Dynamics of LNG & Power Market in Korea

April. 2015

1

I. Gas and Power Market Structure

City Gas

Power Plant

LNG Downstream

LNG Direct Importer (SK, Posco, GS)

LNG Seller

LNG Wholesaler

LNG Market Structure

“Limited to internal captive use only”

(as of 2014)

Korea started importing LNG from 1983 through the establishment of KOGAS, sole wholesaler, importer, and LNG infra operator until Korean government’s deregulation policy was introduced in 1999.

18.2Mtpa (49.9%)

17.0Mtpa (46.6%)

1.3 Mtpa (3.5%)

1

2

3

2

City Gas Market

Highly matured, hence sluggish growth

0

5

10

15

20

25

88 90 92 94 96 98 00 02 04 06 08 10 12 14

Sales volume in city gas

(millions of tons)

CAGR : 35.5%

CAGR : 4.4%

• Regional monopoly

• Sluggish demand growth due to high penetration

• Natural gas only sourced by wholesaler

• Regulated tariff system

Source : Korea City Gas Association

SK E&S 21.5%

Samchuly 15.8%

Kyung Dong 12.5% Seoul

8.5%

Others 42.2%

City gas market share (as of 2014)

1

3

LNG

COAL

0h

24h

NUCLEAR

Power demand

18h

12h

6h

Dispatch order based on cost

• Operates on a cost based market

mechanism, not PPA • KPX plays a key role as a system

operator

• Only at peak demand, the LNG players can be called in

• Only the top players with competitive fuel price would stand the chance to be turned on

Generation ON/OFF is determined daily by KPX (Korea Power Exchange), based on the variable cost (i.e. fuel)

Power Market - Cost Based Merchant Market

($/MWh)

2

4

Power Market - Demand & Supply

Acceleration of power generation capacity

01 03 05 07 09 11 13 15 17 19

New Capacity of power plant (unit : GW)

• 43GW of new capacity (2013 ~ 2019)

• LNG plant accounts for 36% of total capacity

While power demand growth is slowing down, significant new generation capacity will be introduced in the foreseeable future

Source : Ministry of Commerce, Industry & Energy “the 6th Power Supply & Demand Plan” (Feb. 2013)

Deceleration of power demand growth rate

6.5%

4.9% 5.7%

4.5%

2.4%

10.1%

4.7%

2.5% 1.6%

0.6%

05 06 07 08 09 10 11 12 13 14

Growth rate of power demand

• 2.2% of growth rate forecasted for next 15 years

• Slowing economy and maturing power market

Avg. 6%

Others

LNG

Coal

Nuclear

4.6

8.1

5.8

10.1

5.5

4.0 4.9

2

5

2014 2021

Power reserve rate 7.6% 32%

Utilization ratio of LNG power plants 53% 30%

LNG volume consumed by power plants

18mtpa 8mtpa

Power Reserve Rate

3% 7%

16%

21%

29% 33% 32%

2012 2013 2014 2015 2017 2019 2021

77

51

22 5

54

27 5

57

33 4

60

37 4

70

40 4

81

40 4

85

40 4

80 81 83 88 94 98

Max. Demand Nuclear, Coal, Renewable CHP + LNG Oil

Power Market - Impact to LNG Power Plant

With the influx of new capacity, especially the low cost nuclear and coal, LNG powered generation could be less operational

Source : Ministry of Commerce, Industry & Energy “the 6th Power Supply & Demand Plan” (2013), Major Electric Power Statistics (2013), Report for Power System 2014 (KPX)

Power demand by fuel source

2

6

New entrants in Korean LNG Market

LNG direct importers, newly entered the market by the deregulation, are facing several challenges

1999 • Government announced the gas industry reform for deregulating LNG import business

2006 • First direct LNG import by private company, SK E&S, Posco

2014 • Companies importing LNG directly

2020 (E) • Companies securing LNG

Historical changes Challenges to LNG direct importers

Securing own receiving terminal capacity

Disposal of excess LNG volume

Uncertainty of power market

Source : LNG Japan Corporation, GIIGNL, MOTIE

3

7

II. SK E&S LNG Business

E&P • Conventional

(Australia offshore) • Unconventional

(US Shale Gas)

Liquefaction • Freeport LNG Tolling

Agreement (2.2 Mtpa)

Terminal • Boryeong LNG Terminal • US Freeport

• Australia

Shipping

Power Plant • LNG Power • CHP

Retail • City Gas: 4 Mtpa LNG

to 3.3 million households

Upstream

Midstream

Downstream

3rd Party SPA • Indonesia Tangguh • Chevron Portfolio

SK E&S is building LNG value chain to enhance competitiveness for its downstream business

8

III. Expectation to LNG Market

Korean Buyer’s preference has shifted… “Security” → “Economics”

Call for flexibility on LNG pricing scheme LNG Price

Destination

Volume

Global trend to relax and abolish destination clauses in LNG contract

“Relaxation of destination clauses” was agreed by G7 and APEC

Need more flexibility on contracted volume in order to resolve excess volume and cope with power market uncertainty

Thank You