As oil production disruptions in Saudi Arabia and Libya push international prices to a four-month high, South Korea has yet to complete the first settlement under its oil price cap system. The gap between the estimated losses by refiners and the government's compensation amount is expected to lead to significant negotiations.
According to industry sources on September 16, the Price Cap Settlement Committee under the Ministry of Trade, Industry and Energy continues to request data from refiners such as SK Innovation, GS Caltex, S-Oil, and HD Hyundai Oilbank to determine the compensation amount, aiming for the first settlement in October.
However, dissatisfaction is already emerging from the refining sector. With escalating tensions between the U.S. and Iran causing oil and transportation costs to rise again, the government plans to calculate compensation based on production costs plus a reasonable margin, rather than market prices.
Typically, refiners set domestic and export prices based on the Singapore International Oil Price (MOPS). They are submitting data to the committee to calculate compensation based on the difference between export prices and domestic prices under the price cap.
If this method is applied, the estimated losses for refiners since the price cap was implemented on March 13 could reach approximately 7 trillion to 8 trillion won over six months.
In contrast, the government’s compensation amount, calculated by adding a reasonable margin to production costs, is reported to be less than 1 trillion won. Even if the committee uses MOPS as a basis for compensation, the government has allocated only about 4.2 trillion won for the price cap's implementation, which is insufficient to cover the losses estimated by refiners.
Moreover, with the government planning to extend the price cap on September 18 to stabilize prices, the likelihood of needing to compensate for fourth-quarter losses has increased. Although the Ministry of Industry has set aside about 1.5 trillion won from next year's budget for fourth-quarter compensation, this amount is deemed inadequate given the soaring oil prices.
The refining industry is also concerned that the committee may underestimate compensation amounts based on the strong performance of individual companies in the second and third quarters. This strong performance is attributed to a lagging effect from purchasing crude oil at lower prices, while the fourth quarter may see significant losses due to the current high oil prices, necessitating proper compensation from the government to ensure ongoing business viability. The lagging effect refers to the delay in profit and loss due to the time difference between purchasing raw materials and processing them for sale.
Meanwhile, international oil prices have surged to a four-month high due to attacks on Saudi oil pipelines and threats from Yemen's Houthi rebels to block the Red Sea. As of September 11, Dubai crude surpassed $123 per barrel, while Texas and Brent crude reached $108.75 and $105.83 per barrel, respectively, as of September 15.
* This article has been translated by AI.
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