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Note: Information contained in this report is the best available as of August 2002 and can change.
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.
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.
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.
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.
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.
* 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.
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Korea National Oil Corporation
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File last modified: August 14, 2002
Contact: Lowell Feld