S-Oil says at least 20 more years to go for oil-powered cars

The penetration of electric and hydrogen-powered vehicles into the transportation industry will unlikely become a major threat to refiners over the next few decades, but oil demand is expected to continue to rise through 2035, said a senior executive of South Korea’s S-Oil Corp.   

Cho Young-il, senior vice president and chief financial officer of South Korea’s No. 3 refiner, said that refining margins will improve from next year, alongside a rebound in oil prices, which seem to have bottomed out this year. The recovering Chinese economy and the final stages of COVID-19 vaccine development will both boost oil demand.

“It may look like energy demand will abruptly switch (into electricity and hydrogen), but the world doesn’t work that way,” Cho told The Korea Economic Daily in a recent interview.

“It will take at least 20 years for EVs and hydrogen cars to completely replace oil-powered cars. Based on our most reliable information, petroleum demand will likely continue to rise through 2035,” the 40-year refinery veteran said.

The International Energy Agency estimated EVs will account for 3% of global car sales this year, up from 2.6% in 2019.

Cho joined S-Oil, then known as Ssangyong Oil, during his senior year at Seoul National University’s trade department in December 1981. He has worked in the accounting and financial departments of the refinery and in his current role for eight years.

“Even when I joined this company, it was said that petroleum would face depletion in 30 years. But now, 30 years from then, petroleum is being produced in its largest ever volume and nobody is talking about its depletion.”

S-Oil, 63.4% owned by Saudi Aramco Co., is one of South Korea’s four refiners that logged heavy losses between January and September of this year, hit by tumbling oil demand on the back of travel restrictions and lockdowns in an extended pandemic era. Its operating loss came to 1.2 trillion won in the first nine months to September.

The refinery industry is also wrestling with stricter environmental regulations aimed at reducing greenhouse gas emissions.

INVESTMENT PLAN REMAINS INTACT

But Cho dismissed concerns about the refining industry and quelled market speculation that the company might indefinitely postpone a plan to diversify into the petrochemical product market due to operating losses.

“We booked big losses, but it was due in large part to valuation losses on our stockpiles on the back of a drop in crude oil prices. It did not mean worsening cash flow."

S-Oil will move ahead with its plan to invest about 7 trillion won ($6.3 billion) to build a naphtha cracking center. At the facility to be constructed, it will produce basic petrochemicals such as ethylene and propylene, which are in turn used to make a wide range of products, including synthetic resins, synthetic rubber and medicine.

Naphtha, distilled from crude oil, is similar to gasoline and used as a petrochemical feedstock.

“The refining industry tends to go through periods of oversupply and shortage in cycles. It takes at least four to five years to see our investment decisions materialized," he said.

Looking back on his 40 years at S-Oil, Cho picked the 1997-98 Asian financial crisis as the company's most difficult period, due to skyrocketing exchange rates which ballooned its foreign currency debt.

"We always hold around 400 billion won ($360 million) in cash, equivalent to our one-month operating costs, in case of liquidity problems,” he said.

S-Oil was spun off from the now-defunct Ssangyong Group in the wake of the Asian financial crisis. Saudi Aramco, the government-owned oil company, acquired a 63.41% in S-Oil from another Korean company in 2015.

“Even if the COVID-19 vaccine development is delayed, we humans will learn to co-exist with the coronavirus. Travel and transportation will gradually recover, so will oil demand,” the CFO noted. 

S-Oil shares have gained 37% from a one-year low touched in late March to close at 66,500 on Monday. They underperformed a 76% rebound in the Kospi during the same period. 

Write to Jae-Kwang Ahn at ahnjk@hankyung.com
Yeonhee Kim edited this article.