South Korea: Building for the Future

South Korea is approximately 99 times smaller than the United States, 96 times smaller than China, 171 times smaller than Russia, three times smaller than India, and four times smaller than Japan.

Despite being a relatively small country, South Korea claimed fifth place in the global market standings in crude oil refining capacity. According to the data released from the Korea Petroleum Association, Korea’s daily average refining capacity rose to 3,346,000 barrels last year.

Figure 1: Crude Oil refining capability, (Han Ye-kyung, Minu Kim 2019)

The following question naturally comes to mind: How did South Korea reach such a high global ranking knowing that the country has no proven oil reserves?

South Korea is not an oil producing country, it has no proven oil reserves. The maximum it has ever managed to produce from its natural gas field located offshore in the East Sea (Donghae-1) through the efforts of the Korea National Oil Corporation (KNOC) came in around 1000 b/d of ultra light crude oil (condensates), which in the grand scheme of things is an extremely negligible portion of its 2.4 million b/d of petroleum consumption a day, and yet, South Korea managed to feed its giant ever-expanding companies such as Hyundai, KIA, Samsung, Goldstar, Daewoo, etc.

South Korea is one of the world’s leading energy importers. It is the second-largest importer of liquefied natural gas (LNG) in the world, and it ranks among the world’s top five importers of coal, crude oil, and refined products. As a result of insufficient domestic resources, South Korea relies on imports to meet about 98% of its fossil fuel consumption (U.S. Energy Information Administration, 2019).

Despite its lack of domestic energy resources and relatively small size, South Korea is home to some of the biggest and most advanced oil refineries in the world, with three of their refineries in the top five in the world: SK Energy 850,000 b/d, GS Caltex 730,000 b/d and S-Oil 669,000 b/d.

Since the early 2000’s, Korean refineries have invested about $9.32 billion to upgrade their facilities when demand for light oil products surged.

In 2015, South Korea was the ninth highest energy consumer in the world (2.4 million b/d of petroleum and other liquids), and it was Asia’s largest gasoline exporter (it exported $25 billion of refined petroleum in 2015 alone). South Korea’s ranking for energy consumption gets higher every year and in 2017, the country was ranked eighth in the global ranking (Han Ye-kyung, Minu Kim 2019).

Figure 3: South Korea total primary energy consumption by fuel type, 2017 (Euro Petroleum Consultants)

Although petroleum and other liquids, including biofuels, accounted for the largest portion (44%) of South Korea’s primary energy consumption in 2017, its share has been declining since the mid-1990s, when it reached a peak of 66%. This trend is associated with the steady increase in natural gas, coal, and nuclear energy consumption, which has led to the reduction of oil use in the power sector and the industrial sector (U.S. Energy Information Administration, 2019).

However, following Japan’s Fukushima disaster, the government scaled back its long–term plans to rely on nuclear power. President Moon Jae-in explained how renewable energy must be supported as the country phases out coal (mostly due to environmental concerns) and nuclear power (due to safety concerns).

Korea is the most densely populated of the world’s major economies, with more than 50 million people inhabiting an area seven times smaller than Texas. Its electricity consumption in kWh per capita is the highest in Asia, rivalling that of the United States. Between 1998 and 2017, the country’s economy quadrupled from 374 billion to 1.53 trillion, and with it came an enormous growth in demand for electricity. South Korea is still reliant on coal-fired and nuclear power for much of its power generation, and their officials are looking for new technologies to replace existing power generation (BloomEnergy, 2019).

Refining Industry in South Korea:

I. IMO 2020

The refining industry is on the brink of a major shift in the demand structure of bunker fuels. Refiners are making plans to meet changing product demand brought about by the IMO 2020 deadline.

IMO 2020 states that the marine sector will have to reduce sulphur emissions by over 80%, by switching to lower sulphur fuels. The current maximum fuel oil sulphur limit of 3.5 wt% will fall to 0.5 wt%. High sulphur fuel oil (HSFO) will be converted to low sulphur oil (LSFO). IMO 2020 regulations will see the largest reduction in the sulphur content of a transportation fuel undertaken at one time (Rick Joswick and Chris Midgley, S&P Global Platts Analytics 2019).

Asia, due to its surplus of gasoil and its relatively high complexity of refineries, is set to benefit the most from IMO 2020, more than any other region. Moreover, South Korea is home to one of the world’s top shipbuilding industries as it is located on a major waterway, which will make it an even bigger beneficiary from these new regulations.

South Korea's top refiner - SK Energy - has increased production of gasoline and gasoil in the first half of the year on solid local demand, while reducing output of fuel oil. Gasoil demand is expected to grow as the IMO regulations will be implemented from January 2020.

Table 1: Gasoil/Gasoline vs Fuel Oil production (Euro Petroleum Consultants)

IMO pulls on gasoil, which pulls on gasoline, which pulls on naphtha. This underscores the domino effect IMO 2020 is having on the crude complex ranging from refined products to petrochemicals (E. Yep, M. Tan, S.Koh, SPglobal, 2019).

