Natural Security Blog: Post

South Korea’s Quest for (Foreign) Energy

China is normally the most prominent country when the media and analysts cover rising volumes of international energy deals and investments. South Korea, however, is giving it a run for its money. As we noted in the daily news last Wednesday, South Korea has been investing in foreign energy reserves at a rapid pace.

This has followed a growing trend in recent years of South Korean companies more aggressively investing in majority stakes in foreign-owned energy production ventures. As Bloomberg Business reported last fall, these efforts show that “South Korea is turning aggressive to lock up oil supplies after acquisitions by Chinese peers jumped eightfold in three years.” Because South Korea relies on imports for nearly all of its energy needs, it may gain a sense of greater energy supply security by this aggressive acquisition of assets abroad.

Already South Korea’s stakes in foreign assets has increased from 4.2 percent in 2007, to 10.8 percent by the end of 2010. Based on the recent spate of deals, should we expect this trend to become even more prominent in 2011? Let’s look at a few recent examples.

On March 14, the state-run oil company Korea National Oil Corp. (KNOC) purchased a large stake in oil reserves in the United Arab Emirates. When this deal is finalized next year, South Korea will increase the level of imports it gets from sources it owns a stake in to 15 percent of its oil consumption.

Then, on March 18, KNOC acquired a 95 percent stake in Kazakhstan’s Altius oil field for $515 million.  This field produces an average of 104,000 barrels of oil per day. KNOC made headlines again on March 21 after announcing a $1.55 billion deal with Anadarko Petroleum Corp, for a 23.67 percent stake in an oil shale field in Texas. Together, the $2.0 billion deals in Kazakhstan and Texas will bring an even greater sense of self-reliance for energy supplies, according to the Ministry of Knowledge Economy.    

South Korean companies made important deals on the coal front as well. On March 22, for example, the state-run Korea Resources Corp. (KORES) announced that one of its consortiums had purchased a 90 percent stake in Indonesia’s Kapuas thermal coal mines for $84.15 million. On the same day this deal was concluded, the South Korean government also signed a memorandum of understanding with Mongolia where the countries pledged to cooperate in developing “clean coal” from Mongolian mines.  South Korea has also been seeking to secure raw materials and has purchased a stake in Peru’s iron ore mines.

In all, South Korea has set aside $7 billion for resource development this year, a whopping 222 percent increase over the $2.2 billion it spent last year for the same purpose. And we can expect that much of this investment will be abroad given its limited domestic possibilities.

There are a few reasons I think this is particularly important to watch. First, the pursuit of stakes in foreign oil, gas and coal sources may grow among the rising economies should the recent events in Japan discourage growth in nuclear energy adoption. In addition, although many of us, not excluding this author, like to highlight how China’s state companies are aggressively buying up energy sources abroad, it’s worthwhile remembering that the United States and our own allies often do the same.

In a larger sense, this also highlights that by its very nature, the geopolitics of energy, if left to its own devices, can create an acute degree of competition, if not actual conflict, among parties that individually are simply trying to meet the needs of their respective societies. On the other hand, it seems that the strategic importance of resources to all Asian powers makes this a potentially potent topic upon which regional cooperation can be maintained. Time will tell though if the diplomatic efforts required to tip the scales in the direction of resource cooperation will be elusive.  

Energy

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