Korea has yet to find any viable oilfields on its territory but one of the country's major export items is diesel fuel - a substantial proportion of its outbound shipments are now explained by that item.

Behind the mystery are the country's four main refiners, which import almost 1 billion barrels of crude oil every year to refine for both local consumption and exports. Not content with the refining margins in the "downstream" procedures, they are now ready to step into a more lucrative segment of "upstream," or a process of exploring and developing oilfields on their own.

"In the past, refiners were happy with downstream when crude prices were not so strong. But in line with their abrupt appreciation over the past decade, they had to move to the more profitable upstream sector," a Korea Petroleum Association (KPA) official, Jeon Jae-sung, said.

"They are trying to getting bigger and such efforts will continue in the upstream area down the road. Then, Korean players may be able to create more value from the petroleum industry."

In the early 2000s, global crude prices slumped to below $20 a barrel due to mass production, but they started to rise thereafter because of the 2001 terrorist attack on the U.S. and rising demand from developing economies such as China and India. In the summer of 2008, crude oil traded at more than $130 a barrel. Although it plummeted to below $50 in the aftermath of the global financial crisis in late 2008 and 2009, it quickly regained the $100 mark. Currently, it moves in the vicinity of $120 and some fear further rises.

Downstream juggernaut

Currently, the nation's refinery business is headed by SK Innovation while GS Caltex is the runner-up. S-Oil is No. 3 and Hyundai Oilbank is the smallest in the four-way competition. As far as downstream is concerned, they are powerhouses based on the relatively simple business model of importing crude oil, refining it and selling a variety of products both at home and abroad.

Last year, Seoul imported a total of 927 million barrels of crude oil and 87 percent of it came from the Middle East with Saudi Arabia being the single biggest trader by any measure. Refiners send oil tankers such as ultra-large crude carriers, whose size is about 1.5 times bigger than Korea's tallest 63 Building. It takes typically about a half month for the ships to reach Saudi Arabia from Korea. After filling their tanks over about five days, they return to Korea, which takes up to 20 days to reach homeport because of the additional weight of their cargo.

Refiners distil crude to come up with products such as liquefied petroleum gas, naphtha, kerosene, gasoline and bunker C fuel and along the way, they generate refining margins. Their facilities work around the clock because shutdown expenses are so great, which means that tankers filled with crude must reach the country every day so that the refineries keep working.

"Originally, Korean oil companies focused merely on the local market, particularly before gasoline prices were directly regulated by the central government before 1997," Jeon said. "Yet, they needed a new bang for their buck soon after the regulations were eased and found a pair of solutions. The first was to turn their eyes to the overseas market and the second was to go upstream."

By the mid 2000s, refinery produce including gasoline and diesel became top export items and last year, their exports amounted to $51.6 billion, trailing just the shipbuilding business. During the first quarter of this year, their exports stood at $13.7 billion in order to top the podium, even nudging past the conventional cash cow of automobiles at $12.8 billion.

Going upstream The downstream business model promised some profits but as crude prices went up during the first decade of the new millennium, their operating income ratio started heading south. Accordingly, they opted to employ the second option of going upstream spearheaded by business bellwether SK Innovation together with the state-run Korea National Oil Corp (KNOC) - they made efforts to explore and develop oilfields on their own instead of buying them from producers. In 2006, SK Innovation had the rights for merely 20,000 barrels of crude pumped a day but the figure more than tripled to 64,500 barrels last year. The Seoul-based outfit's turnover from the upstream business also more than trebled between the six-year period from 335.9 billion won to 1.05 trillion won.

"As you go further upstream, you can find more added value. We have the target of becoming an independent country in terms of energy procurement even though we hardly produce oil or gas," an SK Energy official said. In fact, the task of jacking up the country's self-sufficiency ratio in energy is not just a private mission but also a nationwide agenda, which has been sought by outfits such as KNOC.

Over the past four years, KNOC carried out seven big-sized merger and acquisition (M&A) including Dana Petroleum of the United Kingdom, Petro-tech of Peru and Canada's Harvest Energy. Such efforts worked handsomely - last year, the proportion of Korea-owned oil and gas imports out of its overall fuel consumption amounted to 13.7 percent, up from 9 percent in 2009.

KNOC strives to crank up the figure to 18 percent this year and 30 percent by 2019. In achieving the tall tasks, the organization reached a milestone of signing a contract with the Abu Dhabi National Oil Company to win the right to drill in around 11 percent of the United Arab Emirates' oil-bearing territory.

Under business alliance with GS Caltex, KNOC plans to invest as much as $2 billion with which the public corporation hopes to hit a jackpot of giant oil fields in the oil-rich Middle East country. There are some doubts on their performances as the Board of Audit and Inspection recently pointed out that most oil exploration rights do not actually see much crude brought into Korea. In response, Korean refiners and KNOC counter that things would improve in the future while arguing that they have no other options to tap into the upstream segment to stay afloat amid the stiff global competition.

Copyright 2012 The Korea Times. All Rights Reserved.

(Originally published April 17, 2012, in The Korea Times.)