Does your jurisdiction have an established upstream oil and gas industry? What are the current production levels and what are the oil and gas reserve levels?
State-owned entities such as Korea National Oil Corporation (“KNOC”) and Korea Gas Corporation (“KOGAS”) and private sector entities such as POSCO International, SK Innovation and GS Energy are the participants in upstream oil and gas operations in Korea and abroad.
In 1998, an offshore natural gas field, Donghae-1, was discovered southeast of Ulsan, Korea, and production began in 2004. In 2014, another natural gas field, Donghae-2, was discovered near Donghae-1. As of December 2019, daily production from Donghae-1 and Donghae-2 was 29 million cubic feet of natural gas and 463 barrels of condensates. Currently, as the gas production from Donghae-1 and Donghae-2 ended on December 31, 2021, the closure and land restoration of the gas wells is in process. These gas fields are planned to be used as an underground storage facility for carbon dioxide (“CO2”) and promoted as a demonstration project for Carbon Capture Utilization and Storage (“CCUS”). According to the plan, a total of 12 million tons of CO2 will be stored for 30 years, equivalent to 400,000 tons per year.
In 1978, Korea and Japan entered into a treaty for joint development over approximately 82,000 square kilometres, stretching south of Korea’s Jeju Island. The area is called the “Joint Development Zone” or “Block 7,” estimated to have oil and gas reserves of approximately 7.2 billion tons. However, no significant discovery has been made, as Japan has not been cooperative in developing Block 7. Recently, the Korean government granted a concession right to KNOC to explore and exploit Block 7.
How are rights to explore and exploit oil and gas resources granted? Please provide a brief overview of the structure of the regulatory regime for upstream oil and gas. Is the regime the same for both onshore and offshore?
The Mining Industry Act (the “Mining Act”) governs the onshore upstream oil & gas exploration and exploitation, and the Submarine Mineral Resources Development Act (the “SRDA”) governs the offshore upstream oil & gas exploration and exploitation. All exploration and exploitation of petroleum within the territory of Korea have been confined to offshore areas, so the SRDA has been the main regulatory regime that governs upstream oil and gas activities. However, the regulatory regimes for onshore and offshore oil and gas exploration and production are similar, as the Mining Act prescribes that the SRDA applies mutatis mutandis to onshore oil and gas upstream activities.
The Korean government has the sole ownership of mining rights (under the Mining Act) and submarine mining rights (under the SRDA) for hydrocarbon. The (submarine) mining right includes both an “exploration right,” the right to explore certain minerals within a mining area, and an “exploitation right,” the right to extract and acquire certain minerals.
While the Korean government enjoys the sole ownership of onshore and offshore mining rights, both Acts provide for (submarine) mining concession rights of hydrocarbon. “(Submarine) mining concession right” means the right granted to a third party to explore for and extract certain minerals in the mining area granted by the Korean government, being the holder of the (submarine) mining rights.
Under the SRDA, submarine mining concession right for exploration shall be granted only to a person deemed to possess sufficient financial resources, technical capability and equipment to reasonably carry out exploration of hydrocarbon. In case the exploration leads to a commercial discovery of hydrocarbon, the concessionaire of the submarine mining right for exploration can apply for submarine mining concession right for exploitation by reporting the discovery to the Minister of Trade, Industry and Energy (MoTIE). After confirming that the applicant has reasonably performed the exploration, that the discovery has economic value, and that the applicant has the capacity to carry out the exploitation, MoTIE grants the submarine mining concession right for exploitation.
What are the key features of the licence/production sharing contract/concession/other pursuant to which oil and gas companies undertake oil and gas exploration and exploitation?
Although the statutory regime on licensing/concession is silent on the mechanism of the concession agreement, private sector explorers enter into concession agreements with KNOC, which acts both as the representative of the Korean government and the concessionaire itself.
The concessionaire of the submarine mining right is obligated to (i) pay concession fees to the MoTIE if it exploits petroleum or natural gas and (ii) submit to the MoTIE any research materials on exploration and exploitation, daily drilling reports, monthly geological survey, annual report on the progress of obtaining research materials and the progress of the submarine mining (in terms of financial and technical aspects).
Any private entity entering into concession agreements with KNOC may also have to pay training fees for local technicians and royalties, among other things.
