As international oil prices and refining margins both experienced a simultaneous decline in the fourth quarter of last year, the oil industry’s performance was once again placed in a state of emergency.
In the worst-case scenario, four major oil companies -- SK Energy, GS Caltex, S-Oil, and HD Hyundai Oilbank -- face the possibility of all reporting operating losses, prompting each company to thoroughly contemplate profitability strategies.
According to a comprehensive review of financial reports from each company conducted on Jan. 28, it appears that the domestic top four oil companies may face simultaneous operating losses in the fourth quarter of last year. SK Energy is expected to have the largest operating loss, estimated at 224.5 billion won (US$167.79 million), followed by GS Caltex at 68.1 billion won and HD Hyundai Oilbank at 10 billion won. S-Oil is the only one expected to achieve a positive operating profit in the range of 23 billion won. However, some industry experts suggest that even S-Oil is expected to incur losses in the range of 250 billion won when considering only the refining sector.
The primary reason for the anticipated deterioration in the performance of the oil industry is the decline in Singapore complex refining margins. Refining margin excludes costs incurred during the refining process, including the purchase of crude oil, facility expenses, and other related expenses from petroleum products such as gasoline, diesel, and fuel oil. As the margin increases, the financial performance of oil refining companies improves, and conversely, it decreases when the margin contracts. In the fourth quarter of last year, the average Singapore complex refining margin was US$5.40 per barrel, marking a 14.3 percent decrease compared to the previous year’s US$6.40. The typical break-even point is known to be in the range of US$4.00 to US$5.00.
Another factor contributing to the deteriorating performance is the rise in inventory valuation losses due to the decrease in international oil prices. The process of importing and refining crude oil by oil companies usually spans three to four months. If international oil prices decline during this period, companies find themselves obliged to sell previously expensive crude at a lower price, resulting in inventory valuation losses, as explained by industry experts.
In the fourth quarter of 2022, even when the composite refining margin exceeded US$6.00, all three major oil companies, excluding HD Hyundai Oilbank, recorded operating losses. The situation has worsened this time as the refining margin dropped to US$5.40.
The recovery in certain product spreads, representing the difference between product prices and costs, is a welcome development. According to the Korea National Oil Corporation’s oil price information Opinet system, the international petroleum product spreads for regular gasoline and fuel oil, which were US$4.00 and US$23.80 per barrel in October last year, increased by 150 percent and 1.3 percent to US$10.00 and US$24.10 in December, respectively. Meanwhile, diesel for automobiles experienced a 19.4 percent decrease during the same period.
To address uncertainties in the oil refining business, oil companies are focusing on new ventures, especially in the petrochemical sector. S-Oil is a notable example, investing a total of 9.26 trillion won to complete the construction of the world's largest petrochemical “steam cracker,” a fundamental oil production facility in Ulsan by 2026. Upon completion of the project, S-Oil will have the capability to produce high-value petrochemical products such as polyethylene (PE) and polypropylene (PP).
GS Caltex has also completed a petrochemical production facility near its second plant in Yeosu, South Jeolla Province, in November 2022, with an investment of 2.7 trillion won. Through this facility, the company is producing up to 750,000 tons of ethylene, 500,000 tons of PE, and 410,000 tons of propylene annually.