The Republic of Korea (South Korea) has a growing economy which depends on imports for 95 percent of its energy needs. The military threat from North Korea, across the Demilitarized Zone, is a constant concern. The United States is a major ally and trading partner.

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BACKGROUND
Under the leadership of Kim Young Sam (whose term of office expires in February 1998 and is ineligible to run for re-election), South Korea is implementing financial reforms and liberalizing its economy under the banner of "segyehwa" (globalization and internationalization). In September 1997, Kim Young Sam resigned the presidency of South Korea's ruling New Korea Party. Kim has been succeeded by Lee Hoi Chang, the party's candidate in the December 18, 1997 presidential election. Running against Lee are Kim Dai Jung of the leading opposition party (National Congress for New Politics) and Rhee In Je (a former governor who quit the ruling party to form his own party).

Although South Korea is considered one of the world's big emerging markets, its economic growth has slowed from nearly 9 percent in 1995 to a projected 5.5 percent in 1997. The restructuring of large companies and financial institutions has led to labor actions, declarations of bankruptcy by some of the largest conglomerates in the economy, and government aid for ailing financial institutions. The country's currency value and stock market have also been affected by a financial crisis wreaking havoc on economies throughout southeast Asia. Priorities include restoring the country's economic health and global competitiveness, while continuing to reform the corporate and bureaucratic structure. On a positive note, the country's trade balance has improved over the past 6 months, and the current account deficit is now projected to be only about half the size of the 1996 deficit.

South Korea became the 29th member of the Organization for Economic Cooperation and Development (OECD) in December 1996, and is also a member of the World Trade Organization (WTO) and APEC (Asia Pacific Economic Cooperation). In its financial liberalization plan submitted to the OECD, South Korea promises to fully open its stock market to foreign investors by 2000 (the current limit of 23 percent foreign is expected to be raised to 26 percent in late 1997). Foreign investment in local conglomerates (known as "chaebols") and long-term corporate bonds of small companies is also planned. The United States and Japan already are major investors in South Korea.

The United States is South Korea's most important trading partner, providing 22 percent of South Korea's imports and purchasing 17 percent of its exports in 1996 (more than any other country). However, this relationship has become strained over barriers to U.S. automobile exports. In October 1997, U.S. Trade Representative Charlene Barshefsky formally designated South Korea as a "priority" foreign country subject to review. This opens up the possibility of future sanctions under U.S. trade law.

South Korea exists under nearly constant tensions with North Korea, particularly in the Demilitarized Zone along the 38th parallel -- the most heavily armed border in the world. Technically, the two countries have been at war since the 1950s, as South Korea never signed the 1953 armistice ending hostilities (neither did the United States). Under a 1954 Mutual Defense Treaty, the United States maintains about 37,000 troops in South Korea to assist its defense against external aggression. An attempt to hold four-way talks among North Korea, South Korea, China, and the United States floundered in September 1997 on North Korea's insistence that the agenda include a discussion of the withdrawal of U.S. troops from South Korea.

South Korea's relations with North Korea are highly limited by ongoing tensions, and consist primarily of security-related initiatives. For example, South Korea agreed to provide two light-water nuclear reactors to North Korea as part of an October 1994 U.S.-North Korea bilateral agreement in which North Korea agreed to freeze and eventually dismantle its graphite technology nuclear program (which could have a dual use in a nuclear weapons program). Employees of South Korea's state power company are now working in North Korea on the first phase of the construction project. South Korea has also donated food supplies in response to international appeals to help North Korea cope with a major famine threatening its population. South Korea lifted its ban on direct trade and investment in North Korea in 1994, and as of September 1997 had authorized 26 companies to do business or invest in North Korea. In October 1997, South Korea signed an aviation agreement that will allow commercial flights over North Korea beginning in February 1998.

OIL
Oil supplies the largest share of South Korea's total energy requirements (about two-thirds of primary energy consumption in 1995), and demand has been rising rapidly with industrial expansion and rising incomes. The growth in gasoline demand has been particularly strong (20 percent annually since 1984) due to increased car ownership. Car ownership rose from 2.1 million cars in 1990 to more than 6 million, and is expected to hit 11 million by 2000.

