Korea Energy Demand Outlook

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KEEI

Korea Energy Demand Outlook

KoreaEnergyDemandOutlook

December 2011

December2011

Korea Energy Economic Institute

132 Naesonsunhwan-ro, Uiwang-si, Gyeonggi-do Phone: (031)420-2114

Fax: (031)422-4958

E-mail : webmaster@keei.re.kr Hompage : http://www.keei.re.kr

KoreaEnergyEconomicInstitute

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December 2011

KEEI

Korea Energy Demand Outlook

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·In charge of overall research Choi, Do-young(dychoi@keei.re.kr)

·Oil/International oil market Kim, Soo-il(sikim@keei.re.kr)

·Electricity/Transformation Choi, Do-young(dychoi@keei.re.kr)

·Coal/International coal market Kim, Tae-heon(thkim@keei.re.kr)

·Town gas/Thermal energy Lee, Sang-youl(akan539@keei.re.kr)

·International LNG market Lee, Bo-hye(10213@keei.re.kr)

·Material/Research support Hwang, In-wook(10242@keei.re.kr)

·Statistical support Chung, Chang-bong(cbchung@keei.re.kr) Phone: +82-31-420-2148, +82-31-420-2234

Fax: +82-31-420-2164

KEEIKorea Energy Demand Outlook

The 「KEEI Korea Energy Demand Outlook」is a report that analyzes trends in the international energy market and energy supply/demand trends in Korea, and makes short-term forecasts on energy demand.

This report quickly identifies recent changes in energy supply and demand, thus providing various energy supply/demand forecast indexes and information for government policies. It is intended to contribute to government efforts in setting and adjusting an overall policy direction regarding energy supply and demand.

This report was written and edited by the Energy Demand and Supply Forecast Team under the Center for Energy Information and Statistics of KEEI.

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Summary ……… 7

Ⅰ. International Energy Market Trends……… 33

1. Trends in the international oil market and oil exports/imports……… 35

2. Trends in the international natural gas market ……… 38

3. Trends in the international coal market……… 41

Ⅱ. Economic and Energy Consumption Trends in Korea ……… 45

1. Economic trends in Korea ……… 47

2. Trends in primary energy consumption ……… 51

3. Trends in final energy consumption ……… 58

4. Consumption trends of petroleum product ……… 68

5. Trends in electricity consumption ……… 75

6. Trends in LNG and town gas consumption……… 82

7. Trends in coal and other energy consumption ……… 88

Ⅲ. Energy Demand Outlook for 2012……… 93

1. Outlook on the international energy market……… 95

2. Domestic economic outlook and outlook assumptions ……… 103

3. Outlook on primary energy demand ……… 110

4. Outlook on final energy demand ……… 116

5. Outlook on petroleum product demand……… 122

6. Outlook on electricity demand ……… 125

7. Outlook on LNG and town gas demand ……… 130

8. Outlook on coal and other energy demand ……… 134

9. Characteristics and implications ……… 139

Reference ……… 150

Appendix ……… 151

Table of Contents for Titles

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<Table Ⅰ-1> International crude oil prices ………35

<Table Ⅰ-2> Consumer prices of petroleum products in Korea ………36

<Table Ⅰ-3> Trends in international natural gas supply and demand ………39

<Table Ⅰ-4> Trends in international natural gas prices ………40

<Table Ⅰ-5> Trends in global coal consumption ………42

<Table Ⅰ-6> Trends in global coal production ………44

<Table Ⅱ-1> Recent economic trends ………48

<Table Ⅱ-2> Composite index………50

<Table Ⅱ-3> Primary energy consumption trends ………53

<Table Ⅱ-4> Level of contribution of each factor that led to a rise in primary energy consumption from January through September 2011 ………56

<Table Ⅱ-5> Trends in final energy consumption………59

<Table Ⅱ-6> Level of contribution of each factor that triggers a change in energy consumption in the manufacturing industry from January through September 2011 ………62

<Table Ⅱ-7> Consumption trends of petroleum products by sector ………69

<Table Ⅱ-8> Consumption trends of key petroleum products ………70

<Table Ⅱ-9> Trends in electricity consumption………75

<Table Ⅱ-10> Electricity supply and demand in the summer ………81

<Table Ⅱ-11> Trends in LNG consumption ………82

<Table Ⅱ-12> Trends in town gas consumption ………86

<Table Ⅱ-13> Trends in coal consumption ………88

<Table Ⅱ-14> Pig iron production and bituminous coal consumption for steel making …………89

<Table Ⅱ-15> Trends in consumption of thermal energy, new & renewable energy, and other energy ……91

<Table Ⅲ-1> IEA’s global oil consumptions and forecasts ………95

<Table Ⅲ-2> Oil price outlook by major overseas organizations in September ………96

<Table Ⅲ-3> International natural gas consumption and outlook ………97

<Table Ⅲ-4> International natural gas production and outlook ………98

<Table Ⅲ-5> Outlook on international natural gas prices ………99

<Table Ⅲ-6> Outlook on global coal consumption ………101

<Table Ⅲ-7> Outlook on global coal production ………102

<Table Ⅲ-8> Trends in international coal prices and outlook ………102

<Table Ⅲ-9> Economic outlook for 2011 and 2012 ………105

<Table Ⅲ-10> Economic outlook by major organizations in Korea………107

<Table Ⅲ-11> Economic growth rate assumptions ………108

Table of Contents for Tables

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<Table Ⅲ-12> Assumptions on temperature variables ………108

