Korea National Oil Corp. to store 5.3 mil barrels of Saudi crude oil

State-run Korea National Oil Corp. will store 5.3 million barrels of Saudi Arabian crude oil in a joint inventory management deal with Saudi Aramco, which would be used as strategic reserves for South Korea, the company said Oct. 23.

The deal was signed on the sidelines of summit talks between South Korean President Yoon Suk-yeol and Saudi Crown Prince Mohammed bin Salman during Yoon's state visit to Saudi Arabia.

Under the agreement, 5.3 million barrels of Saudi crude, mostly Arab Light grade, will be stored at KNOC's base in Ulsan on the country's southeast coast, a KNOC official told S&P Global Commodity Insights.

The first shipment of 2 million barrels will come soon, but exact timelines cannot be disclosed at the moment, the company official said.

KNOC will be paid leasing fees and it would hold the right of first use of the crude oil for domestic release in case of emergency or supply disruptions. This effectively means the Saudi barrels can be used as strategic reserves for South Korea, the world's fourth biggest crude importer, according to the KNOC official.

"The agreement, which comes at a time when oil prices are fluctuating due to political instability in the Middle East due to the armed conflict between Israel and Hamas, would boost South Korea's energy security by pre-emptively attracting large volumes of Middle Eastern sour crude," KNOC said in a statement.

KNOC also indicated that it will try to secure more strategic reserves through partnership with other major oil producers.

During the summit talks between President Yoon and UAE President Mohamed bin Zayed Al Nahyan in January, KNOC had signed a joint storage agreement with Abu Dhabi National Oil Co., allowing ADNOC to use tanks in South Korea to store 4 million barrels of crude.

KNOC operates nine storage bases, including Ulsan and Yeosu tanks, which can hold a total 146 million barrels of crude oil and oil products, including tunnel-type underground tanks and the world's single largest oil storage base.

Of the total capacity, 131.1 million barrels is for crude oil, 14.9 million barrels for refined products and 6.2 million barrels for LPG.

KNOC is currently holding some 96 million barrels in its tanks, excluding foreign oil, which means the country has some storage space for joint storage with foreign crude.

Saudi Arabia's Asian market share

The latest joint storage deal not only enhances South Korea's supply security, but would also help Saudi Aramco upgrade its Asian marketing base and strategies, feedstock managers at two major South Korean refiners including S-Oil told S&P Global.

"Asia's top two crude buyers India and China have been heavily favoring cheap Russian crude so far this year and I am sure this isn't the sort of trade flow and market trend that Saudi Aramco would want to see," said a sour crude procurement and logistics manager at a major South Korean refiner.

In India, Russia has become the South Asian nation's top source of crude oil in 2023, with inflows reaching 1.8 million b/d over January-September and accounting for 38% of India's total oil imports, a substantial rise from 11.2% during the same period in 2022, according to S&P Global. As a result, the share of Middle Eastern crude decreased from 63%, or 2.9 million b/d, over January-September 2022 to 45%, or 2.1 million b/d, over January-September this year.

However, Asia's third and fourth biggest crude importers South Korea and Japan have been actively purchasing Saudi crude oil, while completely shunning Russian barrels. Saudi Aramco would gain logistical advantages in securing a stable oil export base in South Korea for the Asian market share management, according to trading managers and market analysts based in Seoul, Tokyo and Singapore.

Saudi Arabia is the biggest crude supplier to South Korea, providing around 236 million barrels in the first eight months this year, including barrels from the Saudi-Kuwaiti Neutral Zone, which accounts for 35.7% of South Korea's total January-August imports of 661.431 million barrels, latest KNOC data showed.

Despite Saudi Arabia's firm stance to control and limit its crude production levels, the OPEC kingpin has been respecting Asian customers' term supply contracts. Saudi Aramco has been prioritizing its key customers in the Far East, especially South Korean and Japanese refiners, feedstock management sources at South Korean and Japanese refiners told S&P Global.

Saudi Aramco has fully met Asian refiners' nominations for November-loading crude oil, with most buyers having nominated and received full contractual volumes with no cuts made, S&P Global reported previously citing multiple trade sources with knowledge of the matter.