Debts at energy-related state-run companies surge to $50 billion


The success of Korea’s overseas energy development projects, is being called into question as the debt of the top three state-owned energy-related corporations was found to be snowballing to 51 trillion won ($50 billion) as of October.

The data was revealed in a report by Rep. Cho Kyong-tae from the main opposition Democratic United Party for the National Assembly’s regular audit on the Ministry of Knowledge Economy early this week.

The report found the debt of the Korea National Oil Corp., Korea Resources Corp. and Korea Gas Corp. quadrupled over the five years between 2008 and 2012 under the incumbent government compared with 12.4 trillion won in 2007. Behind the mounting debt is the government’s encouragement to seek overseas investment opportunities to secure a more stable energy supply, analysts said.

Back in early 2008, when the current government launched, Lee set overseas energy development as one of the key agenda to fuel economic growth.

The Ministry of Knowledge Economy, responsible for energy-related policies, drew up a way of measuring national energy self-sufficiency, and set an annual target, which was used to evaluate the performance of energy development companies, both private and public. 

To implement the policy, the ministry also unveiled a blueprint to scale up the three large state-owned energy development companies to make them bigger and globally competitive.

Backed by the government’s financial and administrative support, KNOC has aggressively sought overseas oil exploration and production opportunities through M&A activities.

Starting from 2008, KNOC stepped up to buy large oil companies, including struggling Harvest Energy, one of largest oil production and refinery companies in Canada, in 2009 for 4.3 trillion won ($3.9 billion) and secure operating rights for oil fields under exploration.

“No one disagrees on the importance of energy policy as Korea has no oil or gas. But the lack of preparation and performance-driven energy development policy of the current government have been generating different types of problems,” lawmaker Cho said.

In the beginning of every year since 2008, the governments set an annual energy self-sufficiency target by energy source, and energy development firms drove their overseas investments to meet each target. Due to such unified efforts, oil self-sufficiency, for instance, climbed to 13.7 percent in 2011 from 4.2 percent in 2007.

Despite increasing oil reserves overseas, however, citizens have not felt any impact from it in their daily lives. Oil prices have stayed at a record-high level, lingering around 2,000 won per liter for the past few years. The reason why oil prices have not lowered is simply because the oil reserves overseas secured by KNOC have not been shipped to Korea. This outcome was revealed by the Board of Audit and Inspection in May for the first time. The BAI reviewed the status of 17 overseas oil and gas production operations controlled by KNTO and KGC and it found shipments of oil and gas from those operations to Korea up until July 2011 was about 1 percent.

“An error in defining performance measurement and the government’s performance-obsessed energy development policy caused the problem,” Cho said.

Under the current practice, the government recognizes contribution to self-sufficiency if energy reserves are secured overseas. It doesn’t matter whether that energy is shipped to Korea or not.

KNOC and KGC failed to insert a provision that would permit the secured resource to be shipped to Korea into the contract.

Imports of oil or gas involve more than just acquisition of energy reserves overseas, due to a complex set of rules and regulations in energy imports.

“The main concern of energy development companies was to meet their self-sufficiency rate by only securing energy overseas. To fix the problem, we first have to redefine the measurement for energy self-sufficiency,” Cho said.

The performance-driven energy development policy is expected to generate another side effect, as some of KNOC’s overseas investments lacked profitability or were too expensive for KNOC to bear.

For example, KNOC adjusted a contract with PSC in Iraq in August this year to return half of the stake it secured to explore five oil blocks in Northern Iraq in 2008, as oil reserves there had fallen short of expectations.

KNOC’s acquisition of faltering Harvest Energy without a thorough due diligence was another target of criticism. Losses of Harvest Energy snowballed to 11.7 billion won in 2011 from 1.5 billion won in 2009.

Overseas energy development is a high risk and high return business. The success rate in this sector is usually below 20 percent.

“It is critical to take process-driven approach as part of a long-term strategy to raise the success rate,” a researcher at Samsung Economic Research Institute said.

To fix the problems, lawmaker Cho said he would diversify the way performance was measured.

“Investments projects exceeding 50 billion won has to be reviewed for its flexibility in advance.” he said.

By Seo Jee-yeon  (jyseo@heraldcorp.com)