South Korean state-owned enterprises will sell some of their energy assets both inside and outside Korea to shore up their balance sheets under pressure from the South Korean government.
The assets for sale include coal and uranium exploration projects by Korea Electric Power Corporation as well as oil field and liquefied natural gas development projects by Korea Gas Corporation. Offshore energy assets owned by other Korean SOEs, such as Korea National Oil Corporation and Korea Resources Corporation, may also be put up for sale.
In late 2011, the International Monetary Fund advised that countries must include the debt held by SOEs in their national debt statistics. In South Korea, this caused a spotlight to be put on the growing debt incurred by SOEs. SOEs were accused of handing out excessively-generous bonuses and other perks to their employees. In 2013, the new president of South Korea promised rapidly to reduce employee benefits and borrowing by SOEs.
By the end of 2013, South Korea’s public sector debt was approximately US$990 billion, consisting of roughly US$500 billion in national and local government debt and US$490 billion in SOE debt. The South Korean government originally targeted the 18 SOEs with the largest share of the debt by asking them to reduce their debts to around US$85 billion by 2017. This was viewed as reasonably achievable via sales of certain underperforming assets in combination with other cost-cutting measures.
However, the government recently revised its target substantially, and is now requiring the 18 SOEs to cut their debts to approximately US$43 billion by 2017. These 18 SOEs, including Korea Electric Power Corporation, Korea Gas Corporation and Korea National Oil Corporation, are now under greater pressure to unload assets quickly. In March 2014, the South Korean government approved the debt reduction plans submitted by a number of SOEs including KEPCO, KOGAS and KNOC while asking for additional cuts from others such as Korea Coal Corporation and Korea Water Resources Corporation.
While there are slightly conflicting reports out of Korea on precisely which assets are up for sale, some clarity is emerging.
What’s For Sale?
Currently, KEPCO’s debt-to-equity ratio is set to rise from 200% by 2017. Under the debt reduction plan it submitted, KEPCO pledged it would achieve a debt-to-equity ratio of no more than 150% by 2015 by slowing the growth of its debt and by selling some of its assets. Its CEO pledged to deleverage faster than the other South Korean SOEs, though he also insisted that KEPCO would continue to expand its overseas business, especially in the Middle East.
KEPCO has hired Barclays PLC to assist with the sale of certain offshore energy assets. The sale reportedly will include KEPCO’s stakes in two Indonesian coal mines. The first is a 20% stake in PT Bayan Resources Tbk, an Indonesian coal miner, valued at US$500 million that it acquired in 2010, along with agreements to buy two million metric tons of coal per year starting in 2012 and another seven million metric tons of coal a year starting in 2015. KEPCO may be looking to transfer these offtake agreements along with its stake in the company. The second is a 1.2% stake in PT Adaro Energy Tbk valued at around US$31 million. KEPCO had originally paid US$51 million in 2009 for a 1.5% stake along with three million metric tons of coal per year. Also for sale is KEPCO’s 40% interest in a Canadian uranium mining project known as the Waterbury Lake property in Canada’s Athabasca Basin. KEPCO co-owns this project with Denison Mines Corp.
KEPCO has other interests in Canadian mines that may end up for sale. It owns a 12.3% stake in Denison Mines following its purchase of a 19.9% stake in 2007 for C$75 million that included an offtake arrangement for a portion of the mine’s triuranium octoxide. It also owns an interest in the Cree East mine in Canada for uranium exploration. It may also sell up to 49% of its interest in the Bylong coal mine in Australia that it had acquired from Anglo American PLC in 2010.
KOGAS is the world’s top corporate buyer of liquefied natural gas or LNG. KOGAS is majority owned by the South Korean government, with the Ministry of Strategy and Finance holding 26.86%, KEPCO holding 24.46% and the National Pension Service holding 6.56%. According to the latest reports, the goal is to bring its debt-to-equity ratio down to 249% by the end of 2017. That ratio stood at around 400% in 2012.
