South Korea's Oil Refiners Are Likely to Face Tougher Challenges in Coming Years

South Korea's oil refiners are likely to face tougher challenges in coming years as President-elect Park Geun-Hye vows consumer-focused policies and tighter business regulations under her economic democratization platform. 

Park, from the ruling conservative party, was elected in a December 19 presidential poll with a pledge to enforce fair trade practices and protect consumers by restricting the power of large family-owned business groups. Three of South Korea's four refineries are owned by such business houses. She is scheduled to take office February 25 for a single five-year term as the country's first female leader. 

Unlike her predecessor President Lee Myung-Bak, who favored a weaker local currency to boost exports -- the country's main growth engine -- Park is expected to allow the Won to appreciate to tackle inflation, which would erode refiners' earnings since they export more than half their oil products. Park has repeatedly stressed the need for "fair business practices" and promised to boost the role of the country's antitrust watchdog, allow private institutions to sue price-fixing companies and antitrust law violators, and sharply increase fines for violations of fair-trade laws. 

To back up Park's policy, her ruling Saeruri or New Frontier Party is pushing for an early parliamentary endorsement of bills that call for tough regulations on big businesses and stronger penalties for wrongdoing. 

The country's four refiners -- SK Innovation, GS Caltex, S-Oil and Hyundai Oilbank -- have long been accused of price collusion and have been under the close watch of the antitrust watchdog for price rigging. 

The antitrust watchdog ordered refiners in October last year to pay a combined Won 252.5 billion ($235.5 million) in fines for colluding in the retail oil market to keep pump prices artificially inflated. 

In July this year, SK Innovation, the country's largest refiner, was fined Won 4 billion by the watchdog for unfairly supporting its affiliate. No. 2 refiner GS Caltex has been under probe by tax authorities since late November for suspected tax evasion. 

FOUR REFINERS CONTROL 97.7% MARKET SHARE IN 2011 

SK Innovation is run by the country's family-run conglomerate SK Group that also owns SK E&S, a gas-fired power producer and city gas provider, and SK Gas, a major LPG distributor. 

GS Caltex is a 50:50 joint venture between the GS Group and the US' Chevron. Family-run GS Group also owns GS Energy, GS Engineering & Construction and GS Retail, among others. 

Hyundai Oilbank is owned by Hyundai Heavy Industries, which runs the country's major shipyards. 

S-Oil is the only refiner that is not controlled by a business conglomerate. It is owned 35% by Saudi Aramco. 

The four refiners controlled 97.7% of the domestic market in 2011. President Lee took a series of steps to weaken their dominance, labeling it an oligopoly and the main factor behind high domestic oil prices. 

His measures included setting up a network of discount retail fuel pump stations that receive auto fuels directly from state-owned Korea National Oil Corp. at lower prices and sell them at levels below those at refinery-controlled pump stations. 

There are currently 800 discount stations across the country, accounting for over 6% of South Korea's 12,830 pump stations. The government plans to increase this to 10% by 2015. 

The government also set up an online oil trading market in March in which pump station owners can participate as buyers, and refiners and importers as sellers, and provided fiscal incentives to boost participation. 

President Lee even twisted refiners' arms to lower retail fuel prices. The four refiners lowered prices of gasoline and diesel by Won 100/liter, or 5%, in the second quarter of 2011 under pressure from the government. But Lee also introduced a number of policies that favored big businesses and exporters as a way to revive the economy amid sagging domestic demand. 

Helped by this, petroleum products emerged as South Korea's biggest export earner for 2012 at an estimated $56 billion, while refiners' revenues from exports jumped due to the weak local currency. 

REFINERS CONCERNED ABOUT CHALLENGES 

In a big departure from the country's decade-long export-focused policy, President-elect Park has vowed to focus on wealth distribution over economic growth, domestic consumption over exports, inflation over expansion, small firms over big businesses and consumers' welfare over corporate profits under her "economic democratization" platform. 

Park is expected to take tougher measures to ease the refiners' oil market dominance to ensure "fair market competition" and bring down domestic prices with a view to easing the financial burden on fuel consumers. 

Refiners refused to comment on Park's stance, but expressed concern about the tougher challenges that lie ahead. 

"Refiners are already suffering a blow due to discount stations and the online oil market. Tougher regulations on refiners could worsen their earnings," a Korea Petroleum Association official said. 

"The government's provision of benefits and incentives to importers of oil products for discount pumps and the online market has hurt fairness," he added, noting the government has provided tariff reductions and tax refunds on oil products imported for online trading. 

"In case of diesel, imported volumes have increased to account for 10% of local demand," he said. KNOC, which brought 100,000 barrels of Chinese gasoline at auction in October to supply directly to discount fuel stations, will continue imports next year to maintain supply. 

"Overseas oil demand is uncertain due to global financial woes and foreign rivals are expanding production capacities. Still worse, conditions at home are getting worse," the official said. 

Park's promise to raise electricity prices sharply for manufactures is another burden for power-intensive refiners. Electricity prices are likely to be raised as early as this month. 

But refiners are wary of being seen as countering the government's measures amid mounting public outcry against family-run conglomerates. 

Korea Investment & Securities said in a report that refiners could face less pressure for a price cut if Park carries out promised energy tax reforms that lower oil taxes that account for around 50% of pump prices. 

Given that Park has vowed to increase government spending on much-touted welfare programs, however, she is unlikely to lower oil taxes to an extent that would impact already worsening fiscal conditions. 

The Korea Investment report said refiners could also benefit from Park's push for building a regional oil hub. "Refiners can expand their oil trading business when Park's oil hub plan is realized," the report on the outcome of the presidential election said.