Refiners enjoy boom despite low oil prices
By Choi Sung-jin
An oil industry truism is that the lower that crude prices fall, the worse the bottom lines of oil refiners _ but the old notion was broken in Korea last year, industry sources say.
Despite falling oil prices, domestic refining companies registered operating income approaching 5 trillion won ($4.17 billion) in 2015, which is expected to increase further this year, the sources say.
This is a far cry from other countries, where cheap oil has driven an increasing number of refiners to bankruptcy.
Korea’s four major refineries, which struggled under heavy losses in 2014, were estimated to have posted a 5 trillion-won operating profit last year, the largest since the record 7.2 trillion won in 2011, according to an interim tally.
GS-Caltex has already paid special bonuses equivalent to 500 percent of basic pay, and SK Innovation, S-Oil and Oil Bank will likely follow.
The boom is expected to continue through this year. “It is rather uncomfortable to say this in public amid the overall business slump,” an oil industry executive said. “However, the operating profit will possibly grow another 10-20 percent this year, too.”
All this has become possible because of high “refining margins” produced by cracking crude oil into petroleum products such as gasoline, diesel and naphtha.
Most foreign oil refiners are also oil producers, and price falls adversely affect their bottom lines. Korean refiners also suffer damage from price drops as the value of their inventories fall. When it comes to fresh imports, however, the story becomes different. What decides the balance sheets of domestic refiners, which produce little oil but import their entire needs, are refining margins rather than the import prices.
The Singapore complex margin has hovered above $10 a barrel this month, higher than the record high $9.3 last March. The four domestic refiners incur $62.5 million in combined losses if international oil prices drop $1. In comparison, if the refining margin rises $1, they garner $912.5 million in combined operating income. The four companies’ break-even refining margin is set at $4-$5 per barrel.
Another favorable factor is the price fall of Dubai light crude oil since economic sanctions on Iran have been lifted, widening the gap with Brent oil used by their foreign competitors to nearly $10 a barrel.
Of course, domestic refiners are not free from China’s economic slowdown and the protracted global economic slump, which will dampen demand for petroleum products and hurt bottom lines.
If the current situation continues, however, the Korean oil refining industry will be an unlikely winner thanks to low crude prices, the sources said.