The centerpiece of the KOGAS asset sale is a stake in the Akkas gas field in the western province of Anbar, Iraq, after the field begins commercial production in September 2015. The field is estimated to hold in reserve approximately 5.6 trillion cubic feet of gas, and is set to produce about 400,000 Mcf a day of gas for more than 13 years. KOGAS had signed this development deal in 2011 with the Iraqi government. KOGAS has not yet disclosed how much of its stake is for sale. According to sources within South Korea’s Ministry of Strategy and Finance, KOGAS is considering selling up to 49% of its interest. In addition, KOGAS has been looking to sell some or all of its 15% stake in Australia’s Gladstone LNG project for some time as well as a part of its 20% stake in Shell-led LNG Canada.
KOGAS currently holds interest in three other oil and gas fields in Iraq: a 20% interest in the Mansuriya gas field in the north, a 30% interest in the Badra oil and gas field in the west, and a 25% interest in the Aubair oil and gas field in the south. It also holds a 10% stake in the Area 4 gas block in Mozambique. So far, KOGAS has not indicated whether or not these interests are for sale.
Unlike KEPCO and KOGAS, KNOC indicated it had no intention of selling its offshore energy assets with the exception of “non-core” oil refineries in Canada. KNOC owns Harvest Operations, a Canadian oil and natural gas producer, which it bought in December 2009 for US$1.8 billion. In 2012, Harvest Operations reported a net loss of US$720 million. KNOC has also been developing offshore oil fields in Ankor in the US and in the Caspian Sea off Kazakhstan.
Additional asset sale plans may emerge from Korea Coal Corporation, Korea Water Resources Corporation and Korea Resources Corporation.
Foreign companies potentially interested in these South Korean SOE assets will need to observe carefully the back and forth between the SOEs and the South Korean government.
Some SOEs are resisting the pressure to deleverage quickly. They fear that committing to a massive asset sale over a short period would take away their bargaining power and force them to sell the assets at below-market prices. The senior management of the SOEs may also fear the scrutiny that will inevitably come once they achieve these debt reduction goals by 2017 since a new president (and possibly a new party) will come into power in early 2018. For example, a former official of the Ministry of Finance and Strategy came under fire politically and legally for having approved the sale of the Korean Exchange Bank in 2003 to Dallas-based Lone Star Fund, especially when the bank’s shares recovered in 2005.
The South Korean media is beginning to pick up on the danger of selling valuable assets too quickly as an outflow of national wealth, citing the sale of Korean car manufacturers and commercial banks to foreign buyers during the 1997 Asian financial crisis.
To address the fear that this would be a repeat of 1997, certain South Korean government officials have said the sales will favor South Korean buyers. It is not yet clear how this would be achieved. Korean law does not currently allow such preference with one possible exception: the Overseas Resources Development Business Act provides certain tax benefits and credit enhancements, such as loan guarantees, to Korean developers of offshore resource development projects. However, it is unclear whether these benefits will be available to Korean buyers of such projects since their primary purpose may be construed as simply seeking financial gain rather than developing offshore natural resources.
For now, interested foreign buyers should begin evaluating whether partnering with a Korean investor to bid jointly for the assets may provide them with an advantage, or at least with an opportunity to mitigate any potential disadvantage.
There will be ripple effects on all types of overseas activities by South Korean SOEs that are not directly related to reducing debt. For instance, their overseas staffs are likely to be reduced in the short run, handicapping their ability to develop and execute foreign deals. They may focus on overseas investments that do not require a lot of capital up front such as operation and maintenance of projects rather than outright development that may require greater upfront capital. Some SOEs may scrap altogether offshore projects that are in the early stages of development.
The Ministry of Finance and Strategy plans on reviewing whether the large SOEs are satisfactorily carrying out their debt reduction plans sometime in September 2014. At that point, the interested buyers are likely to get additional signals as to what assets are up for sale and how much pressure there is on the SOEs to unload these assets even at depressed prices.