South Korea’s Renewed Focus on Exploration

By Abdelghani Henni 19 Jun 2014

As with many countries located in the Asia Pacific region, South Korea suffers from a lack of hydrocarbon resources, and relies significantly on imports to meet its energy needs. In 2011, the country was the world’s 10th largest energy consumer and relies heavily on oil imports from the Middle East.

South Korea in 2011 was the world’s second largest importer of liquefied natural gas (LNG), third largest importer of coal, and fifth largest importer of crude oil, according to the US Energy Information Administration (EIA).

South Korea consumed 2.3 million BOPD in 2012. According to Korea National Oil Corporation (KNOC), Korea has a small amount of domestic oil reserves, but relies significantly on imports to meet demand. With regard to natural gas, South Korea consumed 1.75 Tcf of natural gas in 2012, which was an increase of 240% over 2001’s 719 Bcf.

South Korea is surrounded by the Yellow Sea, the Sea of Japan (East Sea), and the Jeju and Korea straits, known to South Koreans as the South Sea. There are extensive continental shelves that might hold potential for oil and gas exploration. Some western oil companies such as Gulf and Shell Corporation explored the shallow waters between 1972 and 1982, after which KNOC began working in the area, acquiring 2D and 3D seismic data and drilling 45 wells.

In 1998, KNOC finally discovered a commercially viable gas field in Block 6-1, named Donghae-1, in the East Sea offshore South Korea. The discovery is located about 60 km southeast of Ulsan, South Korea, with recoverable reserves estimated at 186 Bcf of natural gas and 3.2 million bbl of condensate. Although not gigantic, the gas field was the first commercial hydrocarbon development in South Korea. But apart from that discovery, the large area of gently sloping submerged shelves has remained unexplored, including three offshore sedimentary basins (Ulleung basin, Yellow basin, and Jeju basin).

South Korea produced a total of about 36 Bcf of marketed natural gas in 2011 from domestic gas fields. The first deepwater drilling campaign in the Ulleung basin was carried out in 2012. KNOC will continue Donghae-1 field production operations until 2018, when the project will be converted into an offshore storage facility.

Major Basins

According to KNOC, there are three major offshore sedimentary basins—Ulleung basin, Yellow basin, and Jeju basin. 

The Ulleung basin is located in the East Sea (Sea of Japan) between Korea and Japan and comprises two neighboring blocks, Block VI-1 in the south and Block VIII in the north. The two exploration blocks are 12,918 km2 and 8,481 km2, respectively. Block VI-1 was first explored by Shell in 1971, as it acquired 5,193 km of 2D seismic data before the company drilled an exploratory well.

Since the 1980s, KNOC’s attention has been focused on Block VI-1, conducting numerous seismic surveys and 22 more drilling campaigns, one of which resulted in 12 minor gas discoveries and then the discovery of a comerically viable gas field in 1998.

With total proven reserves of 250 Bcf, the gas field (Donghae-1) began commercial production in 2004. A couple of additional gas reservoirs around the Donghae-1 were confirmed in 2005 and 2006, and they will be developed in conjunction with the existing discoveries.

In addition, several exploration activities have taken place in deeper areas including the continental slope and the deepwater area of the Ulleung basin.

In 2007, Woodside Energy and KNOC agreed to explore the deepwater area, Block VI-1 North and Block VIII, and signed a joint operating agreement (JOA) with the Ministry of Knowledge Economy. The joint venture acquired 5,107 km of 2D seismic data in 2008 during its first phase. KNOC and Woodside entered the next phase of the concession contract in 2009. The initial deepwater drilling campaign was carried out in 2012.

Meanwhile, the Yellow Sea basin is made up of three exploration blocks (blocks I, II, and III) containing numerous sub-basins that are relatively less explored than the Ulleung basin. Exploration activities in the Yellow Sea include several seismic data collections on coarse grids, totaling 35,827 line-km of 2D seismic data and 298 km2 of 3D seismic data, as well as six exploratory wells drilled. 

Block I has an area of 36,460 km2, in which KNOC and Texaco acquired 8,520 km of 2D of seismic data and drilled one exploratory well (Haema-1). Block II has an area of 39,433 km2 in which KNOC worked with Gulf Oil and Marathon Oil, resulting in 35,468 km2 of 2D seismic acquisition and four exploratory wells drilled.

