Hyundia partners with Cosmo to build aromatic plants

When YT Seo joined Hyundai Oilbank (HDO) in December 2001 as CFO the company was experiencing severe liquidity problems and he was surprised to find that very few staff knew about its majority stakeholder.

That was nearly eight years ago and just two years before that Abu Dhabi’s IPIC had invested $500 mln in HDO and would eventually steer HDO out of its financial trouble.

By April 2002 Seo had been promoted to President and CEO of the company and set about changing the philosophy, making use of the assets and investments and launching innovations that would take the company to 2011 and beyond.

“At the onset of the investment 10 years ago, IPIC seemed to have positioned itself as a passive investor,” he says

“When I joined HDO as CFO in 2001, I was very surprised that employees were not well aware of IPIC as the majority shareholder of the company and its roles.

“More surprisingly, HDO was facing a serious plight of liquidity problems at that time. To cut a long story short, IPIC had proved itself as a reliable long-term shareholder that solely provided credit facilities and crude oils, which saved the company.”

Seo says that IPIC has also strongly endorsed the innovation and growth of the company along with full trust in its management. As a result, HDO's financial soundness and employees' competency have been enormously enhanced to the extent that HDO successfully launched a $2 bn facility upgrading project in 2007 with a target to complete it by 2011.

“Another noteworthy benefit is synergy among IPIC-invested companies. For instance, we and Cosmo Oil, a leading Japanese oil company invested in by IPIC, agreed to enter MOA (Memorandum of Agreement) this June in developing joint venture later on which will build aromatic plants,” adds Seo.

“I firmly believe that those two once-in-a-generation projects will transform the company into a market leader both at home and abroad and contribute a lot to the maximisation of our shareholders' value as well.

“Furthermore, I still see more to come in collaboration among IPIC portfolio companies. In conclusion, I am very pleased to add that our people are now heartily appreciating IPIC's tremendous contribution to the viability and the growth of our company past, present, and future.”

IPIC currently has a 70 per cent stake in Hyundai Oilbank and having IPIC as the controlling shareholder is one of the mainstays for the company to secure stable operational platform and reliable springboard to further growth.

“For instance, I acknowledge that as a long-term strategic investor, IPIC is willing to take temporary pains if HDO is in trouble. Also, IPIC's sovereign wealth credit worthiness and boldness to invest in good opportunities strengthen the company's growth-seeking mindset and activities. We want to and dare to grow further along with IPIC.”

Korea and the UAE have strong relationships in science and space technology as well as energy. One recent collaboration was the building of the first Emirati satellite, DubaiSat-1, which used Korean expertise and was launched in Kazakhstan on July 29.

Improving ties with the UAE

As well as being the CEO of Hyundai Oil, Seo is also Chairman of the Korea-United Arab Emirates Economic Co-operative Council and believes the ties can be further improved.

“I have witnessed how strong and mutually beneficial the relationship of two growing economic powerhouses in each promising regions of Asia Pacific and Middle East has grown,” he says.

“I am pleased to tell you that the trade amount between Korea and UAE has almost doubled from $8 billion in 2003 to $ 16 billion in 2008.

“But the relationship still has a lot to be fostered. I strongly believe such relation is essential to businesses in both countries where each one's strengths are complement to the other, in ever-increasing global competition.

“In this regard, the unique and strong relationship between IPIC and Hyundai Oilbank would be a very good example of long-term strategic and vertical integration in hydrocarbon sector between the oil producing country of UAE and the non-oil producing country of Korea at the age of high world oil prices.”

HDO now has 2,300 petrol stations across Korea, which it has been building up for a decade and Seo says he wants to do more to service new towns

Oil prices

In the past 12 months, however, oil prices have fluctuated from $150 last summer to just over $30 to the current $60 plus and Seo says this hits Hyundai Oilbank hard as it cannot pass extra costs onto customers.

“Fluctuating oil prices affect HDO's performance on two fronts,” he adds. “First, we cannot pass surging crude oil price, as obvious raw material costs rise, along to domestic consumers.

“The other front is that international petroleum products are not catching up crude oil prices, which hampers refining margin and we suffer from such industry-wide troubles.

“In response to those, our company implements rigorous risk management strategy as well as cost cut initiatives. In the meantime, current crude prices are not hazardous as much as last year's run-ups.

“However, I am concerned that future, including the second half of this year, may pose greater risk amid global recession as well as possibly another run-up of commodity prices along with inflationary pressure.”

HDO’s oil products have been exported mainly to Asian countries. Its largest traditional outlet used to be China which took about a 30 to 40 per cent portion in the past due to its close proximity to Korea.

Recently, however, HDO’s export markets have expanded into the USA, Australia and Europe mainly thanks to its product quality improvement and regional arbitrage trading.

Decreasing demand

With the recent economic crisis the demand for HDO’s products has decreased and Seo says he is not expecting a fast turnaround to the situation.

“Not only dwindling demand but also tightening credit situation impairs businesses,” adds Seo.

“ HDO is under distress on both sides where we see narrowing margins, decreasing sales, and less available liquidity.

“However, I believe we weather the storm so far with vigorous risk management and efficiency enhancement programs taken place for years. I do not base my strategy on bright future in 2010.

“Some say rebound in 2010 and I agree in a sense but it may be wishful thinking. As a CEO, I institute hard-nosed strategic approach and steer the operation on the basis of conservative outlook.”

During his nearly eight years at the helm of HDO, Seo has faced many challenges in relation to building the company into a market leader in Korea.

“One of my challenges has been developing and executing upgrading facilities that transform low-value fuel oil into value-added products like gasoline at the cost of a huge investment,” he says.

“We eventually overcame myriads of obstacles by finally setting "VISION 2012" and successfully launching the historic upgrade project in 2007. Now, we are facing the world economic crisis amid the project execution process but I am confident that we will overcome it again and complete them as scheduled.”

Renewable energy use

HDO has also had to adhere to extremely stringent oil product qualifications from the Korean government for domestic sales and other environmental regulations.

This has meant further investment to meet those guidelines and regulations and in 2009 HDO joined other local refiners to develop and use more renewable energy.

“Our environmental vision is to ensure sustainable development geared toward harmonising the environment and the economy,” says Seo.

“We conduct all our management activities in an eco-friendly manner, and take pride in environmental management.”

In 2007, as an integral part of this vision was HSO’s Hyundai adoption of an integrated system of Safety, Health and Environment (SHE) that enables the company to integrate and share information scattered across the company and manage it most efficiently.

But as for carbon free energy at HDO: that still seems a long way off.

“Our all-out and imminent efforts are placed to complete our historic facility upgrade projects, so it seems not a good time to mention the possibility of running a fresh new carbon free energy business for the company,” explains Seo.

“Personally, carbon free energy development economics will be closely related to the world oil prices; however, I do not expect any big threat against our business from the new energy in the near term.”