<Table Ⅲ-13> Outlook on primary energy demand ………110

<Table Ⅲ-14> Key indices related to energy consumption ………112

<Table Ⅲ-15> Outlook on final energy demand ………117

<Table Ⅲ-16> Outlook on petroleum product demand by sector ………123

<Table Ⅲ-17> Outlook on demand for key petroleum products………124

<Table Ⅲ-18> Outlook on electricity demand ………125

<Table Ⅲ-19> Trends in GDP elasticity of electricity demand ………127

<Table Ⅲ-20> Outlook on LNG demand………131

<Table Ⅲ-21> Outlook on town gas demand………133

<Table Ⅲ-22> Outlook on coal demand ………134

<Table Ⅲ-23> Outlook on thermal energy, new & renewable energy, and other energy demand …137 <Table Ⅲ-24> Outlook on energy intensity ………142

[Figure Ⅰ-1] Petroleum product import prices and consumer prices ………37

[Figure Ⅰ-2] Trends in international natural gas prices ………40

[Figure Ⅰ-3] International coal price trends………43

[Figure Ⅱ-1] Business cycle clock ………50

[Figure Ⅱ-2] Recent economic and primary energy consumption trends ………52

[Figure Ⅱ-3] Trends in Dubai spot oil price………54

[Figure Ⅱ-4] Level of contribution to increase in primary energy consumption by each factor from January through September 2011 ………56

[Figure Ⅱ-5] Trends in primary energy consumption increase rate ………58

[Figure Ⅱ-6] Final energy consumption by energy source from January through October 2011 …60 [Figure Ⅱ-7] Rate of increase in value-added of each business type under the manufacturing industry from January through September 2011 ………61

[Figure Ⅱ-8] Level of contribution made by each factor that triggers a change in energy consumption in the manufacturing industry from January through September ……63

[Figure Ⅱ-9] Trends in consumer prices of oil for transport………64

[Figure Ⅱ-10] Trends in the rate of final energy consumption increase by sector ………65

[Figure Ⅱ-11] Level of contribution of each energy source to primary energy increase from January through October 2011 ………67

[Figure Ⅱ-12] Increase rate of petroleum product consumption by sector ………69

[Figure Ⅱ-13] Gasoline consumption and increase rate ………71

Table of Contents for Figures

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[Figure Ⅱ-14] Consumption of diesel for transport and increase rate ………71

[Figure Ⅱ-15] Consumption of kerosene and diesel and increase rate………72

[Figure Ⅱ-16] Consumption of heavy oil and increase rate ………72

[Figure Ⅱ-17] Consumption of naphtha and increase rate ………73

[Figure Ⅱ-18] LPG consumption and increase rate ………74

[Figure Ⅱ-19] Recent manufacturing business trends and electricity consumption for industrial use…77 [Figure Ⅱ-20] Rate of increase in industrial activity indexes and electricity consumption for industrial use…78 [Figure Ⅱ-21] Share of manufacturing industry’s electricity consumption taken up by different business types in the first half of 2011 (%) ………79

[Figure Ⅱ-22] Electricity consumption increase rate ………80

[Figure Ⅱ-23] Trends in LNG consumption increase rate per use ………83

[Figure Ⅱ-24] Monthly rate of increase in service industry production index ………84

[Figure Ⅱ-25] Trends in town gas consumption by quarter ………86

[Figure Ⅱ-26] Trends in the number of customers of town gas for industrial use ………87

[Figure Ⅲ-1] Outlook on international natural gas prices ………100

[Figure Ⅲ-2] CDD and HDD and assumptions for outlook ………109

[Figure Ⅲ-3] Forecasts on the economic growth rate and primary energy demand increase rate …111 [Figure Ⅲ-4] Forecasts on energy intensity and per capita consumption ………112

[Figure Ⅲ-5] Share of primary energy demand taken up by each energy source………115

[Figure Ⅲ-6] Share of final energy demand occupied by each sector………118

[Figure Ⅲ-7] Share of final energy demand taken up by each energy source ………121

[Figure Ⅲ-8] Forecasts on level of contribution of each energy source to increase in primary energy 122 [Figure Ⅲ-9] Outlook on economic growth rate and electricity demand increase rate …………126

[Figure Ⅲ-10] Outlook on electricity demand by sector ………128

[Figure Ⅲ-11] Trends in electricity consumption share of each sector and forecasts ………129

[Figure Ⅲ-12] Trends in LNG demand per use and outlook………131

[Figure Ⅲ-13] Trends in town gas demand and outlook by use ………133

[Figure Ⅲ-14] Coal demand trends and forecasts per use ………136

[Figure Ⅲ-15] Thermal energy demand trends and outlook ………137

[Figure Ⅲ-16] Trends and outlook on new & renewable energy and other energy demand ……138

[Figure Ⅲ-17] Level of contribution of each factor towards a rise in primary energy consumption from January through September 2011 ………140

[Figure Ⅲ-18] Level of contribution of each factor towards a change in manufacturing industry consumption from January through September 2011 ………141

[Figure Ⅲ-19] Changes in electricity demand sensitivity for temperatures ………145

[Figure Ⅲ-20] Trends in oil dependence and forecasts ………146

[Figure Ⅲ-21] Level of contribution of each sector to a rise in final energy demand ………149

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From January through October 2011(in terms of the total), primary energy consumption tentatively reached 221.3 million TOE, a year-on-year rise of 3.3%.

