Establishment of support system for realizing the goals of government resource development support

To establish a rational support system for resource development, it is necessary to determine what support is needed, meaning that a policy purpose should be identified before the establishment of the support system. Here, we take a brief look at how resource development can support our national interests and identify which operators are eligible for resource development support and what the necessary aspects of the support system are.

1) Security

Resource development is a means of overcoming long-term crises, while stockpiling serves as a short-term measure for securing resources necessary for energy supply stability. In recent years, the possibility of a supply shortage has been falling due to the increase in non-traditional resource development, thus mitigating the concentrated dependence on oil and gas resources. Nevertheless, short-term supply disturbances stemming from short-term regional problems and other issues have led to a rise in oil prices. Although the widths of the fluctuations have not been large, the frequency is increasing.⁵⁶ In the event of a supply disruption in the market, close relationships with suppliers will be crucial to the nation’s response to the crisis. By participating as a supplier in the market through resource development, Korea can strengthen its resilience through the network-construction effect, which is difficult to achieve by making simple purchase transactions.

Resource development by the public sector would be preferred if the purpose were to develop resources for national security purposes. This is because resource development through public enterprises is more efficient, owing to the fact that the private sector has very limited incentive to do a security-purpose resource development business (such as emergency imports). If resource development projects are led by the public sector, the investment in and financing of resource development by public enterprises would be more effective than the direct support system.

2) Economic stabilization

One of the national interests gained through resource development is economic stabilization. While resource development for security purposes involves securing supply stability, resource development for the purpose of economic stabilization involves mitigating national economic shocks through the price hedging of resources and

56 Hyunjae Doh (2014, pp.41-46).

90

use of revenue gained by selling excavated resources when prices are high. As Dubai oil prices were twice as high as usual in 2016, it can be seen that uncertainty of resource prices persists today. This is also true of mineral resources. Copper prices, having recoded USD 4,500 in October 2016, exceeded a record of USD 7,000 in October 2017 on the London Metal Exchange (LME).

When conducting resource development for the purpose of achieving economic stabilization, the scale of resource development should be expanded through private companies’ participation in resource development projects. Accomplishing this goal will be possible if resource consumers (private companies) and resource development companies participate directly in resource development projects or acquire the shares of exploration companies. The stabilization of the economy can be achieved even if the private sector does not acquire operating rights for resource development projects. Therefore, if support is provided for the private sector, in the form of loans and tax reductions, allowing it to improve its internal rate of return, companies can be induced to invest.

3) Fostering industries

According to the 2016 IEA Report, the largest sector in terms of total investment in energy is the oil and gas development upstream industry. It is true that the general attitude toward traditional resource projects has been worsening as oil prices have hovered at around half of what they were in 2014. However, oil and gas demand is projected to grow at about 1% annually, coming to account for more than 50% of energy demand by 2040. In 2040, no oil or gas will be produced from oil wells that are currently active in the world energy market today. In other words, the scale of oil wells currently in production should be re-developed to ensure their productivity in the future. Such re-development will be a parameter for the scale of the future market.

Figure 5-2. Forecast of world energy demand

(Unit: Mtoe)

91

Source: World Energy Outlook, IEA, 2016, summarized by the author.

원문 번역문

석유 석탄 가스 바이오 핵

재생에너지 수력

Oil Coal Gas Bio Nuclear

Renewable energy Hydro power

In order to nurture the industry through resource development, companies must participate in the operation right business. About 80% of the total costs of E&P companies are paid to the related service industry, meaning that resource development projects can affect the development of domestic resource development service companies.

Under the current circumstances in Korea, the role of public corporations is crucial. Public corporations currently own resource development areas. At present, the Korea Oil Corporation is directly expanding its business areas, providing the Korea Gas Corporation and private companies with test beds for the development of digital oil field technology and hydraulic crushing technology. Likewise, it is possible to upgrade industries associated with resource development to an advanced resource development field where domestic knowledge assets can be utilized, by continuing operating rights business in resource development. While economic stabilization can be achieved solely through equity investment in resource development, participation in the operation right business is required to foster the industry. Therefore, to nurture the industry, it is necessary to provide a support system that can offer incentives for companies to participate in the operation right business through the tax system, including the tax credit for overseas resource development facility investment, reserve of overseas investment loss (current Japanese system), and exploration reserve, among others.

92

Table 5-3. Establishment of a support system corresponding to the goal of resource development support National security Economic

stabilization

Industry development Sub

ject Public corporations

Public corporations

and private

enterprises

Public corporations and private enterprises Veh

icle s

Equity investment and

loan Loan and tax support Loan and tax support

Goa l

Emergency imports, etc.

Scale Scale + industry

Cha ract erist

ics

- Because the private sector has a limited incentive to follow national security purpose business (such as emergency import) on the private sector, implementation through public corporations is desirable.

- The growth of the resource

development industry naturally has an impact on national energy security.

- This can be achieved by increasing the scale of resource development.

- This can be achieved through the acquisition of equity stakes and participation.

- Provision of resource development support to induce companies to participate as active operators in development projects.

- Tax support (to guide the direction of activity as an

operator) is

effective.

Source: created by the author

93