[Energy Odyssey] ④Shaking Middle Eastern Supply Chain...Will Expanding U.S. Imports Be the Answer?

Ⅰ. Korea Faces an Energy Bottleneck
Share of Middle Eastern Crude Imports Falls
U.S. and African Oil Volumes Rise
Heavy Crude Specialization and Shortest Route Advantages
Unable to Offset Continued Geopolitical Risks
"Diversification Essential for Energy Security"

Editor's NoteThe importance of energy is greater than ever due to the recent supply chain crisis caused by the war in the Middle East and mega-projects led by the government. South Korea, which relies on foreign sources for most of its primary energy, faces the difficult task of achieving energy security, carbon neutrality, and economic growth simultaneously. This series features planned investigative articles by journalists who cover the energy sector directly in the field, addressing various issues and seeking solutions.

Korea's petroleum energy supply chain, which had previously been centered on Middle Eastern crude oil, has begun to undergo restructuring. As the war between the United States and Iran drags on, major domestic refiners are accelerating their efforts to reduce dependence on the Middle East. As a result, the share of imported crude oil from the Middle East has declined slightly, while imports of crude oil from the United States and the African continent have increased.

According to Korea National Oil Corporation's Petronet on September 19, in the first half of this year, the proportion of crude oil imported from the Middle East was 62.3 percent, down 6.4 percentage points from 68.6 percent in the first half of last year.

Although crude oil from the Middle East still holds the largest market share, the volume decreased by 57.61 million barrels, leading to an assessment that reliance on the region has been eased to some extent.

Instead, during this period, imports from the Americas, characterized by U.S. crude oil, increased to 4.993 million barrels, with their market share rising from 23.4 percent to 26.5 percent. Imports from Africa also surged, jumping from just over 10,000 barrels to about 26,000 barrels, pushing the market share up from 2 percent to 5.6 percent. By country, imports from Congo increased by 536.6 percent and from Gabon by 204.5 percent.

When the Strait of Hormuz was at risk of being blocked this past March, the government suggested refiners import U.S.-sourced crude and other alternatives. However, the refiners were largely skeptical. There was a possibility the war could end in a short period, and even if crude from the U.S., Europe, or Africa was brought in, concerns were raised that it might not be compatible with domestic refining facilities, possibly causing operations to stop. Nevertheless, as the war in the Middle East became protracted, refiners were compelled to diversify their sources and began experimenting by blending crude with different properties for use in existing equipment, seeking new options.

Why Dirtier, Stickier Heavy Crude Is Better

Even as recently as last year, the Middle East accounted for about 70 percent of crude oil imports, still occupying a critical and overwhelming position in Korea's energy supply chain. The region not only possesses the largest reserves of crude oil, but its physical oil characteristics, geographical logistics system, and the long-term contract structure of the refining industry have played major roles.

The popularity of Middle Eastern crude oil stemmed from its properties and refining yield. Each source of crude has different components, which determine the ratio and value of petroleum products obtained through refining.

The main criteria for grading crude oil are its API gravity and sulfur content. API gravity is a measurement established by the American Petroleum Institute (API), with higher numbers indicating lighter oil and lower numbers heavier oil. Crude oil with API gravity above 34 degrees is classified as light crude, while below 30 degrees is considered heavy crude. Crude oil with an API gravity between these values is classified as medium crude.

Dubai crude, one of the three major benchmarks, has an API gravity of 32.0 and a sulfur content of 1.68 percent, classifying it as high-sulfur medium crude. By contrast, Brent crude from the North Sea and West Texas Intermediate (WTI) in the U.S. have API gravities above 34 and are considered light crudes. The refining process for such light, clear oil is simple—so much so that “there’s almost nothing to refine.” Without extensive processing, much of it can be converted into high-value petroleum products, which also keeps the price of the crude itself relatively high.

However, domestic refiners have instead generated high margins by reprocessing oil with more impurities into high-value products like gasoline and diesel. Dubai crude, which is a heavy crude, is cheaper than light crude but contains more impurities like sulfur and heavy metals. The Korean refining industry has built up advanced facilities capable of breaking down heavy crude and then further breaking down the residue to produce value-added products. While heavy crude is typically used to produce low-value items such as asphalt or bunker C oil for large ships or industrial boilers, advanced facilities have enabled the extraction of premium petroleum products and maximized refining margins.

Transport Completed in About 20 Days—The Shortest Geographic Distance

In crude supply, the physical properties of the oil are just as important as logistics costs and transportation constraints. Because crude oil is extremely heavy, the cost of maritime transport is directly tied to distance. The longer the shipping duration, the more substantial the costs become, including ocean freight, crew wages, fuel, and insurance.

