[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
"Diversificat

Editor's NoteDue to the recent Middle East war–induced supply chain crisis and the government's mega-projects, the importance of energy is greater than ever. In a situation where South Korea depends on overseas sources for the majority of its primary energy, the country faces the daunting challenge of achieving energy security, carbon neutrality, and economic growth simultaneously. This series features in-depth reports by journalists who are on the energy front lines, examining various pressing issues and exploring potential solutions.

South Korea's petroleum energy supply chain, which had previously relied predominantly on crude oil from the Middle East, has begun to shift. As the war between the United States and Iran drags on, major domestic refiners have accelerated efforts to reduce their dependency on the Middle East. As a result, the share of crude oil imported from the Middle East has decreased slightly, while imports from the Americas and the African continent have risen.

According to data from Korea National Oil Corporation’s Petronet as of September 19, during the first half of this year, crude oil imports from the Middle East accounted for 62.3 percent, down 6.4 percentage points from 68.6 percent in the first half of the previous year.

While crude oil from the Middle East still holds the top spot in terms of market share, the dependence has somewhat eased as the volume has dropped by 57.61 million barrels.

In contrast, imports from the Americas—most notably the United States—rose to 4.993 million barrels during the same period, with the market share increasing from 23.4 percent to 26.5 percent. Imports from Africa also surged from the 10,000-barrel range to about 26,000 barrels, with the corresponding share jumping from 2 percent to 5.6 percent. By country, imports from the Republic of Congo increased by 536.6 percent, and from Gabon by 204.5 percent.

When the Strait of Hormuz was under threat of closure in March, the government encouraged refiners to import crude oil from the United States and other alternatives, but the industry was largely skeptical. The war might have ended quickly, and even if crude oil was sourced from the U.S., Europe, or Africa, there were concerns that it would not be compatible with domestic refining facilities, potentially causing plant shutdowns. However, as the Middle East war has dragged on, refiners have had no choice but to diversify sources. They have also begun experimenting with blending crude oils of different characteristics for use in existing equipment, exploring new paths forward.

Why Heavier and More Impure Crude Oil Is Preferred

Until last year, Middle Eastern crude oil still accounted for around 70 percent, firmly dominating the domestic energy supply chain. The Middle East not only boasts the world's largest reserves but physical characteristics of its crude, its geographic logistics advantages, and the long-term contract structure prevalent in the refining industry have all played significant roles.

The popularity of Middle Eastern crude stemmed from its properties and yield. Each source of crude has different component makeups, which determine the proportions and value of petroleum products obtained after refining.

The main criteria for crude oil grading are 'API gravity' and sulfur content. API gravity, defined by the American Petroleum Institute (API), increases as the oil becomes lighter and decreases as it gets heavier. Oils with an API gravity over 34 degrees are considered light crude, while those below 30 degrees are classified as heavy crude. Crude oil with intermediate API gravity is classified as medium crude.

Dubai crude, one of the three major global benchmark oils, has an API gravity of 32.0 degrees and a sulfur content of 1.68 percent, classifying it as a high-sulfur, medium-grade crude. In contrast, Brent crude from the North Sea and West Texas Intermediate (WTI) from the United States are both light crudes, with API gravity above 34 degrees. These light, clear crudes require minimal refining, allowing for the production of larger quantities of expensive petroleum products, and thus carry a higher base price.

However, Korean refineries have been reprocessing impure, heavier crude to produce high-value products such as gasoline and diesel, resulting in high margins. Dubai crude, which contains high levels of sulfur and heavy metals, is cheaper than light crude. The domestic refining industry has invested in advanced equipment capable of breaking down heavy crude and further processing the residual oils to create high-value-added products. Normally, heavy crude generates low-value products such as asphalt or bunker-C oil (used in large ship engines, industrial boilers, and factories). Thanks to advanced facilities, however, the industry has maximized refining margins by upgrading those heavy fractions into high-end petroleum products.

Geographic Proximity: Delivery in Just 20 Days

Beyond crude oil characteristics, logistics costs and transport limitations are critical variables in supply. Because of the sheer bulk of crude oil, marine shipping distance translates directly into costs. The longer the transportation period, the greater the additional sea freight and associated expenses, such as crew wages, bunker fuel costs, and insurance premiums.

