Liberalized Energy Sector Attracting Foreign Participation
| South Korea is the world’s fourth-largest oil importer, seventh-largest oil consumer, and second-largest importer of liquefied natural gas (LNG), as well as an importer of coal.. With no domestic oil reserves, South Korea must import all of its crude oil, and oil makes up the largest share of South Korea’s total energy consumption, though its share has been declining in recent years. |
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etroleum accounted for 56% of primary energy consumption in 2000, when South Korea consumed more than 2.1 million barrels a day (bbl/d) of oil, down from a high of nearly 2.3 million bbl/d in 1997.
Because of its reliance on oil imports, Korea has developed short- and long-term strategies to ensure its oil needs are met. In the short-term, it has developed a strategic petroleum reserve, managed by the state-owned Korea National Oil Corporation (KNOC), with reserves roughly equivalent to a 90-day supply. In early 2001, the import cover was expanded from 60 days, in part to meet the requirements for entry into the International Energy Agency (IEA). South Korea’s IEA membership was formally ratified in March 2002.
As a long-term strategy, KNOC is also pursuing equity stakes in oil and gas exploration around the world, and now has 18 overseas exploration and production projects in 13 countries. This includes four producing fields in Yemen, Argentina, Peru, and the North Sea, and four fields under development in Yemen, Venezuela, Libya, and Vietnam.
Concerning exploration, KNOC reported a new oil find in August 2001 at the Vung Tau site offshore from Vietnam, which is expected to be in production later this year, with estimated recoverable reserves of 420 million barrels. The South Korean government aims to have KNOC provide for 10% of the country’s oil needs by 2010.
As for the natural gas sector, South Korea relies on LNG for all its natural gas needs, and the monopoly Korea Gas Company (KOGAS) is planning to expand the country’s LNG receiving terminals and to build a new terminal in partnership with Mitsubishi Corporation and Pohang Iron and Steel Corporation. Limited domestic production of LNG should begin this year.
South Korea uses a combination of thermal (oil, gas, and coal), nuclear, and hydroelectric capacity to meet its demand for electric power. The government estimated in May 2002 that its electricity demand will rise at an average annual rate of 3.4% per year through 2015, and a dozen additional nuclear plants are planned by 2015. This is in part designed to reduce growth in carbon emissions, even though South Korea is not a party to the Kyoto Protocol on greenhouse gas emissions.
Because increasing total production was South Korea’s primary energy goal during its period of rapid industrialization, there was little focus on the development of renewable energy resources. However, given rising prices of imported fossil fuels and concerns about pollution, the government has developed a National Vision for Environmental Policies in the 21st Century that focuses on the importance of diversifying the energy mix. One goal is the promotion of green development schemes, such as increased usage of photovoltaic power and fuel cells.
Opportunities for investors abound in the increasingly liberalized energy sector. The government has announced plans to privatize several large state-owned energy enterprises, including KOGAS and the Korean Electric Power Corporation (KEPCO), which it plans to split into separate generation, transmission, and distribution units. The refining industry, which was completely deregulated in 1998, has already attracted significant foreign investment, and several foreign independent power producers are already operating successfully. |
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| Korea Western Power Co., Ltd. |
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orea Western Power Co., Ltd. (Western Power), established in 2001 as one of six power generation companies in Korea, now accounts for nearly 14% of Korea’s total electricity generating capacity. Western Power was spun off from the Korea Electric Power Corporation (KEPCO) as part of the government’s ongoing privatization program for the power sector, and now sells all of its electricity to KEPCO through the Korea Power Exchange (KPX). It is still 100% owned by KEPCO but operates independently as a separate entity, and it has achieved outstanding success since its foundation.
Western Power is involved in the development of electric power resources, power generation, and its related businesses. With an asset size of three trillion Korean Won, Western Power is ranked among Korea’s top 30 conglomerates, and has recently been introducing itself in international capital markets. Commenting on the success of Western Power’s recent Eurobond issuance, Western Power ’s President and CEO Young Cheol Lee says, “We are delighted about our progress, since we have been able to achieve such strong growth since 2001. We believe the market responded favorably to our strategy of approaching investors with an opportunity to diversify their portfolio, and this enables us to take full advantage of a low interest market.”
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“Korea Western Power will continue to lead the power generation industry in Korea.”
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The company operates five power plant complexes and is now in the process of completing a sixth one. These facilities include Taean Thermal Power Plant (6 x 500MW), Pyongtaek Thermal Power Plant (thermal 1,400 MW and combined cycle 480MW), Kunsan Thermal Power Plant (1 x 66MW), SeoInchon Combined Cycle Power Plant (1,800MW), Samrangjin Pumped Storage Power Plant (2 x 300MW) and Cheongsong Pumped Storage Power Plant, which is now under construction and set to be completed in 2006. Its capacity will be 2 x 300MW.
