South Korea Country Analysis Brief

August 2002

South Korea
The Republic of Korea (South Korea) is important to world energy markets as the fourth largest oil importer, and the second largest importer of Liquefied Natural Gas (LNG).

Note: Information contained in this report is the best available as of August 2002 and can change.

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GENERAL BACKGROUND
After making a strong recovery in 1999-2000 from the effects of the Asian financial crisis in 1997-1998, South Korea's economy was negatively affected by the global economic slowdown of 2001-2002, but has begun to recover in 2002. Growth in real gross domestic product (GDP) is projected at 5.8% for 2002, up from 3.3% in 2001 but down from the 9.2% achieved in 2000. The recovery has been fuelled by domestic demand, even though export growth has been somewhat weak. Increased government spending, largely on infrastructure projects, has been a major contributor to increased domestic demand.

In the wake of the Asian financial crisis, South Korea has began an economic reform program designed to address some of the conditions which made its economy vulnerable. Most importantly, the South Korean government has begun to break the hold of the chaebols (large, multi-industry conglomerates) over the financial sector. The lack of an "arms length" business relationship between borrowers and lenders had led to many South Korean financial institutions having a very large ratio of non-performing loans. While there is no intention of forcing the chaebols to divest their financial subsidiaries, the government has increased regulation to prevent chaebols from abritrarily channeling money into other subsidiaries. Chaebols also have been pressed to spin off their non-core businesses and to rationalize their corporate structures. To stimulate domestic demand, the South Korean government under President Kim Dae-jung enacted a package of tax cuts directed at lower and middle-income workers.

The South Korean government has plans to privatize several large state-owned enterprises (SOEs), including the state electricity utility, Korean Electric Power Corporation (KEPCO) and natural gas monopoly Korea Gas Company (KOGAS). The privatization program has moved at a slower pace than originally planned, due in part to strong opposition from labor unions to some of the privatizations and delays in passing implementing legislation.

South Korea recently joined the International Energy Agency (IEA). Its membership became effective in April 2001, upon its fulfillment of the requirements for membership, and was formally ratified by the South Korean government in March 2002.

OIL
With no domestic oil reserves, South Korea must import all of its crude oil. Oil makes up the largest share of South Korea's total energy consumption, though its share has been declining in recent years. Petroleum accounted for 56% of primary energy consumption in 2000. South Korea consumed more than 2.1 million barrels a day (bbl/d) of oil in 2000, down from a high of nearly 2.3 million bbl/d in 1997, all of which was imported. South Korea is the seventh largest oil consumer and fourth largest crude oil importer in the world.

South Korea's total reliance on oil imports has led to a policy of securing and diversifying the country's oil supply. South Korea has both a short-term and a long-term approach to fulfilling its oil needs. In the short-term, it has developed a strategic petroleum reserve, which is managed by the state-owned Korea National Oil Corporation (KNOC). Strategic stocks are roughly equivalent to a 90-day supply. The period of "import cover" was expanded from 60 days in early 2001, in part to meet the requirements for entry into the IEA. This reserve serves as a safety net against supply disruptions.

In the long term, KNOC is pursuing equity stakes in oil and gas exploration around the world. KNOC has 18 overseas exploration and production projects in 13 countries. This includes 4 producing fields in Yemen, Argentina, Peru, and the North Sea, and 4 fields under development in Yemen, Venezuela, Libya, and Vietnam. KNOC also is exploring domestic blocks offshore from South Korea. KNOC reported a new oil find in August 2001 at the Vung Tau site offshore from Vietnam, which is expected to be developed and in production by 2003. Recoverable reserves at Vung Tau are estimated at 420 million barrels. The South Korean government has stated that it plans for KNOC to provide for 10% of the country's oil needs by 2010.

The South Korean refining industry was strongly affected by the country's economic crisis in 1997-1998, especially because it already suffered from significant overcapacity before the downturn in demand. In September 1998, South Korea's four downstream oil companies raised the retail price of gasoline and diesel oil following a government tax hike. In October 1998, the South Korean government, under financial pressure, decided to fully deregulate the refining industry, accelerating this decision from the original January 1999 deadline in order to attract badly needed foreign investment. Foreign backing has proved critical in maintaining cash flows and preserving the creditworthiness of the refining industry.

Several corporate consolidations and selloffs occurred as a result. In September 1998, Hanwha's 270,000-bbl/d refinery in Inchon was taken over by Hyundai Oil Refinery Company, giving Hyundai the country's third largest refining capacity (after SK Corporation and LG-Caltex) with 580,000 bbl/d. In October 1999, Hyundai completed the sale of a 50% interest in its refining operation to the Abu Dhabi International Petroleum Investment Corporation, which was intended to reduce the company's highly leveraged debt-to-equity ratio. Ssangyong Group sold its 28.4% stake in Ssangyong Oil Refining Corporation to its majority shareholder, Saudi Aramco, in 2000. The firm's name was changed to S-Oil.

