Gulf states are working with Seoul to formalise trade links in a free trade agreement, but national interests are slowing progress
To put a sense of perspective on trade between any of the major net oil importing countries and the Middle East, South Korea provides an excellent case study. While the East Asian state has a strong manufacturing base and its famous brand names such as Samsung, LG and Hyundai all have a prominent presence in the region, the value of the hydrocarbons that sail from the Middle East dwarves anything South Korea sends in the opposite direction.
According to the South Korean Ministry of Foreign Affairs and Trade (Mofat), the country exported just under $3bn-worth of goods to Saudi Arabia in the last available set of figures for 2007-2008. Saudi Arabia on the other hand exported $20.5bn-worth of oil to South Korea - 280 million barrels - making it the biggest exporter of hydrocarbons to the country.
Across the GCC the figures make similar reading, whether it is the UAE’s oil or Oman, Qatar or Yemen’s liquefied natural gas (LNG). In 2009, South Korea imported 87 per cent of its oil and 55 per cent of its LNG from the Middle East.
However, while this bilateral trade may appear weighted in favour of the Middle East, what is not included in Mofat trade figures is something South Korea is selling that is becoming increasingly popular in the region - its engineering, procurement and construction (EPC) contracting expertise.
The Middle East is the number one export market for Korean construction companies and in 2009 accounted for 67 per cent of their business. Major multibillion-dollar contracts were won by South Korean contractors in Saudi Arabia and the UAE, as well as other nations such as Algeria.
The nuclear power plant deal has established a new momentum for economic cooperation
Bong-Kae Do, Mofat
In total $221.6bn-worth of contracts held by South Korean companies are in the Middle East and North Africa (Mena) region out of a total of $280bn worth of foreign contracts in total, according to the International Contractors Association of Korea.
“Even though we can trace 1,000 years of exchanges between Korea and the Middle East, today both sides acknowledge the importance of partnerships away from the past energy-related exchanges,” Bong-Kae Do, director of the Middle East division at Mofat, tells MEED. “The Korean government has continued to strengthen the cooperative partnership with Middle East countries.”
Seoul holds government-level dialogues with almost all of the Middle East countries in the form of joint economic committees, and the East Asian state has reached many agreements to facilitate economic cooperation with the Middle East.
In the case of South Korea and the UAE, for example, four economic agreements are now in place: an agreement for the promotion and protection of investments; a convention for the avoidance of double taxation; an agreement for air services; and an agreement on economic trade and technical cooperation.
|South Korea project finance|
|Year||Project||Country||Total Cost ($)||Korea Eximbank ($m)|
|2005||Shuaibah independent power and water project||Saudi Arabia||2.5bn||460|
|2006||Saudi Kayan petrochemicals project at Jubail||Saudi Arabia||10bn||500|
|2007||Ras Issa refinery project||Yemen||576m||120|
|2008||Maaden fertiliser project||Saudi Arabia||553m||400|
|2009||Al-Qatrana independent power project||Jordan||470m||125|
|2010||Satorp refinery in Jubail||Saudi Arabia||12.8bn||360|
|Source: Export-Import Bank of Korea (Korea Eximbank)|
A $20bn contract was awarded to a consortium of Korea Electric Power Corporation (Kepco), Hyundai Heavy Industries, Samsung Engineering and Construction, and Doosan Heavy Industries and Construction for the development of the Gulf state’s first nuclear power stations.
The nuclear deal signed in December 2009 between Seoul and the UAE is an indication of how far political and trade relations have come between Korea and the Middle East. The construction contract alone lasts for 10 years and the contract for the operation of the facilities will last for the life-span of each nuclear reactor - about 60-70 years.
“Winning the nuclear power plant deal has established a new momentum for economic cooperation between our country and the Middle East,” Do from Mofat explains. “The [nuclear] deal with the UAE is a starting point for Korea,” he adds.
“We understand the UAE chose the Korean consortium for its rich experience, its high level of competitive price, short construction period and most notably the safety of Korean [nuclear] power plants. We hope Korea will play a meaningful role in the global nuclear energy market.”
