In addition to the indirect impact of the removal of the U.S. crude oil export ban on the Korean oil market through the international oil market, many in the Korean oil industry have also been keenly interested in the possibility of importing U.S. crude oil to Korea. Korea imports almost all of its crude oil from overseas and relies heavily on oil from the Middle East. In fact, in the case of condensate, 72 percent of Korea’s imports in 2014 and 84 percent of its imports in 2015 originated from only one country (Qatar). Therefore, if oil-producing regions in the Middle East are threatened by a natural disaster, terroristic activities, war, or a regime change (etc.) and are unable to export their resources, it would not only mean a huge loss for the refining companies and petrochemical companies that handle imports, but would also mean a national crisis for Korea as a whole. Therefore, in order to ensure the stability of crude oil imports, overcome relative disadvantages in import negotiations, and enhance negotiating power, it is imperative that Korea find new sources of oil (Jae-kyung Kim, 2014). The domestic oil industry in Korea has actively been reviewing the possibility of importing U.S.- produced crude oil as part of its efforts to diversify its crude oil sources.
In September 201437, prior to the removal of the U.S. crude oil export ban, Korea imported 794,000 B of U.S. crude oil (condensate) (395,000B by GS Caltex and 399,000 B by SK Energy) on a trial basis. When the export of distilled U.S.
lease condensate was permitted on a limited scale after January 2015, an aggregated amount of 1.936 million B was additionally imported between January and August 2015 (934,000 B by SK Energy, 702,000 B by Hanwha Total, and 300,000 B by GS Caltex). However, after September 2015, domestic refining companies halted the import of U.S. crude oil due to reasons of economy, and there were no imports of U.S. crude oil until October 2016, even though the U.S.
lifted its crude oil export ban in December 2015. In November 2016, GS Caltex signed an agreement to import 1 million B of crude oil produced in Eagle Ford, but it remains to be seen whether this will lead to regular imports.
In order to understand the reasoning behind the low level of imports after September 2015, it is important to examine the two main factors that determine the economy of importing U.S. crude oil to Korea: transport costs and the price spread between similar oil types.
Jae-kyung Kim (2014) estimated the transport costs of condensate from the Middle East (namely Qatar) at around
$1.5/B and transport costs of condensate from the U.S. (namely the Gulf of Mexico) at around $5.0/B, resulting in a difference of around $3.5/B. It is important to note that this analysis was conducted in August 2014 immediately prior to the import of U.S.-produced condensate cargo to Korea, and its accuracy is limited since the calculations used were based on estimates accepted by the refining industry rather than actual shipping costs (internal data of SK Energy). Since September 2014, a total of 2.73 million B in U.S.-produced condensate has been imported to Korea, which enables the accurate calculation of transport costs. This study has calculated the average transport costs (shipping costs) of condensate shipped from the Middle East (Qatar and Iran) and the U.S. (Gulf of Mexico) based on the customs information of PEDSIS38 of the Korea National Oil Corporation (KNOC) from September 2014 to July 2015.
Table 6-25. A Comparison of Transport Costs for Condensate Shipped from the U.S. and the Middle East (Qatar, Iran)
Category Import
Volume (One thousand
B)
Based on C&F prices Based on FOB prices
Shipping Cost (A-B) (USD/B) Country Oil type
Amount (One thousand
USD)
Unit price (A) (USD/B)
Amount (One thousand
USD)
Unit price (B) (USD/B)
U.S.
Processed
Condensate 1,496 116,611 77.9 113,703 76.0 1.94
Eagle Ford
Condensate 934 57,245 61.3 56,311 60.3 1.00
Qatar RAS Gas
Condensate 70,271 5,050,949 71.9 4,903,050 69.8 2.10
37 On June 24, 2014, the BIS approved a lease condensate export license for the Pioneer Natural Resources and Enterprise Products Partners LP.
