Korea seeks to extract 14 bn barrels of oil, gas in East Sea

[Graphics by Song Ji-yoon and Yoon Yeon-hae]

South Korea, a country which is heavily reliant on imports for its energy use, identified potential reserves of up to 14 billion barrels of crude oil and natural gas off the coast of the southeastern city of Pohang, and plans to begin exploratory drilling later in 2024, the Korean government said on Monday.

The government has been conducting oil and gas exploration in the country since 1966, starting with the offshore area of Pohang. It enacted the Submarine Mineral Resources Development Act in 1970 to establish a legal foundation for the efficient development of resources from domestic waters.

Korea National Oil Corp. (KNOC), founded in 1979, also played its part in this exploration. It discovered the first gas field with reserves of 45 million barrels in the East Sea in 1998 after 11 drilling attempts and produced gas commercially until 2021.

Although classified as a small gas field, the East Sea gas field generated sales of 2.6 trillion won ($1.9 billion) and a net profit of 1.4 trillion won. The KNOC has drilled 48 fields in domestic waters to date, including 27 in the East Sea, to enhance its resource development capabilities.

The East Sea gas field ended production at the end of 2021, but the government is promoting a project to capture and store carbon dioxide (CCS) in the depleted gas field. This project, with a total budget of 2.95 trillion won, is set to run from 2025 to 2030, and was selected by the Ministry of Economy and Finance as the subject of a preliminary feasibility study earlier in 2024. It also involves compressing and liquefying carbon dioxide collected from Ulsan and Busan and then injecting and storing it in the depleted gas field via submarine pipes.

If the project succeeds in the demonstration and goes into full-scale operation, 1.2 million tons of carbon dioxide per year could be stored in the depleted gas field starting in 2030, according to the Ministry of Trade, Industry, and Energy.

The government is also expanding financial and tax support for resource development companies. It eased the shareholding requirement for overseas subsidiaries that develop resources, including core minerals, to 2 percent from 5 percent in 2023 in relation to the regulation of excluding dividend income from foreign subsidiaries in gross income. This is a system that excludes 95 percent of the dividend income received by Korean companies from their overseas subsidiaries from taxable income.

It also allowed for a special provision that allows for a 3 percent tax deduction on corporate or income tax for investments in or contributions to overseas resource development projects until 2026.

There are also various successful cases of overseas resource development in the private sector. SK earthon Co., a resource development subsidiary of SK innovation Co., successfully produced oil in the South China Sea in October 2023, marking a new chapter in overseas resource development. It was the first time that SK was granted independent operating rights from exploration to development and production.

POSCO Holdings Inc. also fully recovered its 1.3 trillion won investment in the Roy Hill iron ore mine in Australia in 2023, 13 years after its initial investment. The company expects to earn an annual dividend income of several hundred billion won and says that the investment has strengthened its resource development capabilities in addition to securing a stable supply chain for iron ore.