Government Strives to Foster KNOC as Oil Major

Steps are in place to raise KNOC's production capacity to 300,000 barrels per day, 6 times current capacity

The following are excerpts of an interview between NewsWorld and Kim Jung-gwan, director general for energy policy at the Ministry of Knowledge Economy, who touched on the nation's overall energy policies.
Question: Will you tell our readers about steps to foster Korea National Oil Corp. (KNOC) as a major?
Answer: The overseas resources exploration business is a technology- and capital-intensive one as well as a high risk venture, so the size of a corporation is essentially related to its competitive edge. However, the reality is that KNOC, which ranked 97th in the world with a production capacity of 50,000 barrels per day, could not participate in international bids due to requirements on production capacity. For instance, Iraq demands production capacity of more than 200,000 barrels per day as the requirement for tendering bids for its own mining areas.
In this regard, the government has steps in place to make KNOC bigger and ramp up its capability to explore resources. In June 2008, it established a plan to make KNOC bigger, calling for raising its production capacity to 300,000 barrels per day, six times as much as the current capacity, by 2012. To this end, 19 trillion won, including 4.1 trillion won in government budgets, will be invested by 2012 in order to help KNOC purchase mining blocks and acquire petroleum companies.
KNOC will forge strategic alliances with Korean and foreign resources developers while expanding overseas exploration divisions and their manpower in order to build up infrastructure for overseas resources exploration. In June 2008, KNOC signed an MOU with Korea Gas Corp. KNOC is seeking to sign technology partnerships with foreign resources development service companies. The Korean petroleum company plans to cut down on manpower in such non-core business areas as the construction of petroleum stockpile centers and transfer them to the resources development sector.
The government plans to consider an initial public offering of KNOC in 2012 or later when the company is expected to secure a competitive edge to some extent.
Q: What is the current status of Korea's stockpiling of petroleum and future plans?
A: Korea experienced a severe oil shortage in the wake of the 1974 and 1979 "crude oil shocks." At that time, Korea sustained massive economic losses, caused by the shortage in the supply of crude oil, as the government had almost no petroleum stockpile and the nation's refineries stockpiled only 30-day reserves. Korea saw the growth rate of gross domestic product (GDP) plunging from 8.0 percent to 7.1 percent during the first oil shock and from 6.4 percent to 5.7 percent during the second oil shock, respectively. As a result, in 1980 the government launched an effort to stockpile crude oil in order to secure a stable supply in the case of an energy crisis.
The government is currently doing its job of expanding stockpiling facilities and stockpiling crude oil in accordance with the third crude oil stockpile plan between 1995 and 2010 calling for securing stockpiling facilities with a capacity of 146 million barrels per day by 2009 and stockpiling 141 million barrels per day by 2010.
As of late 2008, it had facilities with a capacity of 137.7 million barrels per day and stockpiled 80.6 million barrels per day. Keeping 34.8 million barrels per day in stock under an international joint crude oil stockpiling project would increase Korea's total amount of stockpiles to 115.4 million barrels, equivalent to about 104 days' reserves required by the International Energy Agency (IEA) as being enough to help Korea brace for a crisis to some extent.
The government is striving to buy reserves in a timely and economical manner after scrutinizing international crude oil movements. It is trying to realize the goals of the third crude oil stockpiling plan at an opportune time by purchasing planned reserve amounts within the limit of its budget by capitalizing on advanced trading methods.
Q: Will you elaborate on the current status of importing natural gas and mid- and long-term supply/demand plans?
A: The nation's demand for natural gas was estimated at 27 million tons as of 2008, with roughly 12.5 million households across the nation depending on it for cooking and heating. The figure accounts for approximately 22 percent of Korea's power production. Currently, most of the annual demand, except about 400,000 tons available from gas fields off the East Sea, is met by liquefied natural gas being imported under long-term supply contracts.
