South Korean oil refiners adopt financial survival plans

Oil has been the biggest import item for Korea, but it is a major export item, too.
Korea’s oil refiners have prospered thanks to solid overseas demand for oil’s value-added by-products and their monopolistic positions in the domestic market, and that is how the country’s petrochemical industry has grown.
But as margins from the traditional refinery business fall drastically, firms are being driven to find new growth engines and readjust their business portfolio.
The top four refiners — SK Innovation, GS Energy, S-Oil and Hyundai Oilbank –have recently spun off some divisions and set up joint ventures with foreign companies with a view to becoming globally competitive players.
Such efforts are based on long-term plans to reduce dependence on the sagging refinery business, and instead tap more profitable and emerging sectors. They are now shifting focus to bio and renewable energies, batteries for environment-friendly vehicles and electronic gadgets, and lubricants for industrial use.
“That’s a strategic transformation,” Seung Do-young, head of the in-house research center at GS Caltex, a subsidiary of GS Energy, said in a media interview. “Developing new business items is a matter of life or death for Korea’s refiners because the future of the oil industry is not bright. It’s a grave challenge.”
So far, the institute has focused on upgrading refining technologies to provide petrochemical products of better quality. However, it is now looking for opportunities in new areas, such as bio energy and carbon fiber, Seung said.
The situation is no different at other firms.
“Refining is still our flagship business, but we are making fewer earnings than in the past from the business,” an S-Oil official said, asking not to be named. “We are trying to diversify revenue sources to prepare for the future. That’s also effective in hedging risks we are facing at the moment.”
The firm has set up a lubricant business unit jointly with Total S.A., a French oil and gas company, to diversify.
S-Oil’s strategic partnership with Saudi Aramco, the world’s largest oil firm and the largest stakeholder of S-Oil, is giving it more business opportunities in overseas markets. Its earnings from exports now account for some 70 % of total revenue.
SK Innovation also plans to spin off two departments of SK Energy, the flagship subsidiary that focuses on the refinery business, this year to secure a competitive edge in the production of paraxylene, an extract from oil that is used to make lucrative synthetic fabrics, and expand trading of oil and petrochemical goods.
GS Energy is also running separate businesses from GS Caltex. The parent firm is now focusing on developing batteries for electronic devices and natural resources, while GS Caltex is handling the refining, lubricant and petrochemical businesses.
Hyundai Oilbank has set up a joint venture with Japan’s Cosmo Oil to increase its share in the petrochemical market, and another joint firm with Shell, a global oil and gas giant, to expand its lubricant business.
All these projects are based on the gloomy outlook for the refinery business.
(April 5, 2013)