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South Korea's oil demand forecast to grow 2.2% in 2017: KEEI

Seoul (Platts)--20 Mar 2017 648 am EDT/1048 GMT


South Korea's oil products demand is forecast to grow 2.2% this year, slowing from a 7.6% expansion last year because of a rebound in retail prices and economic slowdown, the country's state-run think tank Korea Energy Economics Institute said in a recent report.

The country consumed 921.5 million barrels, or an average of 2.52 million b/d, of refined products last year, up 7.6% from 856.3 million barrels in 2015, according to data from state-run Korea National Oil Corp.

The 7.6% growth was the biggest since 1997 when oil demand jumped 10.1% as it consumed 793.9 million barrels driven by a then-booming economy. The volume of 921.5 million barrels in 2016 was the biggest annual oil consumption in South Korea.

"The sharp growth in oil demand in 2016 was driven by low retail prices and expanded petrochemical production capacity, but oil demand growth is forecast to slow to 2.2% this year due largely to rebounding prices," said KEEI, which falls under the purview of the Ministry of Trade, Industry and Energy.

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"The slowing growth in 2017 is largely attributable to sluggish demand for transportation fuels due to higher retail prices and weaker air traffic because of fewer Chinese tourists," KEEI said in its Energy Demand Forecast.

In the forecast, the institute said the country's gasoil demand is expected to edge up 0.9% to 168.1 million barrels in 2017, from 166.6 million barrels last year, which was up 6.5% from 156.4 million barrels in 2015.

The country is forecast to consume 80 million barrels of gasoline this year, up 1.4% from 78.9 million barrels in 2016, which was up 3% from 76.6 million barrels in 2015, according to the KEEI report.

South Korea's jet fuel demand is expected to increase 2.2% to 37.8 million barrels in 2017, compared with 37 million barrels in 2016, which was up 7.6% from 34.4 million barrels in 2015.

Naphtha demand is forecast at 439.3 million barrels in 2017, up 2.9% from 426.9 million barrels in 2016.

"Demand of fuel oil and LPG is also forecast to slow this year due to restructuring of [the] shipping industry and fewer LPG-powered vehicles," the KEEI report said.

LPG demand is forecast to edge down 0.6% to 108.9 million barrels in 2017, from 109.6 million barrels in 2016, while fuel oil demand is expected to inch up 2.2% to 46 million barrels in 2017 compared with 45 million barrels in 2016.

Kerosene demand is forecast to slip 5.2% to 18.1 million barrels from 19.1 million barrels in 2016.


LNG DEMAND TO FALL 12%


The think tank also forecast the country's LNG consumption to fall 12.2% year on year to 30.1 million mt this year from 34.3 million mt last year, because of weak demand for gas-fired power generation, compared with a 4% growth in 2016.

The country's LNG demand that had sharply increased since 2010 had declined in 2014 and 2015. But demand rebounded last year, driven by the shutdown of some nuclear power reactors following a major earthquake in September.

However, LNG demand is expected to slip again this year as new coal-fired power plants and nuclear reactors come online, KEEI said.

"In particular, LNG demand for power production is forecast to drop as much as 20% in the second half of 2017 as some coal-fired power plants and nuclear reactors would be connected to [the] power grid," it said.

The country's biggest nuclear reactor Shin (New) Kori-3 with a capacity of 1,400 MW started commercial operations in December, after nine years of construction, according to state-owned nuclear power operator Korea Hydro & Nuclear Power, or KHNP. Shin Kori-3 is the 25th nuclear reactor operating in South Korea.

Shin Kori-4, with a generating capacity of 1,400 MW, which is currently under construction at the Kori nuclear power plant, is scheduled to start commercial production in late 2017.

KHNP is also building another pair of 1,400-MW reactors, Shin Hanul-1 and 2, on the east coast. Shin Hanul-1 and 2 are scheduled to start commercial operations in April 2018 and in February 2019, respectively, which would further sap LNG demand for power generation.

A mammoth coal-fired power plant with 1,022 MW capacity has started commercial production in December, according to Korea Southern Power, or Kospo, that is run by state-run electricity monopoly Korea Electric Power Corporation, or Kepco.

Coal-fired power plants account for about 35% of the country's total electricity generation and nuclear units supply around 32%, followed by LNG at 19%; oil at 10%; and renewable sources, such as hydropower, solar, wind and fuel cells, at 4%.

Under South Korea's power trading formula, nuclear reactors and coal-fired power plants provide electricity as baseload generators to minimize power production costs. Only if power demand grows, power plants using more expensive fuel of natural gas increase run rates to meet peak hour demand.

Operating rates at natural gas-fired power plants have decreased to less than 40% since the second half of 2014, from 60% over 2012-2013, due to increased capacity of coal-fired and nuclear power plants and economic slowdown.

"Despite the sharp increase in power generation capacity by coal-fired plants and nuclear reactors, the country's power demand growth would be sluggish -- growing less than 2% -- which would drastically decrease LNG demand for power production," the KEEI report said.

LNG demand for households and businesses is also expected to remain weak, expanding just 1% in 2017 as prices are climbing in line with higher crude oil, the report said. South Korea has steadily increased retail natural gas prices for households and industry since late last year to reflect higher LNG import costs.

The KEEI report also said South Korea's reliance on oil and LNG in its total energy mix would decrease whereas coal and nuclear is expected to climb.

The country's total energy demand is forecast to grow 2.2% to 299.4 million mt of oil equivalent in 2017 largely on the back of strong coal demand for electricity generation, it said.

--Charles Lee, newsdesk@spglobal.com
--Edited by Irene Tang, irene.tang@spglobal.com

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