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Energy security, eh?

Martin Hutchinson 

Korea/oil: South Korea may be doing a China. Korea National Oil Company’s C$1.8 billion ($1.7 billion) purchase of Canadian Harvest Energy Trust secures future oil supplies, like recent Chinese deals in Canada and elsewhere.

With oil shortages possible in the medium term, that makes sense. But Korea can’t play rough, so KNOC must stick to countries it trusts. That makes Korea’s quest for a tougher one than China’s.

In a free market, there would be no need to secure oil supplies in this way — rather, they could be acquired freely on the spot market or through long-term contracts. That’s how Korea currently obtains most of its 2.14 million barrels a day in imports.

KNOC represents less than 4 per cent of Korea’s imports and even its ambitions for 2012 have that rising to only 14 per cent.

However, oil markets in particular face obstacles to free operation in the future. Venezuela has nationalised oil operations and Nigeria has renegotiated contracts with multinational groups, while Brazil has a new somewhat more nationalist oil regime.

This and other evidence suggest a trend towards a more mercantilist approach, in which countries control oil supplies directly.

Moreover, John Hess, chief executive of Hess Corporation, said this week he believes there is a likelihood of an oil price spike and supply disruption within the next 5-10 years. If that happened, even direct government interests in oil supplies in other countries might prove unreliable as host governments jockeyed to use their oil for political or economic gain.

In this regard, however, the China National Offshore Oil Corporation has advantages over KNOC. China’s political power and strong armed forces would make it dangerous for an oil supplier to renege on agreements with CNOOC.

Korea, conversely, is a medium-sized democracy with a modest military which it has to keep mostly at home because of the threat from North Korea.

So KNOC probably can't risk venturing as boldly into unstable emerging markets as CNOOC can. Instead, at least for big deals it needs to focus mostly on countries where contracts are reliable or Korea’s political relations strong.

That’s a relatively short list. Companies like Harvest with oil reserves in countries that fit the bill should dust off their valuation spreadsheets.

First Published: Sat, October 24 2009. 00:11 IST