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Young Cheol Lee
President and CEO
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Lee points out that since the company’s establishment in 2001, Western Power has been successfully streamlining its operations and has developed a 10-year master plan that includes strategies for restructuring its capital. Western Power has already reduced its debt-to-equity ratio from 105.4% in 2001 to 80.2% in January 2003. The company is focusing on evolving from a state-run management system to a more competitive private market strategy and management system. “We are doing managerial renovation, aiming to depart from the public company system. We are also considering introdu-cing risk management because our fuel costs account for over 60% of total costs, and it is crucial to minimize the price volatility of fuels,” says Lee. He adds that the company emphasizes staff trai-ning and entrepreneurship for its 1,600 employees.
The company’s relentless effort to become a world class player has enabled Western Power to become the only power generation firm in Korea to have all of its power plant complexes gain ISO 9001 certification.
Currently in a strong growth phase and making significant efforts to penetrate international capital markets, Western Power is seeking investment partners for capital expenditure that includes construction of additional power plants. The first one will be Taean unit 7, 8 (2 x 500 MW). Construction is set to begin in November 2003 with completion set for June 2007 for the first phase, and March 2008 for the second phase, at a total cost of around 1 trillion Won. Ambitious projects like these offer great opportunities for US investors wishing to enter the Korean market.
As Lee points out, “According to the Korean government’s long-term plan and forecasts, the Korean power industry should see notable and steady growth at least until the year 2015. Demand for electricity in Korea has been growing at a compounded average growth rate of 6.4% per annum. To meet these demands, we are planning to construct additional facilities. We are also planning to begin investor-relations activities in the New York area.” The company expects to launch significant expansion programs in 2005-2006, and is seeking US $150 million to $200 million per year in foreign investment.
Lee, with over 30 years of experience in Korea’s power sector, personifies the excellent management techniques that make Western Power a reliable choice for investors. “We aim to formulate and develop a continuous profit generation base, reengineer an innovative management system, use our core competencies to differentiate ourselves from the competitors, maintain a customer-oriented system culture, and take advantage of optimal management resource allocation,” he says, outlining his long-term vision. He adds that the company’s key goals are to provide convenient and safe electricity to Korea’s citizens and enterprises, and that Western Power “makes every effort to be close to customers. We continuously communicate our IR information through our Internet homepage, and take various measures to adapt our customers’ opinions to the management of Western Power.”
Western Power has achieved very stable cash flows during the last fiscal year with 399 billion Won of operating income and 231 billion Won of net profit, thanks to steady revenues in cash from the Korea Electric Power Corporation. Among the six Korean generating companies, Western Power was the first to receive an international credit rating, of BBB from Standard & Poor’s, which was upgraded to BBB+ last September. Lee also anticipates receiving an A3 rating from Moody’s in the near future. These factors, combined with the steady growth of the Korean power sector, make Lee very confident about Western Power’s prospects.
The company is also open to working with US suppliers for the construction of thermal power plants and installation of related systems and equipment, hydro power plants and related systems and equipment. Western Power maintains a policy of treating foreign and domestic suppliers equally when it is making its decisions about awarding tenders.
Given the firm’s rapid expansion and strong growth prospects, and with Korea’s strategic Asian location and long history of ties with the US, Western Power represents an excellent opportunity for US companies in the power sector to broaden their reach and enter new markets. Western Power strictly adheres to procurement procedures based on transparency and fairness, and chooses successful bidders based on whether they meet general and specific requirements, and whether the bidder’s proposal is best suited to achieving Western Power’s goals. Western Power aims to establish long-term, mutually beneficial relationships with all its suppliers and partners and is particularly interested in working with US companies.
Pointing out the importance of maintaining good relations between the US and Korea, Lee says, “We are planning to make our company’s name better known internationally. In the process of resolving the North Korea nuclear issue, I believe that South Korea and the US will cooperate with each other and the alliance between two countries will become much stronger. Most Koreans are aware of the importance of the US, both economically and politically.”
In the next five years, Lee explains, the firm “will be the best power generation company in the Korean power generation sector, and could be listed not only on the local exchange, but also internationally. For incentives, we are considering giving our 1,600 employees stock options.” Since Western Power is operating according to western management procedures, US companies will find this world-class company makes a reliable, competent partner with excellent growth prospects.
Summing up Western Power’s accomplishments and plans for the future, Lee says, “Our company is moving away from the old state-run managerial system to more profit-oriented one, doing our best to make our employees enjoy the full benefits of our success. We strive to be the best.” Maintaining these high standards is a priority for ensuring the company’s prosperity, he says, adding, “I am convinced that Western Power will continue to lead the power generation industry in Korea. As our corporate mission statement says, ‘We contribute to society with the best energy generated in harmony with humans, technology, and the environment.’”
To investors in New York, Lee concludes, “Trust us, and you will be rewarded. Invest in Western Power!” |
Korea Western Power Co., Ltd. (back)
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167, Samseong, Gangnam-gu
Seoul 135-791, Korea
Tel.: 82-2-3456-7684
Fax: 82-2-3456-7689
www.westernpower.co.kr
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