South Korea's SK Innovation to spin off upstream, battery units, phase out refining investments

South Korea's top oil refiner, SK Innovation, plans to spin off its upstream and battery businesses, while gradually reducing investments in the refining segment to better accommodate its long-term transition strategy from a carbon-intensive model to a green business, the company said Aug. 4.

Under the new strategy, SK Innovation aims to increase the ratio of eco-friendly business from 30% to 70% by 2025, to reduce its carbon footprint and create new business opportunities.

"The board of directors approved the plan to separate battery business and oil and gas exploration and production (E&P) segment, which is aimed at enhancing competitiveness of each business and paving the way to speed up the future growth driver," the company said in a statement.

The two separated entities will be officially launched on Oct. 1 after receiving shareholder approvals next month.

"They will be able to better respond to the business environment to make timely investment decisions," it said, noting that the two new entities will continue to be wholly owned by SK Innovation.

SK Innovation is expected to push for listing the battery entity, the world's No. 6 battery maker, that supplies electric car batteries to Volkswagen, Ford Motor and South Korea's Hyundai Motor Group. It aims to become the world's third-largest battery maker by the end of 2022.

After the spinoff, SK Innovation will serve as a holding firm in charge of developing its eco-friendly business portfolio and push for a merger and acquisition in the green business.

South Korea's shift from oil to green energy

SK Innovation is well positioned to play a leading role in the South Korean refining sector's goal to gradually cut middle distillate production and raise clean fuels output, refinery officials and market analysts at Korea National Oil Corp. told S&P Global Platts.

SK Innovation plans to phase out investment in its mainstay oil refining business, which takes up over half of its overall business. The company is considering focusing on petrochemicals production instead of transportation fuels, such as gasoline and diesel, as demand for auto fuels is expected to fall due to increased use of electric vehicles, the official said.

SK Innovation raised its crude throughput to 66% in the second quarter, from 63% in the first quarter, but the run rates were still down sharply from 77% in Q2 last year and 90% in 2019, according to the official.

SK Innovation plans to invest Won 30 trillion ($26.1 billion) over the next five years, mostly in its battery sector, to "accelerate its drive to transform the business portfolio to achieve the goal of decarbonization," the official said.

The company is also considering selling part of its stake in its fully-owned petrochemical subsidiary SK Global Chemical in an effort to reduce its carbon exposure, he added.

South Korea's other major refiners have also made their moves to gradually shift away from oil products to cleaner fuels.

Hyundai Oilbank said it plans to reduce its mainstream refining business to 45% of total revenue by 2030 from 85% currently. Hyundai Oilbank has set a goal to produce 100,000 mt/year of blue hydrogen -- produced from fossil fuels with emissions captured -- by 2025.

In May, GS Caltex signed a memorandum of understanding with state-run Korea Gas Corp., or KOGAS, to build a liquid hydrogen factory. KOGAS and GS Caltex would extract hydrogen from LNG and supply liquid hydrogen to charging stations. It would be the first use of waste cold energy from LNG regasification to liquefy hydrogen, KOGAS had said.

Less upstream exposure

SK Innovation said it may also seek to divest more oil, or gas assets, to help raise funds for its green energy sector led by its battery business.

Industry officials and analysts based in Seoul said any plans to selloff a stake in the upstream businesses at a time of high oil prices would indicate a strong commitment towards clean energy.

In March, SK Innovation decided to sell its entire stake in oil production fields in Oklahoma and Texas and related facilities to Texas-based Benchmark Energy as part of its "decarbonization efforts by reducing its investments in traditional energy resources and projects for their development."

SK Innovation acquired the stake in the fields under production in Grant and Garfield, Oklahoma, and Crane, Texas in 2014. It also acquired in 2018 the whole stake in fields in Garfield and Kingfisher from US shale developer, Longfellow Nemaha.

In September 2019, SK Innovation signed a deal with Argentine's Pluspetrol to sell its 17.6% stake in two Camisea gas fields in the Cusco region of Peru -- Block 88 and Block 56 -- for $1.05 billion.

SK Innovation's upstream production run by its E&P segment averaged 36,000 b/d of oil equivalent in Q2 this year, down from 62,000 boe/d in 2016.