ANALYSTS looking at the scale of Korea’s economic expansion in recent years need look no further than its primary energy consumption. This has doubled since Seoul hosted the Olympic Games in 1988, an historic event which served as a launch pad for Korea’s ambitious attempt to globalise its economy. Oil imports have registered an even more meteoric rise, more than doubling in volume in just five years front 1990-95.

The role of oil in Korea’s energy mix is a powerful one. With no indigenous resources Korea has to import all of its crude oil requirements. By 1995, this had come to mean an import bill of $10,310 million, accounting for 8.32 per cent of all merchandise imports.

Oil is also gaining strength at the expense of other fuels, accounting for 62.6 per cent of primary consumption last year, compared with 48.2 per cent in 1985. The use of coal, nuclear power and firewood is in decline, while the consumption of liquefied natural gas (LNG), which began in 1986, accounts for only 6.1 per cent of primary consumption so far.

The grip of the Middle East on the Korean oil market is equally striking. Last year, the region accounted for 77.9 per cent of all oil imports, according to the Korea Petroleum Association. Reflecting the reasing trend for more Saudi Arabian oil to flow east rather than to traditional customers in the west, the kingdom accountedl for 47 per cent of the Middle East total.

Like its neighbour Japan, Korea has a longterm strategy for diversifying its sources of energy and reducing its reliance on the Middle East region. Historically, this has involved the creation and maintenance of a national stockpile, the promotion of overseas exploration and development by Korean oil companies, state direction of the purchase and refining of crude oil, and tight regulation of domestic distribution.

Amid Korea’s headlong dash to join the ranks of the industrialised nations, this regime is rapidly being eroded as a range of restrictions are lifted. Export-import approval for petroleum products has been abolished, the number and location of retail outlets is no longer restricted and the government has stopped dictating the ratio of contract to spot purchases of crude oil. From 1 January 1997 there will be further deregulation of the import and export of crude oil and products, although the remaining rules for trading in oil may make it virtually impossible for new operators to enter the business.

Paying up

As the regime of controls is reduced, consumers will be paying more for petroleum products as gasoline taxes are being increased sharply. Some prices went up by nearly 50 per cent in July alone as new taxes were applied to products and a special levy was imposed to help pay for investment in education. The increase in prices for consumers was far higher than the recent rise in oil import prices.

The boom in private car ownership is the biggest single cause of increased petrol consumption and a symbol of Korea’s recent rise in personal prosperity. Gasoline consumption rose by 16.2 per cent in 1995 alone, outstripping the growth in demand for every other major product, with the exception of kerosine, which shot up by 31 per cent during a cold winter.

A less fortunate consequence is the increase in urban pollution levels and the government is imposing more demanding emission standards to help meet international targets on the production of socalled greenhouse gases.

Korea’s refiners are engaged in a hurried expansion and upgrading programme to meet the changing needs. Crude oil distillation capacity has doubled since 1988. In 1993, the government approved capacity expansions by Yukong, Ssangyong, Hyundai and Honam. A parallel expansion has been proceeding in heavy fuel oil cracking and desulphurisation capacity. This is essential to supply light petroleum products and meet the tighter environmental standards. By the end of 1997 there will be an additional 123,000 b/d of cracking capacity and a further 180,000 b/d of desulphurisation facilities.

Despite these additions, the Korea Petroleum Association says there is a need for yet more desulphurisation capacity.

The expansion has led to the first Middle East investment in the Korean downstream sector. Saudi Aramco has added to its regional refining interests in China and the Philippines by becoming an investor in the upgrading project at the Ssangyong refinery, which has gained a long-term, secure supply of oil through the partnership.

The trend to lighter petroleum products, from heavy fuel oil to gas oil, is echoed in the increasing adoption of liquefied natural gas (LNG) for power generation. This has to be imported and Korea is compounding its dependence on Middle East oil with major purchases of gas from the Gulf region. The buyer is Korea Gas Corporation which is to take 4 million tonnes a year (t/y) of LNG from Oman, starting in 2000. From 1999 it will be taking 2.4 million t/y from Ras Laffan LNG Company in Qatar, with an option on another 3 million t/y.

The efforts of Korea’s own energy companies in developing their own oil assets overseas have yielded very limited results so far. Yukong has interests in Yemen and Libya, where the Korea Oil Development Association (Pedco) is also an investor. Yet, imports of so-called self-developed crude reached only 3.1 million barrels in 1995, covering 0.5 per cent of crude oil imports.