Gov't Strives to Cope
with Oil Price Hikes

Will boost overseas presence of local energy companies

Ahn Chul-shik, director-general of the Headquarters for Energy Industry at the Ministry of Commerce, Industry and Energy (MOCIE) said the government is going all out to cope with high oil prices and global warming with a focus on rearranging the oil industry toward more environment-friendly and export-oriented directions.
He also said the ministry is also working to help electricity companies advance into overseas markets. The following are the excerpts of his interview with NewsWorld.
Q: Would you first explain the government? oil industry policy on rising oil prices and global warming?
A: The international price of Dubai oil (Korea? benchmark) lingered around US$50 per barrel early this year, but surged to $76.50 as of Sept. 28. The high oil price is attributed to a market situation of excessive demand and low supply, which is unlikely to change.
Since the effectuation of the Kyoto Protocol in February 2005, the issue of global warming has been dealt with on various international stages like the United Nations, the G8 Summit and the Davos Forum. The government, for its part, held the National Energy Commission, chaired by President Roh Moo-hyun, on Aug. 22 to discuss strategies for coping with climate change. The administration has carried out policies to expand low-carbon energy uses and improve energy efficiency that feature the introduction of obligatory carbon reduction and the enlivening of a carbon market.
We will continue our efforts to transform the oil industry into a more efficient and environment-friendly one in order to tackle rising oil prices and global warming more effectively. To secure a stable supply amid high prices, we have been monitoring the international oil market situation and have been operating the emergency warning system. The ministry has also been stepping up efforts to explore overseas resources and to implement plans for maintaining and expanding oil reserves (reserves as of the end of 2006 was for 119 days). As of the end of July, the nation is taking part in 104 exploration projects in 31 countries.
With steady investment in facilities for the production of petrochemical products, we plan to modernize and upgrade the production process and spread the use of bio energy - a low carbon energy resource - to effectively address global warming.
Domestic oil refinery companies plan to invest 13.7 trillion won toward that end by 2011.
Q: What do you have in mind to enhance the competitiveness of the oil industry and improve its structure?
A: Recently, raising the competitiveness of the oil industry and improving its structure has been of increasing importance due to the unrelenting high oil prices coupled with the essential need for oil-related products. Raising the competitiveness of the oil industry is important to ensure a steady supply of oil - a basic energy resource - to guarantee continued and stable economic growth. Domestic oil consumption reached 763 million barrels annually, seventh in the world, making Korea the fifth largest oil import nation in 2006. We plan to carry out various measures to prevent price fixing among oil companies, encourage competition and an efficient market process with the goal of maximizing convenience for consumers.
Steps to raise the competitiveness of the oil industry
We will pursue efforts to increase the production of petrochemical goods amid high oil prices and increasing demand for oil from China and India. By utilizing the crude oil purchase power of oil companies, measures will be taken to increase plant exports and overseas sales in the areas of related industries like shipbuilding, shipping and construction. Petrochemical goods are the nation? fifth largest export item after automobiles, semiconductors, shipbuilding and wireless handsets. Efforts also will be made to upgrade the structure of related industries to enable Korean companies to compete with major international enterprises and efficiently tackle the environmental problems.
Encourage competition in the oil industry
Steps will be taken to ease the stranglehold by certain oil companies and encourage greater competition among them. The market process will be improved after the completion of onsite research. Prices at every petrol station across the nation will be posted on the Internet so that consumers will have easier access to reasonable prices.
Q: What is the state of research and development in bio diesel projects and what is the plan to spread its use?
A: Efforts have been made since 1994 to explore the manufacturing process of bio diesel and using it as automobile fuel. Based on this outcome, we will arrive at a quality standard, improve the production process and certify its safety for use in automobiles. Steady assistance will be given for research and development of manufacturing technology to raise bio diesel? price competitiveness through increased manufacturing efficiency and productivity.