From January through October, primary energy consumption indicated a gradual increase in tandem with a slight slowdown in economic growth, despite the record- breaking cold wave (a 5.4℃drop from average year temperatures) in January.

- In the first quarter, the Korean economy recorded a growth rate of 4.2%, which is close to the potential growth rate. However, the economy’s level of growth slowed down to the mid-3% range in the second quarter and onwards.

- Energy consumption for industrial use led a rise in primary energy consumption from January through October as a result of continued favorable conditions in industrial production.

Notes: Values for the fourth quarter of 2011 are forecasts.

Energy consumption trends

Summary

▶

[Recent economic and primary energy consumption trends]

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Despite the simultaneous onset of major factors that trigger a rise in energy consumption in the first quarter of 2011, such as an upswing in the economy and abnormally low temperatures, primary energy consumption rose relatively gradually.

- This is a result of base effects from the high level of increase recorded in the same period of the previous year (11.2%), a soar in international oil prices, and energy-saving policies, including the measure on placing restrictions on heating temperatures in buildings.

Primary energy consumption recorded a year-on-year increase of a mere 0.5% in the second quarter, but posted relatively high growth of 5.3% in the third quarter.

Notes: Values in parentheses refer to the year-on-year growth rate (%); p refers to tentative figures

Category 2010 2011p

1/4 2/4 3/4 4/4 Annual 1/4 2/4 3/4 October January~October

30.7 27.9 30.3 30.5 119.3 30.4 28.8 32.2 11.1 102.5

(22.9) (11.2) (3.8) (4.5) (10.1) (-0.8) (3.1) (6.4) (12.1) (3.8)

23.3 21.7 24.5 24.3 93.8 24.2 22.3 25.8 8.8 81.1

(14.3) (7.0) (3.6) (4.2) (7.0) (3.7) (2.6) (5.6) (11.8) (4.8)

198.8 193.5 191.8 210.3 794.3 205.0 181.5 199.3 66.3 652.1

(-0.2) (0.5) (4.4) (3.5) (2.0) (3.1) (-6.2) (4.0) (0.3) (0.3)

117.6 111.3 108.8 124.7 462.5 116.3 97.7 108.7 36.7 359.3

(0.0) (-1.0) (3.9) (3.1) (1.4) (-1.2) (-12.3) (-0.1) (-5.1) (-4.5)

11.0 6.7 5.7 9.7 33.1 12.2 7.3 6.3 2.5 28.3

(28.8) (45.0) (24.7) (16.0) (26.8) (11.3) (9.1) (10.3) (7.9) (10.2)

1.2 1.6 2.3 1.4 6.5 1.6 1.9 3.4 0.4 7.2

(47.9) (10.5) (-8.0) (55.7) (14.7) (27.2) (21.4) (44.5) (-19.1) (28.5)

36.0 36.5 37.5 38.5 148.6 37.5 38.6 38.2 12.0 126.3

(-1.6) (-2.3) (0.9) (5.4) (0.6) (4.0) (5.8) (1.7) (-4.9) (2.9)

1.5 1.5 1.5 1.5 6.1 1.5 1.5 1.5 0.6 5.1

(14.9) (14.4) (20.1) (-3.3) (10.7) (2.9) (0.8) (-3.9) (18.3) (1.7)

69.5 61.6 61.8 69.7 262.6 72.2 61.9 65.1 22.2 221.3

(11.2) (8.2) (6.2) (6.1) (7.9) (3.8) (0.5) (5.3) (4.2) (3.3)

54.0 46.8 47.1 54.4 202.3 56.4 46.6 49.0 16.8 168.8

(10.4) (8.0) (6.6) (6.6) (7.9) (4.6) (-0.3) (4.0) (2.7) (2.8)

Coal (Million ton) -Excluding coking coal

Oil (Million bbl) -Excluding naphtha

LNG (Million ton)

Hydro (TWh) Nuclear power

(TWh) Other (Million TOE) Primary energy (Million TOE) Primary energy -Excluding

for raw materials

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Level of contribution of each factor that led to an increase in primary energy consumption from January through September 2011¹⁾

The level of contribution of economic growth to a rise in primary energy consumption is estimated at 3.6%p (7.0 million TOE).

- It is assumed that primary energy consumption would have recorded a year-on-year increase of 3.6% from January through September 2011 as a result of economic growth if there were no changes in other factors that trigger a change in consumption.

The temperature effect contributed 0.7%p (1.3 million TOE) to a rise in primary energy consumption.

- It is assumed that energy consumption rose 0.7% from January through September as a result of a drop (1.2℃↓) in the average temperature in the first quarter, including the record-breaking cold wave in 48 years that took place in January 2011.

Energy consumption went down 1.1%p as a result of changes in other factors such as energy efficiency improvements and a rise in oil prices.

