Australian gas field project gives Korean petrochemical industry a lifeline outside Middle East

SK Innovation E&S will bring 300,000 barrels of condensate from the Barossa gas field off northwestern Australia into Incheon Port early next month, the company said Monday. It is the first time a Korean private company has landed condensate from a field it developed abroad.

The cargo gives Korean petrochemical producers a long-term supply line that starts outside the Middle East, at a point when uncertainty around the Strait of Hormuz shows no sign of lifting.

Condensate is a light crude that comes up alongside natural gas. It is rich in naphtha, the feedstock behind plastics, synthetic fibers and rubber. The Barossa cargo goes to a dedicated unit at SK Incheon Petrochem, where the naphtha will be used to make paraxylene, the raw material for PET bottles and polyester fiber, along with gasoline and jet fuel.

SK Innovation E&S holds 37.5 percent of Barossa, against 50 percent for Santos of Australia and 12.5 percent for Japan's JERA. That share works out to 1.1 million barrels of condensate a year, or 22 million barrels over the 20-year contract. The company joined the project in 2012 and worked through reserve assessment, permitting and construction before this month's first delivery.

The volumes are modest. A very large crude carrier typically holds 2 million barrels, and SK Innovation refines about 800,000 barrels a day.

What the cargo represents is the direction in which Korean refiners and petrochemical makers have been pushed since the Iran war broke out in February. Iran's closure of the Strait of Hormuz cut the route that carries most of Korea's crude, and supplies of crude and naphtha have been unsteady ever since.

Korea National Oil Corporation figures show refiners imported 66.23 million barrels of Middle Eastern crude in January and 43.89 million in June. American and African crude took up the difference.

Naphtha itself went from $62.74 a barrel in January to $106.86 in June, a rise of about 70 percent.

Buyers spent months looking for cargoes that would not have to pass through the strait.

"We were looking for a route that bypasses the Strait of Hormuz, so we went all over the world hunting for naphtha," said an industry source. "The government covering half the price gap on naphtha was a big help."

That support ended on July 1, when the government lowered its crude supply alert. Industry groups have since asked for it to be restarted. The search for alternatives has already redrawn the map, with U.S. naphtha taking a larger share of imports.

Industry sources do not regard any of this as a fix. Feedstock costs have climbed while cheap Chinese products have made it hard to pass the increase on. Margins at Korean petrochemical companies have narrowed as a result. Naphtha prices have turned up again in recent weeks as tension around Hormuz has built back up.

The petrochemical sector supplies base materials to almost everything Korea manufactures, from cars, electronics, ships, construction and textiles to medical IV bags and household plastic goods. A naphtha shortage in March left the country short of the standard-issue bags residents must use to put out household waste.

"Petrochemicals are the capillaries running through manufacturing," said another industry source. "Diversifying feedstock has to be a long-term industrial strategy, not an emergency measure, if we are going to keep any competitiveness at all."

BY SUK GYEONG-MIN [[email protected]]