South Korea election front-runner endorses Arctic route for energy, trade security

South Korea's presidential election front-runner, Lee Jae Myung, is advocating for the development of the North Asia-Europe Arctic trade route, as the initiative could significantly enhance the nation's energy security while opening new oil trading options.

The refining industry is broadly viewing Democratic Party candidate Lee's Arctic trade route plan positively. The successful development of this seaborne pathway could provide an alternative oil procurement route in case of logistical disruptions in the Persian Gulf region. Sources in the refinery and trading sectors noted that an arbitrage window for purchasing North Sea and Mediterranean crude could regularly open up as well.

Following the formal impeachment of former president Yoon Suk-Yeol on April 4, South Korea is set to hold a snap election on June 3. Lee emphasizes the need for a state-backed project to develop the Arctic trade route to Europe, aiming to establish a logistical hub in major port cities like Busan as a key policy and growth strategy.

Currently leading the polls by a significant margin against other candidates, Lee expressed hope that if the South Korea-Western Europe Arctic route opens, it could shorten the distance from major domestic ports like Busan and key oil terminals in Ulsan to Rotterdam in the Netherlands by about 6,000 to 7,000 kilometers, potentially improving logistics.

During his campaign in Busan on May 14, Lee highlighted that the Arctic route could address oil supply security for Asia's third-largest crude importer in the event of issues in the Strait of Hormuz or the Taiwan Strait. "We need to create a route that has no risks. Ultimately, the world will focus on the Arctic route," Lee stated. He also noted that the period when ice cannot be broken is getting shorter, and icebreaking technology has improved significantly. "It seems that the Arctic route could be activated in 5 to 10 years."

Establishing the Arctic route would undoubtedly shorten transportation distances between Asia and Europe, yielding cost-saving benefits. According to feedstock managers at three major South Korean refiners, every cent saved on crude import logistics and every hour saved on feedstock delivery can significantly boost overall refining margins.

Moreover, if the Arctic route is successfully developed, US crude delivery times to North Asia could also be reduced by about one to two weeks, according to a feedstock manager at two major South Korean refiners and traders in Singapore familiar with spot WTI Midland cargo trades in the Asian market.

The Arctic route could also assist many North Asian refiners in reducing reliance on Middle Eastern sour crude and diversifying supply sources by making North Sea and Mediterranean grades cheaper, at least in terms of logistics. This perspective is shared by feedstock managers at South Korean and Japanese refiners, including ENEOS, as well as trading managers at Western trading houses based in Singapore.

In 2024, South Korea imported 8.35 million barrels of Forties crude and Johan Sverdrup from the UK and Norway, accounting for just 0.8% of the 2024 total crude shipments of 1.029 billion barrels, according to data from state-run Korea National Oil Corp.

Although the Brent-Dubai price spread fell to an 18-month low in March, purchasing North Sea grades like Forties and Johan Sverdrup was not necessarily economical due to long delivery distances and high European fossil fuel taxes. However, if the Arctic route project succeeds, the arbitrage window for North Sea cargoes could regularly open, according to South Korean refinery feedstock managers and traders based in Singapore.

Platts, part of S&P Global Commodity Insights, assessed the Brent/Dubai Exchange of Futures for Swaps spread -- a key indicator of Brent's premium/discount to the Middle Eastern benchmark -- at $1.56/b on May 15, recovering from minus 18 cents/b on March 20, which marked the lowest level since minus 19 cents/b on Aug. 24, 2023.

A weaker EFS makes various sweet crudes from the Americas, North Sea, Mediterranean and Africa -- linked to the European benchmark -- more economical compared to Dubai-linked Middle Eastern grades.

Policy Planning

The Democratic Party is accelerating the promotion of related policies by proposing a special law for the establishment of the Arctic route. This initiative aims to support Lee's vision of developing the Arctic route as a new growth strategy for Busan and South Korea's refining hub city of Ulsan.

According to the Democratic Party, the special law for the Arctic route includes essential procedures such as: 1. Establishing a basis for the Ministry of Oceans and Fisheries to conduct basic plans and surveys; 2. Establishing an Arctic Route Committee under the President; 3. Installing an Arctic Shipping Information Center to provide information on overseas trends, ice melting status, and other necessary data for the Arctic route; and 4. Providing a foundation for research and development, international cooperation projects, and other initiatives for establishing the Arctic route.

Lee also emphasized that improving relations with Russia is crucial for the plan, stating, "The most important thing is diplomatic relations. We must resolve the relationship between Russia and the US well."