Project back on track to make Yeosu oil hub of Northeast Asia

2012-04-19 19:39

KNOC pushing to build another  oil storage  facility in Ulsan

The Korea National Oil Corporation’s ambitious scheme to develop Yeosu, South Jeolla Province into an oil hub of Northeast Asia comparable to Europe’s ARA (Amsterdam, Rotterdam and Antwerp) and Singapore’s Jurong Island has finally begun to proceed smoothly.

An oil tank terminal with a capacity to store 8.2 million barrels of crude oil and petroleum products is under construction in Yeosu.
An aerial view of the oil tank terminal construction site in Yeosu (KNOC)

Oil Hub Korea Yeosu, a subsidiary of the KNOC, raised 360 billion won ($316 million) by issuing corporate bonds in late March and hedged the entire amount against currency risks, completing the groundwork for stable management, the state-run oil developer said.

The KNOC has prepared for the project to make Korea the Northeast Asian center of petroleum trade for about a decade.

The experience of oil crises in the 1970s led to the need for strategic petroleum stockpiling, but as state-funded companies faced pressure to stand on their own feet in the late 1990s, the KNOC decided to make its petroleum stockpiling business no longer static.

The company began to seek revenue by using its petroleum storage facilities and oil reserves without undermining the original purpose of strategic stockpiling.

As it successfully led kinetic stockpiling projects, the KNOC recognized that Korea, with its internationally important status in petroleum consumption, refining and exports, had high potential for the oil storage business, and initiated the oil hub plan.
Executives of KNOC and Vopak pose for a photo after signing a preliminary deal late last month in Seoul to cooperate for the project to build a petroleum storage facility in Ulsan. (KNOC)

World-renowned tank terminal companies and oil traders showed great interest and expressed their wish to participate in the project.

In 2008, the KNOC established the joint venture Oil Hub Korea Yeosu with Oiltanking, the world’s No. 2 operator of storage facilities for petroleum and petrochemical products; Glencore, the world’s top raw material trading company; SK Energy and GS Caltex.

Oiltanking and Glencore, however, pulled out from the joint venture in March last year, citing the eurozone debt crisis and the deteriorating oil market conditions.

The construction in Yeosu had already begun, but the withdrawal of the two companies and the delay in finding new shareholders held up project financing.

Eventually, based on its experience in international joint oil reserve programs, the KNOC brought in China Aviation Oil, Samsung C&T and LG International Corp. as new shareholders late last year and inked a deal to use 60 percent of the storage facility’s capacity for eight years.

After struggling in project financing for more than a year, Oil Hub Korea Yeosu decided to issue corporate funds.

The company raised funds by issuing commercial papers late last year in close cooperation with Hyundai Engineering & Construction which is building the facility.

Despite having no operation records yet, Oil Hub Korea Yeosu got a credit rating of A+ for “stable” through consultations with credit rating agencies and financial institutions, and became the first Korean company under construction to succeed in issuing corporate bonds.

By issuing corporate bonds worth 360 billion won, the company saved about 32 billion won in financial costs compared to project financing.

A week after the issuance, the entire won-denominated corporate bonds were redenominated in U.S. dollars through a currency rate swap on March 29 to hedge against currency risks.

The company’s successful issuance of non-guaranteed corporate bonds is attributed to the constant support of shareholders including the KNOC, their active cooperation to sign a contract to use 60 percent of the facility for eight years, the name value of the builder Hyundai E&C and the fact that around 70 percent of the construction in Yeosu was completed.

The KNOC expects the Yeosu project to have direct and indirect effects on production inducement amounting to 306.6 billion won on annual average between 2011 and 2015, and hire 1,378 people directly or indirectly in 2015.

To establish a full-fledged Northeast Asian oil hub, the KNOC is pushing for construction and operation of an oil storage facility with an initial capacity of 9.9 million barrels in Ulsan, South Gyeongsang Province, in addition to the Yeosu project.

For this, the KNOC signed a memorandum of understanding for collaboration with the world’s leading petroleum and chemicals tank terminal service provider Vopak in March.

The KNOC anticipates its experience and knowhow in attracting shareholders, engineering, fund raising and securing clients for the Yeosu project to greatly help make the Ulsan venture successful.

The envisioned Ulsan facility is already highly appreciated for its strategic location which is close to the refineries of SK Energy and S-Oil.

The KNOC is in the process of attracting partners and plans to finalize the participating companies by the end of this year to start the reclamation work in Ulsan’s northern harbor next year.

Once the Ulsan storage facility reaches its final target capacity of 2.789 trillion barrels, it is projected to induce 4.46 trillion won in production and create jobs for 22,000 people, the KNOC said.

By Kim So-hyun (
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