South Korea seeks to improve crude supply security, economics amid Seoul-GCC FTA talks

A free trade agreement between South Korea and the Gulf Cooperation Council would further enhance the Asian nation's energy security and help improve Middle Eastern sour crude import economics, refining industry sources based in Seoul and Ulsan said over Feb. 17-22 following FTA negotiations between the country and the GCC.

Senior officials at key South Korean government ministries, including the Ministry of Trade, Industry and Energy, and the Ministry of Economy and Finance, visited Riyadh, Saudi Arabia, Feb. 14-16 to resume FTA negotiations with representatives from GCC member nations, marking the seventh round of the official FTA discussion meeting between the two parties.

The latest meeting and discussion covered issues regarding trade rules and areas of collaboration, opening of markets for products and services, improving trade environment conditions, and intellectual property rights, MOTIE said in a statement.

As far as South Korea's crude oil supply security and refinery feedstock import costs are concerned, industry analysts and major South Korean refiners including S-Oil indicated that FTA with top Persian Gulf crude producers would pave the way for Asia's fourth biggest economy and the world's fourth biggest crude importer to gain a critical advantage.

South Korea is a highly export-oriented and high-tech manufacturing intensive economy. Lower costs of industrial energy sources and raw materials would make the country's semiconductors, electronics, high-end petroleum products and chemicals much more competitive, industry analysts added.

"The recent success of [South Korea's] summit meetings with Saudi Arabia and the UAE is spreading over the entire Middle Eastern region, and further cooperation outcomes are anticipated in various areas like energy, infrastructure and new industries," South Korea's delegation head and chief FTA negotiator Kwon Hye-jin said.

South Korea currently levies a 3% tariff on imported crude oil, which is abolished or cut for volumes from suppliers that have FTAs with the Asian nation.

South Korea's FTA with the US, for example, has allowed refiners to procure lighter and sweeter grades, which typically command a premium to heavier Middle Eastern crude oil with higher sulfur content, at a lower cost, feedstock managers at two major South Korean refiners told S&P Global Commodity Insights.

Refiners paid on average $102/b for US crude imported in 2022, lower than $107/b paid on average for sour crude shipments from the UAE last year and on par with $102/b paid for Saudi crude, latest data from state-run Korea National Oil Corp. showed. In 2021, shipments from the US cost on average $70.48/b, less than Saudi Arabia's $72.03/b.

KNOC's import costs include freight, insurance, tax and other administrative and port charges.

MOTIE and the finance ministry did not reply to S&P Global Commodity Insights' email regarding Seoul's target timeframe to seal a formal FTA deal with the GCC and any key issues and differences that need to be ironed out.

In February 2022, a MOTIE official said details on tariffs and other trade barriers will be negotiated with the GCC and decided later.

Increased reliance on Middle East

As South Korean refiners have little to no interest in sanctioned Russian crude oil, and while many African crude suppliers were focused more on sales and marketing to European end-users, South Korea will inevitably rely more heavily on Middle Eastern producers, according to a senior market research analyst at Korea Petroleum Association.

A major economic deal like FTA with GCC member nations would further improve South Korea's Middle Eastern sour crude supply security and help bring overall energy import costs down, the KPA analyst added.

South Korea imported 353.5 million barrels of crude from Saudi Arabia in 2022, up from 290.2 million barrels received in 2021, KNOC data showed. Crude imports from Kuwait rose 7% in 2022 to 117.6 million barrels, while shipments from the UAE jumped 49% to 84.8 million barrels last year, KNOC data showed.

Apart from South Korea's top crude supplier Saudi Arabia, the six GCC members include other major crude suppliers, such as Kuwait, the UAE, Qatar and Oman, as well as Bahrain. Among major Middle East crude suppliers to South Korea, only Iraq is not a GCC member.