Notes: Other effects include all factors that cause changes in consumption, excluding the temperature effect and economic growth effect. Examples are improvements in energy efficiency, changes in industrial structure, and changes in energy prices.

1) GDP is announced by quarter. For this reason, an analysis of the level of contribution made to a rise in consumption is limited to January through September.

Outlook on primary energy demand

Category 2011 2012

1/4p 2/4p 3/4p 4/4e Annual (e) First half of

the year (e) Second half

of the year (e) Annual (e)

30.4 28.8 32.2 31.5 122.9 60.8 64.6 125.4

(-0.8) (3.1) (6.4) (3.3) (3.0) (2.7) (1.4) (2.0)

24.2 22.3 25.8 25.0 97.3 47.4 51.0 98.4

(3.7) (2.6) (5.6) (2.7) (3.7) (2.1) (0.4) (1.2)

205.0 181.5 199.3 211.8 797.7 392.9 410.5 803.5

(3.1) (-6.2) (4.0) (0.7) (0.4) (1.7) (-0.2) (0.7)

116.3 97.7 108.7 122.2 444.8 214.9 225.8 440.7

(-1.2) (-12.3) (-0.1) (-2.1) (-3.8) (0.4) (-2.2) (-0.9)

12.2 7.3 6.3 10.6 36.4 20.2 18.0 38.2

(11.3) (9.1) (10.3) (9.4) (10.1) (3.4) (6.7) (5.0)

1.6 1.9 3.4 1.4 8.2 3.6 4.6 8.2

(27.2) (21.4) (44.5) (3.2) (27.0) (4.8) (-2.9) (0.3)

37.5 38.6 38.2 40.1 154.4 82.2 86.4 168.6

(4.0) (5.8) (1.7) (4.1) (3.9) (8.0) (10.3) (9.2)

1.5 1.5 1.5 1.7 6.2 3.3 3.4 6.7

(2.9) (0.8) (-3.9) (11.0) (2.7) (7.1) (6.7) (6.9)

72.2 61.9 65.1 72.3 271.4 138.3 141.3 279.6

(3.8) (0.5) (5.3) (3.7) (3.3) (3.2) (2.9) (3.0)

56.4 46.6 49.0 56.2 208.3 106.2 108.2 214.4

(4.6) (-0.3) (4.0) (3.3) (2.9) (3.1) (2.8) (2.9)

Coal (Million ton) -Excluding coking coal

Oil (Million bbl) -Excluding naphtha

LNG (Million ton)

Hydro (TWh) Nuclear power

(TWh) Other (Million TOE) Primary energy

(Million TOE) Primary energy

-Excluding for raw materials

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Major energy sources for power generation, including nuclear energy and LNG, are forecast to indicate a relatively high increase in demand, attributable to continually strong electricity demand and the operation of new nuclear power plants (Singori Nuclear Power Plant Unit 2, Sinwolseong Nuclear Power Plant Unit 1).

Energy demand for raw material use (naphtha, coking coal) is expected to go up 4.6% in 2011 owing to an upswing in industrial production activities. Its level of increase will likely drop to 3.4% in 2012, reflecting a downturn in the petrochemical industry.

- Energy for raw material use is forecast to account for 23.3% of primary energy demand in 2012.

Forecasts on key energy indicators

The energy intensity (TOE/million won) is expected to improve from 0.252 in 2010 to 0.251 in 2011 and 0.249 in 2012.

- The energy intensity deteriorated temporarily in 2009 and 2010, but is expected to turn around and improve starting from 2011.

Per-capita energy consumption is forecast to rise from 5.37 TOE in 2010 to 5.54 TOE in 2011 and 5.70 TOE in 2012.

Notes: e refers to forecasts.

Forecasts on primary energy demand by energy source

Coal demand is expected to increase 3.0% in 2011 and 2.0% in 2012.

Category 2005 2006 2007 2008 2009 2010 2011e 2012e

Economic growth rate (%) 4.0 5.2 5.1 2.3 0.3 6.2 3.8 3.7

Primary energy consumption

3.8 2.1 1.3 1.8 1.1 7.9 3.3 3.0

increase rate (%)

Energy intensity (TOE/Million won) 0.264 0.256 0.247 0.246 0.248 0.252 0.251 0.249 Per capita consumption (TOE) 4.75 4.83 4.88 4.95 4.99 5.37 5.54 5.70

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- In 2011, coal demand is expected to show gradual growth of approximately 3.0%, attributable to a slowdown in coal consumption for power generation (no new facilities) and base effects from a high increase in coking coal consumption (22.6%) in the previous year.

- In 2012, coal consumption for power generation is expected to show little change since no new facilities were built. Coking coal consumption is expected to turn around and indicate an upward trend in 2012.

Oil demand is expected to indicate extremely gradual growth of 0.4% in 2011 and 0.7%

in 2012.

- In 2011, oil demand is expected to indicate little change despite a rapid rise (6.4%) in naphtha consumption for raw material use. This is owing to a considerable drop in demand for use as industrial fuel as a result of continued high oil prices and demand for heating in the residential and commercial sector.

- A 0.7% rise from 2011 is expected for 2012 to reach 803.5 million barrels, owing to recovery of demand for transport and a slowdown in the downward trend in fuel for industrial use.

LNG demand is forecast to record growth of 10.1% in 2011 and 5.0% in 2012.

