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With no domestic oil reserves, South Korea must import all of its crude oil. Oil makes up the largest share of South Korea's total energy consumption, though its share has been declining gradually in recent years. Petroleum accounted for 54 percent of South Korea's primary energy consumption in 2002. In 2004, the country consumed around 2.14 million barrels a day (bbl/d) of oil, down from a high of nearly 2.3 million bbl/d in 1997, all of which was imported. Demand has fluctuated very little since 2000. South Korea is the seventh largest oil consumer and fifth largest net oil importer in the world. Most of South Korea's oil imports come from the Persian Gulf region, with Saudi Arabia supplying about one-third of the country's import requirements in 2004.
South Korea's total reliance on oil imports has led to a policy of securing and diversifying the country's oil supply. South Korea has both a short-term and a long-term approach to fulfilling its oil needs. In the short-term, it has developed a strategic petroleum reserve, which is managed by the state-owned Korea National Oil Corporation (KNOC). Strategic stocks are roughly equivalent to a 90-day supply. The period of "import cover" was expanded from 60 days in early 2001, in part to meet the requirements for entry into the IEA. This reserve serves as a safety net against supply disruptions.
In the long term, KNOC is pursuing equity stakes in oil and gas exploration around the world. KNOC has 17 overseas exploration and production projects in 13 countries. This includes four producing fields in Yemen, Argentina, Peru, and the North Sea, and five fields under development in Kazakhstan, Yemen, Venezuela, Libya, and Vietnam. KNOC also is exploring domestic blocks offshore from South Korea. KNOC reported a new oil find in August 2001 at the Vung Tau site offshore from Vietnam, which began commercial production in 2003. Recoverable reserves at Vung Tau are estimated at 420 million barrels. The South Korean government has stated that it plans for KNOC to provide for 10 percent of the country's oil needs by 2008, a date which was recently moved forward from 2010. KNOC's output, however, was only covering 4 percent of South Korea's import requirements as of late 2004.
The South Korean refining industry was strongly affected by the country's economic crisis in 1997-1998, especially because it already suffered from significant overcapacity before the downturn in demand. In September 1998, South Korea's four downstream oil companies raised the retail price of gasoline and diesel oil following a government tax hike. In October 1998, the South Korean government, under financial pressure, decided to fully deregulate the refining industry, accelerating this decision from the original January 1999 deadline in order to attract badly needed foreign investment. Foreign backing has proved critical in maintaining cash flows and preserving the creditworthiness of the refining industry.
Several corporate consolidations and selloffs occurred as a result. In September 1998, Hanwha's 270,000-bbl/d refinery in Inchon was taken over by Hyundai Oil Refinery Company, giving Hyundai the country's third largest refining capacity (after SK Corporation and LG-Caltex) with 580,000 bbl/d. In October 1999, Hyundai completed the sale of a 50 percent interest in its refining operation to the Abu Dhabi International Petroleum Investment Corporation, which was intended to reduce the company's highly leveraged debt-to-equity ratio. Ssangyong Group sold its 28.4 percent stake in Ssangyong Oil Refining Corporation to its majority shareholder, Saudi Aramco, in 2000. The firm's name was changed to S-Oil. Sinochem of China reportedly made an offer to purchase the Inchon Refinery in late 2004, but the transaction has been been finalized.
With refining capacity of roughly 500,000 bbl/d over domestic consumption, South Korea has no new refinery projects planned. Strong demand in China, however, has pulled South Korea's refinery utilization back up to 90 percent in the last year, as refiners have begun to produce more for exports.