Are there any unconventional hydrocarbon resources (such as shale gas) being exploited and is there a separate regulatory regime for unconventionals?
No unconventional hydrocarbon resources, including shale gas, have been exploited in Korea. However, such will be considered “minerals” under the current Mining Act and the SRDA.
Who are the key regulators for the upstream oil and gas industry?
MoTIE, KNOC, Korea Gas Safety Corporation (“KGSC”) and other government agencies in charge of granting the license to use public water (in case of submarine mining) regulate the upstream oil and gas industry in Korea. So far, activities for hydrocarbon exploration and exploitation have been confined to offshore areas within Korean territory.
Is the government directly involved in the upstream oil and gas industry? Is there a government-owned oil and gas company?
While the Korean government has the sole ownership of the onshore and offshore mining rights, the actual exploration and exploitation are done through concessions granted to qualified (submarine) mining concession holders.
KNOC is the flagship government-owned upstream oil and gas company in Korea and is engaged in foreign oil and gas projects by itself and through a number of foreign subsidiaries. KOGAS, being partially owned by the Korean government, is also engaged in gas projects overseas.
Are there any special requirements for or restrictions on participation in the upstream oil and gas industry by foreign oil and gas companies?
Foreign oil and gas companies are not subject to special requirements for or restrictions on participation in the upstream oil and gas industry, except for the requirement that only business entities may hold concession rights.
What are the key features of the environmental and health and safety regime that applies to upstream oil and gas activities?
Pursuant to the Environmental Impact Assessment Act, an environmental impact assessment shall be administered if minerals (including hydrocarbon) are exploited from rivers, mountainous districts or shores larger than as specified under the applicable laws and regulations. Also, the Mining Act requires an applicant for the exploitation right to acquire various environment-related licenses and permits. Such licenses and permits include those for occupancy and use of public waters, development activities, conversion of mountainous districts and occupying and using rivers.
The Mining Damage Prevention and Restoration Act was enacted to prevent upstream oil and gas activities from causing environmental pollution and damage. It obligates the mining concession right holders to implement a mining damage prevention plan that includes (i) prevention of mining damages that occurred or are expected to occur in active, inactive, or abandoned mines; (ii) restoration of deteriorated mining areas; and (iii) removal and disposal of facilities, materials, and others that are not in use. Moreover, for the offshore exploitation of hydrocarbon, the Act on Conservation and Utilization of the Marine Environment applies to prevent marine pollution and deterioration of marine ecosystem, obligating the polluter to restore, at the polluter’s own expense, the polluted and/or deteriorated marine environment.
The Mining Safety Act is applicable to environmental, health and safety issues relating to upstream oil and gas activities. It requires a mining concession right holder to obtain approval before the installation of mining facilities and to receive regular inspections from the MoTIE thereafter. In addition, a mining concession right holder must implement safety measures and provide safety education to protect the health and safety of mining workers and prevent environmental pollution and damage. The mining concession right holder also has to appoint personnel for mining safety management and comply with the safety regulation established in accordance with the Mining Safety Technology Standard.
How does the government derive value from oil and gas resources (royalties/production sharing/taxes)? Are there any special tax deductions or incentives offered?
As a mining right holder, the Korean government imposes concession fees when granting a concession right to a third party.
According to the SRDA and the Restriction on Special Taxation Act, a submarine mining concession right holder are exempt from customs duties and value-added tax on the machinery, equipment, and materials that the person imports by December 31, 2022, for submarine minerals exploration or exploitation.
Are there any restrictions on export, local content obligations or domestic supply obligations?
While Korea does not have any general restrictions on export, local content obligations or domestic supply obligations, hydrocarbon imports and exports may be subject to government control measures when its supply is interrupted or disturbed or in case of emergency.
Does the regulatory regime include any specific decommissioning obligations?
Pursuant to the Mining Act and the SRDA, the concessionaire shall restore the mining area to its original state upon the expiration of the concession right.
What is the regulatory regime that applies to the construction and operation of offshore and onshore oil and gas pipelines?
The SRDA, the Mining Safety Act, and the Petroleum Mining Security Rules regulate the construction and operation of offshore oil and gas pipelines in Korea.
The Oil Pipeline Safety Control Act regulates the construction and operation of onshore oil pipelines by providing special rules for obtaining authorizations and for expropriation.
