IPIC offloads $2.2bn stake in Korean oil refinery

The Abu Dhabi Government fund decides to end its presence in the country following a lengthy legal battle.

An Abu Dhabi Government fund has agreed to sell a US$2.2 billion (Dh8.08bn) stake in a South Korean refinery after it lost a long legal battle with Hyundai Heavy Industries. The sale will end an 11-year presence that helped maintain South Korea's position as the second-largest market for the emirate's crude oil exports.

The International Petroleum Investment Company (IPIC) will sell its 70 per cent stake in Hyundai Oilbank, the country's fourth-largest refiner, to Hyundai Heavy Industries, according to a regulatory filing lodged yesterday with the Korea Financial Supervisory Service. Hyundai Heavy, which has waged a legal battle with IPIC for more than two years to wrest control of the stake, will now own 91.1 per cent of the refiner.

"Through the acquisition we will be able to secure a bridgehead in the energy business and seek synergies with our petrochemical plant business," according to a translation of the company's statement posted by Dow Jones. A spokesman for Hyundai Heavy yesterday declined to elaborate. IPIC officials did not respond to a request for comment. Hyundai Oilbank has a long-term contract to buy 70,000 barrels of oil per day (bpd) from Abu Dhabi and operates a refinery in the western city of Daesan with capacity to process 275,000 bpd. The company, together with a major refiner in Japan, has formed the core of IPIC's investments in petrochemicals and refining in east Asia.

Owning a stake in a Korean refinery gave IPIC a guaranteed market for Abu Dhabi crude and provided access to some of the most efficient production capacity in the region, said Tom Grieder, an east Asian energy analyst at IHS Global Insight. South Korea's refineries feed the domestic market and re-export oil products to other east Asian countries. "South Korea itself is not a massive growth potential market but it plays an important role because its refineries are quite complex and are very competitive," Mr Grieder said. "It does open supplies and marketing channels to other companies."

The sale to Hyundai Heavy is likely to encourage Abu Dhabi companies to look for alternative investments in refineries and oil storage in east Asia to guarantee market share, analysts said. A week ago, the Abu Dhabi National Oil Company (ADNOC) and Korea National Oil Corporation, a state-owned entity, signed a wide-ranging oil co-operation agreement that will see Abu Dhabi store some of its crude in Korea.

ADNOC's move comes just as Korea is investing in huge new storage capacity to become a major oil centre in east Asia, said Chang Jihak, the senior vice president for crude oil and trading at Hyundai Oilbank. "Asia has been experiencing a surge in demand for petroleum storage that could not be met by existing capacity," Mr Jihak said last week before the sale to Hyundai Heavy was announced. ADNOC last year signed an agreement with the Japanese government to store up to 3.6 million barrels of crude on the island of Okinawa.

With the $2.2bn cash windfall, IPIC may look to other parts of east Asia, including China, to make its next strategic investment, Mr Grieder said. "I wouldn't see this as a massive loss for IPIC," he said. "China's got much more growth potential, there's a large internal market and it could open up additional opportunities." IPIC was first ordered to sell the stake to Hyundai Heavy last November when it lost an international arbitration case at the Paris-based International Chamber of Commerce.

It rejected the decision, saying it was legally unenforceable. Last month, a Korean court in Seoul ordered IPIC to sell the stake. IPIC bought 50 per cent of Oilbank from Hyundai's parent company in 1999 and increased its stake in the refiner to 70 per cent in 2006. The legal battle stemmed from the fund's 2007 attempt to sell 35 per cent to Hyundai Heavy's rival, GS Group. Hyundai Heavy said the sale broke the terms of the original acquisition agreement and filed suit in early 2008.