Resource Public Enterprises Contemplate Two-Track Strategy: 'Financial Improvement + Resource Exploration'

Overseas Resource Development Innovation 2nd TF Government Recommendation Announcement
"Must improve finances through restructuring and lead private investment in exploration"

[Sejong=Asia Economy Reporter Joo Sang-don] Resource public enterprises such as Korea National Oil Corporation and Korea Gas Corporation have been tasked with rapidly improving their financial situation by 2029. However, alongside financial improvement, they also face the dilemma of needing to actively support private sector participation in high-risk resource exploration projects.

According to the recent government recommendation announced by the 2nd Task Force (TF) on Overseas Resource Development Innovation, the oil corporation, which is in a state of complete capital erosion, was ordered to set goals to resolve capital erosion and restructure its business model that depends on oil prices. The gas corporation needs to reduce its current debt ratio of 340% to 280%, which is the level of global gas companies, by 2029, and establish strategies to prevent financial deterioration due to large-scale future investments. The government plans to establish a normalization plan for resource public enterprises based on this TF recommendation.

The core of this recommendation is to accelerate restructuring of resource public enterprises. The TF judged that the poor performance in overseas resource development projects was due to restructuring not being carried out in a timely manner. The recommendation also acknowledged the role of resource public enterprises and allowed for government support when necessary. Additionally, if public enterprises fail to sell overseas assets according to their self-established roadmaps, the recommendation includes introducing a third-party sale system. Furthermore, overseas assets should be sold to the optimal domestic or international buyers, but if purchase conditions are similar, domestic companies should be given priority. This marks a step back from the previous policy of prioritizing domestic private companies as the top choice when selling overseas assets.

The principle of "first restructuring, then government support" was also recommended. This represents a shift from the first TF recommendation, which was negative about government support, to a stance that restructuring and government support should be pursued simultaneously.

A notable point is the restoration of the role of public enterprises. The TF sees the urgent need to revive South Korea's resource development ecosystem, which is currently facing a crisis, and recommends that public enterprises take the lead especially in high-risk exploration areas and strategically important regions where private company participation is difficult. This is based on the judgment that private companies alone have limitations in acquiring local information, building networks, and managing risks, and that public enterprises can help attract private investment.

However, this conflicts with the order to reduce debt ratios given the high risk of exploration projects. The success rate of exploration is less than 10%. While success can yield a "jackpot," failure can result in losing the entire investment. It is a typical "high-risk, high-reward" business. The TF reportedly held over 70 meetings, but ultimately it seems to have revealed that there is no sharp solution regarding the role of resource public enterprises.

A government official explained, "The purpose of the recommendation is to direct resource development public enterprises, which have suffered losses from purchasing production mines worth trillions of won, to engage in relatively smaller-scale exploration projects. However, since exploration projects carry high risks, the recommendation also includes including public enterprises as targets for special government loan support."

The government currently implements a success-based non-recourse loan that supports up to 30% of project costs when private companies conduct overseas resource exploration. Although project costs vary widely depending on conditions, the scale of deep-sea resource exploration projects is typically around 100 billion won. In this case, the government supports up to 30 billion won. If exploration succeeds, the government recovers 33 billion won, which is the support amount plus 10%. If it fails, only 9 billion won is recovered after reducing 70% (21 billion won) of the support amount. The TF recommends that this success-based non-recourse loan, currently only available to private companies, be extended to public enterprises when they participate jointly with private companies.

The TF also saw the need to improve the special loan system, including support and reduction rates. The success-based non-recourse loan system, abolished at the end of 2015 due to repeated project failures, was revived in 2017 as a special loan system, but the loan ratio was lowered from 80% to 30%, and the loan reduction rate upon failure was reduced from 100% to 70%. The TF believes that to revitalize exploration projects, the loan ratio should be increased again and the reduction rate lowered. A resource public enterprise official said, "The TF's recommendation to support special loans for public enterprises when they join exploration projects with private companies is positive. However, immediate financial improvement is urgent, and with low oil prices and limited profitability, it will be difficult to find private companies willing to engage in exploration, so joint entry will not be easy."

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