Government pushes for tougher regulations on oil refiners after bountiful year

As local oil refiners wrapped up a lucrative year boosted by strong crude prices worldwide, the government is pursuing harsher regulations, fueling a backlash from the industry.

SK Innovation's oil refinery complex in Ulsan [SK INNOVATION]

As local oil refiners wrapped up a lucrative year boosted by strong crude prices worldwide, the government is pursuing harsher regulations, fueling a backlash from the industry. Authorities are frowning on the oil industry's windfall gains, suggesting that the companies did not sufficiently reflect the government's effort to stabilize fuel prices and instead profited from it.

A new rule was proposed by the Energy Ministry as a result, with an aim to encourage competition in the market through wholesale price disclosure.

However, refiners are arguing that they have passed on the cuts in prices, saying that the government is "infringing trade secrets."

Korea Petroleum Association, Korea Oil Association and Korea Oil Station Association recently submitted a statement to the Office for the Government Policy Coordination under the prime minister, opposing a new regulation proposed by the Ministry of Trade, Industry and Energy to force oil refiners to disclose the wholesale price of petroleum products based on regions and buyers.

Oil industry advocacy groups cited infringement of trade secrets and emphasized that the result may be adverse to what the ministry's expecting.

“Contrary to the intention of the proposal, it will lead to limited competition or upward price fixing in the market as the oil refiners will be able to analyze rivals’ price policy,” the organizations said in a statement.

In September last year, the Energy Ministry proposed a revision to the enforcement ordinance under the Petroleum and Alternative Fuel Business Act to encourage competition among suppliers and therefore stabilize petroleum prices.

The proposal is currently waiting for the Government Policy Coordination Office’s regulatory review. The schedule for the review process will likely be decided by February, according to the Energy Ministry.

Under the current regulations, oil refiners are reporting the average wholesale prices of each petroleum product every week based on the buyers, which include gas station franchises run by self-employed owners and ones directly managed by the oil companies.

If the new regulation takes effect, companies will need to disclose the wholesale price gap between gas stations in different regions.

The government pointed out that the selling price of petroleum products differs by more than 100 won per liter between some regions.

“Gas stations do not know how much more or less they are paying for petroleum products compared to other gas stations under the current system,” said a spokesperson for the Energy Ministry’s petroleum division under the Bureau of Resources Industry Policy.

“We expect that by enhancing the negotiating power of the buyers, prices can be further stabilized,” said the spokesperson.

A similar regulation revision was proposed back in 2009, but did not make it through the Government Policy Coordination’s regulation review committee as the Energy Ministry withdrew the proposal citing business.

The spokesperson explained that the ministry is once again pushing to impose the rule “after last year’s price hikes and increased discussions on refining margin and fuel tax cuts.”

The oil industry advocacy groups countered that “the tax cuts have been properly reflected on the prices by the oil refiners.”

Kim Tae-hwan, a researcher at Korea Energy Economics Institute, said that though “both sides do have logical bases,” the ministry should carefully examine the possible implications of the new regulation.

“Both arguments make sense, but eventually the market condition will determine what would actually happen next,” said Kim.

Kim emphasized that wholesale prices are affected by the location of each oil refiner’s petroleum reservoir and logistics network in the region, and that it is hard to predict how the price level would fluctuate if the new rule is imposed.

Propelled by refining margin hikes, Korea’s four major refiners — SK Innovation, GS Caltex, S-Oil and Hyundai Oilbank — racked up a record profit by the second quarter of 2022.

Though crude prices and refining margins fell through the latter half of the year, the strong performance up until June significantly pushed up the bottom line.

Hyundai Oilbank recently handed out end-of-year bonuses worth 1,000 percent of the base wage for its employees. The company saw a 226 percent on-year jump in operating profit by the third quarter of 2022.

Other companies are likely to follow suit until February.

Last year, SK Innovation gave bonuses worth 1,000 percent of the base wage. As the company is expected to report a more than 200 percent on-year jump in the annual operating profit in 2022, bonuses may be even higher than the previous year.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]