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Business Outlook of S. Korean Oil Refiners Worsens
Unfavorable Factors Squeeze Refining Margin
Business Outlook of S. Korean Oil Refiners Worsens
  • By Jung Min-hee
  • October 29, 2018, 09:44
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Korean oil refiners are expected to surpass the US$40 billion (45.7 trillion won) mark in oil product exports this year but their business outlook is not so rosy.

South Korean oil refiners are expected to surpass the US$40 billion (45.7 trillion won) mark in oil product exports this year but their market outlook is not so rosy. This is because the refining margin, which is the difference in value between the products produced by a refinery and the crude oil used to produce them, has dropped sharply compared to last year. The business environment surrounding domestic refiners is getting worse due to uncertainties such as the global unrest and environmental regulations.

According to industry sources on October 28, the benchmark Singapore Complex Gross Refining Margin (GRM) was US$3.3 (3,770 won) a barrel in the third quarter, showing a steep fall from US$5.5 (6,284 won) a barrel a year ago. The figure slightly increased from US$2.7 (3,085 won) at the previous quarter but it was over US$2 (2,285 won) lower than last year. Singapore Complex GRM rose from US$3.8 (4,342 won) in the second quarter last year to US$5.5 (6,284 won) three months later and had been maintained at a high level of US$5 (5,713 won) in the fourth quarter of 2017 and US$4.7 (5,370 won) in the first quarter of 2018. However, it has had a lower level once again after the second quarter when oil prices went up and trade tensions between the United States and China escalated. The increase in oil prices has not been reflected into the price of oil products because of excess supply of oil products and reduction of demand in China.

On the other hand, exports of oil products is expected to exceed US$40 billion (45.7 trillion won) for the first time in four years thanks to rising oil prices. Oil products are forecast to rank fourth among Korea’s top export items this year, following semiconductor, general machinery and petrochemical product.

The problem is that the internal stability is getting worse contrary to growth in size. S-Oil Corp., which released the results of third quarter this year, saw its sales rise 37.9 percent to 7.19 trillion won (US$6.29 billion) compared to the same period a year earlier, but its operating profit fell 42.9 percent to 315.7 billion won (US$276.32 million).

In addition, uncertainty from various environmental regulations is one of the factors that disturb oil refining companies. The Trump administration in the U.S. is recently making moves to postpone the implementation of the International Maritime Organization (IMO)'s sulphur (SOx) emission regulations due into force in 2020.

Starting January 1, 2020, the IMO will require that all fuels used in ships, such as oil tankers and container ships, contain no more than 0.5 percent sulfur. The cap is a significant reduction from the existing sulfur limit of 3.5 percent. So, domestic oil refiners that have been expanding its facilities to produce low sulfur oil in accordance with the new IMO regulations is now in an embarrassing situation.

SK Innovation Co. is currently building a vacuum residue desulfurization (VRDS) facility with an investment of 1 trillion won (US$875.27 million). S-Oil has invested 4.8 trillion won (US$4.2 billion) and completed a residue upgrading complex which can convert high-sulfur intermediate crude oil into low-sulfur fuel oil and petrochemical materials. Hyundai Oilbank Co. has also completed a solvent deasphalting (SDA) facility which can upgrade residue oil to jet fuel or diesel. GS Caltex Corp. is advancing its vacuum residue hydrocracker (VR HCR) facility as well.

Another unfavorable factor to the domestic oil refining industry is that coal consumption in China can increase as the Chinese government has recently decided to lower its ultrafine particle concentration level reduction goal from 5 percent to 3 percent.

The fact that the U.S. has prohibited its allies from importing Iranian crude oil starting from next month is also a concern. According to the industry, domestic oil refiners imported 200,000 barrels of crude oil from Iran a day on average in July but they have stopped importing Iranian oil from August. Accordingly, they are diversifying their imports to the U.S., Australia, Qatar and Norway. Iranian crude oil is ultra light oil that is better than heavy oil in extracting naphtha, which is a key material for producing petrochemical products. Since the domestic oil refining industry has lost the main importing source of ultra light oil, their margins will be inevitably reduced.