Korea seeks to become Northeast Asia Oil hub

The Yeosu stockpiling facility established in 2013. Together with the stockpiling facilities the Korea National Oil Corp. (KNOC) is building in Ulsan, it will create the Northeast Asia Oil Hub, turning the region into the fourth-largest oil cluster in the world. / Courtesy of KNOC

By Park Jin-hai

ULSAN ― Dump trucks rumble by, unloading piles of sand to reclaim the 302,000 square meters of land on the seashore at Ulsan North Port some 410 kilometers from Seoul.

It is part of the Korea National Oil Corp.(KNOC)'s Northeast Asia Oil Hub ambition to turn the city into the fourth largest oil cluster in the world, following the US Gulf Coast, ARA (Amsterdam, Rotterdam and Antwerp in Europe) and Singapore.

"Based on increasing demand in the region, we intend to make Ulsan into a global oil trade center that houses not only massive oil storage facilities but also a logistics center where oil trade can thrive," said Kim Myung-hoon, vice president of the management support department at KNOC, during an interview with The Korea Times.

Korea is the world's eighth largest oil consumer, taking 2.6 percent of global oil consumption in 2014, while the Northeast Asian region sees nearly 15.3 million barrels per day (b/d) of oil inflows, according to the 2015 BP Statistical Review of World Energy 2015.

Oil storage tanks are in cluster at the Yeosu Oil Hub, on the southern coast in South Jeolla Province.

Due to increasing demand in Northeast Asia, global oil big heads in Russia, the U.S. and Latin America fiercely compete to take the lead in the growing market.

Under the Northeast Asia Oil Hub vision, the KNOC will build two major oil stockpiling facilities in Ulsan North and South Port.

The first phase project in North Port, with the participation of China's Sinomart and local companies including S-Oil and Hanwha Total as shareholders, is scheduled to construct 9.9 million barrel stockpiling facilities by the end of 2017.

Currently, the reclaiming work for the site at Ulsan North Port is 45 percent completed.

The second phase of the project at Ulsan South Port, to build facilities with a total storage capacity of 18.5 million barrels, has been under a government feasibility review. The company has a target to complete the project by 2020.

The Yeosu Oil Hub.

"Singapore, despite its lack of hydrocarbon resources, has emerged as the center of Asian oil trade in a relatively short time, thanks to government support. Emulating the success of Singapore, we aim to develop the Northeast Asia Oil Hub into an oil commodity exchange market, where spot and futures are traded, creating added value in this way," said Kim. "Because of the explosive demand in emerging Asian markets, Singapore tends to focus more on Southeast Asia and is losing its influence on Northeast Asia. This calls for another oil hub here."

Singapore's exports to Northeast Asia have halved over recent years to 9.1 percent in 2011, and from 18.4 percent in 2006, according to the company.

When the Ulsan oil hub is established, along with the stockpiling cluster of the state-run energy company established at Yeosu in 2013, Korea will have large-scale commercial storage facilities with total capacity of 36.6 million barrels.

The company says the biggest merit of Korea is its geopolitical location.

"Geopolitically, Korea's neighbors, China, Russia and Japan, are huge oil consumers. Together with its world-renowned refineries and good port facilities, Korea is an ideal location for a new oil hub," added Kim.

By comparison, China's ports have a number of chronic issues, including shallow waters, weak oil refining skills and the fact that navigation is suspended for 50 days per year on average due to fog and freezing.

In the case of Japan, the island country has the disadvantage of high port logistics costs and frequent natural disasters including earthquakes and typhoons.

Although Korea lacks domestic oil reserves, it is home to some of the largest and most advanced oil refineries in the world _ ideal conditions to become the best candidate for the Northeast Asian Oil Hub.

"Korea has three out of the 10 largest crude oil refineries in the world, making us one of Asia's largest petroleum product exporters," said Jung Hyun-chul, manager of the Oil Hub Project Department at the KNOC.

Korean oil refining capacity per facility averaged 608,000 b/d as of the end of 2014, 7th largest in the world and 3.6 times higher than Japan's 167,000 b/d, according to the BP statistics.

When the oil hub project is completed, the company forecasts it will see its oil trade volume reach from 390 million barrels to 450 million barrels annually.

Although the global oil market fluctuates on oil prices, the economic benefits gained from this development have been estimated to be 3.6 trillion won in the short term and 60 trillion won in long term GDP growth, according to Boston Consulting Group.

Since 2008 several plans have been announced to develop Korea into a global oil hub and successive governments have supported it in an effort to stabilize oil supply and demand as well as stimulate the oil industry. President Park Geun-hye called it a great example of "creative economy," pledging to back the project as well.

The Yeosu stockpiling facilities established in 2013 has been running successfully with shareholders inking deals to use 90 percent of the storage facility's capacity.

Deregulation and incentives most needed

Industry experts say there are some issues that Korea should deal with to make it the oil trade hub of Northeast Asia.

They say that government regulations on oil blending should be eased, allowing traders to blend a variety of petroleum products with other high-value petroleum products at the tank terminal and sell them in and out of the country.

"Under current laws, mixing is only allowed for oil refineries, not for oil importers faced with local oil companies' objections for fear of losing their market dominance here. What Singapore did in the late 80s, in order to save itself from being reduced to a mere oil storage site, is that it lured more global oil traders through deregulation of relevant laws and provisions of tax benefits that were most needed," said Jung. "Without something like this, We will not be able to create added value."

Another challenge ahead is to attract international trading houses, financial institutions and petroleum exchanges.

"When the traders and financial institutions are actively engaged in petroleum trade, global energy price assessment organizations such as Argus and Platts will come to the region and eventually energy futures exchange will emerge," Jung said.