38 http://www.pedsis.co.kr/
Iran South Pars
Condensate 2,024 114,540 56.6 112,141 55.4 1.19
Source: PEDSIS (September 2014 - July 2015)
According to more recent calculations based on actual shipping costs, the average transport cost of importing U.S.- condensate to Korea from September 2014 to July 2015 was around $1-1.9/B, while the average transport cost of importing condensate from the Middle East was around $1.2-2.1/B, showing only a marginal difference in transport costs between the two regions. However, due to a variety of reasons, there may be a difference between the shipping cost reported to the customs authorities and the actual shipping cost, making it difficult to calculate with real certainty the difference between the two transport costs (also affected by the nautical distance from the Gulf of Mexico to Korea, which is relatively longer than that of the Middle East to Korea). However, unless the gap between the shipping costs calculated in Table 6-1 and the true transport costs is significant, transport costs alone are not prohibitive to Korean imports of U.S.-produced crude oil.
The economy of importing U.S. crude oil depends largely on the price spread between Middle Eastern crude oil prices (Dubai oil price) and U.S. crude oil prices (WTI price). In order for Korea’s domestic oil industry to reach economy in relation to U.S. crude oil imports, the U.S. crude oil price must be sufficiently cheaper than oil prices in the Middle East, from which crude oil has been imported to Korea for many years. However, as examined above, the difference in shipping costs between the two regions is negligible. Furthermore, as pointed out by Jae-kyung Kim (2015b), the Dubai- WTI Spread may also be rather insignificant since the Middle Eastern crude oil is subject to a 3% tariff and U.S. crude oil imported to Korea is free of tariffs as per the Korea-U.S. free trade agreement.
As explained above, the Dubai-WTI Spread prior to September 2015, when domestic refining companies were importing crude oil (condensate) from the U.S., was estimated to have been favorable enough to attract continued imports.
Figure 6-1. Trends in the Dubai-WTI Spread in 2015
Source: Petronet
가격차이
Price gapHowever, in September 2015, the Dubai-WTI Spread fell rapidly to around $2/B, and after mid-September, the Dubai oil price fell even lower to below WTI prices39. For this reason, the annual average Dubai-WTI Spread recorded in 2015 was $2/B. This negative Dubai-WTI Spread continued in 2016 and stood at an average of -$2.5/B as of July 2016.
Figure 6-2. Trends in the Dubai-WTI Spread in 2016
39 In general, the price of Dubai oil (medium crude oil) is cheaper than WTI prices (light crude oil), which is why the spread between the two oil types up until early September 2015 was seen as a reversal in prices.
Source: Petronet
Due to the drop in the Dubai-WTI Spread, there has been no incentive in recent years for domestic refining companies to import U.S. crude oil, which has remained relatively more expensive than crude oil from the Middle East, even after the removal of the U.S. crude oil export ban. Going forward, unless the international oil market undergoes a dramatic transformation, the reversed Dubai-WTI Spread will continue to be intensified, and recovering the level of the Spread prior to September 2015 may be difficult in the long-term.
Figure 6-3. Long-term Outlook on the Dubai-WTI Spread (2016-2035)
Source: KNOC (Outlook as of March 2016)
If the current low-price trend continues, the supply of U.S. crude oil to the international oil market could be limited, and accordingly, importing U.S. crude oil to Korea may also prove to be difficult.
Trends however, are always subject to change, and the current oil prices may suddenly begin to rise due to unforeseen circumstances. In this case, the relatively more resilient U.S. crude oil production could sufficiently expand, and the Dubai-WTI Spread could return to a level that would ensure the profitability of importing U.S. crude oil. If an increase in the Dubai-WTI Spread became more tangible, Korean companies could then be expected to actively start seeking ways to re-import crude oil from the U.S. However, until this happens, it may be prudent to reserve any evaluation of the potential impact of large-scale imports of U.S. crude oil on the Korean oil industry.
Section 3. Changes in oil policy brought about by the Trump Administration and the response of the Korean oil