President’ men lead Korea’s resources strategy

By Cho Jin-seo

With the appearance of Rep. Lee Sang-deuk from the governing Grand National Party arriving at Incheon International Airport, one can safely assume that another mine or oil rig in some African or South American country is soon going to be purchased by South Korea.

The elder brother of incumbent President Lee Myung-bak is the main force behind the government’s expansionary policies concerning energy and other natural resources. His responsibilities are expected to gain significance over the next two years, as the President has set out an ambitious plan to double the proportion of oil and gas produced in assets owned by Korea to 18 percent by 2012, from 9 percent in 2009.

According to the long-term plan announced last week by the Ministry of Knowledge Economy (MKE), the Lee administration also aims to increase the proportion of uranium production by Korean outfits to 12 percent by 2012 from 1.1 percent in 2009, and that of copper to 15 percent from the current 5 percent.

These are not easy goals. Many industry watchers believe that the President’s brother will have to step up to make greater efforts to cooperate with foreign partners.

“Resource development projects are very tricky and require large financial investments and political commitment, so most foreign countries demand credit from influential figures such as SD,” an official of a government-owned resources development firm said on the condition of anonymity. SD refers to Rep. Lee. “One cannot deny his initiative is making our business easier.”

This year, Lee has been to a number of resource-rich countries in South America and Northern Africa such as Bolivia, Peru, Ecuador and Libya. Park Young-joon, a vice minister of the MKE and a close aide to both Lees, took tours of central and southern Africa. Most recently, he has been to Vietnam and Laos earlier this month. The two are now called the SD Line.

Their typical itinerary goes like this: they may fly to the African, Asian or South American country where the target pit, mine or oil rig is located. They will meet the president or the minister of the country, talk a little bit, sign a memorandum of understanding (MOU), shake hands and take photos for a press release. In the meantime, they may promise some benefits in return, according to market observers.

With an MOU in hand, government-owned energy and resource development companies ― such as Korea National Oil Corporation (KNOC), Korea Gas Corporation (KOGAS) or Korea Resources Corporation (KORES) ― form a consortium with private firms like SK Energy, GS Caltex, Daewoo International and so forth. The consortium will bid for the mining or oil exploration rights in the foreign country while Lee and Park provide support via diplomatic channels.

The state energy companies also provide credit and loans to private firms, in association with state-owned banks such as the Korea Exim (Export-Import) Bank.

“The reason the private firms get loans from state enterprises is not because they really want the money. They just need proof that they are being sponsored by the Korean government, so that they can more easily assure the sellers of the mines and oil rigs,” the official said.

The resources diplomacy of the SD Line has its shortfalls, though. Only a handful of MOUs chalk up tangible results because they are not legally binding agreements. And in most cases the countries that are abundant with natural resources have the least stable political systems. This means that a favorable government of today can be toppled by an unfavorable military force tomorrow, which may nullify any previous agreements.

Another drawback of the SD Line’s proactive involvement in Korea’s natural resources shopping tour is that Lee and Park are not short of enemies in domestic politics. During National Assembly hearings, representatives from opposition parties are eager to attack them and the state energy firms they work with, in order to discredit the President and the ruling party.

But in general, parties agree that Korea needs to secure more mines and oil rigs abroad so as to survive in the era of diminishing natural resources, and that people with big political influence such as the elder Lee and MKE’s Park can be of help in such endeavors.

Along the way, one of the biggest beneficiaries seems to be state enterprises in Asia’s fourth-largest economy. KORES, for instance, plans to expand its payrolls by a quarter over the next two years with the support of the Ministry of Strategy and Finance, which is set to fund some 1.5 trillion won ($1.3 billion) to quadruple its assets by then.

This is in stark contrast to most state-backed entities, which have been forced to cut their payrolls and streamline their organizations in unprecedented austerity under the CEO-turned-politician president who stresses downsizing.

Long-term plan

Apart from help from politicians, the state-owned energy firms are building up expertise by themselves. In September this year, KNOC made rare headlines in the major financial newspapers of the world. Its hostile takeover of Dana Petroleum, based in the United Kingdom, took watchers by surprise in many ways.

The Guardian newspaper said that the deal “underlines the increasingly aggressive tactics being used by the energy-hungry developing economies of Asia and the Far East to grab oil and gas assets all around the world.”

The Dana deal marked the first time for a Korean outfit, private or state-owned, to successfully complete a hostile takeover of a sizable Western corporation. The acquisition is expected to raise Korea’s oil self-sufficiency to over 10 percent.

Next year, KNOC will continue to expand global connections to secure more crude oil supplies controlled by itself by purchasing local production facilities and potential reserves, said its head Kang Young-won.

“We have secured operating bases in core regions. From there, we will look for assets with high potential,” he was quoted as saying by the Yonhap News Agency on Thursday.

South Korea is the world’s tenth largest demander of energy in the world, consuming over 2 million barrels of oil per day in 2009, according to the U.S. Energy Information Administration.

Without producing a drop of oil inside the country, it is the fifth-largest importer of oil and the runner-up for both coal and liquefied natural gas.

The MKE’s long-term goal is to have 30 percent of its oil and gas imports in 2019 come from its own assets overseas. But for the President, only the next two years count as his term will expire in February 2013.

To rapidly improve the self-sufficiency of energy and core minerals, the MKE is going to urge public funds, such as the National Pension Fund, and Korea Exim Bank to provide the necessary finances to state and private firms to buy more foreign assets.