The Impact of Low Oil Prices on South Korea

by Younkyoo Kim
May 14, 2015

This brief by Younkyoo Kim (Center for Energy Governance and Security at Hanyang University, Seoul) is one of seven briefs in the series “Regional Perspectives on Trends in Global Oil Markets.”

South Korea is a major oil and LNG importer in Northeast Asia, most of which comes from the Middle East. In the face of the U.S. shale revolution, South Korea has pursued supplier diversification and regional energy trade collaboration. This brief examines the impact of low oil prices on both South Korea’s domestic energy policy and regional energy trade dynamics and discusses how low oil prices have become an issue of regional cooperation for oil market stability. The recent plunge in oil prices is likely to reverse energy and other infrastructural projects between South Korea and Russia and prolong South Korea’s oil and LNG dependence on the Middle East and the Persian Gulf. This will lead Seoul to strive to diversify oil and LNG supply sources beyond this region to include North America and East Africa.

Economic Impact

As the world’s second-largest importer of liquefied natural gas (LNG), South Korea stands to gain from the current low cost of oil. The price of LNG is tied to the price per barrel of oil, and as the cost of oil falls, South Korea is better able to negotiate strong terms for long-term purchasing contracts. This trend can already been seen in deals such as the one between Chevron and SK LNG Trading, which will see an average of 4.15 million tons of LNG (830,000 tons per annum) from the Gorgon project delivered per annum from 2017 to 2021. [1]

Many end users in South Korea are also making deals with importers, which is an interesting shift from the more traditional means of long-term contract buying. This leads to more competitive terms and essentially cuts out the middle supplier—state-owned Korean Gas Corporation (KOGAS), known as the largest purchaser of LNG worldwide. South Korea’s LNG demand is forecast to rise 2.6% year on year to 42.14 million tons in 2015 before falling steadily. Demand is expected to decline 0.5% to 41.95 million tons in 2016, 2.9% further to 40.74 million tons in 2017, and another 2.3% to 39.81 million tons in 2018. [2] In 2014, KOGAS sold 27.6 million tons of LNG from January to October, down 9.6% year on year (2013–14). [3] Economically this shift could benefit South Korea. Although end users pay a higher price for imports, they receive a net gain because their markup is reduced from the direct transaction. How this will affect KOGAS is still to be seen. Many believe that the company will need to tighten its margins and be more aggressive in contract negotiations to maintain its position as the largest buyer of LNG in the world.

Low prices for oil and LNG allow South Korea to bolster its economy, particularly within the major industries related to oil and gas, such as shipbuilding. Although South Korea is the world’s largest shipbuilding nation, with a world market share of 32%, the industry has been suffering due to the economic slowdown and high oil prices since 2008. This situation is changing, however. Foreign investment in maritime vessels is on the rise, and the potential increase in exports from the U.S. shale revolution is yielding a positive outlook for the Korean shipbuilding industry.

On the other hand, GS Caltex has experienced losses since the rise of U.S. shale, largely because U.S. shale is mainly light tight oil and does not require the type of refinement offered by Caltex. Another potential blow for the company is the Keystone XL pipeline. If finished, the pipeline will transport Canadian tar sands production to the Gulf of Mexico to be refined in the United States. Coupled with low oil prices and increased volatility in the market, this project has caused many in the South Korean energy industry to become concerned about future security and begin searching for long-term stability.

Lower oil prices will boost the competitiveness of South Korean exports, but not all industries will benefit. The petrochemical industry and heavy industry, for example, will be less profitable. If oil prices are also being affected by the sluggish growth of the global economy, then the positive impact on the South Korean economy will be limited.

Prospects for Regional Cooperation on Oil Market Stability

The recent plunge in oil prices is likely to prolong South Korea’s oil and LNG dependence on the Middle East and the Persian Gulf, which will lead Seoul to strive to diversify oil and LNG supply sources beyond this region to include North America and East Africa. With Japan and South Korea as the world’s largest importers of LNG, and China rapidly growing in terms of oil product consumption, these countries form a strong buying trifecta that could work together to stabilize the oil market. Seoul has been making strides to achieve this outcome. By opening an oil storage and refinement hub in 2014 in Ulsan, South Korea could function as the storage, refinement, and exchange site for oil in Northeast Asia. The country also boasts three of the ten largest oil refiners in the world, making it an ideal partner for Japan and China in the coming years.

Impact on Regional Energy Trade Dynamics

In addition to affecting South Korea’s domestic energy policies, the recent oil price collapse has introduced a new dynamic into the East Asian energy equation that forces China, Japan, and South Korea to reconsider their options, policies, and relationships with the United States and other players in the context of a severely diminished Russian presence. East Asia has been the great hope of the Russian government and energy sector. Though Russia has discussed large-scale oil and gas sales to East Asia for over twenty years, the results to date are not much to brag about, even considering the recent gas deal between Russia and China. Gas deals with Japan and South Korea have stagnated, and China is essentially paying for Russian gas at cost.

The only relatively positive area in Russian energy sales to Asia before the gas deal of May 2014 was oil sales to China. However, Russia won those contracts only at the price of accepting huge Chinese loans of $25–$30 billion as infusions of cash to Rosneft and agreeing to facilitate Sinopec’s acquisition of oil and gas assets in Russia. This lopsided energy policy emerges clearly when compared with Russian energy relations with Japan and South Korea. At present, there is no direct oil pipeline from Russia to Japan or South Korea. Thus, China’s monopoly on Russian energy investments in the Far East stokes fears of Russia becoming ever more in the thrall of China due to Russia’s failure to diversify its customer base.

Long-standing Russian plans for a trans-Korean gas pipeline connected to the East Siberian gas fields have gone nowhere. President Park Geun-hye announced in October 2013 a plan to expand economic cooperation with Eurasian countries for more trade opportunities. Called the Eurasian Initiative, the policy is centered on the idea that exchanges between South Korea and Eurasian nations, especially Russia, will help induce an opening up in reclusive North Korea, thus allaying the long-running military and diplomatic tensions on the Korean Peninsula.

However, the recent oil price collapse will further reverse energy and other infrastructural projects between South Korea and Russia. Low prices have dashed for the time being the high hopes for the realization of long-standing Russian plans for a trans-Korean gas pipeline connected to East Siberian gas fields and the Russian Arctic. Absent Pyongyang’s assent, any gas pipeline from Russia to South Korea would have to traverse China, because Beijing already long ago vetoed any alternatives through Mongolia. A pipeline to South Korea through North Korea could bypass China, thereby reducing the latter’s leverage on Russia. This pipeline would provide alternative consumers for Russian energy exports and thus allow Russia to better negotiate a higher price with China.

The most important consequence of the recent oil price collapse is the precipitation of this new debate about energy security and energy trade. A new energy security architecture involving China, Japan, and South Korea will be needed, and South Korea is a good candidate for strong involvement in this emerging global and regional energy architecture. Amid shifting dynamics in global energy markets, it is important to move from bilateral to broader regional and global approaches to energy trade.


[1] Lucie Bell, “Chevron Strikes Deal to Sell Gorgon LNG to South Korean Conglomerate,” Australian Broadcasting Corporation, January 21, 2015,

[2] “South Korea’s KOGAS to Cut LNG Imports in Response to Weaker Demand,” Platts, November 20, 2014,

[3] “South Korea’s KOGAS to Cut LNG Imports.” Platts.

Younkyoo Kim is a Professor in the Division of International Studies and Director of the Center for Energy Governance and Security at Hanyang University in Seoul.