The natural gas market is predicted to stabilize in the short-term as energy demand has dropped due to the latest economic recession, but 15 years from now, the market is feared to be short of supply due the delay of new liquefied natural gas projects in such countries as Australia and Russia. Korea depends on Qatar, Malaysia and Oman for more than 70 percent of its total natural gas imports. In an effort to ensure a stable supply of natural gas, Korea needs to diversify its import sources and secure price competitiveness.
The government is striving to expand types import types and sources of natural gas imports to the Commonwealth of Independent States (CIS) area, including Russia, from which Korea is seeking to bring in pressurized natural gas (PNG) in 15 years. Korea will make efforts to sign supply contracts with competitive terms by renewing the existing natural gas supply contracts or looking to new supply contracts depending on the movements of the global market. It plans to construct the Samcheok Gas Terminal and transform the Donghae Gas Field into a gas stockpiling facility by 2017 and upgrade it to the standard of advanced countries.
Q: Will you tell us about the development of natural gas?
A: Natural gas is produced together with crude oil from the usual petroleum mining fields or from gas fields. Korea Gas Corp. (KOGAS) participates in the development of natural gas fields together with Daewoo International Corp., KNOC, GS and SK. KOGAS and Daewoo International Corp are developing Myanmar's A-1 and A-3 offshore mining blocks. Korean companies have interests in RasGas, Qatar's LNG exporter, and Oman Liquefied Natural Gas (OLNG) plants that supply natural gas to Korea. Now that Myanmar and China have struck a deal to supply natural gas from Myanmar's A-1 and A-3 blocks through pipelines, Daewoo International Corp. and KOGAS are to share profits from 2012. Korean companies' participation in the natural gas projects in Qatar and Oman in the 1990s yielded about $100 million in profits for the Korean side. Korean companies' participation in the development of natural gas fields in Nigeria, East Timor and Uzbekistan are expected to pay off.
Korea's overseas natural gas exploration has made strides in terms of quantitative and qualitative growth. In the past, Korean companies have participated in overseas LNG projects in the form of holding stakes. They are now expanding to all business areas ranging from the development of natural gas fields to the construction and operation of LNG terminals. Korean companies saw their investment amounts in overseas natural gas exploration soaring five to 10 times higher than 10 years ago.
Q: Will you speak about demand side management of the electricity industry and future plans?
A: Power demand management entails actions that bring benefits to both power producers and end-users by changing the quantity or patterns of power consumption. It is divided into peak demand management that reduces the highest power demand and power efficiency improvement that cuts down on energy consumption.
In 2008, 188 billion won was invested to ensure a stable supply of power and conserve electricity through a policy mix of peak demand management and efficiency improvement.
Peak power management cut 2.85 million kW or 4.5 percent off peak demand, thus contributing to stabilizing power supply during the summer period. Power efficiency improvement resulted in reducing power consumption by 646GWh, equivalent to 0.18 percent of power sales, in 2007. The power reduction translates into cutting 290,000 tons of carbon dioxide emissions. A combination of peak power management and power efficiency management had an effect of reducing the need for investments in power facilities by an estimated 973.4 billion won and energy costs by 391.1 billion won yearly.
During 2009, demand side management projects will be implemented in a systematic and substantial manner so that efficiency can be enhanced. Electricity charge support programs, which are independently implemented by Korea Electric Power Corp. (KEPCO) and Korea Power Exchange, will be consolidated to create the unified power demand side management market. Projects to improve efficiency will be designed to explore and proliferate such new energy-efficient equipment as light-emitting diodes (LEDs), a replacement for incandescent electric lamps. The job, being done separately by KEPCO and Korea Energy Management Corp., will be revamped.
Q: Will you tell us about the current status of power technology development and future plans?
A: R&D of the power industry is about the development of an integrated approach for 3E (energy, environment and environment) issues designed to ensure a stable power supply and maintain the growth of the industry. Of late, new power technology development is essential to cope with external business changes including crude oil price hikes and pacts on climate change.
Power industry R&D involves power generation, power transmission/distribution and infrastructure technologies. Mid- and large-sized tasks are implemented in a top-down method and short-term tasks are done in a bottom-up method simultaneously. During the period between 2001 and 2008, the government poured 537.4 billion won into its budget to carry out 1,878 tasks that are projected to have yielded an estimated 216.6 billion won in sales.
