(Exclusive) ‘Drilling in Donghae Yeongil Bay Oil Field’ Exempted from Pre-Trial Assessment

An uncertain business with a success rate of around 20%
Judged by 1 drilling unit, not 5 drilling units
The business expenses do not exceed the budget criteria

The government has provisionally concluded that drilling projects related to the development of deep-sea oil and gas fields in the East Sea are not subject to preliminary feasibility studies. Since it is uncertain whether drilling projects in promising structures (structures with potential oil and gas reserves) will lead to actual development, it is reasonable to consider the project as one (KRW 100 billion) drilling unit rather than five (KRW 500 billion). The preliminary feasibility study for public institutions’ projects is for total project costs of KRW 200 billion or more.

According to the Ministry of Strategy and Finance, the Ministry of Trade, Industry and Energy, and other related ministries on the 18th, the government is discussing the fact that the drilling project in the waters off Pohang Bay and Yeongil Bay in Gyeongbuk Province is not subject to a preliminary feasibility study. Government officials said, “Korea National Oil Corporation’s oil field development investment project does not exceed the total project cost of 200 billion won, which is the preliminary feasibility study standard for public institutions, and it is not a new project as it has been ongoing since the 2000s, so it is not subject to a financial preliminary feasibility study.”

The public institution feasibility study is a procedure to investigate the feasibility of large-scale new investment projects and to secure the financial soundness of public institutions. If the total project cost is 200 billion won or more, and the sum of the national financial support amount and public institution burden is 100 billion won or more, it is subject to investigation. Although it costs more than 100 billion won to drill a single borehole, it is judged not to be subject to investigation because it falls short of the 200 billion won total project cost standard for public feasibility studies.

The government plans to drill at least five wells to confirm actual oil and gas. However, given the high level of uncertainty, it is reasonable to divide the project into drilling units. Resources may be discovered immediately after the first drilling and development and production may begin. However, since the exploration success rate is around 20%, there is a greater chance of failure.

A government official said, “If drilling, development, and production are carried out as a single package, tens of trillions of won or more will be required, so it is right to receive a preliminary feasibility study all at once before drilling,” adding, “However, since drilling has a higher chance of failure, there is no guarantee that it will definitely enter the development and production stages.” The official added, “There is uncertainty as to whether drilling will end after one round.” This is because the Korea National Oil Corporation and ActGeo have only confirmed the possibility of resource deposits using their own technology, and there may be various variables after the exploratory drilling process of directly digging the seafloor.

The government also believes that it is difficult to view the drilling project as a new project, and therefore difficult to view it as a subject of a general feasibility study, which is a financial feasibility study. The project is a government-funded project for oil field development conducted by the Korea National Oil Corporation, and government investment in exploration has been ongoing since the 2000s. Another government official explained, “Government investment in resource exploration has been ongoing for a long time, so it is difficult to view it as a new project.” The financial feasibility study targets new projects with a total project cost of 50 billion won or more and a government financial support of 30 billion won or more.

Even if a feasibility study is conducted, there is a realistic judgment that it is difficult to secure the accuracy of economic analysis. In fact, in 2020, the government conducted a feasibility study for the exploration of the central and eastern gas fields near the East Sea Gas Field Block 6-1. This is because it met the criteria for public institutions’ feasibility studies (total project cost of KRW 100 billion or more, agency/government burden of KRW 50 billion or more) until 2022. However, in the study, the Korea Development Institute (KDI) concluded that an economic study would be difficult.

Another government official explained, “Even during the feasibility study for the gas field exploration project that ended production in 2021, KDI concluded at the time that it would be difficult to conduct an economic analysis,” adding, “This is because it was practically difficult to judge the economic feasibility compared to the costs incurred in a situation where it was impossible to predict whether the exploration would succeed or fail.” Choi Sang-mok, Deputy Prime Minister and Minister of Strategy and Finance, said at the National Assembly’s Planning and Finance Committee held on the 8th, “Looking at past cases, each drilling case was viewed as a new project,” and “We will look at (the progress of the feasibility study, etc.) to the extent that can be reasonably explained by looking at past cases.”

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