In early March, South Korea’s President Park Geun-hye made a four-nation tour of the GCC and held summits with the leaders of Kuwait, Saudi Arabia, the UAE and Qatar.

It was South Korea’s largest ever business delegation, containing 116 representatives of public and private firms offering a wide range of services aimed at helping the region prepare a diversified business portfolio for the post-oil era. The business leaders came from sectors including energy, security, construction, rail, healthcare and information technology.

There was a large gap between imports and exports in 2014, but with energy prices coming down, that gap will close in 2015

South Korea’s Ministry of Foreign Affairs & Trade

The visit took place at a time when oil prices have reached their lowest level in six years and South Korea is faced with sluggish growth that is seriously stalling its economy. As a result, bilateral cooperation between the region and one of its largest energy customers has become more vital than ever.

Observers have suggested the official delegation was a reminder from Seoul to the GCC’s major energy producers that, as one of their most important customers, it expects to be treated more favourably than others.

Despite the relationship between South Korea and the Middle East being symbiotic, the former imports vastly more than it exports to the region, and this is something Seoul would like to address as it looks to revitalise its economy.

Selective spending

Low oil prices mean the high levels of spending witnessed in the GCC over the past six years, especially in the hydrocarbons sector, are unlikely to be sustained between now and 2020. Most GCC economies, however, are still committed to other capital spending, especially in social and conventional infrastructure, as well as stimulating growth through conversion industries, and South Korea could assist with all these objectives.

Park’s visit underlined the fact that Seoul has been able to industrialise its economy and build world-class infrastructure, while staunchly defending the border it shares with North Korea. There are, therefore, many areas where the Southeast Asian country thinks it can work with the GCC.

High energy prices have contributed to the sluggish growth in South Korea in recent years and the economy is expected to grow by only 1 per cent in 2015. However, as prices for both oil and gas have dropped by 50 per cent in the past eight months, this should provide a stimulus for a country reliant on heavy industry and manufacturing as its main economic drivers.

South Korea has no energy reserves of its own and has to rely entirely on imports. This has meant that in recent years it has been subject to triple-figure crude prices and Asian liquefied natural gas prices of $16 a million BTUs.

According to South Korea’s Ministry of Foreign Affairs & Trade (Mofat), the country bought $36.7bn-worth of oil from Saudi Arabia in 2014, amounting to more than 300 million barrels. In return, only $8.2bn-worth of goods, including vehicles, electronics, steel and other industrial equipment, travelled in the opposite direction. The UAE sold $16.1bn-worth of oil, or 108 million barrels, to South Korea, with $7.2bn of exports coming back in return.

The disparity between exports and imports is even greater in Kuwait and Qatar. Kuwait exports nearly $17bn of oil, but imports less than $2bn of goods from South Korea. Qatar exports $25.7bn-worth of gas while importing only $905m-worth of goods, making Seoul Doha’s second-largest trade partner.

“There is a close relationship between South Korea and the Middle East, and that has been built on the back of energy imports,” says a spokesman from Mofat. “There was a large gap between imports and exports in 2014, but with energy prices coming down, that gap will close in 2015.”

New era

This reversal now makes Seoul’s bargaining position far more powerful, especially as there is a clear strategy from the GCC’s major oil producers to maintain high output and sell at a discount to sustain market share with key customers.

There is a definite feeling among some South Korean multinationals that operate in the Middle East that a new era is beginning that will see a different approach to doing business.

However, there are others that believe business opportunities in the region are diminishing with lower oil prices and the future lies in other markets.

“When I go back to Seoul, there are two trains of thought [about the Middle East], with some saying this is the time to build on what we have already achieved and others thinking it is time to look at markets in South America or the CIS [Commonwealth of Independent States],” says a GCC-based country manager at a large South Korean contractor. “I think there are still some great opportunities here, but the market is slowing down and there is not as much work as there was three or four years ago.” 

In the period between 2009 and 2013, South Korean contractors won $123bn-worth of work in the Middle East and North Africa (Mena) region, according to regional projects tracker MEED Projects. The vast majority of this work was won in the two key markets of Saudi Arabia and Abu Dhabi, and mostly in the process plant markets in sectors such as oil and gas, petrochemicals, and power and water generation.

The South Korean model of low bidding for contracts, coupled with extremely aggressive procurement and project management, was hugely successful. It was also popular with clients due to almost all the risk being taken by the contractors.

But in 2013 and 2014, many of the most successful South Korean contractors in the region, including Samsung Engineering, GS Engineering & Construction and Daelim Industrial, all reported huge losses running into hundreds of millions of dollars. The party was well and truly over.

“There is absolutely no chance of us ever bidding that low for work again,” says a GCC-based business development executive for a major South Korean contractor. “We took the risk and overstretched, but it cost us and no [South] Korean is going to bid at those prices again.” 

In 2015, the market is certainly different. In contracting, there is already more of a collective approach to major projects, with consortium bidding becoming increasingly popular on large infrastructure, power and energy schemes. 

Park’s tour was a success and agreements were signed in all four nations that will increase cooperation between the Gulf states and Seoul.

Five years after winning a $20bn deal from the UAE, nuclear power generation is back on the agenda: a memorandum of understanding for further cooperation was signed between South Korea and Saudi Arabia for two small-to-medium-sized nuclear power stations. Seoul also signed a deal that will see Qatari nationals being trained in nuclear physics and the construction of a research reactor. 

In the energy field, research and development agreements have already been signed with Abu Dhabi and Kuwait, and more are expected to follow.

Riyadh is also keen to foster links between some of South Korea’s most recognisable brands, including electronics giants Samsung and LG, and automotive manufacturers Kia and Hyundai. This could result in future manufacturing bases being set up in the kingdom’s burgeoning industrial cities.

Approach criticised

This economy-first type of diplomacy being promoted by Seoul is not without its domestic critics, however. Jang Ji-hyang, a research fellow of the Middle East and North Africa Centre at the Asian Institute for Policy Studies in Seoul, believes South Korea should be taking a less business-led approach.

“I understand there is a need to stimulate the domestic economy, but a better strategy would be to first ensure the Middle East is a safe and secure place to do business,” she says. “We are a mature economy and we should be offering assistance to try and sort out the security issues in the region first and then sort out the business deals later.”

Jang also thinks Seoul is running the risk of looking like it is only interested in making money, and says a more balanced policy that combines business and security would be beneficial to both parties.

South Korean companies are now well-established players in the Middle East across many different sectors. With the latest round of agreements, it is clear these relationships will grow stronger over the next few years.

Seoul knows it has the experience to help guide the region through its own economic miracle, and this is why Park has offered her country’s assistance. Lower oil prices will only reinforce this as the GCC’s major economies look to lock in their best customers and diversify away from hydrocarbons. A new era – and even closer relationships – now beckon.