Recently, KNOC and China National Offshore Oil Corp. have agreed to exchange existing seismic data and interpretations to better understand the basin history in terms of hydrocarbon potential. Block III has an area of 41,427 km2, which KNOC and Shell started exploring between 1970 and 1997, but no well was drilled.

Despite the lack of discoveries, the Yellow Sea basin is still considered to have highly prospective areas as shown in a recent study by KNOC integrating additionally acquired 2D and 3D seismic data with remote-sensing analysis of satellite images.

The third major basin in Korea is Jeju basin (East China Sea basin), which is a tertiary basin located between three countries (Korea, Japan, and China) and runs through Blocks IV, V, and VI-II to the northeast. 

Overseas E&P Investment

Because of the apparent lack of oil and gas resources in the country, South Korea has outlined a strategy based on boosting its E&P investments abroad. “In recent years, the country emerged as one of the most active acquirers, as the government set a master plan for overseas development in 2001 in order to avoid any future shortages,” said Sujin Jeon, a researcher in the Strategy and Industry Research Unit at the Japanese Institute of Energy Economics.

According to the EIA, as of December 2011, KNOC was invested in 215 projects in 24 countries, 57 of which were production projects.

But the country’s new government, which took office in February 2013, has criticized state-owned firms for running up large debts and for investing in already-producing fields. KNOC, Korea Gas Corp. (KOGAS), and Korea Resources Corp. (KORES) invested USD 23.2 billion between 2008 and 2012. 

As of December 2013, the Korean government’s budget allocation for overseas energy and resources development was under review by parliament. However, it appears the government wants its state-owned firms to focus more on exploration activities.

In Challenge, an Opportunity

As more than 80% of Arabian Gulf oil production is exported to China, India, Japan, South Korea, Taiwan, and the Association of Southeast Asian Nations (ASEAN) countries, South Korea has seen an opportunity and launched oil stockpiling bases.

Major national and international oil and gas producers are opting to stock their oil in South Korea, which has built oil stockpiling bases to accommodate the increasing demand for crude oil storage facilities. “The biggest opportunity is the geography of the Korean peninsula, as it lies between China, Japan, Russia, and Taiwan. These are major oil consumers and importers, and we want to use our location as an eastern Asian moving hub,” said Moon-Kyu Suh, who has been chief executive officer and president of KNOC since August 2012.

KNOC has a stockpiling capacity of around 128 million bbl of oil. Major KNOC oil stock sites include Ulsan, Guri, Yeosu, and many others. “Though the main business of KNOC is exploration and production, we also run a stockpiling business; actually, we constructed cabins to stock about 146 million bbl of crude oil underground and some tanks of petroleum products,” said Suh. “We are leasing part of these cabins for oil- producing companies or countries, offering these facilities for their marketing strength; in return, we have some priority to buy oil in case of some interruption of supply.”

Rise of South Korean Contractors

In a market shaped by fewer but higher-value projects, South Korean contractors saw a record year in overseas orders in 2012, securing USD 70 billion worth of projects outside South Korea. The Gulf Cooperation Council (GCC) countries (including Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Oman, and Bahrain) account for the majority of Korea’s engineering, procurement, and construction (EPC) contracts abroad and, within the GCC, Saudi Arabia placed the largest order.

In 2009, after the global credit crunch, the energy project market went from being an EPC-led to a project owner-led market, as contractors were thirsty for work and project owners were eager to reduce costs. South Korean contractors responded well to these owners as they had gained considerable engineering experience and exposure to major projects yet were able to keep their costs more competitive than traditional top-tier EPC contractors.

There is an increasing acceptance of South Korean contractors as sole bidders, especially on large- sized projects. According to the UAE-based consultancy firm Contex Partners, more than half of the large-scale projects awarded to South Korean contractors in 2010 were on a sole-bidder basis—that is, contractors bidding on their own. This is a considerable increase from 2009 when it stood at only 32%, with the remaining 68% being won by South Korean/non-South Korean consortia. 

Abdelghani Henni is the Middle East Editor for the Journal of Petroleum Technology.