The KOGAS Act regulates the construction and operation of the onshore gas pipeline constructed by KOGAS and provides special rules for obtaining authorizations and for expropriation. These special rules mandate most of the onshore gas pipeline be owned and maintained by KOGAS. Once constructed, a gas pipeline is maintained pursuant to the Urban Gas Business Act (the “UGBA”) and the internal rules of KOGAS.
Any person other than KOGAS may install gas pipelines but only after acquiring land use rights and authorizations pursuant to the UGBA. Such gas pipelines constructed thereafter shall also be maintained pursuant to the UGBA and the internal rules of KOGAS since such gas pipelines are connected to KOGAS-owned gas pipelines.
What is the regulatory regime that applies to LNG liquefaction and LNG receiving terminals? Are there any such terminals in your jurisdiction?
Regulations applicable to gas supply facilities and gas consumption facilities under the UGBA may apply to LNG liquefaction as well. A regulation specifically tailored to LNG liquefaction is expected to be introduced when there are a sufficient number of business participants in LNG liquefaction in Korea.
In Korea, there are five LNG-receiving terminals operated by KOGAS (those in Pyeongtaek, Incheon, Tongyeong, Samcheok and Jeju) and two LNG-receiving terminals operated by private entities (those in Gwangyang and Boryeong). Additional LNG-receiving terminal projects are those currently underway in Dangjin, Yeosu, Ulsan and Tongyeong, and these projects are well advanced at present and are already reflected in the government’s “14th Basic Plan for Long-term Natural Gas Supply and Demand” (the “14th Plan”; details to which are further listed out in Response 18 below). Several other business entities are also in the course of preparing for additional terminal construction.
Principal regulations governing LNG-receiving terminals are the UGBA and the High-Pressure Gas Safety Control Act (the “HGSA”). Pursuant to these regulations, only a few types of entities may construct LNG-receiving terminals, and the entities include authorized gas business entities, direct importers for self-consumption, natural gas suppliers for ships (i.e., LNG bunkering) and companies leasing LNG-receiving terminals to one of the foregoing entities.
What is the regulatory regime that applies to gas storage (not LNG)? Are there any gas storage facilities in your jurisdiction?
The UGBA regulates natural gas in general. The Safety Control and Business of Liquified Petroleum Gas Act (the “LPG Act”) regulates liquefied petroleum gas, and the Petroleum and Alternative Fuel Business Act (the “PAFA”) provides a few regulations on natural gas and petroleum gas.
In addition, according to the Economic Promotion and Safety Control of Hydrogen Economy Act (the “Hydrogen Economy Act”), which took effect on February 2021, hydrogen storage and distribution facilities will be regulated under the Hydrogen Economy Act as well as the HGSA.
The HGSA regulates high-pressure gas matters. There are more than 100 high-pressure gas storages in Seoul alone, which are subject to the HGSA. In addition, the LPG Act applies to liquefied petroleum gas storage.
These high-pressure gas storages store not only petroleum gas and natural gas but also other gas, including ammonia, helium, nitrogen, and carbon dioxide.
Is there a gas transmission and distribution system in your jurisdiction? How is gas distribution and transmission infrastructure owned and regulated? Is there a third party access regime?
Natural gas is mainly supplied through pipeline networks. KOGAS supplies approximately 38 million tons per year through its main pipeline, with a length of 5,027 km and 416 supply management offices. Some of the dedicated pipes connecting the main pipe with the end users are installed and managed by urban gas business entities or end users. The natural gas business has been split into a wholesale and a retail business, with the wholesale business monopolized by KOGAS. Urban gas business entities, being private sector companies, purchase natural gas from KOGAS and supply it to end-users for residential, heating, and business purposes.
KOGAS has long been monopolizing the import of natural gas. Although in recent years, companies that use natural gas for power generation and industrial use or bunkering services have been allowed to directly import natural gas, they are still subject to relevant regulations that have the effect of restricting competition against KOGAS.
Distribution of natural gas can be done through gas stations, tank lorries, ships, etc., in addition to the pipeline networks.
Local gas pipelines should be connected to the main pipeline network of KOGAS and can only be installed after a relevant license is obtained. Natural gas imports are subject to the aforementioned regulations, and domestic distribution of natural gas is strictly regulated.
