Since the oil price cap took effect, the government and the refining industry have been locked in an intense behind-the-scenes tug-of-war over how to cover losses, and they have failed to narrow differences over how to calculate oil product prices, which serve as the basis for loss compensation. On top of that, a claim that the compensation scope should include the drop in value of refiners' inventory assets is making both sides' math even more complicated.
On the 3rd, based on earnings estimates from the securities industry, first-quarter operating profit for Korea's four major refiners—SK Innovation, GS Caltex, S-Oil, and HD Hyundai Oilbank—is each expected to come in at around 1 trillion won. As Middle East tensions sent global oil prices surging, the prices of petroleum products made from crude purchased earlier at lower prices rose, temporarily boosting profits.
The Korea Energy Economics Institute (KEEI) expects global oil prices to fall if normal passage through the Strait of Hormuz becomes possible. Dubai crude, which traded around $80 per barrel in early March, jumped to around $150—roughly double—after mid-month. Recently, as the United States and Iran entered a cease-fire, it fell to about $105 on the day.
Refiners are concerned that stabilizing oil prices will worsen their results. If the war ends and the value of crude purchased at high prices during the conflict collapses, inventory valuation losses at refiners will grow. During settlement of account, inventory assets expected to be sold below cost or unsellable are immediately recognized as valuation losses. In other words, inventory asset valuation is calculated each quarter.
Unable to receive Middle Eastern crude under long-term contracts because of the Strait of Hormuz shutdown, refiners have been paying premiums to secure spot cargoes from alternative sources such as Saudi Arabia and the United States. Considering premiums tied to geopolitical risk and transport disruptions, some volumes are estimated to have been purchased at $140–$150 per barrel. The alternative crude volumes secured by domestic refiners in April–May total about 1.1 billion barrels.
Refiners' results in fact swing with global oil price moves. In the first quarter of 2022, when the Ukraine-Russia war broke out, the combined operating profit of Korea's four refiners was 4.7668 trillion won, and inventory-related gains accounted for 40% of the total. When the spiking oil price plunged, crude inventories became a drag, and in the fourth quarter all four companies saw profits tumble sharply.
With second-quarter results expected to deteriorate, the refining industry is cautiously suggesting that losses on inventory assets also need compensation. The government earlier pledged to cover losses for refiners under the oil price cap, and the argument is that refiners scrambled to procure expensive crude in the process of cooperating with government policy.
The four refiners have begun calculating their own loss amounts, but the actually compensable sums and payment timing have not been set. The government has earmarked 4.2 trillion won in contingency funds for compensating refiners' losses. Settlement will be done quarterly: after a refiner submits its self-calculated loss amount to the government, the government will finalize the figure following verification by the "maximum-price settlement committee."
The current sticking point is how to calculate unit costs for individual petroleum products such as gasoline and diesel. The government says it will compensate losses based on crude import costs, while the industry argues that, given the nature of petroleum products as joint outputs, measuring individual costs is impossible and compensation should be based on product prices. The Ministry of Trade, Industry and Resources says it will confirm losses after the refiner submits its own product cost calculations for review by the cost-calculation committee.
Experts expect the dispute over loss compensation between the government and refiners to continue for the time being. Accountant Park Dong-heum said at the Korea Petroleum Association (KPA) press academy on the 28th, "From here, global oil prices have only room to fall, and refiners are now in a position where they must treat the expensive crude they bought as a loss," adding, "If inventory asset valuation losses emerge, talk of compensation will come up on that front as well."