South Korea's Strategic Petroleum Reserve Transforms into Self-Financing Enterprise

Strategic Insights -

South Korea is transitioning its Strategic Petroleum Reserve (SPR) into a dynamically managed, self-financing entity that enhances its domestic security of supply. State-owned Korea National Oil Corp. (KNOC) is leasing idle crude storage capacity to top bidders, generating revenue for building more capacity. Established clients include Norway's Statoil, Algeria's Sonatrach, Chinaoil, and Kuwait Petroleum Corp. (KPC), with India's Oil and Natural Gas Corp. and western crude traders also expressing interest. KNOC currently has 99.5 million barrels of crude storage capacity, with 74 million barrels dedicated to the SPR and 19.9 million barrels leased to foreign producers and traders.

Key Takeaways:

  • KNOC is leasing spare crude storage capacity to generate revenue for building more capacity, aiming to increase total storage to 127 million barrels by the end of 2007.
  • Foreign producers and traders are forecast to lease upwards of 40 million barrels of capacity, including Norway's Statoil (19.9 million barrels), Algeria's Sonatrach (1.9 million barrels), Chinaoil (2.7 million barrels), and Kuwait Petroleum Corp. (KPC, unstated volume).
  • India's Oil and Natural Gas Corp. and western crude traders, including Glencore, Vitol, and Trafigura, are also showing interest in leasing capacity.
  • KNOC tenants are obligated to sell any crude in their tanks to KNOC in the event of an emergency, enhancing security of supply.
  • The leased capacity can be filled up and run down at will, creating opportunities for "smarter trading strategies" by state oil firms.

Statistics:

  • South Korea's oil demand is growing by about 2% per year, with a current demand of 2.15 million barrels per day.
  • KNOC has more than 50 days of forward cover for crude and products.
  • KNOC plans to build 27.5 million barrels of new storage by the end of 2007.
  • Foreign producers and traders are forecast to lease upwards of 40 million barrels of capacity.
  • Chinaoil leased 2.7 million barrels of crude storage for 12 months in October.
  • January Dubai is assessed by Singapore brokers at 35 cents/bbl over December, not enough to cover storage lease.

Sources:

  • Petroleum Intelligence Weekly (PIW), "Now leasing spare capacity", November 28, page 4.
  • Petroleum Intelligence Weekly (PIW), "ONGC enters Sakhalin-1, aims to use Korea tank", November 7, page 7.