Section 3. Changes in oil policy brought about by the Trump Administration and the response of the Korean oil
(2015b), under the right conditions, the export volume of U.S. crude oil has the potential to reach around 2.36 million b/d, which is four or even five times more than what it is today, even if low oil prices continue into 2025. These numbers signify that U.S. crude oil exports could potentially have a greater impact on the international oil market, which in turn would also affect the Korean oil industry.
In light of this, and the fact that the new Trump Administration could impose trade pressure on the Korean government in multiple ways, such as reviewing the Korea-U.S. FTA in order to resolve the trade deficit41 against Korea, it may be necessary for Korea to positively pursue importing U.S. crude oil. To this end, this study proposes the following policy suggestions.
1. Import of U.S. crude oil in commercial storage facilities (ex. Northeast Oil Hub)
Even if the Trump Administration adopts more favorable oil policies than the Obama Administration, it will still take time for these policies to enhance the production potential of U.S. crude oil and produce tangible results. Therefore, until any new policies have had a chance to sufficiently mature and take effect, it is more likely that U.S. crude oil will remain subject to frequent, short-term, small-scale spot transactions rather than large-scale, long-term export transactions.
In Korea, there is a demand for short-term, spot transactions among domestic refineries due to an uncertainty in the operation of refining facilities. In general, refineries project the market conditions for petroleum products, set up a plan to procure the crude oil necessary for operating their refining facilities, and set out to procure crude oil according to plan.
However, it takes around 60 days for an order to be placed, shipped from the producing region, and unloaded in Korea, which means that the market conditions for the petroleum products in question may change from the time when the plan is first made until the time when the product is completed. Refineries must shoulder the burden of any uncertainties in deciding whether to operate their facilities, and there is always a demand for spot trades in order to fill any gaps brought about by these short-term market changes (Sangyoon Shin & Jae-kyung Kim, 2016). Such demand is frequently met by acquiring a supply from another region (such as Singapore) based on a long-term contract. This demand for spot trades among domestic refineries can also be met by short-term, sporadic imports of U.S. crude oil. However, if this demand can be satisfied by a mid- to long-term contract instead of a short-term sporadic contract, it can more effectively contribute to lowering the uncertainty of those in the domestic oil industry by securing a stable supply.
Considering the demand in both Korea and the U.S., this study proposes the import of U.S. crude oil for use in the commercial storage facilities that will be constructed through the Northeast Asia Oil Hub Project. This national project aims to acquire commercial storage facilities in the Yeosu and Ulsan regions. Through this project, three large-scale storage facilities with capacities of 8.2 million B, 9.9 million B, and 18.5 million B will be constructed in Yeosu, the North Port in Ulsan, and the South Port in Ulsan, respectively. A part of these facilities will be utilized for the storage of petroleum products, but it is also worth considering operating these storage facilities mainly for crude oil given the domestic demand for spot trades as mentioned above. Furthermore, using these new facilities as crude oil storage units will also serve to attract U.S. oil companies or traders with U.S. nationality as facility users, permitting them to bring in U.S. crude oil directly to the domestic commercial storage facilities. If enough crude oil is stored at these facilities, it could enable spot transactions between domestic refineries and facility users. Once crude oil with the specifications required by domestic refineries can be maintained at a sufficient level, crude oil spot transactions can be promoted in Korea, and the flow of oil into the storage facilities can be increased (Sangyoon Shin & Jae-kyung Kim, 2016).
This would most likely require, with the cooperation of domestic refineries, the including of an obligatory purchase amount as part of the facilities lease agreement with U.S. oil companies and/or traders. This could provide an incentive to U.S. oil companies or traders since it would guarantee a minimum amount of crude oil for sale, increasing the attractiveness of using Korea’s commercial storage facilities.
As outlined above, this study suggests the import of U.S. crude oil to Korea, provided that the crude oil is transported by a U.S. oil company or trader. This method should be considered as a short-term approach to satisfy the crude oil spot demands of Korean refining companies.
