South Korea has decided to add 1.82 million barrels of crude and oil products to its strategic oil reserves this year, taking advantage of lower oil prices, said a Ministry of Trade, Industry and Energy source.
The 2016 purchases will boost the country's total strategic oil reserves to 94.42 million barrels, given the current holding of 92.6 million barrels.
Last year, it had added 839,000 barrels to the strategic reserves.
South Korean plans to buy 1.67 million barrels of crude and 153,000 barrels of gasoline to add to the reserves this year, said the source.
"The 1.67 million barrels of crude would be Iraqi Basrah Light. We issued the first tender in March seeking part of the volume," he said.
State-run Korea National Oil Corp., which manages the country's strategic reserves, will receive the Iraqi crude in October at average first-quarter/third-quarter prices.
South Korea originally planned to buy around 800,000 barrels of crude and oil products to add to the strategic reserves in 2016, but decided to raise it to 1.82 million barrels as oil prices have been low, said the source.
In 2015, the country added just 839,000 barrels of crude oil and gasoline due to a cut in the state budget. The volume comprised 601,000 barrels of crude - all Iraqi Basrah Light - and 238,000 barrels of gasoline.
South Korea has allocated Won 90 billion ($78.6 million) for buying crude and oil products for the strategic reserves this year, up from Won 54.9 billion allocated in 2015.
Of the total Won 90 billion, Won 11.5 billion will come from the government for gasoline purchase and Won 78.5 billion from KNOC for crude purchase. This means the country expects to buy crude at $47/b, and gasoline at $75.2/b.
For the first two months of this year, South Korea paid an average $31.20/b for crude, down from an average $53.30/b paid for full year 2015 and from an average $52.07/b paid for January-February 2015.
BASRAH LIGHT CRUDE TO BE PURCHASED
The South Korean government's purchase of Iraqi Basrah Light for strategic reserves is in line with domestic refiners importing more Iraqi crude at lower prices.
Over January-March this year, South Korean refiners imported 36.39 million barrels of Iraqi crude, up 14.3% on year from 31.85 million barrels imported a year earlier, according to preliminary data released last week by the Korea Customs Service.
In 2015, South Korea imported a total 126.64 million barrels of Iraqi crude, up 78% from 2014, customs data showed.
The import price for Iraqi crude averaged $26.60/b in February, compared with an average import price of $31.69/b from the UAE, $33.57/b for Qatari crude and $29.07/b for Saudi crude.
"If crude prices remain weak for the rest of the year, we can buy more than the targeted volume with the budget," the source said.
Following the 2016 purchases, South Korea will have a total 81.07 million barrels of crude and 13.35 million barrels of oil products in its strategic reserves. It currently has 79.4 million barrels of crude and 13.2 million barrels of oil products.
"There is no problem in storing the additional [crude and oil products] this year because KNOC tanks can store additional 7.3 million barrels," said Moon Sang-min another official with the MOTIE.
ENOUGH STORAGE SPACE
KNOC operates nine state-run oil storage sites that can hold 146 million barrels of crude and oil products, of which 127.5 million barrels are for crude and 18.5 million barrels for oil products.
Of this 146 million barrels of storage space, strategic reserves account for 92.6 million barrels, 26.6 million barrels for foreign oil that is stored under joint storage agreements, and 5.9 million barrels for KNOC's trades, and 800,000 barrels for other commercial uses.
Storage space for 12.8 million barrels can not be used as the tanks are being renovated. This leaves space for 7.3 million barrels, which can be used for additional oil purchases.
The foreign oil, including 6 million barrels of crude from state-owned Abu Dhabi National Oil Company, is not owned by South Korea, but the country has first right to buy the oil in the event of an emergency.
It is not clear if South Korea will continue buying oil for its strategic reserves next year, said the MOTIE source.
The state budget for strategic reserves was halved last year due to the government's push to reduce outlays for state-owned firms and cut spending for energy reserves with President Park Geun-Hye's drive to spend more on welfare programs.
"The government allocated much of the budget this year to [buying oil for the] strategic reserves to take advantage of lower prices, but it is uncertain if the state budget will [allocate similar amount] next year," he said.
"But the government will try to further increase strategic reserves as its first priority is to ensure stable oil supplies," the source said.
The government also raised its target for 2025, seeking strategic oil reserves of 107 million barrels comprising 92 million barrels of crude and 15 million barrels of oil products - from 101 million barrels earlier.
South Korea, the world's fifth-largest crude importer, is vulnerable to rises in oil prices because it imports all its crude requirements.