South Korea has reacted to the war-driven energy crisis by accelerating its push to build new liquefied natural gas (LNG) import terminals and storage facilities despite having some of the lowest utilization rates for its existing LNG terminals.
The rapid growth of proposed LNG infrastructure presents a high risk of overinvestment and overcapacity amid the country’s transition to net-zero carbon.
Many of the 11 planned terminal projects are located close to one another, suggesting an inefficient allocation of assets that may further hinder usage rates.
IEEFA suggests aligning the build-out with LNG demand based on Nationally Determined Contribution targets, boosting public-private efforts for efficient use of LNG receiving terminals, and avoiding the promotion of technologies and services that would prolong LNG use without aiding national climate goals.
Following the start of Russia’s invasion of Ukraine in February 2022, Asian countries found themselves in direct competition with European buyers for limited global supplies of liquefied natural gas (LNG). Prices of the fuel skyrocketed, and energy security became an urgent priority for countries around the region.
South Korea has responded to the crisis by accelerating its push to build new LNG import terminals and storage facilities, aiming to bolster its ability to manage supply and demand in a highly volatile, post-invasion LNG environment.
The rapid growth of proposed LNG import terminals by both state-owned firms and the private sector presents a high risk of overinvestment.
However, the Institute for Energy Economics and Financial Analysis (IEEFA) finds that the rapid growth of proposed LNG import terminals by both state-owned firms and the private sector presents a high risk of overinvestment. Government climate targets envision a nearly 20% reduction in long-term natural gas demand, and LNG markets are expected to remain extremely volatile for the remainder of the decade. Already, the country has some of the lowest utilization rates for its existing LNG terminals compared with other major LNG importing economies.
Moreover, many of the country’s newly proposed LNG investments are located close to one another, suggesting an inefficient allocation of assets that could further hinder usage rates. Expanding the use of LNG in new applications, such as blue hydrogen production, bunkering and hydrogen-LNG blend power plants, offers limited potential for addressing climate targets effectively.
IEEFA estimates that South Korea’s new LNG receiving terminals could cost about ₩11.3 trillion (US$8.7 billion). Overall, incumbents and new entrants in the country’s LNG market aim to complete 11 LNG terminal projects by 2031, many of which are either under construction or at earlier stages of development. These terminals account for roughly 37 million tonnes per annum (MTPA) of regasification capacity, which, if built, would increase national capacity to 190 MTPA, up from 153 MTPA currently.
South Korean companies have also proposed 3.4 million tonnes (MT) of new LNG storage capacity, which would represent a 53% increase in the country’s current capacity of 6.3 MT to nearly 10 MT. However, existing storage facilities are already sufficient to meet the government’s nine-day LNG storage target for the peak demand season in winter.
IEEFA’s analysis shows a growing mismatch between LNG import infrastructure and demand targeted in the country’s net-zero goal, given the South Korean government’s climate targets have projected that the share of LNG-fired power generation will fall to 9.3% by 2036, down from 26.8% in 2018. Through 2036, the government expects natural gas demand to record 37.66 MTPA, a 17% decrease from 45.4 MTPA in 2022.
The current report assesses the reasons behind the overinvestment in LNG import infrastructure. South Korean companies’ race to build new LNG infrastructure largely stems from: a perceived need to boost energy security in the wake of the Russian invasion of Ukraine; growing competition in the domestic gas market; and the development of new LNG applications, including blue hydrogen, bunkering services, and hydrogen blending in power generation.
This report also outlines major issues exacerbating overinvestment risks in the country’s LNG sector, including: declining natural gas demand amid the country’s transition to net zero; inefficient asset allocation and stranded asset risks in key areas; volatile LNG market outlooks; and the limited role for new LNG applications in the country’s climate-aligned pathways.
Further, IEEFA is presenting the following recommendations for the South Korean government and companies to mitigate the overinvestment risks in the country’s LNG import sector: