Sign Of the Times, South Korea Buying Oil Companies

Jim Brown
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This should be as clear as the back of your hand. Countries are on the prowl to buy up independent oil companies in order to add to reserve and protect future flows of oil when peak oil arrives.

The government of South Korea said it expected to spend $6.5 billion on buying oil companies in 2010. The goal is to add 50,000 to 100,000 bpd of crude to its daily production.

South Korea is the fifth biggest oil importer and the government has declared oil and food as a priority in coming years. The government said they were going head to head with the more powerful Chinese competitors in an effort to avoid being shut out of supplies in future years.

For several years I have been warning that China was buying up oil reserves not to just own more oil but to "control" that oil and keep it off the market once peak oil arrives. This has just recently become a major topic in the U.S. administration and it appears they have finally caught on to what is happening. Secretary of State Clinton has reportedly had several conversations with her Chinese counterparts about the U.S. concerns but to no avail.

Now South Korea is headed down the same path. When I first started warning about this several years ago I was criticized that oil was fungible. If China began buying oil from a new source then the previous buyers from that source would just get the same oil elsewhere. While I agree that oil is fungible to some extent within grades the argument does not hold water when China is specifically buying it to take it off the market. There is only so much oil to go around.

With production in 2010 expected to reach 86.3 mbpd the loss of a specific 1-mbpd field through a purchase by China means there is only 85.3 mbpd left for everyone else. As China continues to pickup another mbpd each year it is only going to hasten peak oil because they are taking current excess production off the market. They are not just gaining ownership so they can make a profit selling to someone else.

The fact that South Korea has picked up on this should be ringing alarm bells somewhere. Korea National Oil Company (KNOC) just purchased Canada's Harvest Trust in 2009 for $1.7 billion and assumption of $2.3 billion in long-term debt. That added 54,000 bpd to KNOC capacity.

Last month KNOC acquired Kazakhstan's Sumbe for $335 million and added another 20,000 bpd to their capacity. KNOC now pumps about 128,000 bpd and the immediate goal is to bump that production level to 300,000 bpd by 2012.

KNOC said it was planning on making two acquisitions in the first half of the year and it is looking at between 5-10 companies. Obviously they would not say which ones.

KNOC started drilling last year in the Bazian block in Kurdish administered northern Iraq. They are spending $1 billion in the project and the field is thought to contain 1.2 billion barrels.

The government said they were planning on spending $12 billion in 2010 to acquire energy and mineral assets around the world.

South Korea is funding these purchases by exporting nuclear power plants around the world. Kepco, the state power company just won a $20 billion contract to develop nuclear plants in the UAE. They are also building 18 new plants in South Korea. Seoul predicts they will export 80 nuclear reactors by 2030 and putting it in the top three nuclear exporters.

Should we worry when countries go on the hunt to buy up oil companies, oil reserves and drilling assets? Absolutely! This is a sign of the times that should be a red flag to anyone that can do basic math. Take a shrinking asset and start chipping away and locking up the pieces and eventually there is not enough to go around and that is when the oil wars will begin.

Jim Brown