Despite the consolidation in South Korea's refining sector, it has yet to fully recover from the effects of the Asian financial crisis and the shock of the 1998 deregulation. Profit margins have remained very weak through 2002.

NATURAL GAS
South Korea currently relies on imported liquefied natural gas (LNG) to meet its entire demand for natural gas, though a project currently under development will make the country a minor natural gas producer by early 2003. Imports of LNG began in 1986, after the founding of the state-owned monopoly LNG importer Korea Gas Company (Kogas). South Korea currently gets most of its LNG from Indonesia, Malaysia, and Qatar, with smaller volumes from Brunei and Oman. The supplies from Qatar began in August 1999, under a contract with Qatar's new Ras Laffan LNG (RasGas) venture. The first shipment of Omani LNG was loaded in April 2000. In 2000, natural gas comprised around 10% of South Korea's primary energy consumption. South Korea is the second largest importer of LNG worldwide, importing 669 billion cubic feet (Bcf) of LNG in 2000. South Korea's annual LNG imports increased by 140% between 1993 and 1997, but fell by 9% in 1998 due to the effects of the Asian financial crisis. In 1999, however, South Korea's LNG imports grew by 22%, followed by 10% growth in 2000, as its economy recovered and new supplies from Qatar came onstream. South Korean natural gas demand is split almost evenly between the electricity sector and the residential heating sector.

Despite the temporary downturn, Kogas is planning to push ahead with projects for the expansion of LNG receiving terminals. South Korea is increasing capacity at its existing terminals (Pyongtaek and Inchon). Also, Mitsubishi Corporation of Japan and Pohang Iron and Steel Corporation signed a letter of intent in October 1998 to build an LNG receiving terminal in South Korea at Kwangyang. Construction of the facility started in June 2002, and current plans call for it to be completed in the first half of 2005.

The South Korean government announced in 1999 that it intends to privatize Kogas. An initial public offering of 33% of Kogas equity was carried out in December 1999. Privatization plans initially stalled, however, due to questions about the structure of the companies, which would result if Kogas were split for privatization, and opposition from labor unions representing Kogas employees. Current plans call for the Kogas privatization to take place in 2003, but legislation necessary to put the process in motion has not been passed by the South Korean legislature. The uncertainty over the future structure of the industry has led to delays in Kogas concluding agreements for new LNG supplies, even though additional volumes of LNG beyond current contracts are expected to be needed by 2004.

In addition to LNG imports, South Korea will have a small amount of domestic natural gas production starting in 2003. KNOC's $320 million Donghae-1 development project is developing a natural gas deposit offshore from Ulchin in southeastern South Korea estimated to contain 200 Bcf of reserves. Donghae-1 is a relatively minor development, however, and will satisfy only about 2% of South Korea's gas demand once it comes onstream.

Meanwhile, South Korea also is exploring the possibility of a gas pipeline from the Kovykta natural gas deposit in the Irkutsk region of Eastern Siberia. The pipeline would supply China as well as South Korea, and might run through North Korea. The project as currently envisioned would supply about 1 Bcf/d to South Korea, and a larger volume to China, possibly beginning around the end of the decade. The two Koreas agreed in September 2001 to conduct a joint feasibility study of the pipeline project, which has not yet concluded. Since the only overland route the pipeline could take would cross North Korea, renewed tensions on the Korean peninsula have called South Korea's participation in the project into question.

COAL
Coal supplies about 20% of South Korea's total energy requirements. Most of this coal is imported, since the only indigenous coal resources consist of low-quality anthracite used in home heating and small boilers. Bituminous coal supplies (steam coal for power plants and industrial boilers and metallurgical coal for steelmaking) come mainly from Australia and China, with the United States also among the suppliers. State power company KEPCO has invested in several Australian coal mines. China has become a significant supplier of coal to South Korea in the last two years, as its coal export volumes have increased, displacing some of the volume from Australia.

ELECTRIC POWER
South Korea uses a combination of thermal (oil, gas, and coal), nuclear, and hydroelectric capacity to meet its demand for electric power. Total power generation capacity was 50 gigawatts (GW) as of the beginning of 2000. The South Korean government estimated in May 2002 that its electricity demand will rise at an average annual rate of 3.4% per year through 2015.

In September 1998, KEPCO officially dedicated its Ulchin Number 3 nuclear reactor and launched the construction of Ulchin Nuclear Power Plants Numbers 5 and 6. Ulchin Number 3 has a generating capacity of 1 GW and is the first nuclear power plant built completely with South Korean technology from design to construction. The Number 4 Ulchin nuclear plant was completed in late 1999, and Numbers 5 and 6 are targeted to be completed in 2004 and 2005.