With no domestic reserves, South Korea must import all of its crude oil. As a security measure, the country plans to diversify its sources of supply in order to reduce its dependence on the Middle East (from 78 percent currently to 65 percent within 10 years). One example is LG-Caltex Corp.'s announcement in December 1996 of a long-term contract to import 30,000 barrels per day of Alaskan North Slope oil from BP. South Korea is also building a strategic petroleum reserve in anticipation of joining the International Energy Agency (IEA). Strategic stocks are currently equivalent to a 60-day supply (the IEA requires a 90-day supply).

An important aspect of the country's long-term strategy is to increase oil imports from overseas projects in which South Korean firms are participating (to a targeted 10 percent of imports by 2010). At the end of 1996, South Korean companies were participating in 37 oil fields in 16 countries. In March 1997, crude oil production capacity at these fields was estimated at 43,500 barrels per day. State-run Korea Petroleum Development Corp. (PEDCO) is currently participating in 19 oil exploration projects in 13 countries, including 5 fields (in Yemen, Egypt, Argentina, Peru, and the North Sea) which together produce 18,000 barrels per day. Major refiners and trading houses are also actively involved in development of overseas petroleum reserves.

Five major refining companies produce petroleum products primarily for use within South Korea. However, exports of petroleum products have increased in 1997 as the companies have completed refinery expansions. In the first 7 months of 1997, exports exceeded 500,000 barrels per day, including large volumes to China and Taiwan. This surge is largely attributable to a rapid expansion of the country's refining capacity, which has doubled since January 1996 (to an estimated 2.4 million barrels per day). In July 1997, Ssangyong Oil Refining Company (35-percent owned by Saudi Aramco) signed the country's first term contract to sell gasoline to an oil-producing country (an agreement to export 1.8 million barrels to Saudi Aramco over a 6-month period).

In January 1997, South Korea began implementing the deregulation of petroleum product prices and liberalization of import and export markets. Government price ceilings on petroleum products were lifted (refiners were required to give the government advance notice of price increases for the first 6 months), and non-refiners (up to 50 percent foreign ownership) were permitted to import and export crude oil and petroleum products without the need for a government license. Beginning January 1, 1999, any company will be able to enter any level of the oil business by simply registering with the government.

In September 1997, South Korea dedicated a 593-mile oil product pipeline and a large oil products storage terminal (1.97 million barrels capacity) in Songnam. The pipeline serves the terminal as well as cities throughout the southern part of the country. The first phase, serving cities in the Seoul area, has been open since 1992.

NATURAL GAS
South Korea relies on imported liquefied natural gas (LNG) to meet its growing demand for natural gas, which currently supplies about 7.5 percent of its total energy needs. This share is projected to increase to 10 percent of consumption in 2010. According to the International Energy Agency, the power sector accounted for about half of total natural gas consumption in 1994, followed by the residential sector (at 32 percent) and the industrial and commercial sectors (at about 9 percent each).

Korea Gas Corp. estimates LNG demand will more than double by 2001 (to 20.7 million metric tons compared with 9.5 million metric tons in 1996), and continue increasing (to 25 million metric tons in 2006 and 29.3 million metric tons in 2010). To meet these higher demand levels, South Korea is increasing the capacity at its existing terminals (Pyongtaek and Inchon) and planning a third LNG receiving terminal at a location not yet determined. It is also investing in storage facilities and entering into additional long-term supply agreements.

South Korea currently gets most of its LNG from Indonesia (55 percent) and Malaysia (34 percent), with smaller volumes from Brunei and Australia. As with oil, South Korea is trying to diversify its LNG supply sources as a security measure. Long term agreements have recently been signed with Oman and Qatar, which are expected to supply 40 percent of South Korea's LNG in 2001 (as the Indonesian and Malaysian shares fall to 32 percent and 12 percent, respectively). The Oman project is noteworthy in that it is the first in which South Korea has taken an equity position (with the purchase of a 12 percent stake by Korea LNG, a new company formed by five South Korean companies -- including Korea Gas). Formal signing of a long-term agreement with Brunei is expected by the end of 1997. Future supplies are also planned from new LNG projects in Yemen and Canada's British Colombia. Longer term options include the possibility of a pipeline to ship natural gas from Russia (Irkutsk in East Siberia), via China.

During 1997, Korea Gas Corp. conducted its fourth round of bidding for seven LNG carriers needed to transport LNG from Oman and Indonesia for up to 25 years. The company is also investing in infrastructure to deliver the gas to domestic markets. It plans to complete a national transmission loop with extensions to remote cities by 1999. Distribution and sale of natural gas is handled by 10 private companies, each of which has exclusive rights to operate within a defined area.

