SK Group Chmn. Chey's guts to venture into the sector pay off
SK Innovation has seen the exploration & production (E&P) business produce 71,000 barrels of oil equivalent per day in the second quarter of this year since the company made inroads into the E&P business 30 years ago, becoming the first private company to surpass the 70,000 barrel per day barrier.
The figure represents a nearly three-fold surge from 26,000 barrels of oil equivalent per day in 2008, and is owed to SK Innovation’s successful achievements from Peru’s Blocks 56 & 88, Vietnam’s Block 15-1, and Yemen’s LNG project.
The company’s E&P business accomplished the a feat of surpassing 1 trillion won in sales in 2011 and SK Innovation has become the biggest oil producer in the private sector.
Korea National Oil Corp. became the first public entity to produce 100,000 barrels of oil equivalent daily in 2001, but the state-invested company saw its production decline sharply under the current government. SK Innovation has emerged as the biggest producer in the private sector as other companies, primarily general trading companies, have huge output.
SK Innovation’s E&P business has been making strides since 2008. The sector chalked up 525.3 billion won in sales and 294.4 billion won in operating profit in 2008, and 576.9 billion won and 528.5 billion won in 2011 and 2012 in operating profit, respectively. The company’s E&P sector also logged 286.7 billion won in operating profit in the first half of 2013, and the operating profit for the whole of this year is projected to go beyond the 500 billion won mark for the third straight year.
Despite the sagging performance of SK’s refining business unit, the E&P business has the potential to emerge as the company’s possible future growth engine. In particular, the E&P sector raked in 262.7 billion won in sales in the second quarter of 2013, accounting for a meager 1.6 percent share of SK Innovation’s total sales, but posted 163.5 billion won in operating profit for the same period, shouldering a whopping 41.3 percent share of the company’s total operating profit.
SK Innovation’s E&P business dates back to April 1983, 30 years ago, when the company’s project to dig eight petroleum exploration wells in the Karimun Block in Indonesia in cooperation with U.S. petroleum developer Conoco ended in failure.
In February the following year, the company made another attempt: acquiring equity shares in the Maribu Block in North Yemen. SK Innovation’s dream of striking oil came true when the company introduced into Korea the crude oil it produced with its own hands in 1987. The company’s exploration and production, which took 40 months, was unprecedented at that time.
SK Innovation did not give up the E&P business even though the company was struggling with a financial crunch in the wake of the effects of the 1997 Asian financial crisis.
SK Innovation’s E&P business made a turning point for growth momentum as it was reorganized into the Resource & International (R&I) Business in 2004 at the behest of Chairman Chey, who gave much thought to specialization. At that time, SK Group Chairman Chey Tae-won stepped on the gas to expand the E&P business. He made first-hand observations of Peru’s Block 88, which has turned out to be one of the company’s success stories. This year, the chairman has moved forward to upgrade the E&P sector to the equivalent of CIC (company-in-company) status with the goal of making a successful business model of integrating E&P and M&A.
SK innovation is actively participating in 24 blocks and four LNG projects in 16 countries and has proven reserves of 603 million barrels of oil equivalent, which amounts to nine-months of Korea’s consumption.
An SK Innovation official said the company will maintain growth momentum to become the first private company to see its daily production surpass 100,000 barrels of oil equivalent.