41 The U.S. trade deficit against Korea (trade in goods) increased from USD 13.2 billion in 2011 to USD 28.329 billion in 2015, recording an annual average increase of more than 23 percent. In particular, the trade deficit increased to USD 38.0 billion during the three years prior to the announcement of the Korea-U.S. FTA (2010-2012) and three years after the announcement (2013- 2015), recording the highest deficit among the 17 countries with which the U.S. has a free trade agreement (Byoungwoo Kim et al., 2016).
2. Import of U.S. condensate to diversify the oil composition of the Strategic Petroleum Reserve (SPR)
Satisfying the crude oil spot demands of domestic refineries by importing U.S. crude oil through the use of domestic commercial storage facilities may be effective in the short-term. However, crude oil spot demands can be sporadic, and the potential volume of U.S.-produced crude oil that can be imported may be limited by the fact that the commercial storage facilities of the Northeast Asia Oil Hub Project cannot be leased in their entirety to a U.S. oil company or trader with U.S. nationality.
As mentioned above, the proposal of importing U.S. crude oil must be reviewed by the Korean government. A review must also be conducted in consideration to the trade pressure from the new U.S. Administration resulting from the trade deficit with Korea and in consideration to reinforcing the U.S.-Korea alliance, which may be subject to re-establishment in terms of defense cost sharing, among other things. In short, the import of U.S. crude oil to Korea has become an issue that cannot be resolved simply by determining the potential profitability for the domestic oil industry, particularly oil refineries.
In addition to oil refineries, the Korea National Oil Corporation (KNOC) supervised by the government (Ministry of Trade, Industry and Energy) can import crude oil to Korea. Pursuant to Article 16 of the Petroleum and Alternative Fuel Business Act, KNOC acts as an agency for the government and is responsible for the petroleum stockpiling of crude oil (and several petroleum products) in order to respond effectively to any short-term supply disruptions.
As of the end of March 2016, the capacity of the storage facilities for crude oil stockpiling was 127.5 million B, and, excluding international joint reserves, 79.4 million B of crude oil in Korea was stored as part of the Strategic Petroleum Reserve (SPR) (Jae-kyung Kim, 2016b). The composition of the SPR is mainly Middle Eastern medium crude oil with a small quantity of crude oil from Australia and Norway (approximately 1.3 percent) (Refer to Table 6-2).
Table 6-26. Composition of the Strategic Petroleum Reserve (as of the end of March 2016)
Country of origin Oil type (API°) Volume
(One million B) Proportion Iran
Iranian Heavy (29.5) 1.9 2.37%
Iranian Light (33.4) 0.05 0.06%
Kuwait Kuwait (30.5) 2.5 3.13%
Oman Oman (33.0) 19.6 24.70%
Iraq Basrah Light (30.2) 44.3 55.83%
Dubai Dubai (30.4) 4.4 5.56%
Saudi Arabia Arabian Light (33.0) 4.6 5.81%
Algeria Saharan Blend (46.0) 0.03 0.04%
Australia North West Shelf Cond (55.9) 1 1.28%
Norway Oseberg (37.8) 0.08 0.09%
Qatar Deodorized Field Cond. (57.0) 0.9 1.13%
Subtotal 79.4 100%
Source: KNOC internal data
The concentration in certain oil-producing countries in the composition of SPR reflects, in a way, the demand for crude oil of domestic refineries. But given efforts in the private sector to diversify sources of crude oil imports have led to a dependency of 82.3 percent on oil produced in the Middle East (as of 2015), it is doubtful that the current composition of the SPR accurately reflects domestic crude oil demand. In order to rationalize the composition of the SPR, it is necessary to increase the proportion of condensate for which there is a demand not only in the oil refinery but also in the petrochemicals industry. Therefore, the import of U.S. condensate should be positively reviewed.
It is important to note that the KNOC has had a stake in the condensate production of Eagle Ford in the U.S. since 201142.
Figure 6-4. Current Map of KNOC’s Production Assets (Mining Lot) in Eagle Ford, U.S.
Source: Byoungyun Lim (2015)
This fact alone provides sufficient grounds for the review of the proposal contained in this study as it could not only resolve the controversy surrounding the import of crude oil produced as part of KNOC’s upstream assets43, but also simultaneously enable a policy-based approach to the import of U.S. crude oil.