In the meantime, the government will improve the predictability in the bio diesel market to induce related companies to make appropriate facility investment. To that end, we held a policy coordination meeting on Sept. 7 to come with a mid-and-long term bio-diesel plan.
The contents of the plan are as follows:
The BD5 mixture ratio, which now stands at 0.5 percent, will increase gradually to 3.0 percent by 2012 with the goal of achieving 5.0 percent in the mid-and-long term perspective.
Bio diesel cars will be exempt from taxes by the year 2010 during the initial stage of introducing them to the public, given the higher prices compared with gasoline-powered cars. Steps will be taken to ensure a stable supply of bio diesel ingredients, such as a test-planting of relevant plants and raising the collection ratio of used substitute oil.
Q: Would you tell us about the dimethyl ether (DME) project?
A: Dimethyl ether (DME) is a chemical product created by heating natural gas and bio mass. It is a clean energy. It? not poisonous, it? easy to deal with and can be used for various purposes. Though it has similar physical characteristics as liquefied petroleum gas (LPG) (liquefying at minus 25 centigrade and 6 atmosphere on Earth), it also has a high enough cetane number (55-60) that it can be used instead of diesel fuel and has emerged as a fuel that can replace freon gas. It is not poisonous nor is it harmful to the ozone layer.
DME has price competitiveness against LPG and gasoline when the energy resource is developed and produced through small- and mid-sized oil fields.
The Ministry of Commerce, Industry and Energy has been carrying out various projects to commercialize DME from September this year, through demonstrations and test operations. It plans to set up the infrastructure by the end of next year. For this, it will map out a quality standard and relevant laws. By 2009, it will conduct a demonstration project with the goal of realizing commercial use by supplying 1 million tons of DME for domestic consumption.
When it reaches mass production, DME will be priced 20 percent lower than LPG. With its environment-friendliness, it will help meet the international environmental regulations on climate change.
Q: How do you see the future consumption of natural gas and what are MOCIE? policies in this regard?
A: We expect the demand for natural gas, which stood at 24.47 million tons in 2006, will increase 12.4 percent this year to 27.51 million tons. It will also likely increase to 40.35 million tons in 2020 with an annual growth rate of 3.6 percent.
Despite the recent low growth rate for household gas use due to saturated demand, the consumption of natural gas for electric generation has continued to increase sharply.
The focus of the natural gas industry needs to be on securing long-term supply resources as well as short-term supply during the winter season coupled with the selection of the fourth LNG base for the expansion of the nation? supply basis.
We signed additional contracts with Australia (500,000 tons annually) and Qatar (2.1 million tons annually) early this year in bids to secure stable supply resources. In addition to existing channels like Qatar, Malaysia and Indonesia, we have been seeking to diversify them to Russia and Australia.
The ministry has been saving gas this summer for use in the winter and is poised to secure additional volume. It is also saving LNG for electric generation and is monitoring the supply and demand situation.
Regarding the selection of the fourth LNG site, the ministry has chosen Samcheok City, Gangwon Province, as the priority negotiator on the premise of providing the city with a state budget for the construction of a breakwater for the receiving terminal.
Q: Can you give specifics about the current electric supply and demand and MOCIE? future policy direction?
A: Electricity demand peaked last year at 58.99 million kw and is expected to increase further this year to reach 62.28 million kw, prompted by economic growth and an improved living standard.
This year? consumption surpassed the earlier estimate by 1.2 million kw, but there was no shortage thanks to more than 4 million kw in reserve.
The government has been forecasting and devising proper measures with its bi-annual Basic Plan for Electricity Supply.This year, it has completed construction of new power stations in Cheongsong, Taean and Dangjin, which can generate a combined electricity output of 1.94 million kw. It plans to construct large-size plants in the future to meet the growing demand.
Measures will be taken in the event of peak electricity use in the summer, such as encouraging the use of more efficient home appliances and motors, replacing LED lighting appliances and initiating energy-saving campaigns.
