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The Korea Herald
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THE INVESTOR
July 16, 2024

Economy

[KH Explains] Has South Korea really struck oil?

  • PUBLISHED :June 04, 2024 - 17:07
  • UPDATED :June 04, 2024 - 17:07
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The Donghae Gas Field platform, situated 58 kilometers off the coast of Ulsan's Yeongil Bay, was operated by the Korea National Oil Corporation until 2021. (Korea National Oil Corporation)

The South Korean government is making headlines with claims of potentially substantial oil and natural gas reserves discovered off its southeastern coast, near Pohang's Yeongil Bay. If confirmed, this discovery could elevate Korea’s status as an oil-producing nation. However, transitioning from finding these reserves to harnessing them is a complex journey. Here, we address the key questions surrounding this development.

What is the basis of the government's claim?

In February 2023, the Korean government commissioned Act-Geo, a US-based geoscience consulting firm, to conduct an in-depth geophysical survey around the Donghae gas field, near Yeongil Bay in North Gyeongsang Province. Completed in early 2024, the analysis estimates the region holds between 3.5 to 14 billion barrels of oil equivalent. This figure encompasses 320 million to 1.29 billion tons of natural gas and 780 million to 4.22 billion barrels of oil.

The reserves are believed to be situated between 38 to 100 kilometers off the coast of Yeongil Bay. This area falls entirely within South Korea's exclusive economic zone, which grants the country exclusive rights to explore and utilize marine resources, including energy production.

If the estimates hold true, the reserves could theoretically meet South Korea’s oil needs for four years and its natural gas needs for 29 to 30 years. However, there's a catch. Not all reserves can be extracted due to the high costs and low efficiency of deepwater drilling. Typically, only 30 to 40 percent of such reserves are actually produced, making it unlikely that the full 14 billion barrels will be brought to the surface.

A map illustrating the southeastern coast of the Korean peninsula, with a red circle highlighting the promising geological structure and surrounding area believed to contain substantial oil and gas reserves. (Ministry of Trade, Industry and Energy)

What exactly is a geophysical survey?

A geophysical survey is a crucial preliminary step in exploring natural resources. It employs methods like seismic, gravity, magnetic and electromagnetic exploration to indirectly assess the subsurface's structure and composition, akin to taking an X-ray of the earth. While these surveys can indicate potential locations of oil and gas deposits, they do not confirm the actual presence or economic viability of these resources. Further validation through exploratory drilling is required.

Even if drilling confirms the presence of oil and gas, their economic viability depends on multiple factors. These include the depth and ease of access to the deposits, which affect drilling difficulty and costs. The quality of the hydrocarbons is crucial, as higher-grade oil and gas fetch better prices. Additionally, the expenses involved in extraction and transportation must be considered. These factors can significantly influence whether it is financially feasible to develop the resource.

Who is Act-Geo?

According to its LinkedIn profile, Act-Geo was founded in 2017 as a geoscience consulting firm that offers expert consulting, training, and career development services, with a focus on regional exploration and high-resolution production-scale mapping, tailored for business applications.

It is a sole proprietorship with fewer than 10 employees.

Vitor Abreu, a former ExxonMobil's exploration team leader, consulted Act-Geo until November last year. According to his profile on the Brazilian oil company Fluxus's website, where he now holds a leadership position, Abreu played a key role in significant discoveries such as the Liza-1 well in Guyana and key finds in the Caspian Sea and Ghana.

Has Korea found oil before?

Yes. This is not the first time oil reserves have been reported in Korea. In 1976, President Park Chung-hee announced the discovery of oil in a similar region off Pohang’s Yeongil Bay. However, subsequent analysis revealed the liquid first discovered was not commercially viable crude oil, and the project was abandoned.

Despite past disappointments, Trade Minister Ahn Duk-geun explained during a press briefing that advancements in deep-sea exploration technology and comprehensive data analysis from the past 12 years increase the likelihood of success this time.

In 1988, the Korea National Oil Corporation discovered a commercially viable natural gas deposit 58 kilometers southeast of Ulsan, leading to the development of the Donghae Gas Fields, making South Korea the 95th oil-producing nation. Although small, this gas field produced 45 million barrels from 2004 to 2021, saving the country 2.7 trillion won ($1.96 billion) in imports. Despite this achievement, the country eventually lost its oil-producing status. The total development cost was 1.2 trillion won, with KNOC leading the project.

How long and what is the cost of verifying reserves?

The Korean government plans to begin exploratory drilling later this year to determine the reserves' size and exact location. At least five wells will be drilled, with detailed results expected in the first half of next year. Given the depth of the resources, which are likely over hmm 1 kilometer underground, each drilling operation is projected to cost over 100 billion won ($72.6 million).

Can Korean companies drill the reserves?

The government says Korea lacks the technology and experience for deep-sea drilling, necessitating overseas investment and collaboration. It has not specified which companies might be involved in the drilling process.

If the reserves are confirmed, the Donghae gas field will be fully owned by the Korea Gas Corporation. The state-run KOGAS will determine daily production volumes and decide on the domestic and international distribution of the oil and gas. This could lead to significant benefits, including reducing the need for imports and generating domestic revenue. Long-term contracts will be essential for managing both domestic use and exports effectively.

Actual production and revenue?

If reserves are confirmed, preparatory work for extraction could begin by 2027 to 2028, with commercial production potentially starting around 2035. However, these timelines are tentative and depend on various factors, including the confirmation of reserves and the complexity of extraction.

It is too early to estimate the potential revenue from the reserves. The government plans to continue drilling through 2026 to better understand the deposit's size. While speculative revenue estimates suggest a value of $1.4 trillion based on 14 billion barrels, this figure is highly preliminary.

By Moon Joon-hyun (mjh@heraldcorp.com)

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