3. Strengthening US-Korea energy cooperation for the construction of crude oil export infrastructure in the Northwest U.S.
Korea must consider the possible import of U.S. crude oil in response to trade pressure from the Trump Administration (which is aiming to resolve the trade deficit against Korea), to strengthen the Korea-U.S. alliance, meet domestic demands for short-term spot transactions, and strengthen its strategic petroleum reserve. Korea should even consider the possibility of importing U.S. crude oil in the form of relatively large-scale, long-term contracts and maybe even consider shifting a part of its supply from the Middle East to the U.S.
However, any long-term shifting of supply lines would first require U.S. crude oil to be released in the international oil market on a larger scale. This would likely only be possible after the Trump Administration establishes a more favorable policy environment and this environmental change effectively advances the U.S.’s crude oil production potential. In other words, this is an issue that requires a mid- to long-term approach rather than a short-term approach.
Even after considering all of the above, there is yet another barrier to the large-scale import of U.S. crude oil to Korea under long-term contracts: export infrastructure. As examined in Chapter 5, crude oil export ports connected to major LTO-producing regions via pipelines are clustered mainly in the Gulf of Mexico. As of yet, none of these ports can be accessed by VLCC or ULCC-grade oil tankers, which are needed for large-scale exports. The ports in the Gulf Coast are working to improve their export infrastructure, including their export terminals, and the Trump Administration has also
42 In April 2011, KNOC acquired a 23.7 percent stake in the condensate mining lot of Eagle Ford, Texas. This mining lot measures approximately 1,643가 (406,000 acres) and is under the shared ownership of Anadarko (47.3 percent), SM Energy (14.5 percent), Mitsui (12.5 percent), and CNOOC (2 percent). Anadarko holds the operation rights, and the produced condensate is sold mainly to BP, Flint Hills, and Shell. The condensate production volume is 77,000 b/d, of which KNOC has a stake of about 18,000 b/d (Byoungyoon Lim, 2015).
43 KNOC’s overseas upstream business sells the produced crude oil to nearby regions and remits the revenues to Korea. KNOC was criticized its lack of contribution to Korea’s oil security by not importing the crude oil to Korea.
expressed its support of the construction of export infrastructure. However, as mentioned in Chapter 4, the main destinations for U.S. crude oil exports are countries in the Central and South Americas and Europe, and therefore, it is likely that the construction of export infrastructure in the Gulf of Mexico will be tailored to exports to established clients in these regions rather than potential clients in East Asia.
Therefore, it is necessary to review the possibility of constructing export infrastructure along the coast of the Northwestern U.S. region or the Canadian West Coast, which is geographically closer to Korea. For this to be possible, a pipeline infrastructure must be constructed that connects Bakken (an LTO-producing region) in North Dakota to the coastal area. The crude oil (mainly LTO) produced in Bakken is transported to the Cushing trading hub in Oklahoma via pipelines or to the East or Midwest in the U.S. via railways. The crude oil transported to the West is first moved to Bakersfield in California via railway and then delivered to relevant refineries in different regions by various shipping routes. If a pipeline infrastructure is constructed that links Bakken to the northwestern coast (Washington or Oregon State) or the western coast of British Columbia in Canada, crude oil can be shipped from a port along the relevant coast and imported to Korea.
Figure 6-5. Major Shipping Routes and Methods for the Crude Oil Produced in Bakken
Source: https://stateimpact.npr.org/pennsylvania/2012/06/13/charting-the-course-of-bakken-shale-oil/, accessed on November 11, 2016
It goes without saying that the construction of new infrastructure would require the support of the state government through which the pipelines pass as well as the support of the U.S. federal government. Fortunately, the Trump Administration seems to have taken a favorable position on the construction of oil transport infrastructure and has expressed a willingness to re-authorize the construction of the Keystone Pipeline, which was halted during the Obama Administration. Taking advantage of this administration change, the Korean government will have to devote mid- and long-term efforts to strengthening U.S-Korea cooperation in various channels, including joint research for the construction of a crude oil export infrastructure (including pipelines) along the northwestern coast of the U.S.