As the government unveiled a plan to merge and reorganize energy public corporations, attention is focusing on how to resolve the 21 trillion won liability held by Korea National Oil Corporation (KNOC), which is in a state of complete capital impairment, and the more than 14 trillion won in accounts receivable at Korea Gas Corporation (KOGAS). The government says it will consider creating a subsidiary to manage bad asset after combining the two companies, but strong backlash is expected from shareholders because KOGAS is a listed public corporation.
According to the energy industry on the 4th, the government announced the "Plan to promote functional reform of public institutions" on the 3rd and decided to integrate the oil corporation and the gas corporation to establish a tentatively named Energy Resources Corporation. The government plans to transfer KNOC's oil stockpiling and oil exploration and development functions to the Energy Resources Corporation.
In the industry, there is an assessment that combining KNOC and KOGAS to increase scale would offer the advantage of boosting international bargaining power with oil-producing countries or global energy corporations. The government's position is to manage oil and natural gas in an integrated way to gain an edge in bidding for or negotiating overseas blocks.
Oil and natural gas are formed through the same process and in the same geologic settings, so it is common for them to be found together in the same oil or gas fields. Oil and natural gas are substances transformed under high heat and pressure from organic matter such as microorganisms and plankton that accumulated on the seabed or lakebed hundreds of millions of years ago. Light natural gas usually sits in the upper layer of an oil field, and crude oil generally lies in the middle layer.
Shin Hyun-don of Inha University said, "It is common for oil and natural gas to come from the same place, so many major oil companies run both businesses," and added, "The direction of managing oil and natural gas businesses under one roof is right."
The problem is that there is still no clear solution for how to improve the poor financial condition of KNOC and KOGAS.
KNOC has been in a state of complete capital impairment since 2020. As of the end of last year, KNOC's liability was 21.9733 trillion won, exceeding its asset (19.4442 trillion won). KNOC's dependence on borrowing fund rose to 88.82% last year from 76.4% in 2019, before the capital impairment.
The biggest factor behind KNOC's capital impairment was losses incurred during overseas resource development and mergers and acquisitions (M&A) of resource corporations. In the late 2000s, KNOC received large-scale capital injections from the government to conduct M&A of overseas oil development corporations such as Canada's Harvest and the U.K.'s Dana, or to acquire asset, but it covered most of the acquisition funds by issuing bonds and borrowing from financial institutions. As a result, it had to shoulder 400 billion to 500 billion won in interest every year.
On top of that, when international oil prices plunged during the COVID-19 pandemic in 2020, the cash generation capacity of the acquired oil development corporations deteriorated, resulting in impairment losses that reduced the book value of asset. In 2020 alone, recognizing impairment of tangible and intangible asset related to overseas development projects led to a net loss of 2.4 trillion won, eventually pushing the company into capital impairment.
KOGAS posted operating profit of 1.5853 trillion won in the second quarter this year, up 29% from a year earlier, marking an improvement in results. However, massive accounts receivable are weighing it down. Second-quarter accounts receivable were 14.1782 trillion won, up 462.2 billion won from the end of last year.
Vice Finance and Economy Minister Heo Jang said at a press briefing the day before, "We are aware of concerns about the integration of KNOC and KOGAS," adding, "Because the functions of energy public corporations are similar, we plan to proceed with integration in a way that maximizes synergy."
A bigger question is whether the government can win over KOGAS shareholders during the integration process. Although accounts receivable are an issue, from the perspective of KOGAS shareholders, who see the company posting a headline profit, acquiring KNOC, which is in a state of capital impairment, would not be beneficial.
More than half of KOGAS equity, 54.48%, is held by the government (26.15%), Korea Electric Power Corporation (20.47%), and local governments (7.86%). But foreign investors (10.44%) and general shareholders (28.61%) also hold 39.05%.
The main options floated for merging or reorganizing KOGAS and KNOC are a merger, an asset acquisition, or establishing a holding company. If KOGAS chooses to merge with KNOC, it would need to convene a shareholders' meeting and pass a special resolution. A merger is approved if at least two-thirds of shareholders present vote in favor and at least one-third of all issued shares vote in favor. In other words, the government's equity alone does not guarantee a merger.
A KOGAS official said, "At present, no integration method has been decided," adding, "The government will amend related laws such as the KOGAS Act and the KNOC Act and, after sufficient feedback from stakeholders including shareholders and labor unions, will flesh out the integration plan by the first half of 2027."
An official at the Ministry of Trade, Industry and Resources said, "We are reviewing a plan to resolve KNOC's liability issue by creating a separate entity," adding, "When the roadmap for public institution reform comes out in the first half of next year, detailed plans will be announced together."