South Korea’s Jeju island is famous for the haenyeo, the sea women who dive for seaweed and shellfish in the waters off the volcanic coast, but a new sight has become common bobbing offshore: oil tankers.
The country, the world’s fifth-largest oil importer, is fast running out of commercial storage space, leaving some of Asia’s biggest refiners scrambling for alternatives as the coronavirus pandemic batters energy demand and feeds a glut in global supply.
“We are in an unprecedented crisis,” said Kim Woo-kyung, at the country’s largest refiner, SK Energy.
South Korea has the fourth-largest commercial storage capacity in Asia, and is a popular spot to store crude and fuels thanks to its proximity to the region’s big oil buyers, including China and Japan.
In addition to its own refiners, state-run oil companies in countries such as the United Arab Emirates and Kuwait use South Korea’s storage facilities. With onshore facilities nearly overflowing, refiners are turning to costly floating storage.
SK Energy has filled 95 per cent of its 12m-barrel onshore crude oil storage capacity, and storage on vessels — such as the 2m-barrel carrier it is using off Jeju — is running perilously low.
“We are paying tens of thousands of dollars a day to keep the [oil carrier] floating but we have no other options,” said Ms Kim.
South Korea’s biggest refining groups including SK Energy, GS Caltex, S-Oil and Hyundai Oilbank reported combined operating losses of Won4.4tn ($3.6bn) in the first quarter in their worst-ever performance, according to regulatory filings.
Goldman Sachs warned in late April that the world would reach full oil storage capacity within weeks as coronavirus crushed demand just as a price war between Saudi Arabia and Russia boosted supply.
While the worst is now past, Goldman reckons, thanks to an agreement by Opec and its allies to cut about 10 per cent of global supplies from early May, the move to ease production has yet to feed through to oil refiners.
Son Ji-woo, an analyst at SK Securities in Seoul, warned that local refiners would find it difficult to weather the current storage shortages if they persisted for more than a few months.
“It is hard to slash crude purchases because they are mostly long-term contracts. Once their tanks are full, they just have to cut back on crude processing further and cut their product prices to reduce their refining stock,” he said.
Amid the global scramble to find space to store crude oil and fuels, South Korea’s government has sought to allay worries.
“Although tanks in the private sector have been almost fully contracted, [state-owned] Korea National Oil Corp can still rent out some space [to refiners in need of storage],” said Yoon Chang-hyun, a manager in the energy ministry’s petroleum industry department.
KNOC has total storage capacity of 136m barrels, though about 96m barrels are usually for the country’s strategic reserves. The energy ministry declined to provide data on current storage levels.
But mushrooming stockpiles of refined products such as unwanted jet fuel, with most aeroplanes grounded because of travel restrictions, are exacerbating the storage challenges.
“It has become a matter of who goes under first. We just hope we can weather the storm longer than our competitors,” said SK Energy’s Ms Kim.