Korean oil refiners forced to keep plants rolling despite pandemic losses

South Korean oil refiners are facing heavy losses due to the coronavirus pandemic, but are unable to shut down their plants without causing further problems.

According to a domestic oil refinery unit SK Innovation, the company is unable to close its facilities despite a mounting operating loss as oil must keep flowing through the pipes.

“Car manufacturers can simply halt their assembly lines and resume operation again, but that’s not the case for refineries. When oil heated up in high temperature stops inside the pipes, it becomes solid and sticky, and has to be scraped and wiped out,” said a SK Innovation official.

The refinery industry has been hit hard by the plunging international oil prices as well as low demand for petroleum products upon the coronavirus outbreak, pulling down the refinery margin and creating heavy inventory losses.

“I have spent 10 years in this business but I have never seen worse. Refining margins are already negative, so SK Innovation has cut the operating ratio of Ulsan plant by 10 to 15 percent. Only the end of the COVID-19 epidemic will increase demand,” the official said.

Hyundai Oilbank, another domestic refiner, has entered emergency management since Tuesday, slashing the pay of executives by 20 percent.

“While executives are returning some of their wages as a symbolic sign, the company plans to save more than 50 billion won ($40.6 million) by cutting costs,” a Hyundai Oilbank official said.

“Hyundai Oilbank has entered emergency management to take preemptive measures against the serious business situation as refining margins have declined significantly due to a simultaneous fall in oil and product prices followed by shrinking demand during the crisis.”

However, according to industry sources, cutting labor costs is unlikely to prove effective, as wages only account for around 2 percent of sales in the refinery business.

Other refiners are taking similar steps to offset the impact of the virus, with S-Oil adjusting its budget. Meanwhile, an official from GS Caltex predicted a similar measure to take place, such as initiating emergency management.

Domestic refineries’ struggle is expected to worsen as Chinese refineries are beginning to resume operations, according to industry sources.

By Kim Byung-wook (kbw@heraldcorp.com)