KNOC strives to secure energy through overseas deals

While investing in alternative energy, major countries are racing to secure fossil fuel resources because they are still the main driving force of industrial development.

Korea, Asia`s fourth largest economy, heavily depends on imported oil, and has also been trying hard to attain energy security by obtaining stakes in overseas exploration projects. At the center of such efforts is the Korea National Oil Corp. The state-run energy developer aims to produce 300,000 barrels of oil per day by 2012.

"For Korea, the world`s fifth-largest oil importer and seventh-largest consumer, securing energy through overseas exploration projects is the most important task," said KNOC president Kang Young-won.

"The stable supply of petroleum resources in the competitive market, driven by major oil countries and Western countries, is crucial for improving the nation`s energy security and promoting development," he said.

KNOC is seeking to further develop its exploration technology with an injection of 19 trillion won, aiming to secure 2 billion barrels. The government will invest about 4 trillion won and the rest will be self-financed, KNOC said.

KNOC is now moving to substantially raise the country`s self-sufficiency rate in oil and gas by focusing on the implementation of the project and self-expansion.



Importance of M&A

Acquiring oil fields is the key to company expansion, industry officials said.

"There is no other way to secure energy but by acquiring oil companies overseas," an M&A expert on energy in Seoul told The Korea Herald.

"KNOC can, of course, explore oil fields after getting a license from foreign countries. But that may take ages. This means M&A is the most efficient way to both secure energy and the right to explore oil fields," he said, requesting anonymity.

Exploring oil fields overseas through M&As will help the country lower its dependency on oil from the Middle East, KNOC said.

Despite progress in efforts for stabilization, the Middle East still suffers from a fragile security structure and a lack of reliable legal and bureaucratic frameworks, which hampers the investment needed for development of its resources and industries, the company said.

This year, KNOC has made a step toward becoming a global energy supplier by winning two major deals. The prices were good, thanks to the dropping value of commodity assets in the international market, industry officials said.

In February, the state-run oil company acquired Petro-Tech, an oil production and exploration company that owns an offshore oil field in Peru. It is potentially capable of churning out a total of 842 million barrels of crude oil, the company said.

Last month, KNOC has concluded a $3.95 billion merger and acquisition deal with a Canadian firm, Harvest Energy that currently produces 53,400 barrels of crude and gas per day. The purchase is expected to push up the country`s self-sufficiency in oil and gas to 8.1 percent of total domestic demand from the current 6.3 percent.

At present, production from oil and gas fields owned or partly controlled by Korean companies stands at around 120,000 barrels per day.

Although most countries are on the green bandwagon and governments are under pressure to develop renewables, there will be no alternative energy source soon to meet soaring energy demand.

"As long as the country strives to make economic development, the demand for fossil fuels will be high in the future. So, the Korean government must secure energy sources to support its economic development," an industry watcher said.

Out of nearly 50 overseas projects, the most important is a massive oil development project in Iraq. Iraq holds the world`s third-largest reserves, estimated at 115 billion barrels of crude. It produces up to 2.5 million barrels per day from its 24 fields. KNOC, by forming a consortium, has concluded a deal to explore five oil fields, expected to have 7.2 billion barrels of oil. If KNOC consortium succeeds in exploring the crude, the country will secure 2.7 billion barrels of oil. The project in Iraq will help KNOC become the 60th largest energy company in the world, with 30 trillion won of capital by 2012, the company said.



Competitive oil market

China is spending a massive amount of capital to secure oil and natural gas. Korea should not compete with the soon-to-be world`s No. 1 economy, but seek joint ventures in securing energy sources, experts said.

"If Korea tries to beat China in the energy M&A market, it will either lose or have to pay much higher than expected," an expert said.

"We need to build good relationship with China in this regard and work together when acquiring an oil company."

Earlier this year, Sinopec bought Swiss oil explorer Addax Petroleum Corp for $7.24 billion in China`s biggest overseas acquisition, following a behind-the-scenes bidding war with KNOC. A few months ago, KNOC agreed to cooperate in overseas oil exploration, production and trading with China Petrochemical Corp., also known as Sinopec Group. KNOC said it had signed a memorandum of understanding with Sinopec`s two affiliates on cooperation in crude oil storage, trade and marketing.



M&A outlook

Experts say the company has to secure more oil fields by the end of next year. The share price of an oil company is very sensitive to global oil prices. KNOC needs to carefully look at the movement of global commodity prices, an M&A expert in Seoul said.

"We need to target oil fields with a high amount of reserves. (KNOC) needs to make efforts by the end of the year to achieve the goal of securing 300,000 barrels per day," he added.

Many market watchers say global oil prices will surge next year, with demand growing.

The price of the nation`s benchmark Dubai crude is likely to reach the $80-per-barrel mark by the end of the year, according to a report by the Korea Energy Economics Institute. The price of Dubai crude is likely to hover between mid $60 and $70 level per barrel in the third quarter of the year and then to reach the $80-per-barrel mark in the final quarter. If signs of economic recovery in the United States start appearing in the final quarter of the year, capital inflow into the oil market will also increase and this will eventually accelerate the price growth of oil, it said. The oil price is crucial for Korea as the country relies almost completely on imports for its oil needs. The world`s fifth-largest crude buyer imported $85.8 billion worth of oil last year.

(christory@heraldm.com)



By Cho Chung-un