- LNG demand for power generation, which accounted for 46% of overall consumption in 2010, is expected to rise 12.5% in 2011 and 5.1% in 2012, thus leading an overall increase in LNG demand.

- LNG demand for power generation and demand for town gas production both go up in case of an abnormal cold wave in the winter. For this reason, there is a need to thoroughly examine LNG supply and demand conditions in the winter.

The amount of nuclear power generation is forecast to go up 3.9% in 2011 and 9.2% in 2012 with the operation of new facilities.

- Following the operation of Singori Unit 1 in (February) 2011, commercial operation of Singori Unit 2 and Sinwolseong Unit 1 is planned for early 2012.

- At the end of 2012, there will likely be a substantial rise in the amount of nuclear power generation in tandem with facility expansion of around 2 million kW(10.7%) from the previous year.

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Final energy demand is forecast to record a year-on-year increase of 3.1% in 2011 and 2.9% in 2012.

Energy consumption soared in all demand sectors in 2010. However, the level of consumption increase is expected to slow down from 2011 to 2012 due to base effects, a slowdown in economic growth, and continued high oil prices.

- In 2011, consumption in the industrial sector is expected to record relatively high growth of 4.6%, but consumption in the residential/commercial/public sector and transport sector is forecast to go up only by a small extent.

- In 2012, the level of increase in demand in the industrial sector is expected to go down compared to the previous year as a result of a slowdown in the level of increase in demand for naphtha and electricity for industrial use. The level of increase in demand in the residential/commercial/public sector is also forecast to be more gradual.

Outlook on final energy demand

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Notes: Values in parentheses are the year-on-year growth rate (%); p refers to tentative figures; e refers to forecasts.

Category 2011 2012

1/4p 2/4p 3/4p 4/4e Annual (e) First half of

the year (e) Second half

of the year (e) Annual (e)

29.7 29.0 30.1 31.6 120.5 61.8 63.7 125.4

(2.4) (1.8) (8.4) (6.0) (4.6) (5.1) (3.2) (4.1)

14.0 13.7 14.0 15.6 57.3 29.6 30.5 60.2

(3.9) (0.4) (7.2) (6.8) (4.6) (6.8) (3.2) (4.9)

8.8 8.7 9.8 9.7 37.0 17.8 19.6 37.3

(2.8) (-5.8) (2.6) (1.7) (0.3) (1.2) (0.4) (0.8)

15.3 8.4 7.2 11.5 42.4 24.0 19.0 42.9

(5.3) (-2.7) (2.0) (0.1) (1.6) (1.1) (1.3) (1.2)

53.8 46.2 47.0 52.9 199.9 103.5 102.2 205.7

(3.3) (-0.6) (6.1) (3.8) (3.1) (3.5) (2.3) (2.9)

38.1 30.9 31.0 36.9 136.8 71.4 69.1 140.4

(4.2) (-2.3) (4.5) (3.3) (2.5) (4.7) (5.7) (2.7)

8.1 4.5 3.0 5.9 21.5 13.4 9.3 22.6

(6.2) (5.5) (14.8) (8.2) (7.7) (5.9) (3.9) (5.1)

194.7 178.1 195.7 206.0 774.4 380.2 401.1 781.3

(3.1) (-5.1) (4.8) (0.8) (0.9) (2.0) (-0.1) (0.9)

106.0 94.2 105.0 116.3 421.5 202.2 216.5 418.7

(-1.5) (-10.8) (1.3) (-0.2) (-3.2) (1.0) (8.7) (-0.7)

121.4 109.0 112.5 113.7 456.6 237.9 239.3 477.3

(7.9) (5.1) (3.2) (4.4) (5.2) (3.3) (5.8) (4.5)

10.6 10.7 10.7 11.7 43.7 22.7 23.3 46.0

(-5.5) (3.0) (13.0) (9.6) (4.6) (6.4) (4.1) (5.2)

4.4 4.2 4.3 5.2 18.1 9.4 9.7 19.1

(12.5) (-0.1) (17.9) (14.5) (11.0) (8.9) (2.3) (5.5)

2,203 1,612 1,417 2,163 7,395 3,991 3,768 7,758

(4.2) (3.6) (0.6) (9.0) (4.7) (4.6) (5.2) (4.9)

Industry (Million TOE) -Excluding for raw materials Transport (Million TOE)

Residential /commercial /public (Million TOE)

Total Million TOE

Total -Excluding for raw materials Town gas (Billion m³)

Oil (Million bbl) -Excluding naphtha Electricity

(TWh) Coal (Million ton) --Excluding coking coal Thermal and

other (Thousand TOE)

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With regards to final energy demand by energy source, the level of increase recorded by major energy sources in 2012 will likely maintain the 2011 level or slightly slow down.

Town gas for industrial use is forecast to lead an overall rise in demand. The demand increase rate is forecast to stand at 7.7% in 2011 and 5.1% in 2012.

Oil demand is forecast to indicate an increase rate of less than 1% in both 2011 and 2012.

- Oil demand for transport is expected to go up 0.1% in 2011 and 0.4% in 2012 despite continued high oil prices. This is attributable to a steady rise in automobile sales, a rise in fuel demand for road freight since the second half of 2011, and an increase in international transport.