Petroleum gas is liquefied and supplied through gas stations or tank lorries. Liquefied petroleum gas can be supplied after obtaining authorization pursuant to PAFA. Compared to the natural gas market, participating in the petroleum gas market is easier.
Since the government’s “Road Map to a Korean Hydrogen Economy” (the “Hydrogen Roadmap”) was announced in January 2019, various activities have been carried out in Korea to produce, store, distribute and utilize hydrogen, and infrastructure for transportation and distribution of liquefied hydrogen (“LH2”) or pressurized hydrogen is rapidly expanding. For example, in the case of hydrogen fueling stations, there were only 14 stations in 2018, but as of September 30, 2022, 198 stations are under operation.
Is there a competitive and privatised downstream gas market or is gas supplied to end-customers by one or more incumbent/government-owned suppliers? Can customers choose their supplier?
KOGAS retains a de facto monopoly in the domestic LNG wholesale market and is the only entity allowed to distribute natural gas imported from overseas. Some companies are also allowed to import natural gas, but only for their own respective uses or for bunkering services.
Only the businesses that acquired special authorization pursuant to the UGBA can receive natural gas from KOGAS and distribute it to the general public. End users cannot choose a natural gas supplier as these businesses monopolize the supply within a certain geographic region.
On the other hand, privatized downstream petroleum gas market is well-established, with domestic refineries and solvent producers comprising petroleum refineries.
As a reference, through the 14th Plan, the government plans to promote alternate fuel contracts that can supply temporarily converted fuel from natural gas to LPG to achieve stable gas supply and demand.
How is the downstream gas market regulated?
The UGBA, the PAFA and the HGSA are the principal legislations regulating the downstream natural gas market, whereas the LPG Act (instead of the UGBA) applies to the downstream petroleum gas market.
The natural gas business is heavily regulated, with KOGAS and a few private business entities monopolizing the import and the domestic distribution, as previously noted.
Have there been any significant recent changes in government policy and regulation in relation to the oil and gas industry?
There has been a recent effort to promote competition in the natural gas sector. Law has changed to allow companies using natural gas for power generation, industrial use or bunkering services to directly import natural gas, bypassing KOGAS.
In line with such change, KOGAS can now set a so-called “individual price” for a specific power plant, different from the price of natural gas supplied to the general public. In other words, KOGAS had a single price for all power plants by averaging all LNG prices in the contracts executed by KOGAS. With such change, different prices may apply for different power plants based on the individual contract executed by KOGAS for a specific power plant.
On April 2021, the government announced the 14th Plan and unveiled the natural gas supply and demand plan from 2021 to 2034. Some significant changes are as follows: (i) including new market demands related to ship bunkering, hydrogen production and revitalization of the cold and heat industry into the future supply and demand prospect, (ii) introducing a control order to the UGBA against private natural gas importers in the event of a national supply crisis and (iii) planning to raise the mandatory stockpile of natural gas.
What key challenges have been identified by the government and/or industry in relation to your jurisdiction's oil and gas industry? In this context, has the aftermath of the Covid-19 pandemic and/or Russia's invasion of Ukraine had an impact on the oil and gas industry and if so, how has the government and/or industry responded to it?
Presidential elections were held in Korea on March 9, 2022, and President Yoon Suk-Yeol of the People Power Party won the election. The Yoon Administration officially abandoned the preceding Moon Administration’s nuclear power phase-out policy and will pursue the implementation of the “2050 Net Zero” policy based on an efficient and practical mix of renewables and nuclear power (indicating that the Moon Administration’s objective of increasing the share of renewables to 60% by 2050 would be substantially reduced. Furthermore, under the Yoon Administration, the future of the coal-to-gas replacement policy is somewhat unclear since #21 of the 110 Major Policy Initiatives (announced by the Yoon Administration) simply states that both coal-and-gas-fired plants would be reduced in a “rational” manner. The foregoing changes will be reflected in “the 10th Basic Plan for Power Supply and Demand” (expected to be announced in December 2022).
As demand for domestic petroleum products declined due to the outbreak of COVID-19, crude oil imports dropped dramatically by 8.6% (47 million barrels) and petroleum product exports dropped by 4.3% on a year-on-year basis. To cope with the worsening market condition, Korean oil refining companies are expected to continue expanding their business portfolio in the non-refining sector by increasing market share in the EV battery business and investing in olefin production plants.