The South Korean government is moving ahead with plans to break up and privatize KEPCO. The South Korean government plans to split KEPCO into separate generation, transmission, and distribution units. Progress has been slow, however, due to opposition from labor unions. In early 2001, KEPCO split its power generation holdings into six separate subsidiaries, in a preliminary move to facilitate a split into competing companies. Five of the six operate thermal and hydroelectric facilities and are of roughly equal size in terms of installed generating capacity - between 7 and 8 GW. The sixth is comprised of all of KEPCO's nuclear plants, which will be kept together in one corporation under government ownership. The privatization plan has been controversial, with unions fearing layoffs by new management and some politicians opposing foreign ownership. Current plans call for the first of the five generating units, Korea Southeast Power, to be sold off by January 2003. The other four thermal generation companies are to be sold by 2005.

While most of South Korea's generating capacity is still controlled by KEPCO, a few independent power producers (IPPs) exist. LG Power, owned by the LG Group conglomerate, operates a 540-megawatt (MW) independent power plant at Bugok near Asan Bay. The facility began operation in April 2001. LG Power purchased the existing Anyang and Puchon plants in June 2000, with a combined capacity of 950 MW, from KEPCO after a competitive tender. Tractebel is also investing in a new 519-MW IPP plant in Yulchon in partnership with Hyundai. In another significant development, South Korea's original IPP, Hanwha Energy was spun off from its chaebol parent company in June 2000, in a deal in which El Paso Energy acquired a 50% stake. Hanwha Energy operates a 1,800-MW plant at Inchon.

While South Korea is not a party to the Kyoto Protocol on greenhouse gas emissions, its future plans emphasize the development of more nuclear power plants to reduce growth in carbon emissions. A dozen additional nuclear plants are planned before 2015.

ENVIRONMENT
South Korea's rapid growth has resulted in significant environmental side effects, as industrial emissions from factories have caused serious acid rain problems. Increased car ownership also has led to a corresponding rise in carbon emissions from the country's transportation sector, contributing to South Korea's air pollution problems. Transboundary pollution is a major concern in the region, leading environmental ministers from South Korea, China and Japan to establish a joint commission to attempt to tackle the problem.

Although slowed by the Asian financial crisis, South Korea's energy consumption has rebounded and continues to increase as the country's economy grows. In 2000, South Korea consumed 7.9 quadrillion Btu's of energy, up 7.8% over 1999 and 15.9% higher than in 1998. South Korea's energy intensity (energy consumption per $1995 of GDP) increased from increased from 11,054 Btu per $/1995 in 1980 to 12,759 Btu per $1995 in 2000, putting the country on par with countries such as Thailand and the Philippines. The country's per capita energy use has increased with its economic growth, from 88.1 million Btu per person in 1990 to 166.7 million Btu per person in 2000, but South Korea's per capita carbon emissions unfortunately have increased at a similar pace.

Thus far, there has been little emphasis on the development of renewable energy resources in South Korea, but that is changing as the 1997-1998 financial crisis focused attention on South Korea's dependence on imported oil to meet domestic energy demand. One of the country's stated goals in its 'National Vision for Environmental Policies in the 21st Century' is the promotion of green development schemes such as increased usage of photovoltaic power and fuel cells. South Korea's environmental outlook depends on its ability to shift its energy supply mix to cleaner-burning fuels and de-link the increase in carbon emissions from economic growth.

Sources for this report include: Asia Pulse; Asian Wall Street Journal; CIA World Factbook 2001; Dow Jones News Wire service; DRI/WEFA Asia Economic Outlook; Economist Intelligence Unit ViewsWire; FT Energy - Power in Asia; Korea Economic Weekly; Korea Herald; Korea Times; U.S. Energy Information Administration; Petroleum Intelligence Weekly; Reuters News Wire; World Bank; World Gas Intelligence.

COUNTRY OVERVIEW
President: Kim Dae-jung
Independence: August 15, 1945
Population (7/01E): 47.9 million
Location/Size: Eastern Asia/(98,480 square kilometers 38,000 square miles), about the size of Indiana
Major Cities: Seoul (capital), Pusan, Taegu, Inchon, Kwangju
Language: Korean (English widely taught)
Ethnic Groups: Korean, with a small Chinese minority
Religions: Christianity, 49%; Buddhism, 47%; Confucianism, 3%; Other, 1%
Defense (8/98): Army, 548,000; Navy, 60,000; Air Force, 52,000 (plus 35,910 U.S. troops)