- Oil demand in the industrial sector is forecast to go up 2.2% in 2011 and 2.0% in 2012.

Demand for industrial raw material use is expected to lead a rise in overall demand as it is forecast that there will be an increase in production activities in the petroleum refining and petrochemical sector in 2012 as well.

Electricity will likely indicate relatively high growth of 5.2% in 2011 and 4.5% in 2012 resulting from several factors: a rise in industrial production activities, low charge, increased dissemination of equipment that use electricity, and convenience in use.

Coal consumption is forecast to record a sound increase rate that is in the low 5% range in 2012 as it is expected that the high growth in anthracite demand for industrial use will continue and coking coal demand will bounce back and slightly go up.

Forecasts on level of contribution made by each final energy source to primary energy demand

Electricity, which triggers energy input for power generation in the transformation sector, is forecast to contribute to around half of the amount of primary energy increase recorded in 2012.

The level of contribution made by energy demand for industrial raw material use is expected to slightly go down from the 2011 level to stand at 25.9% in 2012.

The level of contribution made by town gas is expected to be 14.7% in 2012. Final petroleum products for fuel, excluding naphtha, are expected to contribute to a 3.8%

reduction in primary energy demand as decreased consumption is expected in 2012.

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From January through October 2011, primary energy consumption rose 3.3%, recording a lower increase rate than the economic growth rate (3.7%) from the first through the third quarter of 2011.

From January through October, primary energy consumption indicated gradual growth as the level of economic growth somewhat slowed down. This is despite a rise in energy demand for heating purposes owing to the record-breaking cold wave in January.

A soar in international oil prices and strengthening of energy-saving policies contributed to the stabilization of energy consumption.

The speed of industrial production increase (7.4%) exceeded the level of economic growth (3.7%). Energy consumption for industrial use (4.6% increase) led a rise in primary energy consumption from January through October.

[Forecasts on contribution rate of each energy source to increase in primary energy]

Major characteristics

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The level of contribution made by the economic growth factor to a rise in primary energy consumption from January through September is assumed to be 3.6%p, while that made by the temperature effect is assumed to be 0.7%p

- On the other hand, changes in other factors such as energy efficiency improvements reduced energy consumption by 1.1%p.

Notes: 1) Values in parentheses refer to each factor’s level of contribution to change in energy consumption.

Notes: 2) Other effects include all factors that trigger a change in energy consumption excluding the temperature effect and economic growth effect such as changes in the industrial structure and energy prices as well as energy efficiency improvements.

The establishment of a low energy-consuming industrial structure and improvements in energy intensity were carried out.

An analysis of the level of contribution made to a rise in energy consumption in the manufacturing industry from January through September 2011⁴⁾indicates that industrial structure changes and energy intensity improvements contributed to restraining the increase in energy consumption.

4) Energy consumption of the manufacturing industry does not include anthracite and new & renewable energy.

Only overall industrial statistics are compiled for new & renewable energy and anthracite for industrial use.

They are not broken down into statistics by business type under the manufacturing industry.

[Level of contribution of each factor towards a rise in primary energy consumption from January through September 2011]

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- The level of contribution made by production activities to a rise in energy consumption in the manufacturing industry is assumed to be 7.5%p. This means that energy consumption in the manufacturing industry would have posted a year-on-year increase of 7.5% if no changes took place in other factors.

- In contrast, the level of contribution made by industrial structure changes to a rise in energy consumption was -2.4%p. Industrial structure changes contributed to bringing down energy consumption in the manufacturing industry by 1.7 million TOE.

- This is because the share of the manufacturing industry’s added value that is taken up by the fabricated metal industry, which has a relatively low energy intensity, went up, while the share accounted for by the petrochemical industry, whose energy intensity is high, declined.

- Energy intensity improvements of the manufacturing industry led to a 0.8%p decline in consumption.

Forecasts on energy intensity improvements in 2011 and 2012

Energy intensity (TOE/million won) deteriorated in 2009 and 2010, but is expected to improve to 0.251 in 2011 and 0.249 in 2012.

[Level of contribution of each factor towards a change in manufacturing industry consumption from January through September 2011]

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The worsened energy intensity in 2009 and 2010 seems to be temporary amid mid- to long-term energy efficiency improvements.

- The worsened energy intensity of 2009 resulted from the level of increase in primary energy consumption (1.1%) exceeding the economic growth rate (0.3%), owing to operation of new facilities in industries that consume a great amount of energy and a rise in energy transformation loss as a result of a rapid increase in electricity consumption⁵⁾.

- The worsened energy intensity of 2010 mainly resulted from base effects from sluggish consumption witnessed in the previous year, a soar in energy consumption for industrial use owing to a rapid economic upswing, and an increase in energy consumption for cooling and heating purposes as a result of abnormal climate conditions throughout all seasons.

Continued rapid increase in electricity consumption is expected

Electricity is forecast to maintain a rapid increase in consumption due to several factors:

5) Final energy consumption went down 0.3% in 2009 but electricity consumption indicated relatively high growth at 2.4%.

[Forecasts on energy intensity and per-capita consumption]

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low charge; continued upswing in production in industries that consume a great amount of electricity; increased propagation of electric equipment; and convenience in use.

