South Korea Aims to Triple KNOC Assets by 2012

SEOUL (Dow Jones Newswires), June 12, 2008

South Korea unveiled a plan Thursday to beef up the competitiveness of state-run Korea National Oil Corp. by sharply boosting its oil and gas production and assets through injections of state funds and acquisitions of producing fields and oil companies.

The plan comes only few days after the country released a comprehensive KRW10.49-trillion ($10.2 billion) package of relief measures to help low-income individuals deal with the impact of record oil prices.

Resource-deficient South Korea desperately needs to expand the size of its state-run oil development firm to survive in the global race to secure costly overseas resources, the energy ministry said.

"In high risk, capital- and technology-intensive oil development businesses, size directly leads to competitiveness and it serves as a prerequisite for participation in (oil development) projects," the Ministry of Knowledge Economy said in a statement.

The ministry held out as models "Spain and Italy, which lack resources like South Korea, (and) have achieved high energy self-sufficiency through government-led expansion of state firms."

Latecomers such as China and India also own globally competitive state energy companies, the ministry noted.

Some private-sector analysts agree that bigger may be better for South Korea's largest energy company.

"The government's fund injection will serve as a stepping stone for KNOC to compete with global energy companies," said an analyst at a local energy research institute. "Raising assets is important, but it is equally essential to secure technology and manpower to buoy its competitiveness."

The government needs to focus on developing KNOC into a global player before considering privatizing it because it is a highly risky business, said the analyst, who declined to be identified.

"Until now, KNOC has been mostly buying fields under exploration, but from now on, it will focus on buying producing fields as well as acquiring other countries' oil development projects," said Lee Jae-hoon, Vice Minister for Trade and Energy at the Ministry of Knowledge Economy.

"Many experts talked about the need to have aggressive strategies to acquire producing fields and oil companies. Japan has belatedly also been doing it via mergers and acquisitions and expansion of its state firm," Lee said.

He added that there may be risks involved in mergers and acquisitions when oil prices are rapidly rising, but noted that prices of producing fields have been relatively stable because they are based on the long-term oil price outlook.

Under the KNOC expansion plan, KNOC's assets would rise to KRW30 trillion by the end of 2012, more than tripling the KRW9.4 trillion posted at the end of 2007. Production would rise to 300,000 barrels per day from 50,000 at the end of last year, and the company's workforce in the development sector is expected to rise to about 2,500 from about 450.

To expand KNOC's size, the government plans to inject KRW4.1 trillion in state funds, and another KRW14.9 trillion from KNOC's own funds, borrowings and other methods.

"To raise KRW19 trillion, we have (to use a variety of channels)...raising through local and foreign financial institutions or various advisors. We will allow the private sector, including the National Pension Service, to invest substantial amount of funds," said Lee.

To enable KNOC to act promptly to purchase oil fields and oil development companies when they are put up for sale, the government plans to inject KRW964.7 billion of the KRW4.1 trillion this year via a supplementary budget.

It will provide the remaining funds - about KRW800 billion each year - in 2009-2012.

The government had already said Sunday that it plans to inject KRW600 billion into KNOC to buoy its oil and gas development capabilities. Following the additional allocation, the company's development budget for this year will rise to KRW964.7 billion from the KRW364.7 billion originally planned.

South Korea had reviewed a plan to merge KNOC and Korea Gas Corp. (036460.SE), or to put the two state companies under one holding firm, but decided to keep them as separate entities.

However, KNOC and Kogas will cooperate strategically in seeking new oil and gas projects.

The government expects the expansion and acquisition plans to raise the country's oil and gas self-sufficiency rate to 25% in 2012, up from a target of 18.1% expected prior to the adoption of the expansion plans - and a big jump up from 4.2% in 2007.

After boosting KNOC's competitiveness and size between now and 2012, the government will consider listing shares of KNOC, which is currently wholly-owned by the state, in the domestic stock market to help the company raise necessary funds.

"Realistically, it isn't feasible to launch an initial public offering for KNOC now. The IPO has to be done after expanding KNOC's size to a certain level and that level is when it has daily production of 300,000 barrels, which is about the middle among the global oil companies," Lee said.

However, the government intends to maintain control of the company, so it won't be selling a controlling stake in the IPO, he said.

The government will change the law if necessary to increase KNOC's capital. Under current laws, KNOC's capital can be raised to about KRW10 trillion from about KRW5.4 trillion currently. KNOC is the world's 93rd largest oil company in terms of production capacity.

The government may also consider an expansion plan to beef up the competitiveness of the state-run Korea Resources Corp., Lee said.

Currently, KNOC has 37 projects in 16 countries. Its major investments include oil and gas fields in Russia, Kazakhstan, Uzbekistan and Nigeria.

Russia's Rosneft (ROSN.RS) and a Korean consortium led by KNOC are exploring an offshore oil block in Kamchatka.

In May, a Korean consortium led by KNOC signed an $85 million exploration and production contract with a state company to acquire a 27% stake in Kazakhstan's offshore Caspian Sea Zhambyl oil block. Exploration will begin later this year.

An international consortium of KNOC, Uzbekneftegaz, China's CNPC, Russia's Lukoil Overseas and Malaysia's Petronas are conducting exploration of an offshore gas field in Uzbekistan until 2012.

In Nigeria, Korean companies led by KNOC and others are exploring a deep sea oil block until 2010.

Copyright (c) 2008 Dow Jones & Company, Inc.

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