ECONOMIC OVERVIEW
Currency: Won (W)
Exchange Rate (8/13/02): US$1 = 1,201 Won
Real GDP Growth Rate (2001E): 3.3% (2002E) 5.8%
Inflation Rate (consumer prices)(2001E): 4.1% (2002E) 3.1%
Unemployment Rate (5/02E): 3.7%
Current Account Balance (2002E): $4.6 billion
Merchandise Exports (2002E): $164.7 billion
Merchandise Imports (2002E): $152.8 billion
Merchandise Trade Balance (2002E): $11.9 billion
Major Exports: Electronics, textiles, ships, automobiles, steel, computers, footwear
Major Imports: Crude oil, food, machinery and transportation equipment, chemicals and chemical products, base metals and articles.
Top Trading Partners: U.S., Japan, China, Germany

ENERGY OVERVIEW
Oil Consumption (2001E): 2.1 million barrels per day (bbl/d); all imported
Crude Oil Refining Capacity (1/1/02): 2.6 million bbl/d
Natural Gas Consumption (2000E): 669 billion cubic feet (bcf)--all imported LNG
Recoverable Coal Reserves (2000E): 86 million short tons (Mmst)
Coal Production (2000E): 4.6 Mmst
Coal Consumption (2000E): 71.7 Mmst
Electric Generation Capacity (1/1/00E): 50.0 gigawatts
Electricity Generation (2000E): 273.2 billion kilowatthours

ENVIRONMENTAL OVERVIEW
Minister of Environment: Kim Myung-ja
Total Energy Consumption (2000E): 7.9 quadrillion Btu* (2.0% of world total energy consumption)
Energy-Related Carbon Emissions (2000E): 115.3 million metric tons of carbon (1.8% of world carbon emissions)
Per Capita Energy Consumption (2000E): 166.7 million Btu (vs. U.S. value of 351.1 million Btu)
Per Capita Carbon Emissions (2000E): 2.4 metric tons of carbon (vs. U.S. value of 5.6 metric tons of carbon)
Energy Intensity (2000E): 12,759 Btu/$1995 (vs U.S. value of 10,919 Btu/$1995)**
Carbon Intensity (2000E): 0.19 metric tons of carbon/thousand $1995 (vs U.S. value of 0.17 metric tons/thousand $1995)**
Sectoral Share of Energy Consumption (1998E): Industrial (55.7%), Transportation (20.2%), Commercial (15.1%), Residential (9.0%)
Sectoral Share of Carbon Emissions (1998E): Industrial (49.8%), Transportation (24.0%), Commercial (17.1%), Residential (9.1%)
Fuel Share of Energy Consumption (2000E): Oil (58.3%), Coal (20.4%), Natural Gas (9.5%)
Fuel Share of Carbon Emissions (2000E): Oil (56.0%), Coal (34.6%), Natural Gas (9.4%)
Renewable Energy Consumption (1998E): 177 trillion Btu* (9% decrease from 1997)
Number of People per Motor Vehicle (1998): 4.4 (vs. U.S. value of 1.3)
Status in Climate Change Negotiations: Non-Annex I country under the United Nations Framework Convention on Climate Change (ratified December 14th, 1993). Signatory to the Kyoto Protocol (signed September 25th, 1998 - not yet ratified).
Major Environmental Issues: Air pollution in large cities; water pollution from the discharge of sewage and industrial effluents; drift net fishing.
Major International Environmental Agreements: A party to the Antarctic-Environmental Protocol, Antarctic Treaty, Biodiversity, Climate Change, Endangered Species, Environmental Modification, Hazardous Wastes, Law of the Sea, Nuclear Test Ban, Ozone Layer Protection, Ship Pollution, Tropical Timber 83, Tropical Timber 94, Wetlands and Whaling. Has signed, but not ratified, Desertification.

* The total energy consumption statistic includes petroleum, dry natural gas, coal, net hydro, nuclear, geothermal, solar, wind, wood and waste electric power. The renewable energy consumption statistic is based on International Energy Agency (IEA) data and includes hydropower, solar, wind, tide, geothermal, solid biomass and animal products, biomass gas and liquids, industrial and municipal wastes. Sectoral shares of energy consumption and carbon emissions are also based on IEA data.
**GDP based on EIA International Energy Annual 2000

ENERGY INDUSTRY
State Energy Companies: Korea National Oil Corporation(KNOC); Daehan Oil Pipeline Corporation (DOPCO); Korea Electric Power Company (KEPCO); Korea Gas Corporation (KOGAS)
Major Oil Companies (Private): SK Corporation; LG-Caltex; S-Oil (formerly Ssangyong Oil); Hyundai Oil
Major Refineries (1/1/02 Capacity): Ulsan (817,000 bbl/d); Onsan (520,000 bbl/d); Yocheon (633,600 bbl/d); Daesan (310,000 bbl/d); Inchon (270,000 bbl/d)
Major Ports: Pusan, Inchon, Kunsan, Mokpo, Ulsan
LNG Regasification Terminals: Pyongtaek, Inchon

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