Korea National Oil Corp (KNOC) seeks to become a big oil dog with foreign ventures

Implications: Sarah J. Wachter in Seoul, South Korea reported in the June 30 issue of the International Herald Tribune that the government is becoming concerned about crude oil supplies. Over 97% of purchases are on the open market. High fuel prices recently caused thousands of truck drivers to strike. Korea’s economy is in trouble because of a 60% rise in the cost of oil imports this year. The nation’s economy is energy-intensive because of a high manufacturing content. Consequently South Korea is intensifying its worldwide search for crude oil reserves. To stimulate the industry, the government offers credits to Korean companies engaged in oil development projects overseas. Diplomatic activity is increasing as the country tries to influence foreign governments to grant oil concessions. Part of the strategy is offers to trade expertise in information technology, oil refining and power generation. A bottleneck that could make the effort difficult is a lack of skilled oil industry professionals.  

Analysis:  Even as early as 2004-05, South Korea, concerned about future supplies began negotiations with Uzbeknefgas (Uzbekistan state-run oil and gas company. A joint venture agreement was signed that gave KNOC and Korea Gas Corp. (Kogas) the right to explore two oil fields and two gas fields. In 2006, KNOC made two natural gas discoveries named Donghae and Ulsan in the Sea of Japan. Both were small and considerable evaluation still must be done before a pipeline can be constructed. This year, their liquefied natural gas (LNG) contracts with Qatar and Indonesia terminate, partially offset by long-term contracts with Yemen and Russia. But these supplies will not be adequate to cover demand growth. KNOC negotiated a profit-sharing contract with the Kurdistan Regional Government (KRG) for a concession in the Kirkuk area but in December of 2007, the Iraqi Oil Ministry in Baghdad cancelled the contract on the grounds that it was illegal. The ministry warned KNOC that further attempts to negotiate with the KRG could lead to blacklisting for future Iraqi contracts. Negotiation is currently in progress with no indications of an early settlement. On the LNG side, Kogas (6%) is part of an international consortium to build a liquefaction plant in Yemen which would eventually allow new LNG supplies. Financing of $2.8 billion is lined up of which Total put up $1 billion. Total will be the project leader. Hyundai (5.88%) is also part of the consortium. In late 2007, KNOC announced that it was interested in buying Burren Energy which has oil and gas production in the M’Boundi field in Congo. But so far they have been outbid by Eni of Italy. The above examples show how difficult it is for a company like KNOC to enter the big leagues. It is mainly a question of Capital which KNOC does not yet have enough of.