Korea plans to focus power industry R&D capability on the development of power information technology and environmentally-friendly, high-efficiency power technology by allotting 27.6 percent out of the total R&D outlays to the former and 34.6 percent to the latter. The global power information technology market is seeing explosive growth, but the domestic industry, which includes infrastructure, needs to be fostered as a new growth engine. The global environmentally-friendly, high-efficiency power technology industry has huge potential, but Korea needs to be armed with the technological upper hand due to cutthroat competition.
The nation is building a 3,000-household power test-bed designed to test and evaluate green power R&D achievements and develop a Korean-type new power grid network during the period between 2009 and 2013.
Q: Will you tell us about the current status of the exploration of the overseas power industry and future plans?
A: The Korean power demand market is entering a saturation stage, whereas the global power market shows signs of expansion, particularly in developing countries in Asia, the Middle East and Africa, which see growth due to booming development. The domestic power demand market is projected to grow at an annual rate of 3.1 percent during the period between 2008 and 2013 and slow down to less than 1 percent during the period between 2015 and 2022. With that background in mind, power companies are aggressively striving to penetrate into the overseas power markets.
KEPCO, which has advanced to such countries as the Philippines and China since 1998, operates power plants with a combined capacity of 7,696MW. The Korean power giant has stakes with a capacity of 2,991MW. KEPCO is exploring new projects in such areas as Central Asia and the Middle East. Korean contractors and plant service providers see their orders from Middle Eastern countries surging for the construction of power/desalination plants. Korea saw the value of power/desalination power plant orders climbing from $15 billion in 2005 to $22.6 billion in 2006 and $39.3 billion in 2007.
The government plans to strengthen diplomatic channels with Central Asian and Southeast Asian countries, which show signs of a surge in power infrastructure investments. It will actively provide support to Korean power companies in landing power plant orders from other countries by holding international power industry fairs and dispatching investment delegations abroad in order to publicize the Korean power industry and beef up networking efforts with foreign power plant buyers. It plans to ramp up its financial support for surveying foreign markets, exploring projects and conducting feasibility studies. It plans to extend 11 billion won in funds for providing support to exporting industries. Korean power companies will team up with contractors and plant service providers to get into foreign markets while beefing up collaboration with related organizations including KOTRA, the Export-Import Bank of Korea and Korea Export Insurance Corp.
Q: Will you tell us about the current status and plans of gas and electricity safety management?
A: The government plans to focus on steps to raise awareness toward safety management by revamping constitutional systems in order to prevent gas and safety accidents as well as to expand the energy safety welfare of the underprivileged.
It plans to ease regulations and restrictions on energy safety systems, which are closely related to businesses and users' activities, while striving to raise safety standards by advancing institutional systems and embracing information technology. The government plans to introduce the Quantitative Management Assessment, an on-line gas facility safety management regime, in order to raise safety standards on gas facilities and ease related regulations and restrictions. It has already introduced the fair inspection system on high-pressurized gas containers in which businesses are allowed to undergo checks according to the testing methods they choose. It plans to explore and ameliorate irrational and excessive restrictions on the supply of new technology and products while electric safety control services for electric installations for private use, now commissioned to the Korea Electrical Safety Corp., will be handed over to the private sector between 2009 and 2012.
In an effort to step up the energy safety of the underprivileged, the government will implement projects to give free checks on gas and electric facilities and improve them. It will continue to implement projects to repair gas facilities for 15,200 underprivileged households, provide emergency restoration of electrical installations for low-income brackets around the clock, and improve electrical installations for newly-born nursing and childcare houses. Among the steps designed to ensure the energy safety of the underprivileged are the continuation of a project to improve gas and electrical installations of conventional markets, the free provision of gas safety valves to the elderly and free checks and repairs of gas installations of social welfare facilities. nw

Kim Jung-gwan, director general for energy policy at the Ministry of Knowledge Economy