The government will announce the first compensation amounts for oil refineries due to the implementation of the oil price cap by the end of this month. The size of the compensation is expected to significantly influence the year-end financial results, and if the amounts fall short of expectations, a fierce dispute between the government and the industry is anticipated.
According to the Ministry of Trade, Industry and Energy on November 9, the Oil Price Cap Settlement Committee plans to notify the results and basis for compensation amounts for each refinery for the period from March 13 to June 30 of this year within this month. Refineries will have 30 days from the notification date to file objections, and the government intends to review these objections before finalizing the compensation amounts and completing payments by the end of the year.
This marks the first time the government will present a specific figure for the recognized losses, drawing significant attention. The oil industry estimates cumulative losses of 7 trillion to 8 trillion won over the approximately seven months since the price cap was implemented in October. The government has set aside 4.2 trillion won in reserve funds to cover losses for the second and third quarters. While the industry argues that lost sales revenue due to price controls should also be considered, the government maintains that compensation should focus on actual costs incurred and reasonable profits.
The difference between the industry’s estimated losses and the reserve funds amounts to approximately 2.8 trillion to 3.8 trillion won, suggesting that the level of compensation will have a significant impact on the operating profits of the refineries this year. The four major refiners reported a total operating profit of 12.84 trillion won from their refining businesses in the first three quarters of this year. Individually, GS Caltex reported 4.42 trillion won, SK Energy 3.14 trillion won, HD Hyundai Oilbank 3.03 trillion won, and S-Oil 2.26 trillion won. The simple difference between the industry estimates and the reserve funds represents about 22% to 30% of these four companies' cumulative operating profits from refining over nine months.
As the compensation amount will affect the extent of performance improvement, refineries are expected to scrutinize how much of their costs and profits are recognized. Key issues will include the production costs allocated to domestic sales of gasoline, diesel, and kerosene, as well as the 'reasonable profit' acknowledged by the government. If the recognized amount is less than what was applied for, there may be demands for adjustments through objections.
Moreover, the criteria for this calculation could also influence the settlement of losses for the second half of the year. Refineries are likely to continue their disputes with the government over the calculation results, considering not only the first compensation amounts but also the potential impact on subsequent settlements.
An industry insider stated, "For refineries to import crude oil and supply it stably in the domestic market, it is essential to secure reasonable profits. Given the shared burden during this crisis, we hope the process of loss compensation will adequately consider the industry's challenges."
* This article has been translated by AI.
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