South Korea Questions Value of Canadian Resource Sector

In August, the former CEO of state-owned Korea National Oil Corporation (KNOC) went on trial for breach of trust in connection with the 2009 acquisition of Canadian oil and gas company Harvest Operations and its affiliate North Atlantic Refining Limited (NARL). Harvest has oil and gas extraction projects in Alberta, Saskatchewan and British Columbia, while NARL operated an oil refinery in Newfoundland.

It is alleged that this acquisition resulted in a substantial loss of public funds and that KNOC’s former CEO pushed for the Harvest purchase despite knowing that its assets were over-valued.

The controversy surrounding the Harvest acquisition, and similar overseas investments, is causing the South Korean government and public to scrutinize the way the country uses state funds to purchase foreign energy and mining assets. The outcome of these debates may lead to important changes in South Korea’s appetite for future investment in Canada’s natural resource sector.

Resource Diplomacy as Official Government Policy

For many natural resource ‘insecure’ countries in Asia, using state funds to acquire foreign energy and mining assets is a way to both secure steady supplies, and mitigate the high costs, of natural resource imports. South Korea is one such country. With no domestic oil and gas reserves, and a 97 per cent import dependency for fossil fuels, ‘resource diplomacy’ – the practice of investing and acquiring energy and mining assets in resource-rich countries as part of diplomatic efforts – has been conducted by South Korea since the late 1970s.

Under President Lee Myung-Bak’s administration (2008-2013), the practice became the centerpiece of South Korea’s foreign policy. Of the C$38 billion invested in overseas oil, gas and mining assets since 1984, C$35 billion was invested during Lee’s tenure.

The global commodity boom was a key driver of this policy. For much of the last decade, demand for raw materials by emerging economies (especially those in Asia) drove up the prices of oil and industrial commodities, making foreign oil, gas and mineral extraction projects highly desirable investment opportunities.

During this period, South Korea invested in a wide range of commodity projects around the world through its state-owned enterprises (SOEs), including KNOC (state oil corporation), KOGAS (state gas corporation) and KORES (state mining and resources corporation).

For example, KORES acquired a 27.5 per cent stake in the Ambatovy nickel and cobalt mine in Madagascar in 2006, and a 30 per cent stake (as part of consortium) in the copper-zinc-cobalt-manganese Boleo mine in Mexico in 2008. The consortium later bailed out the troubled Boleo project in 2012, resulting in a majority share for KORES. KNOC purchased Ankor offshore oil field in the Gulf of Mexico in 2008, while KOGAS acquired a stake in Gladstone Santos LNG project in Australia in 2010.

Due to its wealth of energy assets, Canada was an obvious destination for South Korean investment. KOGAS, for example, has made significant investments in the Canadian oil and gas sector, including a 20 per cent stake (later reduced to 15 per cent) in the LNG Canada export terminal and joint ventures with Encana in three gas fields in the Horn River and Montney formations in British Columbia.

KORES has invested in mining projects outside of Canada that are co-owned by Canadian companies. For example, both the Ambatovy and Boleo mines are co-owned by Canadian mining companies and KORES has a 30 per cent stake in Vancouver-based Capstone Mining Corp.’s Santo Domingo iron-copper mine in Chile.

Heavy Financial Losses Lead to Soul Searching

Since peaking in February 2011, commodity prices have fallen as a result of oversupply and weakening global demand, according to the World Bank.As a result, foreign energy and mining assets purchased by South Korean SOEs since 2008 are estimated to have lost around $C14 billion, which has lead to a heated public debate in South Korea about SOE investment in foreign commodity assets.

At the official level, the administration of President Park Geun-hye set up a special committee in December 2014 to investigate the former President Lee’s spending on resource diplomacy.

Certainly there is a strong political incentive for the current administration to critique the record of the previous President, but this issue is not just about elite-level politics. Media coverage has been intense, and a civic organization has also been created to push for more information about purchases of foreign energy and mining assets under the former President.

While South Korean SOEs have been losing money on assets around the world, the acquisition of Canadian company Harvest is at the forefront of the resource diplomacy controversy. KNOC purchased Harvest at a high price of C$4.1 billion (C$1.8 billion plus assumption of C$2.3 billion in debt) after initially offering to pay C$2.7 billion. The deal included the purchase of Harvest’s oil refining subsidiary, NARL.

The high price reflected the optimism for petroleum assets in the high oil price environment. However, especially since oil prices began to fall in mid 2014, some members of the South Korean government and the public have expressed concern that KNOC overpaid for these assets. These allegations intensified when KNOC sold NARL in 2014 for just 10 per cent of its original purchase price.

KOGAS’s investments in Canadian gas fields have also been incurring losses, due in part to low Canadian gas prices. According to Korean MP Kim Je-Nam, 62 per cent of KOGAS’s original investment in Canadian oil and gas projects had been lost as of January 2015.


The government of South Korea must now decide whether to make the additional C$51.4-billion investment required to keep all of South Korea’s foreign energy and mining assets (not just those in Canada) afloat.

While it is unclear how the current administration will proceed, even before the Harvest scandal President Park had effectively abandoned the term ‘resource diplomacy’ in her administration’s policies. Instead, she has been focusing on fostering a ‘creative economy’ that emphasizes using information technology and human capital to increase energy efficiency and develop alternative energy technology such as renewable and nuclear energy.

This change in policy does not mean that South Korean SOEs will stop investing in foreign energy and mining assets. However, the South Korean government is levelling greater scrutiny on the foreign activities of KOGAS, KNOC and KORES, including those in Canada. After President Park was elected, the government initiated a review of foreign oil and gas operations owned by Korea’s SOEs with the goal of increasing profitability. KOGAS subsequently sold five per cent of its stake in LNG Canada and Harvest sold NARL.

South Korean SOEs are also likely to be more price-sensitive in future acquisitions. The era when Asian SOEs would pay a premium for natural resource extraction projects has come to an end, not only due to changing government policies but also due to low commodity prices and weakening demand.

Looking to the immediate future, the South Korean public’s appetite for investing in Canada’s natural resource sector may be reduced due to the widespread negative attention to the poor performance of Canadian assets in the South Korean media and in political discourse. As a consequence, Canadian natural resource companies and Canadian governments need to be ready to counter skepticism and to more forcefully convince South Korean counterparts, and even the public, of the benefits of investing in Canada’s natural resource sector.