Industry Warns Lower Operating Rates and Government Export Limits Could Undercut Profits If the Iran Crisis Drags On
S-Oil Ulsan production line. (Photo provided by S-Oil)
South Korea is a country that does not produce a single drop of oil, but the refining industry has generated massive profits through exports. This is because the industry possesses world-class competitiveness in its refining capacity to convert entirely imported crude oil into petroleum products.
The refining capacity of the four major domestic refiners is 3.36 million barrels per day. It ranks fifth in the world after China, the United States, Russia, and India. Investment in upgrading facilities that convert low value-added products like bunker C oil, produced by refining crude oil, into high value-added products such as gasoline and diesel amounted to approximately 34 trillion won (approximately $23.09 billion) from 2007 to 2024. Although it is a non-oil-producing country, it has secured both production efficiency and price competitiveness at the same time by building a structure that can increase the proportion of high value-added product production. In particular, it possesses product quality that meets global standards so that it can be exported directly to various countries without separate additional refining.
Based on this, the domestic petroleum product export amount achieved fourth place overall as of last year. In addition, it contributed to the improvement of the trade balance by exporting about 60% of the crude oil import amount. This is the background of how a non-oil-producing country rose to the ranks of the world’s top five petroleum product exporters.
However, as the Strait of Hormuz has been practically blockaded recently due to the Middle East war, petroleum product exports are showing signs of slowing down. The proportion of domestic demand in total petroleum product production rose from 56.4% in February to 60.6% in March, and during the same period, the export proportion decreased from 35.9% to 31.3%. In March, the export volume of petroleum products such as gasoline, diesel, aviation fuel, and kerosene from the four major refiners was found to have decreased by 17.7% compared to the previous month. The trend of weakening exports was immediately revealed in the indicators.
Above all, the instability in the global crude oil supply and demand is holding back the refining industry. This is because if crude oil introduction is blocked, production and exports are bound to shrink simultaneously. The government limiting the export volume of refiners to 100% of the volume during the same period last year to ensure the smooth domestic distribution of petroleum products also fueled this situation. An industry official analyzed, “In the case of refiners, they have been making profits through exports rather than domestic demand, but the possibility that this structure will be shaken by the Iran crisis is growing,” and added, “Separate from the expectation of good performance in the first quarter due to rising oil prices and improved refining margins, the fact that exports are decreasing is an adverse factor in itself.”
As each country stakes its life on securing crude oil, the instability of the global market is increasingly amplifying. As South Korea, the largest fuel supply country, reduces its export volume, even the United States is on high alert. In fact, major countries such as the United States and Japan have conveyed their opinions to the South Korean government requesting restraint on the export control of petroleum products.
If the Iran crisis is prolonged, the problem becomes serious. This is because even if the war ends, it is expected to take a considerable amount of time for the global petroleum supply chain to recover. Inside and outside the industry, there are observations that the recovery timing may vary depending on the extent of damage to the production and shipping facilities of Middle Eastern oil-producing countries, but normalization could take as early as 6 months, and as long as 1 to 2 years or more. If crude oil production is suspended, the recovery of petroleum product exports within a short period of time could become difficult. When the operation of production facilities stops, the viscosity of crude oil increases, and if this happens, the possibility that it will take more time to resume production cannot be ruled out.
Among refiners, it is pointed out that the already dropped operation rate itself is a burden. If the operation rate of refining facilities becomes lower than it is now amidst the instability of crude oil supply and demand, the burden of fixed costs such as labor costs and facility maintenance costs will increase, which is bound to lead to deteriorating profitability. Jang Tae-hoon, an associate research fellow at the Korea Energy Economics Institute, expressed concern, saying, “If product volumes simultaneously decrease due to supply disruptions originating from the Middle East, the effect of improving profitability due to price increases may also be limited,” and added, “Even if the unit price of the product rises, if the sales volume decreases, the overall profit will decline.”
Jung Min-hee
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