South Korea mulls oil industry relief measures as refiners, consumers seek respite from price surge

South Korea's oil refining and petrochemical industry is not overly concerned about the escalating geopolitical tensions between Washington and Moscow as the country depends very little on Russian crude oil, but the market is actively calling the government to take action to help tackle surging oil prices and revive consumer confidence.

Major South Korean refiners and petrochemical makers, including SK Innovation, S-Oil and Hanwha Total, are largely unfazed by the possibility of financial sanctions disrupting Moscow and Russian oil supply. But surging crude procurement costs and faltering consumer confidence amid high retail fuel prices are at the top top of their near-term business and sales agendas, fuel and chemical marketers and crude traders at these companies told S&P Global Platts Feb. 15.

Russian crude oil make up only 5.6% of South Korea's overall refinery feedstock imports, while alternatives for Far East Russian ESPO, Sokol and Sakhalin blend crudes are available in the regional and US spot markets, Platts reported previously.

As surging prices is the main concern for the refining sector, the industry is pinning their hopes on the government to roll out some concrete price relief measures over the coming months, the refinery sources said.

The Ministry of Trade, Industry and Energy recently convened an emergency meeting with crude oil importers and state-run integrated oil company Korea National Oil Corp. to discuss the Ukraine crisis and its implications on the international oil market, with the possibility of a further rise in benchmark crude prices.

In an effort to help reduce refiners' feedstock cost burden, the government is ready to release more oil from its strategic petroleum reserves, a ministry official said. The ministry, however, did not elaborate on the specific volume and crude grades to be released; on top of the 3.17 million barrels that were previously announced to be dispatched during the first quarter.

"Ultra-light crudes, light sweet and medium sour grades are commanding high premiums in the international spot market lately, so if the state could offer some of the similar grades at a steep discount to current market levels, that should help," a feedstock trading manager at Hanwha Total said.

In November 2021, the energy ministry said it will release 2.08 million barrels of crude oil and 1.09 million barrels of refined products from the SPR over January-March 2022, joining the US-led drive to bring down international crude oil prices and tame consumer inflation.

The country currently holds 97 million barrels of strategic reserves -- 83 million barrels of crude and 14 million barrels of oil products -- equivalent to around 106 days worth of domestic demand as recommended by the International Energy Agency, according to the energy ministry and KNOC.

Lower import tariff, fuel tax cuts

South Korean refiners and petrochemical makers are also re-assessing their feedstock shipment costs after the ministry indicated on Feb. 11 that it would consider lowering tariffs on crude imports. South Korea currently levies a 3% tariff on imported crude oil.

Crude procurement managers at the major refiners indicated that import tariff cuts could shave off anywhere between $1/b and $5/b of their regular intake of Middle Eastern crude shipments.

"Thanks to the South Korea-US free trade agreement signed a few years back, higher quality light sweet US grades come cheaper than high sulfur Middle Eastern crude ... US crude takes a longer sea route too," a crude procurement manager at a major South Korean refiner, who declined to have its company name identified due to the sensitive nature of international corporate trading relationships, said. "This clearly explains how lower tariffs and taxes on imports can make a huge difference."

Meanwhile, South Korea lowered taxes on auto fuels by up to 20% for six months from November 2021, but industry and market participants continue to call for the scale and duration of the tax cuts to be increased, so as to effectively ease upward pressure on pump prices and support consumer sentiment.

The government should consider reducing taxes further at least during times when benchmark oil prices are above the $90/b mark, since a few percentage cut in fuel taxes would only make minor changes when outright prices surge in a grand scale, according to distribution and sales associates at Korea Oil Station Association.

The Ministry of Economy and Finance declined to comment when asked about the possibility of bigger tax cuts, but the energy ministry official indicated that the government would consider extending the duration of the tax cuts.

Taxes account for almost 50% of the retail gasoline price, 40% of the diesel price and 30% of the butane price in South Korea.