Electricity demand increased 2.5 percent on average annually. Since it stood at 353.1 billion kwh in 2006, it will likely to increase to 478.6 billion kwh in 2020. A total of 29 trillion won was poured into the construction of power plants to expand by 34.42 million kw. By 2020, power capacity will increase to 94.28 million kw, with around a 15 percent reserve ratio.
Meanwhile, regarding the conflict involving the construction of power plants, the ministry will take proactive measures to solve it through the Conflict Management Committee under the wing of the National Energy Commission to prevent such disputes from causing problems for electricity supply.
Q: Do you have any plans to help the electricity industry advance into overseas markets?
A: The government prepared a package of devices to prompt exports of electricity products last year with a view to compensating for sluggish growth in domestic electricity sector and secure a new growth engine.
Based on this, the government has been operating a commission for electricity industry export (chaired by the vice minister of MOCIE) and has aligned the overseas divisions of the Korea Electric Power Corp. according to regional differences.
The ministry devised a plan for the export of electricity technology and services, focusing on feasibility studies, test projects and the setup of a network and information database, with a 2007 budget of 600 million won.
In order to get overseas orders, we have been strengthening cooperative ties with countries like China and Indonesia, for instance, where we have made substantial progress. We also plan to take proactive steps to advance into other nations. Countries that have shown interest are China, Vietnam, Cambodia, Laos, Myanmar, Indonesia, Egypt, South Africa, Nigeria, and some Caribbean nations.
The government plans to assist with projects for the joint advancement of KEPCO, plant companies and small-and-medium companies with the goal of realizing common growth among relevant industries and exporting Korean electricity technology and services with 10 million kw of power generation in foreign countries and 1.4 trillion won in profit.
Q: What is the current situation the coal industry faces and what is the plan to ensure a balance of supply and demand?
A: The government has been pushing the ?olicy for the rationalization of the coal industry?since 1989 amid economic growth, a growing preference for clean energy and low economic benefit. The number of coal mines, which amounted to 347 in 1988, decreased to only seven in 2005 while coal production, which stood at 24.29 million tons in 1988, dwindled to 2.82 million tons in 2006. The miners, who numbered 62,259 in 1988, decreased to 5,940 in 2006.
But due to a rising demand for briquettes from the beginning of 2000, there has been shortage in supply. Despite the freeze on briquette prices, the prices of alternative fuels such as kerosene continued to surge due to the ever-increasing demand from flower houses, in particular. While the production of coal continued to decrease an average of 6 percent annually since 2001, due to the rationalization policy, consumption has increased an average of 3.2 percent, causing a supply shortage.
Against this backdrop, the government has been carrying out a program to properly manage anthracite supply and demand, focusing on releasing stocked coals and preventing consumption for less-developed purposes.
The ministry raised the price of briquettes to maintain the demand at the proper level. The price per briquette, which stood at 184 won, rose to 221 won, up 20 percent in April this year.
As part of efforts to compensate low-income households for the rise in the briquette price, the government is providing some 40,000 households with 33,000 won in cash, which is equal to the price of 90 briquettes.
The ministry has also reduced the quota for anthracite to power plants by 200,000 tons to 2.16 million tons to use the resource for the production of briquettes. Accordingly, the anthracite supply has stabilized and the demand is likely to decrease to 4.22 million tons, down 10 percent from a year earlier.
The ministry plans to raise the price of briquettes gradually in the future to manage the supply and demand at a proper level. The plan will be announced in advance so that consumers can seek alternatives. Direct payment will be made for people on or below the poverty line. The demand for anthracite for floricultural farms will be reduced to increase the production of briquettes in an emergency situation.
We will consider the import of anthracite coal within the boundary of a maximum 20 percent of the entire consumption for the production of briquettes. With this, the ministry will be able to stabilize the supply of anthracite and provide the less-privileged people with briquettes on a more stable basis, thus helping promote their welfare. nw

Ahn Chul-shik, director-general of the Headquarters for Energy Industry at the Ministry of Commerce, Industry and Energy (MOCIE)