While the nuclear deal with the UAE was the largest of its kind won by Korean companies, a number of other multibillion-dollar process plant projects were won by the nation’s EPC contractors in the Mena region, especially Saudi Arabia, Abu Dhabi and Algeria, last year.
With projects of such magnitude, the issue of finance is of vital importance and the Export-Import Bank of Korea (Korea Eximbank) has become a key partner for any South Korean contractor looking to win work in the Middle East.
The massive rise in multibillion-dollar projects being awarded to South Korean contractors has meant that Korea Eximbank is undergoing what is its busiest period for funding overseas projects. Established in 1976, Korea Eximbank is one of two official export credit agencies in the country. The bank provides export credit and guarantees programmes that support Korea’s export-led economy and the national companies in their overseas business.
More contractors from South Korea are putting their own money into projects as equity investors now
Doo Cheol Ha, Korea Eximbank
“The South Korea contractors are expanding their businesses in the Middle East area, especially in the oil and gas sector, and they are very competitive in the downstream area,” Doo Cheol Ha, senior loan officer from Korea Eximbank explains. “Usually export credit agencies cover about 50 per cent of the EPC amount, so for us, 2009 was a busy year,” he adds.
The deals that Korea Eximbank has helped to find in recent years include independent power projects and refinery schemes in Saudi Arabia, Jordan and Yemen.
“The domestic markets for most areas are not good, but the Middle East is a good area at the moment with regard to projects. Korea is expecting $70bn-worth of contracting exports in the next two years,” he says.
Another area of opportunity is also opening as the Middle East countries look to diversify away from hydrocarbons and expand their industrial bases into manufacturing products such as aluminium and steel.
Negotiating free trade
While the Middle East’s domestic demand for metals and other manufactured goods is on the increase, much will still have to be exported. With this in mind, the GCC countries and South Korea have been trying to negotiate a free trade agreement (FTA) that would eliminate any tariffs between the South Asian state and the six-nation collective.
An FTA is still not in place, but three rounds of talks have already been held – the first in Seoul in 2008 and two further rounds in Riyadh in 2009. The initial feedback gives an indication of the direction in which some nations are heading concerning manufacturing.
“Korea’s top priority product in the negotiations with the GCC is cars,” a source close to the talks says. “Korea was told from the GCC side that Saudi Arabia has a plan to nurture its own automotive industry. [Saudi Arabia] has to conclude its internal consultation first before opening the automotive market to South Korea, however.”
The source also reveals that no request for direct investment has been made to the South Korean automotive industry to setting up a manufacturing facility anywhere in the GCC area.
“[Saudi Arabia] didn’t ask South Korea to increase its direct investment in the GCC, but the reason why there is some sensitivity regarding the automotive sector is that they are trying to attract direct investment from a third-party country. We don’t know which one,” the source adds.
While there are other products on the South Korean side of the FTA such as electronics and steel products, the source says that South Korea’s position is clear.
“[The GCC] wants more time to make a decision regarding its position on automobiles, but without automobiles there is no FTA; that’s Korea’s position.”
Over the past two years each of the major hydrocarbon producers in the Middle East have stepped up efforts to diversify their economies away from a reliance on hydrocarbon revenues.
But changing a country’s industrial base to include petrochemicals and metals manufacturing will take decades to fully realise. South Korea will, therefore, continue to be a key trade partner for many years yet, but at the same time, South Korea realises that it must be ready to evolve to the next stage.
National development projects
“More and more contractors from South Korea are putting their own money into projects as equity investors now,” Ha from Korea Eximbank says.
In particular, South Korean firms see opportunities in the national plans for developing and diversifying economies.
“We hope that our EPC contractors will be important participants in the national development projects of Mena-region countries,” Do from Mofat says.
“The hard working spirit of the South Korean people will be of great service to the planned socio-economic infrastructure projects that are becoming more commonplace in that area.”
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