The rise in auto fuels production (such as gasoil and gasoline) was pushed by the strong local demand on lower retail prices, thanks to oil tax reduction. The South Korean government cut taxes on auto fuels by 15% for six months from November last year. This was supposed to end in May, but the South Korean government extended this until August and also set a 7% lower rate rather than 15%, to ease the burden of the growing oil prices on households and small businesses (G.P. Vahn, C.Lee, SPglobal, 2019).

II. What are South Korean Refineries Investing in?

The four major South Korean oil refineries - SK Innovation, S-Oil, GS Caltex, and Hyundai Oilbank have maintained or slightly improved their oil refining capacity over the past decade, but they have significantly increased their petrochemicals production capacity.

Korea’s petrochemical industry has an advantage of being closely located to the world’s largest import market of China as well as the fast-growing markets of Southeast Asia and India. Based on such advantage, Korea can reduce distribution costs and delivery time.

South Korea’s petrochemical majors affirmed a total investment plan worth nearly $13 billion over the next five years.

Catex Corp – the country’s second largest refiner – will invest $2.1 billion by 2021 to build an olefins manufacturing plant or a mixed feed cracker at its Yeosu manufacturing complex.

Saudi Aramco bought a 35% interest of S-Oil in August 1991 and increased its share to 63.41% in 2018. The Middle Eastern oil producer is moving into petrochemicals as a way to earn more from its energy deposits. On 26th June 2019, S-Oil – the third largest South Korean refiner – together with Saudi Aramco, inaugurated the RUC-ODC project. S-Oil will expand its 669,0000 barrel-a-day refinery and chemical complex by constructing an olefin downstream complex (ODC) and a new residue upgrading complex (RUC) near its Onsan factory in the southeastern city of Ulsan. The project is worth around $4.2 billion. The new complex (RUC) features the latest refinery technologies which have raised S-Oil’s petrochemical portion from 8% to 13%, and it also includes production of propylene and gasoline (Bloomberg, 2019, catalystgrp, 2019).

Table 2: OGJ Online, 2019, Euro Petroleum Consultants

The RUC-ODC inauguration also included a memorandum of understanding (MOU) between the two companies (Saudi Aramco and S-Oil), to collaborate on the second phase of the complex which will involve the construction of a $6 billion, 1.5 million-tpy mixed-feed steam cracker and olefins downstream project, scheduled to be completed by 2024.

Hyundai Chemical Co. - a joint venture between Hyundai Oilbank Co. and Lotte Chemical Corp.- is investing $2.3 billion to build a heavy feed petrochemical complex at Hyundai Oilbank’s manufacturing plant in Daesan.

Other South Korean oil refineries, LG Chem Ltd for instance, have also been investing in petrochemical facilities. LG Chem Ltd signed an agreement with Yeosu City and will be investing $1.8 billion to build a new facility which will include a naphtha cracking center and manufacturing plant for polypropylene (PP), polyethylene (PE), and other high value-added products.

Following the Ulsan inauguration of the RUC-ODC projects, Aramco signed 12 more agreements worth billions of dollars with other South Korean partners covering ship building, engine manufacturing, refining, petrochemicals, as well as crude supply, sales, and storage. Saudi Aramco is enlarging its presence in South Korea by buying stakes in local refiners and has now become the second largest shareholder of Hyundai Oilbank, Korea's fourth largest refiner affiliated with Hyundai Heavy Industries, after acquiring a 17% stake in the company.

South Korea’s Latest Agreements

South Korea has also accelerated a plan to generate power from clean sources, including, notably, fuel cells. South Korea has already deployed more than 300 MW of fuel cell systems, and now plans to increase that total to 600 MW by 2022, making it the world leader in the deployment of the technology for utility power. (BloomEnergy, 2019). Saudi Arabia’s Crown Prince Mohammed bin Salman has also signed a $6 billion agreement with S-Oil, in which both companies will collaborate on hydrogen fuel-cell technology development (Park Yong-beom, Cho Jeehyun, Pulse, 2019).

Between supportive government ventures and innovation from local industry, the country is positioned to become a global energy leader. South Korea’s chemical industry is entering a position of leadership in the world market. However, industry experts affirmed that there is still need for more investment in developing environmental chemical technology and the production of more eco-friendly materials in order to bring the sector in line with other more advanced chemical producers. The information gathered and stated in this article gives us a good insight on where the key investments will take place in South Korea:

1. Yulchon General Industrial Complex
2. Ulsan-Mipo National Industrial Complex
3. Onsan National Industrial Complex
4. Yeosu National Industrial Complex
5. Daesan General Industrial Complex

Presently, South Korea has some of the world's top oil refining centers, and the implementation of the announced agreements and projects can only further strengthen its position.

Learn more by attending ASIA-TECH 2020 – Asia Downstream Technology Forum, October 2020 in South Korea. Visit www.asia-tech.site for more details.

Sonia Sanchez B.Eng.

Project Executive

EURO PETROLEUM CONSULTANTS

Euro Petroleum Consultants is a technical oil and gas consultancy with offices in Dubai, London, Moscow, Sofia and Kuala Lumpur. Euro Petroleum Consultants also organises leading conferences worldwide.