The route from the Persian Gulf, through the Strait of Hormuz, across the Indian Ocean, the Strait of Malacca, and the South China Sea, brings crude to domestic ports (such as Ulsan or Yeosu) in about 20 days on average, covering a one-way distance of approximately 12,000 km. Until the recent war in the Middle East, this was the most stable and quickest route. This is why domestic refiners have traditionally imported large volumes of Middle Eastern crude oil.

With the blocking of the Strait of Hormuz, various bypass routes have drawn renewed attention. The first prominent alternative was through the Red Sea. By passing the Bab el-Mandeb strait, which connects the Red Sea and the Gulf of Aden, crude could still be shipped to Korea.

However, even this option has recently become less viable, as the Houthi rebels, backed by Iran, have engaged in military conflict with Saudi Arabia, making passage difficult. As a result, some ships are reportedly using a route that bypasses the Cape of Good Hope via the Suez Canal. Bypassing via the Cape of Good Hope adds another 9,000 km and around 10 additional days of travel, and it increases costs. CSuez Canal is a man-made channel but has limitations for very large crude carriers (VLCCs); only one size smaller, 'Suezmax' vessels, can pass through. Suezmax refers to the largest naval architectural dimensions that a loaded vessel can have while still being able to transit the Suez Canal.

U.S. crude oil can be imported via a route that passes through the Panama Canal and crosses the Pacific Ocean, but the Pacific route poses significant geographic and physical constraints due to the canal’s narrow width and frequent droughts, resulting in shallow depths. For these reasons, geographic factors have made it difficult to reduce reliance on Middle Eastern crude. Recently, however, freight rates on Middle Eastern routes have soared. According to Clarkson Research, freight spot rates for VLCCs on the Middle East-China route jumped from 74 last year to 326 this year—a 4.4-fold increase. The maximum daily VLCC freight rate on this route has reportedly risen to $800,000 (about 1.08 billion won). The prolonged war in the Middle East is increasing the need to explore new routes.

Long-Term vs. Spot Contracts—A 60:40 Ratio

In order to secure stable crude oil supplies, domestic refiners have typically entered into long-term contracts lasting at least one year, making agreements with oil-producing countries’ governments, national oil companies, or major oil corporations to have a portion of their imports covered under long-term arrangements. This accounts for about 60 percent of all crude oil imports.

Especially, Middle Eastern countries such as Saudi Arabia, Kuwait, and Iran have preferred long-term contracts. Because such arrangements ensured stable supply in the long run, provided temporary crises like oil shocks were overcome, this led to the high proportion of Middle Eastern crude in Korea’s imports.

About 40 percent is covered by spot contracts, which are generally used to procure the remaining quantity needed after long-term contract supplies are secured. Spot contracts involve purchasing a specific volume of crude at a specific time.

Unlike other commodities, crude oil must be produced, stored, and sold continuously, so spot purchases and imports are generally conducted on a monthly basis. Refiners make plans for plant operation and supply three months ahead based on current conditions, establishing strategies for both long-term contracts and spot crude purchases.

Since the latest escalation in the Middle East, volatility in spot prices has increased, causing difficulty for refiners. Crude oil procurement managers must monitor all possible information, including available volumes, price fluctuations, and sellers, and also check for any issues with unloading and transportation. If, for example, a Saudi pipeline pumping station is attacked by a drone overnight and facilities are damaged, disrupting operations, it becomes very difficult to predict crude prices and supply.

The Growing Need for Overseas Resource Diversification

There is increasing emphasis on the need to diversify crude oil suppliers and bolster energy security in the face of geopolitical risks in the Middle East.

Starting this month, the government has decided to fully subsidize the freight rate differential incurred when importing non-Middle Eastern crude oil to hedge against instability in the Middle East. By compensating refiners for the additional logistics costs associated with importing crude from regions with longer shipping distances and higher maritime shipping and insurance premiums—such as the U.S., Latin America, or Africa—the government aims to lower economic entry barriers and promote genuine diversification of import sources.

Some also argue for a more proactive approach in securing overseas resources. Korea National Oil Corporation has continuously worked to secure overseas assets, such as the acquisition of Harvest in Canada in 2009 and obtaining new stakes in Vietnam Block 15-1 last year. However, lingering challenges remain regarding liability for losses incurred during resource development.

Jang Taehoon, Associate Research Fellow in the Petroleum Policy Division at the Korea Energy Economics Institute, stated, “We need to consider not only domestic resource development, but also strategic overseas resource development. It’s beneficial to own direct equity stakes, but even partial investments can be useful as they help secure supply during times of crisis.” He further emphasized, “Before an urgent situation such as war in the Middle East arises, there must be a comprehensive system to manage the supply chain with a particular focus on oil security—even during normal times.”

This content was produced with the assistance of AI translation services.