COAL
Coal supplies about 18 percent of South Korea's total energy requirements. Most of these requirements are met by imports, since the only indigenous coal resources consist of a low-quality anthracite used in home heating and small boilers. Bituminous coal supplies (steam coal for power plants and industrial boilers and metallurgical coal for steelmaking) are imported mainly from Australia. State power company KEPCO has invested in several Australian coal mines, and plans to increase coal imports from China, Indonesia, and possibly the western United States. The company is particularly interested in new sources of low-sulfur coal needed to meet new government emissions guidelines for 1999.

ELECTRIC POWER
South Korea uses a combination of thermal, nuclear, and hydroelectric capacity to meet its demand for electric power. Thermal capacity (coal, oil, and LNG) generates nearly 62 percent of the total, nuclear nearly 36 percent, and hydro less than 3 percent. Currently, nuclear power is generated by 12 units at four plants (Kori, Ulchin, Wolsong, and Yonggwang), with total net generating capacity of nearly 10 gigawatts (including 650 megawatts from a new unit of the Wolsong plant dedicated in September 1997). In addition, industrial companies (steel plants, refineries, chemical makers, etc.) have installed about 3 gigawatts of self-generation capacity which is not connected to KEPCO's grid.

South Korea's Ministry of Trade, Industry, and Energy projects the country will need to more than double its electric generating capacity (to 67.51 gigawatts) by 2010 to meet anticipated electricity demand increases of 11-12 percent annually. To reduce the country's large energy trade deficit, the plan calls for reducing the relative share of LNG generation while increasing the relative importance of the country's nuclear, coal, and hydroelectric power. The country plans to complete four more nuclear plants totaling 3.2 gigawatts by 2000, and another 2 nuclear plants totaling 1.9 gigawatts by 2003 (two more nuclear plants are in the planning stage).

Plans include a gradually increasing role for independent power producers (IPPs), which ultimately could provide 6 gigawatts or more of power. In 1996, South Korea awarded two 450-megawatt LNG-fired plants and two 500-megawatt coal-fired plants to South Korean companies on a build, own, and operate (BOO) basis. The second round, currently underway, is seeking bidders for two 450-megawatt LNG-fired plants. Foreign ownership of IPPs may not exceed 50 percent and a foreign firm may not represent the majority interest in the project.

The potential market share for U.S. fossil-fired and nuclear generation technology and flue gas desulfurization technology is estimated to exceed $1 billion over the next 14 years.

In October 1997, South Korea's Securities and Exchange Commission approved a request by the Korea Development Bank to purchase a 6.92 percent stake in KEPCO, which would reduce the government's share to 68.63 percent. Subsequently, KEPCO announced plans to buy back shares equivalent to 0.87 percent equity over a 3-month period to support the bearish domestic stock market. Currently, individual investors are allowed to hold up to 1 percent each, but the Ministry of Finance and Economy has announced plans to increase the individual share limit to 3 percent.

ENVIRONMENT
As South Korea's economy has developed, environmental concerns have become increasingly important. The Ministry of Environment, established in 1990, presented a long-term master plan ("Vision") in 1995. The long-term plan emphasizes a sound national environment and codification of environmental standards to be met by 2005.

In addition to an over-arching basic law, South Korea has enacted specific legislation covering air, water, waste, noise, and other forms of pollution. Regulation and enforcement is delegated to various ministries and regional bodies.

Energy-related environmental initiatives include measures affecting gasoline consumption and electric power production. Unleaded gasoline was introduced in 1987 and phased out by 1993, and gasoline specifications on aromatics, benzene compounds, and oxygen content are being tightened. Long-term plans for the electric power sector include the adoption of flue gas desulfurization, high-efficiency dust collection technologies, and clean coal technology. The electric power plan also includes a demand side management program designed to reduce peak demand and the associated need for additional power plants.

South Korea's economy has significant room for conserving energy. For example, a February 1997 report by the Bank of Korea indicated Korean manufacturing companies use significantly more energy than Japanese companies for each $1 million worth of goods produced (110 tons of oil equivalent versus only 60 tons in Japan, based on data for 1990). Basic material companies (including steel, petrochemicals, and cement makers) used nearly twice as much energy per $1 million worth of output (240 tons of oil equivalent versus 130 tons in Japan), according to the Bank.

