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Industry reports, briefs and video-clips issued by Samsung Economic Research Institute

Enhancing the Competitiveness of Korea's Offshore Energy Development

Enhancing the Competitiveness of Korea's Offshore Energy Development

BAE Young-Il

June 11, 2012

Transcript

Welcome to our video program. I'm Young-Il Bae from the Industry and Strategy Department II.

Expo 2012 in Yeosu, Korea is now under way with its theme being “The Living Ocean and Coast.” The theme for the international event seems to suggest a lot for the future of Korea, a country with oceans on three sides. Given this, this presentation will look at an industry related to the ocean.

Marine activity has been exploding recently despite economic hardships around the world. In particular, the ocean energy development industry has expanded sharply. It involves exploration, drilling and production of oil and gas and operation of facilities. The industry reached US$220 billion in 2010, twice the amount of the shipbuilding industry.

The main reason for the surge is persistently high oil prices, which are sustained by steady demand. At present, crude oil prices are nearly US$100 per barrel. This is due to the energy demand of emerging economies. In particular, oil needed for transportation is likely to only grow because there are no widely developed options. Shale gas is rising as a new energy source for heating and power generation in North America.

The rise in demand will lose speed due to wider use of renewable energy sources. At the current pace, however, oil is expected to continue to be the No.1 energy source in the foreseeable future. Moreover, the ongoing short supply of oil will sustain higher prices over the long term. All of these factors are prompting a rising interest in tapping ocean oil fields.

Breakthroughs in exploration and drilling technologies have pushed the limit of ocean oil exploration. It is now possible at lower depths, farther offshore and in new areas such as parts of the Arctic Ocean. Of paramount importance is safety because a slight mistake can lead to a catastrophic explosion or an oil spill. An oil rig explosion can take the lives of many workers and cause an oil spill that could devastate the marine ecosystem over a broad area and damage coastal communities.

The Deepwater Horizon explosion in the Gulf of Mexico in 2010 killed 11 crew members working in the platform, which sank in 36 hours after the explosion. The resultant oil spill lasted for five months, releasing 5 million barrels of crude oil. Direct financial losses to the developer BP are estimated at over US$11.2 billion.

As is seen in BP's case, a single accident can shatter a company to its core. This is why safety is the highest priority in the industry of marine development. Thus, it is almost impossible for a firm that is short on experience or financial health to enter the industry regardless of its technological capability. Current leaders are regarded as “trustworthy” due to their lengthy experience in the industry and the high reputation they have built up. Moreover, recent progress in deepwater development is setting the bar even higher for a new entrant to successfully establish itself in the market.

Customer needs are becoming more complicated. For example, national oil companies in the Middle East and Brazil prefer to deal with a company that can control the whole value chain in extracting oil. As a result, they maintain consultation-oriented partnerships with developers for their projects. In response, even renowned firms seek to complement their disadvantages through M&As or by taking a stake in other companies.

Major Korean shipbuilders partially participate in the marine energy services by manufacturing floating offshore facilities. Although they are the top producers of such facilities, they stay in the minor league of the global industry due to the overall lack of experience in the field and the capability for basic design and marine engineering. However, there is no need to give up in advance. The industry is characterized by application and convergence. This means Korean firms will be able to acquire necessary capabilities earlier rather than later if they fully utilize their advantages in shipbuilding, construction and engineering.

What is most urgent for Korean companies is to attain designing capability. The design of a drilling rig is critical to a project. It determines the specifications, equipment, materials and schedule of a project.

Developing designing skills internally would require a long-term effort. To speed the process, Korean companies need to consider M&As with specialized firms. Also, the government has an important role to play. Education courses that provide theoretical classes as well as field training opportunities should be created to foster specialists in marine energy projects. In addition, the government needs to launch a pilot project to give business experience for local players.

Only 10% of the oceans on Earth have been explored and the oceans have been developed to 3,000 meters in depth. Oceans have oil fields and other potential energy sources, including manganese and methane hydrates, which can go beyond our imagination. They are the last resort for humans grappling with energy shortages. Thus, the potential for marine development is limitless. Businesses which may not seem directly related with the industry will be able to find new opportunities if they look deeper into the oceans.

Thank you for watching. I'm Young-Il Bae.

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