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S Korea's Hyundai Oilbank to sell oil storage terminal stake to fund green energy projects

Highlights

Hyundai Oilbank to focus on blue hydrogen project

To cut refining business to 45% of total revenue by 2030 from 85%

S Korea's May crude stocks fall 13% on year at 40.6 mil barrels

South Korean refiner Hyundai Oilbank will sell off a majority stake in its oil storage terminal in Ulsan, on the country's southeast coast, to help fund its green energy projects, a company official told S&P Global Platts.

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The company's board has approved a plan to divest 90% interest in Hyundai Oil Terminal to J& Private Equity Fund, the company official said.

Hyundai Oilbank will hold the remaining 10% stake in the terminal and form a partnership with the local private equity fund, he said.

The official refused to disclose financial details of the deal, but indicated that the 90% stake is worth around Won 180 billion ($157 million) as the total value of the oil storage terminal is estimated at Won 200 billion.

Hyundai Oilbank has been managing and operating Hyundai Oil Terminal since December 2013, making it the first domestic refiner to conduct a commercial oil storage business.

The terminal, which cost Hyundai Won 100 billion, has 35 tanks that can store a total of 280,000 kiloliters of crude oil and refined oil products, and a dock for a 50,000 dwt capacity oil carrier.

"The deal to sell the stake in the oil storage terminal is part of Hyundai Oilbank's efforts to reduce its refining and petroleum segment and instead to focus on green energy projects such as blue hydrogen," the company official said.

Hyundai Oilbank plans to reduce its mainstream refining business to 45% of its total revenues by 2030, from 85% currently, the official said.

Hyundai Oilbank has set a goal to produce 100,000 mt/year of blue hydrogen by 2025, using carbon dioxide produced by the refiner as feedstock for hydrogen. Blue hydrogen refers to hydrogen produced from fossil fuel in a process that captures carbon dioxide emissions.

In April, Hyundai Oilbank signed a memorandum of understanding with US hydrogen giant Air Products & Chemicals to use its technology to produce hydrogen from its crude oil byproducts and natural gas.

The refiner is 74.13% owned by Hyundai Heavy Industries Holdings, that runs South Korea's top shipbuilder Hyundai Heavy Industries, while Saudi Aramco is its second-biggest shareholder with a 17% stake.

Hyundai Oilbank runs two CDUs with a combined capacity of 520,000 b/d in the Daesan complex, on the country's west coast.

The refiner also owns a 60% stake in Hyundai Chemical via a joint venture with local chemical maker Lotte Chemical, which runs a 130,000 b/d condensate splitter.

Hyundai Oilbank plans to list its shares on the country's main bourse next year on the back of favorable capital market conditions.

Stockpiles

Hyundai's bold decision to sell off a big chunk of its stake in the oil storage facilities came on the heels of South Korea's dwindling crude stockpiles, while backwardation in the crude and refined products market structure does not bode well for the storage business, industry sources and market analysts in Seoul said.

South Korea's crude stockpiles fell 12.8% year on year to 40.64 million barrels in May, compared with 46.6 million a year ago, latest data from state-run Korea National Oil Corp. showed. Monthly stocks averaged just over 40 million barrels to-date in 2021, compared with the monthly average of 45 million barrels in 2020 and 45.8 million barrels in 2019, the KNOC data showed.

The downtrend in stocks does not represent, or indicate, the country's robust demand and drawdowns in inventory. Rather, major refiners, fuel distributors and trading firms generally do not see the need to stock up feedstocks due to tepid domestic fuel demand and lower run rates compared with levels before the outbreak of the pandemic, according to crude oil and middle distillate traders at three South Korean refiners.

In addition, a steep backwardation in the Dubai crude price structure has dampened storage economics this year, the trading sources said.

The spread between the first and third-line Dubai crude swaps was assessed at $2.06/b on July 22 in Singapore, Platts data showed, the strongest backwardation since Dec. 19, 2019, when the backwardation was assessed at $2.08/b.

A backwardation in the crude market structure represents lower prices for forward month contracts than the current spot price. In essence, backwardation occurs when market participants are expecting future prices to be weaker than prompt prices, hence increasing a sense of urgency for trading firms and refiners to cut back on oil stockpiles going forward.