SK Innovation leads South Korea’s energy security drive with Asia-focused upstream projects

South Korea's leading oil refiner, SK Innovation, plans to expand its upstream business in the nearby Asian region over the next decade, taking the lead in the nation's crude supply security initiative as the state-run Korea National Oil Corporation grapples with significant debt.

Due to KNOC's financial troubles following a string of poor upstream performances, the country's private sector players should rightfully take charge of the nation's energy security drive, refinery feedstock managers and industry analysts based in Seoul said over May 21-26.

SK Innovation has adopted a new strategy to concentrate its upstream business efforts in Southeast Asia and China, moving away from remote regions, such as Peru, as part of its "business reorganization strategy focused on decarbonization", the company official said.

South Korea is Asia's third biggest and the world's fourth largest crude oil buyer as the nation relies almost entirely on imports for refinery feedstock requirements. The nation is vulnerable to any major geopolitical issues disrupting crude oil supplies and trade flows, while oil price volatility significantly affects the overall trade balance sheet.

Private-sector petroleum firms make upstream project investment and operational decisions purely based on feasibility, profitability, socio-economic and environmental assessments, not political motives. KNOC's financial health is very poor unfortunately, as its upstream projects in the past decade were mostly driven by political motives, feedstock managers and product sales executives at two major South Korean refiners and analysts at three local security houses based in Seoul said.

The refinery sources and analysts declined to be identified due to the sensitive nature of domestic politics.

SK Earthon, the exploration and production subsidiary of SK Innovation, has recently won exploration rights to two "promising" offshore oil and gas blocks in Indonesia, as part of efforts to focus and expand its upstream business on the nearby Asian region, company officials said.

The project will enhance SK Innovation's upstream "clustering strategy" focused on Southeast Asian's three main oil producers of Indonesia, Vietnam and Malaysia, the company official said, noting the strategy would enable faster commercialization and improved operational efficiency.

SK versus KNOC performances

Earlier this month, SK Innovation discovered crude oil at Vietnam's Lac Da Hong (Pink Camel) well in the offshore Block 15-1/05. Prior to the recent discovery, SK Innovation discovered oil reserves in Block 15-2/17 in January, just south of the Block 15-1/05, in which the company holds a 25% stake.

In November 2023, SK Earthon successfully shipped its first equity crude oil produced from the Lufeng 12-3 field inside Block 17-03 in the northeastern offshore area of the South China Sea. In September 2024, the company secured operatorship of Malaysia's offshore block of Ketapu Cluster.

SK Innovation is currently involved in 14 oil and gas upstream projects in eight nations, producing 58,000 b/d of oil equivalent.

"Private sector players such as SK Earthon have a much better strike rate than KNOC, that's for sure," said a petroleum and refining sector analyst at a local securities firm based in Seoul.

KNOC is currently undergoing a capital impairment process. As of 2024, the state-run oil explorer's total assets were approximately Won 18.2294 trillion ($13.4 billion), while total liabilities reached Won 19.5781 trillion ($14.4 billion).

Experts attribute the oil corporation's financial troubles to failed resource diplomacy initiatives undertaken during former President Lee Myung-bak's administration. Notable investments, such as the purchase of the Harvest Oil Field in Canada for Won 4.8 trillion ($3.5 billion), have resulted in significant losses, with the total investment in Harvest reaching Won 7.5766 trillion ($5.6 billion) while only recovering Won 49.02 billion ($36 million).

Most recently, KNOC conducted its first exploratory drilling off the country's southeastern coast for 47 days, concluding Feb. 4. 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 the Block 6-1.

Indonesia project

SK Earthon has signed production sharing contracts, or PCSs, with Indonesia's oil and gas regulatory body for the Block Serpang off the northern Java Island and the Block Binaiya off the eastern Maluku Islands.

"The Block Serpang is considered one of Indonesia's most promising offshore blocks under exploration works as nearby fields are already producing crude oil and natural gas," the company official said.

The block is presumed to hold 1.2 billion barrels of crude oil and 6.3 Tcf of natural gas, according to the official.

SK Earthon holds a 14% stake in the Block Serpang in which Malaysia's state-owned Petronas and Japan's Inpex control 51% and 35%, respectively.

The Block Binaiya is estimated to hold 6.7 billion barrels of crude oil and 15 Tcf of natural gas. SK Earthon holds a 22% stake in the block, with Indonesia's state oil companies Pertamina and Petronas controlling 56% and 22%, respectively.

Indonesia is taking significant steps to reverse its declining oil and gas production by planning to auction 60 upstream blocks over the next two to three years, Platts reported previously.