COUNTRY OVERVIEW
President: Kim Young-Sam (since February 1993; next election December 18, 1997)
Independence: August 15, 1948
Population (7/97E): 45.9 million
Location/Size: Eastern Asia/98,480 square kilometers (38,000 square miles), about the size of Indiana
Major Cities: Seoul (capital), Pusan, Taegu, Inchon, Kwangju
Language: Korean (English widely taught in high schools)
Ethnic Groups: Korean, with small Chinese minority
Religions: Christianity, 48.6%; Buddhism, 47.4%; Confucianism, 3%; Other, 1%
Defense (8/96): Army, 548,000; Navy, 60,000; Air Force, 52,000 (plus 35,910 U.S. troops)

ECONOMIC OVERVIEW
Currency: Won (W)
Exchange Rate (10/31/97): US$1 = W965
Gross Domestic Product (GDP, Market Exchange Rate, 1996): $485 billion
Real GDP Growth Rate (1996): 7.1%
Inflation Rate (consumer prices) (1996): 4.9%
Unemployment Rate (9/97): 2.2%
External Debt (1996): $104.7 billion
Total Reserves, Non-Gold (9/97): $30.4 billion
Current Account Balance (1996): -$21.8 billion
Trade Balance (1996): -$15.5 billion (-$3.9 billion with U.S.)
Exports (1996): $128.4 billion ($22.7 billion to U.S.)
Imports (1996): $143.8 billion ($26.6 billion from U.S.)
Major Exports: Manufactures, textiles, ships, automobiles, steel, computers, footwear
Major Imports: Crude oil, food, machinery and transportation equipment, chemicals and chemical products, base metals and articles.
Top Trading Partners: United States, Japan, China, Germany

ENERGY OVERVIEW
Trade, Industry, and Energy Minister: Yim Chang-yol
Oil Consumption (1996E): 2.16 million barrels per day (b/d)
Crude Oil Refining Capacity (1/1/97): 2.2 million b/d
Natural Gas Consumption (1996E): 457 billion cubic feet (bcf)
Recoverable Coal Reserves (12/31/93): 202 million short tons
Coal Production (1996E): 5.5 million short tons
Coal Consumption (1996E): 57.6 million short tons
Coal Imports (1996E): 52.7 million short tons
Electric Generation Capacity (1/1/96): 32.2 gigawatts
Electricity Generation (1996E): 194.2 billion kilowatthours (Kwh)

ENVIRONMENT OVERVIEW
Minister of Environment: Yun Yo-Chun
Total Energy Consumption (1995E): 6.28 quadrillion Btu
Energy Consumption per Capita (1995E): 140.1 million Btu (versus 345.9 million Btu for the United States)
Energy-Related Carbon Emissions (1995E): 101.45 million metric tons (1.7% of world carbon emissions)
Carbon Emissions Per Capita (1995E): 2.3 metric tons (vs. 5.4 metric tons in the United States)
Major Environmental Issues: Air pollution in large cities; water pollution from the discharge of sewage and industrial effluents; drift net fishing.

ENERGY INDUSTRY
State Energy Companies: Korea Petroleum Development Co.; Daehan Oil Pipeline Corporation (DOPCO); Korea Electric Power Company (KEPCO); Korea Gas Corp.
Major Oil Companies (Private): SK Corp. (formerly Yukong); LG-Caltex (formerly Honam);. Ssangyong Oil ; Hanwha Oil, Hyundai Oil
Major Refineries (1/1/97 Capacity): Ulsan (759,500 b/d); Onsan (500,000 b/d); Yocheon (361,000 b/d); Daesan (310,000 b/d); Inchon (261,000 b/d)
Major Ports: Pusan, Inchon, Kunsan, Mokpo, Ulsan
Liquefied Natural Gas (LNG) Regasification Terminals: Pyongtaek, Inchon

Links to other sites:
1997 CIA World Factbook - South Korea
U.S. International Trade Administration, Country Commercial Guide - South Korea
U.S. Department of Energy's Office of Fossil Energy's International section - South Korea

The following links are provided solely as a service to our customers, and therefore should not be construed as advocating or reflecting any position of the Energy Information Administration (EIA) or the United States Government. In addition, EIA does not guarantee the content or accuracy of any information presented in linked sites.

Korea Electric Power Corporation
Korea Gas Corporation
Korea Petroleum Development Corporation
Embassy of the Republic of Korea in the United States
National Statistical Office for the Republic of Korea

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File last modified: November 5, 1997

Contact:

Lowell Feld
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