However, it is important to note the soaring energy prices in conjunction with the Russo-Ukrainian War, especially the LNG market. As the dramatic decrease in the supply of PNG to Europe following the Russo-Ukrainian War resulted in Europe’s large-scale purchase of LNG from the U.S., LNG spot price has rallied in Northeast Asia. However, the decrease in economic activities resulting from China’s zero-Covid policy appears to be acting as a noteworthy downward pressure on LNG pricing. Regardless, the price of LNG remains significantly high. The Korean government is attempting to counter such a price surge by cutting oil/fuel taxes. However, various domestic LNG power plants that directly import LNG from overseas still suffer from the rising price. Furthermore, KEPCO has been significantly burdened by the LNG price rally and its inability to transfer costs to consumers under a restrictive government guidance, given that LNG generation constitutes approximately 20% of electricity generated in Korea.
As noted below, important long-term changes are expected to occur following the revitalization of carbon neutrality and the hydrogen economy. The Korean government intends to regulate the natural gas sector since natural gas is an energy source that emits carbon. However, given that natural gas, combined with carbon capture technology, serves as a bridge energy source that would transform the hydrogen economy, domestic demand hereafter is expected to be maintained to a certain level, as predicted in the 14th Plan.
Are there any policies or regulatory requirements relating to the oil and gas industry which reflect/implement the global trend towards the low-carbon energy transition? In particular, are there any (i) requirements for the oil and gas industry to reduce their carbon impact; and/or (ii) strategies or proposals relating to (a) the production of hydrogen; or (b) the development of carbon capture and storage facilities?
Korea has enacted various laws, such as the “Framework Act on Low Carbon, Green Growth,” the “Act on the Allocation and Trading of Greenhouse-gas Emission Permits” and the “Act on the Promotion of the Development, Use and Diffusion of New and Renewable Energy,” to reduce fossil fuel reliance, promote use and supply of renewable energy, foster research and development of green technology and to expand carbon sink to reduce greenhouse-gas emissions.
In particular, Korea has implemented the Korean Emissions Trading Scheme (K-ETS) since 2015. As the mining sector is subject to K-ETS, a mining concession right holder may be designated as a business entity eligible for allocation if it has emitted more than 125,000tCO2-eq in the last three (3) years or owns a place of business that emits more than 25,000tCO2-eq annually. Please note that a total of five (5) companies in the mining sector were designated as business entities eligible for allocation during the second commitment period (2018-2020). However, no upstream oil and gas company has been designated as a business entity eligible for allocation.
Meanwhile, Korea currently implements the Renewable Portfolio Standard in accordance with the Renewable Energy Act, which provides that anyone who owns a facility that generates more than 500,000kW must generate at least 10% of its electricity by utilizing renewable energy. If such a power generation business does not generate electricity using renewable energy, then the power generation business has to purchase Renewable Energy Certificates from other power generation businesses. Such policies encourage the use of renewable energy, which could reduce the demand for hydrocarbon.
The Hydrogen Economy Promotion And Hydrogen Safety Management Act (the “Hydrogen Economy Act”) and the Basic Act on Carbon Neutral and Green Growth in response to Climate Crisis (the “Carbon Neutral Basic Act”), taking effect from September 2022, have been enacted, and Korea is moving very actively in such direction. Carbon emissions should be reduced, and efforts are being made to move toward the hydrogen economy. In this regard, the Korean government announced the Carbon-Neutral Scenarios in October 2021, aimed at reducing greenhouse gas emissions by 40% by 2030 compared to those in 2018. In addition, two scenarios (Proposal A & Proposal B) were presented in line with the goal of making net greenhouse gas emissions zero (so-called “net-zero”) by 2050. Proposal A prohibits LNG power generation in its entirety, and Proposal B prohibits coal power generation but allows LNG power generation, provided that carbon capture is integrated therein. In addition, the Hydrogen Economy Act and the Hydrogen Roadmap (dated January 2019) are seeking to produce and distribute clean hydrogen (and hydrogen compounds such as ammonia), including (i) blue hydrogen that captures, utilizes and/or stores CO2 accompanied by reforming natural gas and (ii) green hydrogen produced through water electrolysis using renewable energy, and are in the course of constructing hydrogen distribution facilities, equipped with the world’s largest number of hydrogen fuel cell vehicles in terms of utilization (approximately 16,000 hydrogen vehicles are in operation in Korea as of August 2021). A domestic manufacturer has signed a contract to export 1,600 10-ton hydrogen trucks to Switzerland by 2025. In order to facilitate clean hydrogen distribution, preparation for the introduction of the CHPS (Clean Hydrogen Portfolio Standards) system is underway and will start to operate in early 2023, and a separate rate system is being drawn up for LNG used in hydrogen production. Furthermore, in respect of the utilization of hydrogen, a method of burning natural gas and hydrogen together at the LNG power plant is being actively introduced, and a method of utilizing ammonia is also being studied.
