It doesn't have the monetary or population heft of China or India, but with a $1.8-billion deal to buy Canada's Harvest Energy Trust, South Korea has officially joined the rush of Asian economic powers scrambling to secure international resource assets.
State-controlled Korea National Oil Corp.'s (KNOC) offer, which includes the assumption of $2.3-billion in debt, marks the largest overseas oil and gas deal in South Korea's history and underscores the East Asian country's strong economic performance amid the global financial crisis.
South Korea's economy expanded at the fastest pace in nearly six years during the second quarter, as major manufacturers, including Hyundai Motor Co. and Samsung Electronics Co., reported a significant increase in foreign sales and profit. Despite its reliance on exports, South Korea has managed to avoid recession, suffering only one quarter of contraction before rebounding, a feat due in part to low rates, a weak currency and government spending.
With almost no oil production of its own, South Korea is now taking a cue from its hulking neighbour China, making overseas oil and gas acquisitions to help meet South Korean domestic consumption.
"It's quite natural. They see the increase in demand domestically for gasoline and energy, but in their own country they do not have any reserves. On the other hand, Canada is a huge country with huge natural resources," said Shih-Fen Chen, a professor at the Richard Ivey School of Business at the University of Western Ontario.
The Harvest deal, which will boost KNOC's oil output by 76 per cent to 123,400 b/d, likely marks the beginning of an acquisition spree. South Korea's government has mandated a KNOC target production of 300,000 b/d by 2012.
"KNOC has ambitious plans for future growth and is committed to a long term investment strategy in Canada," the state-controlled company's president, Young-won Kang, said in a statement.
The challenge for KNOC and other South Korean companies, will be finding a way to compete with rivals from China and India. China has spent about $13-billion (U.S.) snapping up foreign oil assets since December, while India has spent $2.5-billion. KNOC plans to raise $1.65-billion to finance the Harvest bid and is in talks with "four or five companies for further acquisitions," Kim Jung Gwan, South Korea's deputy minister for energy told Bloomberg news.
Besting China for prime resource properties won't be easy. KNOC lost out in June to China Petrochemical Corp. (Sinopec) in the battle to buy TSX-listed Addax Petroleum Corp. Sinopec's bid of $7.2-billion was the top offer for the company, which has assets in West Africa and Iraq.
However, South Korea, which is Asia's third largest economy (behind Japan and China), may have an advantage because of potential political concerns about Chinese investment.
"A Chinese company buying an oil company in Canada that is more likely to attract the attention of the government and trigger nationalism among the people because China is a huge country. On the other hand, people will be less concerned about control of oil reserves by a Korean company because the country is less threatening," Mr. Chen said.
© The Globe and Mail
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