South Korea unlikely to change major crude importer status despite potential oil discovery

South Korea is stepping up efforts to rely less on imports for the nation's crude oil needs with vast offshore oil and gas potential in the east coast region, but materializing upstream production could be extremely difficult owing to rigorous tests, ample time and hefty finances needed, refinery and trade sources said over June 3-4.

On June 3 President Yoon Suk-yeol said that the government has approved a plan to conduct exploratory drillings for a potentially massive oil and natural gas reserve off the country's southeastern industrial port city of Pohang.

The reserves could hold up to 14 billion barrels of oil and natural gas, an amount that could meet South Korea's gas and oil demand for 29 years and four years, respectively, Yoon said in a press briefing.

The government estimates that 75% of the reserves are natural gas, with the remainder being oil -- natural gas of at least 320 million mt up to 1.29 billion mt in addition to oil reserves of between 780 million barrels and 4.22 billion barrels, according to the Presidential Office.

The structure for the estimated oil and gas reserves is close to the country's offshore Block 6-1 where the Donghae (East Sea) gas field produced around 45 million boe of natural gas and condensate over 2004-2021.

"The seismic results indicate a very high possibility of deposits amounting to 14 billion barrels of oil and natural gas, and these findings have been verified by leading research institutions and experts," Yoon said.

However, South Korea's refining industry and crude traders across Asia were cautious not to get excited over the upstream exploration project in Northeast Asia, as the oil and gas reserve potentials in South Korea's, both east and west coast areas, have been regularly mentioned since 1960, while success rate of reserve potential studies and exploration leading to successful commercial production is very low.

"Almost 30 years of reserves for South Korea... that's too good to be true but, not many [in the refining industry] actually believe this would actually materialize and even if the project is successful, that's going to take at least a decade," said a feedstock management source at a major South Korean refiner.

South Korea, which is Asia's third-biggest crude importer, relies on imports for almost all of its crude requirements. It imported 90.41 million barrels, or around 3.01 million b/d in April, up 11.4% from a year earlier, latest data from Korea National Oil Corp. showed.

The refining industry won't take the reserve potential too seriously for now, said feedstock managers at three South Korean refiners, adding that the country will likely remain among top Asian crude buyers for at least another two decades.

Limited Asian market impact

A vast oil reserve potential in East Asia is positive for the overall Asian oil and refining community as it strengthens the region's energy security. Many Southeast Asian export crude grades, including Malaysian Kimanis, Brunei's Seria Light, Vietnam's Su Tu Den, as well as Far East Russian ESPO Blend may see price differentials fall sharply in the Asian spot market if the South Korean exploration can eventually lead to commercial-rate output, according to low sulfur crude and condensate traders based in Singapore, Jakarta and Kuala Lumpur.

However, chances of discovery and exploration activity ultimately leading to steady production are 15%-20% at best. The Asian market will not take the South Korean exploration too seriously until more solid reserve details become available, traders and analysts said.

The government claimed that it first discovered the high likelihood of the oil and gas reserve in February 2023, and then requested US-based research company Act-Geo to conduct the study that showed the estimated oil and gas reserves.

However, feedstock managers at two South Korean refiners pointed out that the discovery was not new as former President Park Jung-hee had also announced the vast reserve potential off the coast of Pohang in 1975.

"At this stage, it's nothing but hopes and dreams... I have no doubt South Korea has the financial power and technology to conduct this exploration activity, but the success rate is always very slim at best... especially in untapped areas like South Korean offshore," a condensate trader at a European trading house based in Singapore said.

The exploratory drilling will be launched to confirm the actual deposits, a process that typically takes at least three years, Yoon said.

"Once the actual reserves are confirmed, preparations for commercial drilling will begin, with an aim to start commercial development around 2035," Minister of Trade, Industry and Energy Ahn Duck-geun said.

Political motives

Commodity market and fixed-income securities analysts based in Seoul, as well as Democratic Party's members of parliament, indicated that the timing of Yoon's oil exploration statement and the absence of major local and global upstream companies in the build-up to the latest discovery announcement raises question over the upstream potential credibility.

South Korea's ruling People Power Party was heavily defeated in the April 10 parliamentary election, which was considered a mid-term judgment for the unpopular President Yoon who took office in May 2022. Yoon's approval rating was as low as 21% in recent media polls.

"President Yoon must be desperate [due to his very low approval rating]," said Lee Un-ju, Democratic Party's member of parliament who had previously worked at a South Korean refiner S-Oil.

South Korea has launched a new long-term energy development plan since 2014, calling for intensifying efforts to explore oil and gas reserves off its domestic coast, instead of pushing for costly overseas projects.

KNOC has conducted exploratory drilling off the country's east coast for the past years in hopes of discovering viable reserves around the offshore Block 6-1, which is not far from complexes of the country's major oil refiners such as SK Innovation and S-Oil Corp.