- Electricity consumption indicated annual average growth of 6.1% in the 2000s, the highest among major final energy sources. It is forecast to record relatively rapid growth of 5.2% in 2011 and 4.5% in 2012.

A rise in electricity consumption expands energy conversion loss, thus triggering an increase in primary energy demand⁶⁾.

- The level of contribution made by electricity towards a rise in primary energy consumption is forecast to be 49.4% in 2011 and 50.9% in 2012. It is forecast that around half of the primary energy increase will be accounted for by electricity demand.

- Strong electricity demand is expected to continue for the time being as a result of sound growth of industries that consume great amounts of electricity and changes in lifestyles triggered by technological development.

The supplied reserve level is steadily decreasing

Since 2000, peak electricity demand has been quickly increasing, faster than the speed at which power generation facilities were built. For this reason, spare electricity is steadily declining.

From 2000 through 2011, peak electricity demand in the summer indicated annual average growth of 5.3%. In contrast, total capacity and supply capacity recorded an annual average increase of a mere 4.7% and 4.9%, respectively. The supplied reserve level in the summer substantially dropped.

Peak demand in the winter (December - February) indicated annual average growth of 6.2% during the past decade, thus recording a faster increase rate than peak demand in the summer. Power generation capacity at the point of winter peak demand recorded an annual average increase of 4.6%. This means that reserve power at the point of winter peak demand quickly went down.

6) There is an energy loss of 63.6% in the power generation sector (as of 2010). This is why 2.74 TOE of primary energy is needed to produce 1 TOE of electricity.

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Increase in the range of fluctuation in energy demand caused by temperature changes Temperature changes have had increasing influence on changes in energy consumption in the 2000s.

- Energy consumption is substantially influenced by temperature changes in tandem with increased dissemination and use of cooling and heating equipment and frequent occurrence of abnormal climate conditions.

Electricity demand in the winter is especially becoming more sensitive to temperatures and the range of fluctuation in demand is widening in tandem with increased dissemination of electric heating equipment.

- An analysis of how sensitive electricity demand was towards changes in HDD in a 10- year period after 1985 (movement to recent year by one year on an annual basis)⁷⁾ indicates that electricity demand is becoming more sensitive to temperatures as time passes.

- This shows that electricity is quickly replacing oil as energy for heating.

7) Sensitivity analysis model (Monthly data used): InE=α+β1InGDP+β2CDD+β3HDD+e

(E refers to electricity, CDD refers to Cooling Degree Days, HDD refers to Heating Degree Days)

[Changes in electricity demand sensitivity for temperatures]

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Oil dependence regarding primary energy consumption is forecast to continually drop.

The share of primary energy taken up by oil decreased to less than 40% in 2010, and will likely go down further to 37.7% in 2012.

When excluding non-energy oil for industrial raw material use (naphtha, asphalt, etc.), the share of primary energy taken up by oil used as an energy source is expected to decrease from 21.8% in 2010 to 19.6% in 2012.

The decrease in the Korean economy’s dependence on energy oil is the result of continued high oil prices and relative prices among energy sources in Korea.

- A rise in oil prices has led to a slowdown in the level of increase in fuel consumption for transport and continued downward trend in consumption for power generation. Oil is being steadily replaced by other energy sources such as electricity.

There is a need to examine whether the speed at which the share taken up by energy oil is dropping is appropriate when Korea establishes energy supply and demand policies.

- Considering Korea’s industrial structure, where the level of contribution of the petrochemical industry to the economy is high, the nation’s oil dependence target should be set targeting oil for fuel.

[Trends in oil dependence and forecasts]

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Continually implement measures to stabilize winter and summer electricity supply and demand in 2012.

Due to limited expansion of base-load power generation facilities (nuclear power, bituminous coal), electricity supply and demand conditions that were witnessed in 2011 will likely continue in 2012.

- Commercial operation is planned for two nuclear power plants (Singori Nuclear Power Plant Unit 2, Sinwolseong Nuclear Power Plant Unit 1) in the first half of 2012, but there are no plans for additional bituminous coal-based power generation facilities.

- Base-load power generation facility capacity (as of the end of the year) in 2012 will record a year-on-year rise of a mere 4.8%. The level of increase will be similar to that of electricity demand (4.5% increase).

As such, strong measures on stabilizing supply and demand need to be continually implemented in 2012 in order to stabilize electricity supply and demand.

- There is a need to continually move forward with reform into a cost principle-based charge system. At the same time, there is a need to come up with a mid- to long-term roadmap that would reduce the economic shock caused by the change in the charge system and would allow electricity consumers, including the industrial sector, to prepare for the change.

- There is a need to examine the matter of putting off the shutdown of power plants and engaging in early construction of new power plants in order to secure more supply capacity between now and 2015, when there is no spare electricity.

- If needed, current electricity supply/demand stabilization measures (reduce peak demand, place a restriction on heating temperatures, etc.) should be improved and continually executed.

- PR activities should be strengthened so that information is delivered to the general public on how to use electricity efficiently and the importance of reducing energy consumption.

Policy implications

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There is a need to pay more caution to electricity supply/demand management when there is a change in the season.

There is a possibility that difficulties will be experienced in electricity supply in the event of a soar in electricity demand as a result of abnormal climate conditions when there is a change in the season.