Attempts are being made in regard to carbon capture, but seemingly there is no progress crystallized yet. As mentioned earlier, there is a movement towards implementing underground carbon storage at the Donghae gas fields and finding ways to utilize captured carbon for the production of methanol, carbon, dry ice and plastic. The government announced on June 2021 “A Roadmap to Technology Innovation of Carbon Capture and Utilization (CCU),” further indicating its plan to invest approximately USD 100 million annually in R&D for carbon capture.
On November 9, 2022, the 5th Hydrogen Economy Council was held for the first time in one (1) year, the first to take place since the Presidential election in May 2022. The resolutions of the council succeed most of the hydrogen policies from the preceding administration. In particular, the resolutions of the council revealed its plan to promote the enactment of the Hydrogen Business Act (tentative title) to regulate the installers of hydrogen pipelines and other supply facilities, hydrogen sellers, etc. (for reference, the abovementioned Hydrogen Economy Act was promulgated to overhaul the overall hydrogen system, such as provisions on clean hydrogen, etc.).
South Korea: Energy – Oil & Gas
This country-specific Q&A provides an overview of Energy – Oil & Gas laws and regulations applicable in South Korea.
Does your jurisdiction have an established upstream oil and gas industry? What are the current production levels and what are the oil and gas reserve levels?
How are rights to explore and exploit oil and gas resources granted? Please provide a brief overview of the structure of the regulatory regime for upstream oil and gas. Is the regime the same for both onshore and offshore?
What are the key features of the licence/production sharing contract/concession/other pursuant to which oil and gas companies undertake oil and gas exploration and exploitation?
Are there any unconventional hydrocarbon resources (such as shale gas) being exploited and is there a separate regulatory regime for unconventionals?
Who are the key regulators for the upstream oil and gas industry?
Is the government directly involved in the upstream oil and gas industry? Is there a government-owned oil and gas company?
Are there any special requirements for or restrictions on participation in the upstream oil and gas industry by foreign oil and gas companies?
What are the key features of the environmental and health and safety regime that applies to upstream oil and gas activities?
How does the government derive value from oil and gas resources (royalties/production sharing/taxes)? Are there any special tax deductions or incentives offered?
Are there any restrictions on export, local content obligations or domestic supply obligations?
Does the regulatory regime include any specific decommissioning obligations?
What is the regulatory regime that applies to the construction and operation of offshore and onshore oil and gas pipelines?
What is the regulatory regime that applies to LNG liquefaction and LNG receiving terminals? Are there any such terminals in your jurisdiction?
What is the regulatory regime that applies to gas storage (not LNG)? Are there any gas storage facilities in your jurisdiction?
Is there a gas transmission and distribution system in your jurisdiction? How is gas distribution and transmission infrastructure owned and regulated? Is there a third party access regime?
Is there a competitive and privatised downstream gas market or is gas supplied to end-customers by one or more incumbent/government-owned suppliers? Can customers choose their supplier?
How is the downstream gas market regulated?
Have there been any significant recent changes in government policy and regulation in relation to the oil and gas industry?
What key challenges have been identified by the government and/or industry in relation to your jurisdiction's oil and gas industry? In this context, has the aftermath of the Covid-19 pandemic and/or Russia's invasion of Ukraine had an impact on the oil and gas industry and if so, how has the government and/or industry responded to it?
Are there any policies or regulatory requirements relating to the oil and gas industry which reflect/implement the global trend towards the low-carbon energy transition? In particular, are there any (i) requirements for the oil and gas industry to reduce their carbon impact; and/or (ii) strategies or proposals relating to (a) the production of hydrogen; or (b) the development of carbon capture and storage facilities?