South Korea's East Sea oil project stalls, politics hinder future funding

South Korea's upstream project in the East Sea may struggle to progress further after initial key exploratory drilling failed to find economically viable reserves, with political motives preceding the exploration casting doubt on future funding, refining industry participants and crude traders said over Feb. 6-13.

The country conducted its first exploratory drilling off the southeastern coast for 47 days, concluding Feb. 4. The drilling targeted the most promising structure among seven potential oil and gas reserves identified in the deep sea off the east coast in 2024. The drillship West Capella, operated by Norway-based Seadrill, was employed for the project named "Blue Whale."

However, the Ministry of Trade and Energy (MOTIE) said on Feb. 6 that the country failed to confirm the economic feasibility of the structure in Block 6-1 as it announced the results of the initial exploratory drilling.

The results indicated that while the Blue Whale prospect showed some signs of containing natural gas, the hydrocarbon saturation rate -- a key factor in estimating the potential production of oil and natural gas from a reservoir -- was not "meaningful enough to guarantee economic feasibility," MOTIE said.

Feedstock managers at major South Korean refiners, alongside crude traders in Singapore and Seoul, indicated little surprise toward the disappointing findings.

Local refining industry participants and broader Asian market participants continue to question the rationale behind the Blue Whale project launch, as major Asia-Oceania upstream companies had already spent years exploring the East Sea area without significant success.

Australian oil and gas major Woodside ended its exploration partnership with state-run Korea National Oil Corporation in January 2023 after nearly 16 years of exploration in the Ullung offshore basin.

Additionally, Japan's Inpex conducted exploratory drilling in a similar area. Despite detecting natural gas and crude oil, the upstream company concluded in 2022 that the hydrocarbon volumes were insufficient for commercial production.

"This indicates that even major upstream players with extensive experience in the oil and gas sector found the prospects insufficient after a prolonged investment of time and resources. It's still a mystery what made the government so confident about an oil discovery," said a feedstock inventory and trading manager at a major South Korean refiner.

Rosy promises

A high-ranking MOTIE official said "political influence" from President Yoon Suk-Yeol's office significantly impacted the lead-up to the exploration. Two anonymous upstream operation sources at KNOC told local media that it was highly unusual for the president to personally announce what was merely a preliminary prospect phase of oil discovery.

In a surprising press briefing in June 2024, Yoon said South Korea had discovered massive oil and natural gas reserves in Block 6-1 off the southeast coast, claiming it could hold up to 14 billion barrels of oil equivalent -- sufficient to meet South Korea's gas and oil demands for 29 years and four years, respectively.

Yoon said the discovery could surpass the scale of successes seen in offshore Guyana.

According to Yoon, a "leading" research institution and experts verified the estimated oil and gas reserves, referencing the US-based research company Act-Geo, which was later found to be a tiny firm operating from a residential house with reported revenue of just over $20,000 in 2022.

The US firm was also revealed to have neglected paying its operating tax in February 2023 when it entered into a contract with KNOC. Media reports indicated that the firm had lost its legal corporate status at the time of the agreement.

Amid rampant skepticism, the opposition-led National Assembly slashed the entire Won 49.7 billion ($34.3 million) budget allocated for the Blue Whale project's 2025 drilling operation. President Yoon cited the budget cut as one of the reasons for declaring martial law on Dec. 3, purportedly to suppress opposition parties.

Following the failed martial law bid, the National Assembly impeached Yoon on Dec. 14, stripping Yoon of his presidential powers. Yoon is currently awaiting the Constitutional Court's verdict regarding his potential removal from office. Yoon has been imprisoned on insurrection charges, which could lead to the death penalty or life imprisonment if convicted.

The Constitutional Court's verdict is anticipated as late as April, with many legal experts predicting Yoon's removal. If this occurs, presidential elections would be held two months after Yoon's dismissal, likely benefiting an opposition candidate. This scenario suggests that Yoon's controversial "Blue Whale" project could be completely scrapped.

Despite the ongoing domestic political turmoil, KNOC indicated that it may continue the project by seeking foreign investor interest to fund the exploration.

However, refinery sources and traders said attracting foreign investment may be challenging.

The withdrawal of established upstream companies like Woodside, following extensive exploration efforts, has fostered skepticism about new discovery potential in South Korea. This sentiment is echoed in the muted reactions from local and Asia-wide oil industry participants and trading houses, who recognize the challenges and risks involved.