The route departing from the Persian Gulf, passing through the Strait of Hormuz, the Indian Ocean, the Strait of Malacca, and the South China Sea, takes around 20 days to reach Korean ports (such as Ulsan and Yeosu). This one-way journey of about 12,000 kilometers had been, up until the Middle East war, the most stable and fastest route—hence the high volume of Middle Eastern imports.

When the Strait of Hormuz was blocked, alternative routes gained fresh attention. The Red Sea route, passing through the Bab el-Mandeb Strait to connect with Aden, was first considered. This enabled marine transportation to Korea via the Red Sea.

However, this route is also now under threat, with pro-Iranian Houthi rebels clashing militarily with Saudi Arabia, making passage increasingly difficult. As a result, some ships are reported to have diverted through the Suez Canal and around the Cape of Good Hope. Circumnavigating the Cape adds 9,000 kilometers and approximately 10 extra days at sea, further escalating costs and reducing oil quantities delivered. The Suez Canal is a man-made waterway and cannot accommodate ultra-large crude carriers (VLCCs); only one size down, "Suezmax" vessels, can transit the canal. The term “Suezmax” originates from naval architecture and refers to the largest vessels that can transit the Suez Canal when fully loaded.

U.S. crude oil can be imported via the Panama Canal and across the Pacific. However, the Pacific route faces major logistical and geographical constraints due to the canal’s narrow width and shallow draft, aggravated by frequent droughts. For these reasons, it has historically been difficult to abandon Middle Eastern crude from a geographical standpoint. However, Middle Eastern shipping rates have surged recently. According to Clarkson Research, the VLCC spot freight index for Middle East–China routes for 270,000-ton vessels skyrocketed from 74 last year to 326 this year—a 4.4-fold increase. Recent VLCC daily rates on this route have reportedly reached as high as USD 800,000 (approximately KRW 1.08 billion). The prolonged Middle East conflict adds new urgency to opening up alternative shipping routes.

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

To secure stable oil supplies, domestic refiners have established primarily long-term contracts (at least one year) with oil-producing nations, national oil companies, or major petroleum corporations, covering a portion of their needs. This accounts for roughly 60 percent of total imported crude oil.

The prevalence of long-term deals with Middle Eastern countries—such as Saudi Arabia, Kuwait, and Iran—traces to their preference for ongoing contracts. If temporary shocks such as oil crises are managed, these arrangements have long-term stability, explaining Korea’s high Middle Eastern import share.

About 40 percent is procured via spot contracts, which cover additional requirements beyond those supplied under long-term agreements. These are deals for specified volumes at specific points in time.

Unlike most commodities, crude oil production, storage, and sales are continuous, so spot purchases are generally arranged on a monthly basis. Refiners plan plant operation and procurement schedules three months out, arranging spot purchases as needed in addition to long-term supply.

Since the recent Middle East crisis, spot prices have become highly volatile, causing difficulties for refiners. Oil procurement teams must quickly assess availability, price changes, and seller information, checking thoroughly for any issues in unloading or shipping. If vital facilities like Saudi Arabia’s pipeline pumping stations were struck by surprise attacks—such as drone strikes overnight—causing plant closures, oil prices and supplies would become extremely unpredictable.

The Need to Diversify Overseas Resource Development

Calls are growing for Korea to ensure energy security by diversifying sources in order to withstand Middle East geopolitical risks.

Beginning this month, the government plans to fully subsidize freight cost differentials that arise when importing crude oil from non–Middle Eastern sources to counter instability in the region. The aim is to reduce economic barriers for refiners and promote practical diversification of suppliers by reimbursing the additional logistics costs incurred when sourcing from farther locations such as the U.S., South America, or Africa, which involve higher sea freight and insurance costs than the Middle East.

Some observers say Korea should take a more proactive approach to securing overseas resources. Korea National Oil Corporation (KNOC) has continued its resource acquisition efforts—for example, the 2009 acquisition of Harvest in Canada and last year’s securing of new interests in Block 15-1 in Vietnam. However, the risk of losses during resource development remains an unresolved challenge.

Jang Taehoon, Associate Research Fellow at the Petroleum Policy Research Department of the Korea Energy Economics Institute, stated, "In addition to domestic resource development, strategic overseas resource development should be considered. Whether by owning stakes directly or investing in a portion, such measures can help stabilize supply in times of crisis." He added, "Before emergency situations like the Middle East war arise, and particularly in terms of oil, a comprehensive system to manage the supply chain even during peacetime will be all the more necessary from a resource security perspective."

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