December 22, 2024

• 

President-elect Donald Trump attends a campaign event, in Allentown, Pennsylvania, US, on Oct. 29. (Reuters-Yonhap)

As US President-elect Donald Trump assembles his energy team with the aim of expanding oil and gas production in his second term, there may be pressure on allies to import US oil.

However, South Korean oil companies, heavily reliant on Middle Eastern suppliers, might hesitate to switch to US crude, industry sources said Monday.

Over the weekend, Trump tapped Chris Wright, CEO of Liberty Energy, a natural gas fracking company, as the secretary of energy, and North Dakota Gov. Doug Burgum to head the Interior Department and chair the new National Energy Council.

Both appointees reportedly share Trump’s negative stance on the Biden administration’s anti-fossil fuel policies. During his campaign, Trump pledged to achieve “US energy dominance,” scaling up fossil fuel production by approving new drilling, pipelines and refiners.

Industry watchers here say Trump’s new energy policy is expected to result in a decline in international oil prices and stabilize long-term demand.

“After Trump’s inauguration, if the crude oil price falls rapidly, Korea’s oil refineries are likely to face inventory losses -- when a company buys crude oil at a high price which falls by the time it sells refined oil,” said an industry source on condition of anonymity. “But as the downward trend continues, demand will stabilize, enabling the companies to secure balanced supplies and demand.”

Although Trump has not explicitly urged US allies, including South Korea, to import large quantities of US crude oil, the Korean government has already started assessing the import sources of the nation’s four major oil refining companies -- SK Energy, GS Caltex, S-Oil and HD Hyundai Oilbank.

According to data from the Korea Chemical Industry Association, Korean refineries imported 71.9 percent of their oil from the Middle East while securing 14.2 percent from the US. Almost 60 percent of the deals are made in long-term contracts, while the remaining 40 percent are short-term deals made depending on price adjustments.

With the US production expansion of shale oil in 2017, Korea increased its one-off imports from the country. However, following Russia’s invasion of Ukraine, most of the US oil products were redirected to Europe, prompting Korea to revert to Middle Eastern sources.

Putting the war aside, the US boasts lower crude oil prices, selling at $70.96 per barrel, while the Dubai oil price index stands at $73.07 at 1:30 p.m. South Korea also has a Free Trade Agreement with the country, allowing for tariff-free oil trade.

Despite these price advantages, Korean companies have been reluctant to expand reliance on the country because of shipping fees that have become almost three times more expensive. US oil also takes twice as long to arrive as oil from the Middle East, and entails additional infrastructure costs.

“Korean oil refineries would consider expanding US crude oil imports under three conditions -- if Trump ends the Russia-Ukraine war, US oil prices become cheaper and supply remains stable,” said an official from an oil company. “The price, in particular, would have to be far lower than it already is, given the extra costs of preparing facilities for refining US oil products.”

Korean refineries are equipped for heavy crude from the Middle East, with only modest investments in facilities for refining US light crude. Increasing US imports would require significant investments in facility modifications, imposing a financial burden.

Aside from S-Oil, whose largest shareholder is Saudi Arabia’s Aramco, the three other refineries could face mounting pressure if Trump insists on Korea boosting oil supplies from the US.

“The Korean government cannot mandate private companies to increase US supplies,” said the official. “But if the US-Korea oil trade goes to the point where the negotiations can impact other bilateral trade relations, refineries will have to increase US imports. Even so, it would not completely replace Middle Eastern crude.”

Lee Jin-ho, an energy analyst at Mirae Asset Securities, echoed the view and noted, “The potential impact of Trump’s second term on a drop in international oil prices is expected to be minimal. Previously, Republican fossil fuel-friendly policies have not led to a massive expansion in the country’s oil production. Korean companies are likely to prioritize cost efficiency over policy changes.”

By Byun Hye-jin  (hyejin2@heraldcorp.com)