March 29, 2011

South Korea’s Quest for (Foreign) Energy

China is normally the most
prominent country when the media and analysts cover rising volumes of
international energy deals and investments. South Korea, however, is giving it
a run for its money. As we noted
in the daily news last Wednesday
, South Korea has been investing in foreign
energy reserves at a rapid pace.

This has followed a growing
trend in recent years of South Korean companies
more aggressively investing
in majority stakes in foreign-owned energy production ventures. As Bloomberg Business reported last fall,
these efforts show that “South
Korea is turning aggressive to lock up oil supplies after acquisitions by
Chinese peers jumped eightfold in three years.”
Because South Korea relies on imports for
nearly all of its energy needs
, it may gain a sense of greater energy
supply security by this aggressive acquisition of assets abroad.

Already South Korea’s stakes in
foreign assets has increased from 4.2
percent in 2007, to 10.8 percent by the end of 2010
. Based on the recent
spate of deals, should we expect this trend to become even more prominent in
2011? Let’s look at a few recent examples.

On March 14, the state-run oil
company Korea National Oil Corp.
purchased a large stake in oil reserves in the United Arab Emirates.
When this deal is finalized next year, South Korea will increase the level of
imports it gets from sources it owns a stake in to 15 percent of its oil

Then, on March 18, KNOC
acquired a 95 percent stake in Kazakhstan’s Altius oil field for $515 million
 This field produces an average of
104,000 barrels of oil per day. KNOC made headlines again
on March 21 after announcing a $1.55 billion deal with Anadarko Petroleum Corp
for a 23.67 percent stake in an oil shale field in Texas. Together, the $2.0
billion deals in Kazakhstan and Texas will bring an even greater sense of
self-reliance for energy supplies, according
to the Ministry of Knowledge Economy


South Korean companies made
important deals on the coal front as well. On March 22, for example, the
state-run Korea
Resources Corp. (KORES)
announced that one of its consortiums had
purchased a 90 percent stake in Indonesia’s Kapuas thermal coal mines for $84.15
. On the same day this deal was concluded, the South Korean
government also signed a memorandum of understanding with Mongolia where
the countries pledged to cooperate in developing “clean coal” from Mongolian
.  South Korea has also been seeking
to secure raw materials and has purchased a
stake in Peru’s iron ore mines

In all, South Korea has set aside
billion for resource development this year
, a whopping 222 percent increase
over the $2.2 billion it spent last year for the same purpose. And we can expect
that much of this investment will be abroad given its limited domestic

There are a few reasons I think
this is particularly important to watch. First, the pursuit of stakes in
foreign oil, gas and coal sources may grow among the rising economies should
the recent events in Japan discourage growth in nuclear energy adoption. In
addition, although
many of us
, not excluding
this author
, like to highlight how China’s
state companies are aggressively buying up energy sources abroad
, it’s worthwhile
remembering that the United States and our own allies often do the same.

In a larger sense, this also
highlights that by its very nature, the geopolitics of energy, if left to its
own devices, can create an acute
degree of competition, if not actual conflict, among parties that individually

are simply trying to meet the needs of their respective societies. On the other
hand, it seems that the strategic importance of resources to all Asian powers makes
this a potentially potent topic upon which regional cooperation can be
maintained. Time will tell though if the diplomatic efforts required to tip the
scales in the direction of resource cooperation will be elusive.