SK Energy in High Gear

With focus on oil exploration by acquiring two new oil blocks in Vietnam and Peru

SK Energy, Korea's leading energy provider, on Oct.30 announced third quarter earnings results for 2007. Operating profits rose 20%, from 349.6 billion won last year to 418.4 billion won. This increase was mainly led by solid performance in the petroleum business which was the result of the cost reduction and increased production and sales volume of high value added products, such as gasoline and diesel.
The company's total sales revenue was 6,657.9 billion won, a 2% increase from the 6,514.7 billion won reported a year ago. This improvement came from the petrochemical division's solid sales revenues of 1,880.7 billion won, a 20% increase year-on-year. The jump in sales revenues was the result of strong naphtha prices, which allowed higher petrochemical product prices.
"We are pleased with the increase in operating profits this quarter compared to the same period a year ago."Said Shin Heon-Cheol, President and CEO of SK Energy. "Looking ahead to the fourth quarter,
we expect favorable results with strong refining margins and a diversified business portfolio that allows the company to hedge against the cyclical nature of the energy business."The petroleum division's third quarter sales totaled KRW 4,324 billion, a 5% decrease year-on-year, mainly due to the seasonal downturn and lower utilization rates caused by the CDU maintenance shut-down.
Operating profit for the third quarter reached KRW 217 billion, a 124% increase compared to the third quarter of 2006. The jump is mainly due to the improved year-on-year simple refining margins, the cost reduction and increased production volume of high value added products from the company's desulfurization unit expansion.
The average Dubai simple refining margins in the third quarter strongly improved at US$ -0.1 per barrel, compared to US$ -3.5 per barrel a year ago.
Despite weakened cracking margins in the third quarter; the company's refining business achieved good outcomes. This is mainly the result of increased production volume of ultra low sulfur diesel, stronger low sulfur diesel and LSFO (light sulfur fuel oil) margins and newly applied valuation of inventory since July this year.
SK Energy maintained healthy cracking margins by optimizing utilization rates of its upgrading facilities. The utilization rates of plant operation for RFCC (Residue Fluid Catalytic Cracking) and HOU (Heavy Oil Unit) facilities are 98% and 99% respectively.
Petrochemicals
The petrochemicals division recorded KRW 1,881 billion in sales for the third quarter of 2007, a 20% increase year-over-year, thanks to the rise of product prices led by strong Naphtha price.
However, operating profit for the third quarter was KRW 117 billion, a 16% decrease year-over-year. This decrease is due to high Naphtha prices and weak Aromatic spreads caused by bearish Aromatic market conditions, despite improvements in ethylene and polymer spreads.
Naphtha prices continued its bullish trend into the third quarter, up US$41 year-on-year, despite the increase in Naphtha exports from India and the decrease in demand caused by regional NCC (Naphtha Cracking Center) shutdowns.
Looking ahead into the fourth quarter, even though a regular maintenance shut-down for #1 NCC is scheduled, SK Energy expects to a promising outlook through improvements in BTX and aromatic spreads.
Exploration and Production (E&P)
E&P division's sales and operating profits for the third quarter of 2007 declined by 16% and 29% year-over-year, to 81 billion won and 45 billion won respectively, owing to a decrease in crude oil volume from the Libya NC 174 block upon the completion of investment cost recovery.
However, SK Energy achieved some significant performance in the third quarter. By selling a 10% share of the Peru LNG project to Marubeni Corp. in Japan, SK Energy secured 100 billion won in cash and lowered its Peru LNG investment costs. Brazil BMC-8 Block, in which SK Energy owns a 40% stake, started crude oil production at the end of July and the first shipment was made in mid-October. The expected average daily production from the block is 20,000 barrels in 2008.
SK Energy acquired two new blocks, a 25% stake in Vietnam Block 15-1/05 and a 100% stake in Peru Block Z-46.
More production is expected to come from Peru 56 Block and Vietnam 15-1 Block as well as the LNG production from Yemen and Peru. nw

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