- The shortage of reserve power in the summer and winter is forecast to continue for the time being. Repair of power plants needs to be carried out mainly in the spring and autumn.

- There is a possibility of power load temporarily rising in the event of simultaneous occurrence of abnormal climate conditions and load shifting of industries when there is a change in the season.

- In case of simultaneous occurrence of a drop in supply capacity and a rise in power load, as such was the case on September 15, 2011, there is a possibility of imbalance between supply and demand in the short term.

There is a need to improve Korea’s industrial structure into a low energy-consuming structure.

Energy demand in the industrial sector rose 8.5% in 2010. It is forecast to go up 4.6% in 2011 and 4.1% in 2012, thus leading a rise in final energy consumption.

* Rate of increase in final energy demand: (’10) 6.5% →(’11) 3.1% →(’12) 2.9%

- As a result, the share of final energy accounted for by consumption in the industrial sector is expected to continually increase and reach 61% in 2012.

The rapid increase in demand in the industrial sector is attributable to continued rapid growth of leading industries that consume a great amount of energy, including the steel and petrochemical industries, as well as the fabricated metal industry that mainly uses electricity, including semiconductors, machinery, and automobiles.

- In 2010, there was a substantial rise (12.9%) in electricity demand for industrial use as a result of construction of large steel making facilities (total capacity of 19,000 thousand tons)⁸⁾that consume a great amount of electricity, including Blast Furnace #1 and #2 of Hyundai Steel

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The level of contribution made by the industrial sector to a rise in final energy consumption has been on an upward trend since 2009.

- In 2012, energy consumption in the industrial sector is expected to increase by 5.0 million TOE, accounting for 86.2% of final energy demand increase (5.8 million TOE).

The level of contribution of energy for industrial raw material use (naphtha, coking coal) towards a rise in final energy is expected to reach 37.2%.

- In 2012, the level of contribution of the transport sector and residential/commercial and public/other sector is forecast to be low at 5.0% and 8.8%, respectively.

Roles performed by the industrial sector are important in reducing energy demand in Korea, but there is a restriction on reducing demand in the short term⁹⁾. For this reason, industrial structure improvements should be continually implemented as a mid- to long- term task.

8) This accounts for 8.8% of the total steel making facility capacity (216,667 thousand tons) recorded in 2010.

9) Energy for raw material use accounts for 52.4% (as of 2010) of energy consumption in the industrial sector.

[Contribution rate of each sector to a rise in final energy demand]

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Energy Demand Outlook for 2012

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Chapter Ⅰ

International Energy Market Trends

1. Trends in the international oil market and oil exports/imports 2. Trends in the international natural gas market

3. Trends in the international coal market

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A. Trends in international oil prices and domestic petroleum product prices

International oil prices have been indicating a downward trend since April. Despite geopolitical tension in the Middle East and improvements in economic indicators in the US, international oil prices recorded a 2.2% drop from the previous month to stand at

$105.5/barrel (Dubai oil) in December 2011. This is attributable to anxiety over Europe’s financial crisis, weak manufacturing industry indicators in China, and a rise in crude oil inventory in the US.

Notes: Values in parentheses indicate the year-on-year increase rate (%).

Trends in the international oil market and oil exports/imports

1

(Unit: $/Bbl, %)

Category WTI Brent Dubai

2008 99.92 (27.21) 97.47 (24.85) 94.29 (25.86)

2009 61.94 (-37.98) 61.73 (-35.74) 61.92 (-32.37)

2010 79.49 (17.55) 79.66 (17.93) 78.13 (16.21)

January 89.54 (14.30) 96.78 (26.69) 92.55 (20.59)

February 89.66 (17.28) 103.90 (40.75) 100.24 (36.20)

March 102.97 (26.73) 114.64 (45.21) 108.53 (40.33)

April 109.96 (30.13) 123.26 (45.17) 115.76 (38.40)

May 101.29 (37.42) 114.27 (51.91) 108.04 (40.60)

2011 June 96.26 (27.85) 113.97 (52.12) 107.50 (45.17)

July 97.30 (27.52) 116.82 (54.32) 110.15 (51.70)

August 86.32 (12.67) 110.11 (42.68) 105.00 (41.57)

September 85.58 (13.73) 111.52 (43.23) 105.75 (40.63)

October 86.51 (5.58) 109.13 (31.20) 103.54 (28.97)

November 97.27 (15.28) 110.53 (28.90) 107.91 (29.11)

December 98.72 (10.72) 107.74 (17.41) 105.51 (18.62)

<Table Ⅰ-1> International crude oil prices

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B. Trends in petroleum product prices in Korea

In December 2011, consumer prices of gasoline and diesel in Korea recorded a year-on- year increase of 9.7% and 14.2%, respectively. Consumer prices of butane for vehicles went up 8.2%.

The relative price of diesel against gasoline continually dropped after April. As of December, it skyrocketed to 92.5%, influenced by a rise in international product prices of diesel.

Notes: Values in parentheses indicate the relative price against gasoline prices (%).

Consumer prices of petroleum products in Korea are roughly 2.4 times (gasoline) and 2.0 times (diesel) higher than prices in the Singapore spot market around two weeks earlier.

(Unit: Won/liter, Won/kg, %)

Category Gasoline Diesel