The Democratic Party of Korea is reducing the budget for the East Sea deep-sea gas field project, known as the "whale project," leaving the Korea National Oil Corporation to struggle with funding strategies. The oil corporation plans to prioritize securing funds for the whale drilling project by adjusting the priorities for next year's projects. Issuing bonds and debentures is expected to further increase the financial burden on the oil corporation, which has been in a state of capital erosion for several years.
According to the industry on the 19th, the offshore drilling vessel West Capella is set to begin its excavation work for its first exploratory drill today to determine whether gas and oil are buried in the East Sea. It is reported that West Capella arrived in the drilling area of the promising whale structure, located about 50 kilometers east of Pohang, on the 17th.
The oil corporation plans to determine the presence of oil and gas by collecting rock samples from 1 kilometer below the seabed. They expect that securing samples through drilling will take about two months. Following sample analysis, the first exploratory drilling results are anticipated in the first half of next year. The issue is the expense. The financial requirement for the first exploratory drilling project of the whale project is around 100 billion won. Half of this was to be covered by the government budget, with the remainder planned to be financed by the oil corporation, but 98% of the government budget has been cut.
With the government budget support cut off, the oil corporation decided to fully bear the cost of the first exploratory drilling. The drilling expenses are paid on a monthly basis, and if the drilling work starts this month, expenses will commence from January. The oil corporation intends to hold a board meeting this year to prioritize the whale project, adjusting the budget allocation and ranking for each project. The annual budget for the oil corporation is approximately 5 trillion won, making it difficult to proceed with other delayed projects. The oil corporation engages in oil development, oil stockpiling, distribution structure improvement, and new energy projects.
The budget for the whale project has been set at 576.1 billion won over five years. If the project expenses increase due to additional drilling following the first exploratory drilling, the oil corporation is likely to issue bonds and debentures. Bonds and debentures issued by the public agency are guaranteed by the government, receiving the highest credit rating of AAA.
If procurement demand increases, it could disrupt the bond market supply and demand, similar to the situation with Korea Electric Power Corporation bonds in 2022. At that time, Korea Electric Power Corporation, which accumulated large deficits due to the effects of nuclear phase-out, issued over 27 trillion won in new bonds to secure operating funds, leading to an influx of market funds. As many AAA-rated bonds were issued, corporations with lower credit ratings had to bear higher financing costs.
If the oil corporation issues bonds, the financial structure, which has been in a state of capital erosion since 2020, could become even more vulnerable. As of the end of last year, the corporation's total borrowing fund was 15.4 trillion won, with a borrowing dependency rate of 84.6%. The annual interest is approximately 500 billion won.
The oil corporation is also considering attracting foreign investment. An official from the corporation noted, "The direction will likely be set if the first drilling results are positive."