Korea National Oil Corporation: Balancing act

02 December 2005
Desperate times require desperate measures. And there is no better evidence of this dictum than at state-owned upstream operator Korea National Oil Corporation (KNOC).
Desperate times require desperate measures. And there is no better evidence of this dictum than at state-owned upstream operator Korea National Oil Corporation (KNOC).

Over the past two decades, the Middle East has been KNOC's principal source of crude oil imports, accounting for more than 70 per cent of its total global offtake. However, even though the Korean economy has recorded average annual economic growth of 3-5 per cent over the past three years and 2004 data from the Korea Petroleum Association shows that the region accounted for 78 per cent or 2.256 million barrels a day (b/d) of its total imports, the Middle East is no longer KNOC's primary focus.

'It is my mission to sign a major offtake deal with Russia,' says Jin Seok Kim, vice-president of global exploration & production. 'I am looking at a symbiotic relationship where we will both need each other.' He includes two leading energy consuming neighbouring states to strengthen his point of view. 'It makes more sense for Russia to sell oil to Korea, Japan and China, which together consume about 18 million [b/d], rather than focus on Europe, its prime buyer.' Russian exports to Europe are at present estimated to be about 8.5 million b/d.

With the 'Asian premium' still in effect, imports from neighbouring Russia will provide much-needed relief to Korea's energy import bills. Since 2001, Middle East producers have been charging a premium of $1 a barrel on exports to Asian consumers. The issue is far from being resolved, despite repeated pleas by Asian buyers.

There are also strategic matters to consider. 'For energy security, it is time we diversify our sources. We were struck hard two times by the oil crisis of the 1970s and more recently by the [Gulf] wars. Continued dependence on the Middle East will make the Korean economy more vulnerable to political developments in the Middle East. I have never felt more strongly of the need to reduce our dependence on Strait of Hormuz crude,' says Kim, citing security aspects in transportation and increasing premiums on hull insurance of very large crude carriers (VLCCs) as major deterrents.

Logistically, imports from Russia imply a shorter haul, reducing transportation costs considerably. On average, the sailing time for a 300,000-dwt VLCC from Ras Tanura in Saudi Arabia to a South Korean port is 24 days, while from Sakhalin it will be a week.

The first signs of a new relationship between Russia and South Korea were visible in late 2004, when KNOC signed a memorandum of understanding (MoU) with Russia's Rosneft Oil Company for joint exploration and production (E&P) of the Veninsky block at Sakhalin and the West Kamchatka shelf in the Sea of Okhotsk. Some $250 million is planned for investment to develop an estimated 951 million tonnes of crude oil in the two acreages. KNOC is also pursuing opportunities in the neighbouring Caspian region, where it has signed an initial agreement in Azerbaijan.

Middle East

The outcome of the Sakhalin and Caspian initiatives will be keenly awaited, but in the meantime Kim is well aware of Middle East potentials. 'We are not moving away from the region, but will invest selectively. Our aim will be to an upstream operator, with rights to book oil and gas reserves,' he says. 'With improvement in development and drilling technologies, we plan to challenge new frontiers in the Middle East.'

Kim will take note of the strategic necessity of steering clear of the Strait of Hormuz, while targeting new investment opportunities in the Middle East. Not surprisingly, Yemen figures prominently on KNOC's radar, where it signed three production sharing agreements (PSAs) in 2005 covering blocks 16, 39 and 70. In December, KNOC is due to sign another PSA for block 4. KNOC and a group of Korean private investors are aiming to invest at least $800 million in the four acreages, estimate

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