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Stratfort: "South Korean state energy firm gets in deep"

13 May 2006 [09:21] - TODAY.AZ
Deepwater oil production is an exacting and expensive technology with a very flat learning curve. But these hurdles are not stopping the South Koreans from building an energy firm with global competency, including deepwater oil production competency.

It is difficult to overstate how impressively South Korean technical expertise can expand when there is a corporate or government decision to move into a new industry. During the Cold War, South Korea was known for its ability to shift from heavy industry to light industry or to fabricate a shipbuilding sector in a matter of a few short years. This is a country that put together its first supertanker at the same time it built the dry dock needed to build that same supertanker. A combination of creativity, liberal funding, government foresightedness and sheer grit has turned South Korea from a war-torn refugee zone that was one of the world's poorest countries in 1955 to (as of 2005) a technology-driven industrial powerhouse that ranked as the world's 10th largest economy.

As Stratfort informs, as such, when the Korean National Oil Corp. (KNOC) began expanding its reach and goals a few years ago, Stratfor took note. Most state-owned energy firms are bloated, inefficient corrupt entities that survive by a mix of overt government favoritism and by monopolizing a captive market and captive reserves.

Unlike the more famous state-run oil firms, such as Petroleos de Venezuela, Russia's Gazprom or the Saudi Arabian Oil Co., KNOC is not a firm in a country with meaningful energy reserves to monopolize. Domestic crude production in Korea is zero -- yes, zero -- and the oil refining, distribution and retail markets are dominated by the country's private industrial conglomerates, the chaebol, so KNOC has no domestic base to rely on.

KNOC's mission is different from other state-owned firms. It stands charged with securing energy supplies for South Korea's rapidly growing economy -- South Korea currently uses 2.17 million barrels per day -- in order to reduce its dependence on outside resources of supplies and suppliers. Since it has no energy reserves at home, KNOC needs to go abroad. And unlike other state firms that do so, it has no natural advantages.

This is a familiar story in South Korea -- a country within negligible natural resources of any type -- which has nonetheless managed to develop with extreme success. As such, as in so many other things, South Korea is playing catch-up. And it is not sparing the horses, learning every technology it can get its hands on. Work on tar sands with the University of Alberta is the latest KNOC project.

KNOC's first big victory came in 2000, when it discovered a 610 million barrel reserve in Vietnam's 15-1 block, one of the largest discoveries that year. Industry players were stunned that a firm as small as KNOC could find such a project in the Vietnamese offshore in the first place, doubly so when it established and led a consortium to develop that field, which included one of the world's supermajors: Conoco. The 15-1 block established KNOC's standard operating procedure: Find a project you cannot develop, then build and operate a consortium that can. Thus, KNOC covers most of the costs and learns all the associated technologies. It is a striking difference from the policies of most state firms, which insist on tech-transfer and the money. That strategy does not work, but KNOC's does.

And the strategy has paid off. As of May, KNOC is operating in 17 states throughout Central Asia, East Asia, the Middle East, South America, Europe and Africa. In March, it signed its first solo deepwater project in the Nigerian offshore. And now, KNOC has gained the technology to look again in the South Korean offshore, where technological constraints previously prevented it from working. There is already a small amount of natural gas flowing from South Korean offshore fields -- no small feat for a country heretofore completely dependent on liquefied natural gas imports -- to the South Korean mainland; prospecting is intensifying on the country's continental shelf, too.

In its newest venture, KNOC signed a preliminary agreement May 11 with the State Oil Company of Azerbaijan (SOCAR) to take over its 50 percent stake in the Inam field in the Caspian Sea, a field which holds an estimated 20 billion barrels of reserves.

Inam is a difficult field to develop because of its depth, high bed pressure and steepness. Even BP Amoco PLC has been having difficulty in maintaining its equipment in the field, and had to halt work in 2001 to rework its technology for Inam. Also, Inam is not in the ocean, it is in the Caspian, which means that equipment must be brought in overland -- not a simple matter when one considers the needed equipment needs to be able to work under some 325 yards of water and then drill though some 4,375 yards of rock. From an oilman's point of view, Inam embodies the perfect storm of difficult physical operating conditions.

Yet it comes packaged with, from KNOC's point of view, the perfect consortium. The other 50 percent of Inam ownership is held by Royal Dutch/Shell and BP, supermajors that have the technical capacity to exploit the field, but that have not done so partly due to the burden of carrying the weight of SOCAR, the shares of which KNOC is likely to take over. SOCAR is your typical state oil firm: It provided neither money nor expertise to the Inam venture. As in so many other ways, however, not so KNOC.



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