Oil Fields for Sale

A fund privatizing Korea National Oil Corporation (KNOC) shares in oil fields abroad will be made available to the public next year.

“KNOC’s shares in foreign oil fields will be handed over to the private sector,” declared a high-ranking official in the Ministry of Commerce, Industry and Energy (MOCIE) on October 18. “In order to keep the fund stable, we are looking at ways to hand shares of oil production fields that are already producing crude oil to the private sector.”

He added that “the KNOC plans to invest the money from selling the shares in exploring or developing other oil fields abroad.”

Why Transfer Foreign Oil Fields to the Private Sector?-

The government is handing over the KNOC’s shares in foreign oil units to the public in order to raise the funds needed for developing oil fields.

Oil field development requires enormous capital at the start, and as governmental funding cannot meet the costs alone, the government has come up with the strategy of bringing in private capital.

A fund for oil field development is a very risky product, however, and investors can actually lose their principal if the project ends up a failure.

Therefore, for a certain period in the beginning stages the product will operate on a “low risk, low profit” model which funds the development of an already located oil field, rather than on a “high risk, high profit” model which affords the possibility of hitting a jackpot by investing at the exploration level.

An MOCIE official stated, “When oil field development funds are relatively stabilized, high-risk, high-profit funds investing in oil fields in the exploration or development stages will also be launched.”

KNOC currently owns shares in eight oil production fields abroad. Out of these, it holds an interest of higher than 10 percent in the following: Vietnam’s 15-1 (14.25 percent), Britain’s Captain Field in the North Sea (13.5 percent), Libya’s Elephant Field (16.67 percent), Peru’s Mining Area Number Eight (20 percent), and Venezuela’s Onado Field (14.1 percent), among others.

The KNOC explained that “since these oil fields are already producing crude oil, their stability is secure, unlike oil fields under exploration or development.”

Small Beginnings for Early Funds-

At the moment, petroleum directly produced by Korean companies accounts for a mere three percent of the total petroleum consumed in the country.

According to government estimates, 16 trillion won will be needed to bring up this figure to 15 percent by the year 2013.

Half of this amount will be raised from the private sector, with 1.6 trillion won from oil field development funds. This means the fund will need to bring in an annual average of 200 billion won for eight years starting from 2006 in order to meet the target of 1.6 trillion won.

“We cannot say for sure that we will be able to raise a vast amount of capital, as the fund is still in the beginning stage,” commented a member of the team involved in the oil field development fund. “The size of the early fund is likely to be smaller than 100 billion won.”

Tax Benefits, Loss Compensation Still Unfixed-

Experts analyze that in order for oil field development funds to absorb floating funds in the private sector, measures such as giving tax benefits and guaranteeing compensation for losses are essential.

While acknowledging the urgent need for securing energy sources, government agencies have not reached an agreement on granting tax breaks, however.

The Ministry of Finance and Economy believes it is inappropriate to increase tax benefits when there is a shortage of tax revenues already.

The MOCIE, on the other hand, argues that incentives to protect investors are necessary since the fund is a high-risk product in which investors risk the possibility of losing their principal.

“A shipping fund with the biggest tax breaks grants tax-free benefits for dividends and other earnings to investors of less than 300 million won,” pointed out an executive at a securities firm. “To attract the interest of investors, benefits surpassing those of the shipping fund must be provided.”

Chang-Won Kim changkim@donga.com