Nuclear Revival in Japan, South Korea Blurs LNG Outlook

Japan and South Korea have reversed their policies to reduce nuclear power as they prioritize energy security and 2050 net-zero goals, potentially hitting LNG demand in the long term. However, the lasting effects on LNG demand are still uncertain due to a number of challenges, including plans to wean off coal and potential delays to the nuclear revival plans.

In December, Japan’s Prime Minister Fumio Kishida approved a green policy draft which could allow existing nuclear reactors to operate for more than 60 years. It also includes plans to build new reactors to replace those that were decommissioned. The return to a pro-nuclear policy took the public by surprise as Japanese politicians have refrained from supporting nuclear power since the catastrophic 2011 Fukushima earthquake. So far, the policy U-turn has had little pushback, possibly due to a perception that the nuclear revival will lower energy bills and help meet the country's net-zero goals. Japan currently has nine operational reactors in line with the government’s request to meet winter demand.

In South Korea, President Yoon Suk-yeol wants to meet 30% of the country’s energy with nuclear by 2030 by extending the lifetime of existing reactors, resuming construction work on suspended reactors and building four new reactors.

LNG Still Key in the Medium Term

Analysts are cautious about how the policy shifts could affect long-term LNG demand in the region, but agree that LNG would continue to play an important role. Consultancy Wood Mackenzie still sees a critical role for LNG alongside nuclear in the energy transition. “In the midterm especially, LNG offers a source of flexible, dispatchable power for grid security and will help facilitate acceleration of coal retirements,” Woodmac’s Asia Gas and LNG Research Director Lucy Cullen says. Last year, the Japanese government announced a program to invite private firms to build 6 gigawatts of new LNG-fired power capacity by 2030, underpinned by government support. “We see this as a practical step in safeguarding national energy security while facilitating the country’s longer-term energy transition,” Cullen says.

South Korea is heard to have delayed the release of the country’s next 10th long-term electricity plan, which includes an updated supply-demand balance, from end-2022 to early 2023. A draft of the plan left the share of gas almost unchanged at around 20% out to 2030, Cullen says. Seoul pegged LNG’s share at 19.5% by 2030, down from 26.8% in 2018, after it set a tougher target to reduce emissions by 40% by 2030 ahead of the COP26 meeting in Glasgow last year.

South Korea’s LNG demand trajectory is expected to be a little different from previous forecasts due to coal retirements, coal-to-gas plant conversions and delayed nuclear decommissioning, according to Ian Nathan, gas and LNG research director with Energy Intelligence’s Research & Advisory (R&A) unit. Last week, South Korea permanently shut its two oldest coal-fired power plants, which will be replaced by new LNG-fired units, as part of a plan to retire 24 aging coal-fired power plants by 2034 and phase out coal for power generation by 2050. R&A forecasts South Korean LNG demand slipping from 47 million tons last year to 46.5 million tons in 2025 and rising to 48.3 million tons in 2030, 53.1 million tons in 2035 and 54.5 million tons in 2040.

R&A forecast Japan's LNG demand slowly declining from 73.2 million tons last year to 68.4 million tons in 2025, 67.5 million tons in 2030 and 66.6 million tons in 2035. Unlike South Korea, Japan has not committed itself to exit coal completely, instead pledging to reduce coal use as much as possible and looking at co-firing ammonia in existing coal-power plants.

Analysts at consultancy Rystad Energy similarly see LNG demand in Japan declining and marginally increasing in South Korea over time. They also point out nuclear power has historically been rife with substantial schedule delays and cost overruns. "It is difficult to see how this ‘nuclear renaissance’ will be much different given the structurally tight labor market and potential shortages in nuclear power expertise," Rystad analyst Kaushal Ramesh says. Renewables will continue to remain intermittent until storage technology is scaled up substantially, which could take another 10 years. So any shortfall from nuclear power will have to be made up by LNG in both countries to ensure energy security, he says. Korea’s nuclear revival appears to be aimed at displacing renewables, which could lead to a tweaking of renewable targets, he adds. There could be a risk of lower LNG demand if emissions targets are tightened further, but given that operational coal-fired power capacity remains at 39 GW last year, any LNG demand reductions would be marginal, he notes.

Uncertainty for LNG Procurement

The policy shift also brings more long-term demand uncertainty for Japanese and Korean buyers that have been conspicuously absent from the LNG contracting market since the start of Russia’s war in Ukraine last year. Jera and traders Itochu and Mitsui signed binding term sheets in December with Oman LNG for a combined 2.35 million tons/yr.

Japanese and Korean buyers are expected to return to the market this year as the expiry of several major legacy supply contracts has raised concerns over energy security. A source with a Japanese firm says buyers need greater offtake flexibility to deal with demand uncertainties. The suppliers in the best position to offer such flexible conditions are legacy producers such as Oman, Abu Dhabi and Malaysia, which have repaid their debt obligations. Buyers could also aggregate LNG demand with other buyers, he added.

The terms of Japan’s deal with Oman are on an f.o.b. basis over five or 10 years from 2025. A source with a seller says that Oman is in a unique position as it can offer only f.o.b. oil-indexed supplies up to 10 years, which match the requirement of some traditional buyers despite a higher asking price. Oman LNG is heard to have sought oil slopes of at least 13%.

In South Korea, a greater number of power generators have been directly importing LNG, diminishing the need for state-owned Korea Gas to sign new deals, after it used to hold the import monopoly for the country’s power and city-gas sectors. Korean buyers are “cherry-picking” purchases and are cautious to buy in a seller’s market, which is why they might take longer to commit to new deals, a source says. “It may take some time for Korean buyers to feel comfortable to admit there is a structural change in the market,” he adds. Kogas, which has recently appointed a new chief executive with little experience in the energy sector, may wait for the release of the government’s 10th electricity plan and the 15th long-term natural gas plan in the first half of the year before making new LNG commitments.