Korea eyes offshore oil rigs for high returns

Korean oil refiners are increasing their overseas exploration activity to take advantage of rising profitability amid skyrocketing oil prices.

The Federation of Korean Industries, the mouthpiece of the nation`s big companies, said last month that Korean companies are currently carrying out 56 projects across the world.

Their combined investment reached a record $666 million last year alone.

"Investment in overseas resource exploitation has been steadily recovering from the low of 1998 when the economy was battered by the Asian economic turmoil," said Chung Woo-jin, a research fellow at the Korea Energy Economics Institute.

The companies spearheading offshore oil development became financially crippled during the financial crisis by rising interest rates. The situation led them to cut back on their investment, with some lucrative sites sold to big-name companies from Western countries.

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However, oil projects are once again attracting local refiners as an oil price hike triggered by the Iraq war and high demand coming from China promises high returns.

Thanks to escalating oil prices, SK Corp., the nation`s biggest oil refiner, posted sales of almost 460 billion won ($440 million) during the first half of the year, compared to 276 billion won ($260 million) all of last year.

As oil prices almost tripled during the past several years, investment in foreign oil fields by the nation`s companies also nearly tripled in the same period.

The Korea National Oil Corp., Korea`s leading oil developer, is currently carrying out 19 projects abroad, extracting 36,000 barrels of oil per day in the United Kingdom, Libya and Peru.

Teaming up with two local developers, the state-run company made a successful bid earlier this year for an exploitation project involving two Nigerian mining areas, surprising Western rivals.

Combined reserves of the two areas are estimated to surpass two billion barrels, an amount that can meet Korea`s oil demand for two and a half years.

SK is attempting to transform itself into a leading crude oil developer in East Asia.

The world`s second largest oil refiner hopes to secure the aggregate reserve of 700 million barrels by 2010 from the current 300 million barrels, quadrupling its daily crude oil output.

SK has picked three oil and gas-rich regions - Latin America, Southeast America and Central Asia - and plans to invest $5 billion in those regions.

Despite the rising eagerness of the government and private developers for gushing black oil, the nation`s crude oil self-sufficiency is still only around four percent, compared to nearly 90 percent with France and 45 percent with Italy.

Threatened by oil crises several times since the 1970s, Western economies have been consistently tapping into overseas oil fields in a bid to secure their own oil supply chains that would be unhampered by fluctuating oil prices.

On the back of public subsidies and focused investment, several Western developers grew into forerunners in the oil development market.

"Compared to Western majors, Korean developers are mom-and-pop stores around the corner," said Chung.

Against this backdrop, the Korean government unveiled a new scheme last month to expand the nation`s foothold in oil exploitation and development overseas.

Under the plan, the government would expand the assets of KNOC to some 4 trillion won ($3.9 billion) from the current 1.1 trillion ($1.05 billion) to transform the company into a specialized oil developer.

"I believe the expansion plan for KNOC is a good approach to efficiently carry out large-sized projects," said Chung.

Oh Young-ho, policy manager at the Ministry of Commerce, Industry and Energy, said, "If the plan is properly carried out, KNOC will grow into a major oil developing company in Asia, reaching daily production of 300,000 barrels by 2013."

Given the near-consensus forecast that high-flying oil prices may not come down in the near future, the government`s blueprint to secure oil fields in other countries is expected to help the country become less exposed to oil risks.

The FKI, however, pointed out that the companies are seriously short of oil development experts to carry out the projects.

The federation said the economic crisis which started in 1998 has reduced the labor pool for development engineers.

"Korea`s companies and colleges currently have about 350 engineers, much less than one-tenth of the 7,244 at U.S.-based Occidental Oil and Gas Corp. alone," added the FKI.

"If KNOC and other local developers launch their own large-sized exploitation projects, 30 to 100 professional engineers will be necessary for every project," said Lee Churl-gyu, general manager of the Korea Petroleum Association.

"The current pool of experts in the country is far short of implementing the blueprints of the companies and government."

The FKI also raised a concern that there is no financial institution to induce a large amount of private capital.

As part of its efforts to reach the targeted oil supply self-sufficiency rate of 18 percent by 2013, the government is set to form a fund worth 16 trillion won ($15.3 billion) to finance KNOC and private developers.

Though the government announced half of its fund is to be raised from private investors, investors don`t have any measures to evaluate the project`s profitability.

Local financial institutions currently lack the expertise as well as experiences of financing oil development projects, according to the FKI.

"With large-sized projects looming ahead, fund shortages will be a critical issue in the future," said Chung.

(kkt@heraldm.com)



By Ko Kyoung-tae