Gazprom and China National Petroleum Corp. to build two pipelines that will eventually supply 60 billion to 80 billion cubic meters of gas per year to China -- some of which could be shipped to South Korea -- cheered energy planners in Seoul.

But after three years of a stalemate on plans to open up the huge Kovykta gas field, South Korea, which depends on imported LNG for almost 13 percent of its energy needs, is unwilling to hinge its energy security on a Russian vow.

Seoul's concerns over being too dependent on the world's most gas-rich nation deepened this winter after the pricing dispute between Russia and Ukraine hit supplies to Europe.

"The South Korean government had discouraged KOGAS from signing long-term LNG import contracts when they thought Kovykta gas was near to being operational," said a Tokyo-based gas analyst who declined to be named. Korea Gas Corp., or KOGAS, is the state natural gas buyer."But now they are saying it's OK to sign the LNG deals."

South Korea has worked with oil firm TNK-BP and CNPC to carry out the Irkutsk pipeline natural gas project, which involves development of TNK-BP's Kovykta field in Eastern Siberia.

Under a preliminary plan, South Korea would receive the equivalent of 7 million tons per year of LNG, about 31 percent of last year's total imports of the supercooled, compressed gas transported in tankers.

A source familiar with the plan said it envisaged 38 bcm going via the eastern route and 30 bcm via the western, with Korean demand taking another 10 bcm in the east as soon as 2011.

China can afford to wait for the Russian supplies to materialize, as it has potentially huge untapped demand to absorb the extra gas if it comes, and vast domestic coal resources to rely on if it falters. South Korea has no such luxuries and the crunch time is looming.

Given the typical five-year lead time required to secure long-term LNG contracts, KOGAS must decide soon if it hopes to secure any new supplies before 2012. "South Korean gas demand is increasing fast, so if they just keep waiting for pipeline gas and if they do not sign new LNG contracts, they will lose LNG supplies to other countries," said the analyst.South Korea has long-term contracts with suppliers such as Qatar, Malaysia and Indonesia due to end within two years.

Securing Russian gas would allow Seoul to diversify away from the Middle East, which supplies about 80 percent of Korea's oil and a growing share of its LNG.

But the question of price may remain a sticking point that could mean the first whiff of Russian gas is further off the 2011 target envisioned in the China deal.

"The deal did not include the price of Russian gas supply,which is the most critical part of the project, so I think there will be a setback in realizing this deal," said Doh Hyun-jae at Korea Energy Economics Institute. He said South Korea would continue to renew or sign new LNG contracts as long as uncertainties over Russian gas remained.

The cuts in Russian gas exports in the wake of its pricing dispute with Ukraine forced South Korea and Japan, the world's two largest LNG buyers, to vie for LNG with European users suffering from a drop in heating fuel supply during the peak winter season.

South Korea is still likely to rely on LNG to meet the 5 percent average annual rise in gas demand expected until 2020, even if it means repeating this winter's experience of paying record-high prices of around $20 per million British thermal units for spot cargoes.

"Russia has used gas as a political weapon to put pressure on other members of the former Soviet Union," an official at South Korea's Energy Ministry said in an interview. "We have to prepare for such a case."