[Exclusive] Oil Price Drops $10, Refiners' Tariffs 'Slightly Deferred' for 2 Months

No Review of Industry Demands Such as Crude Oil Tariff Exemption and Reduced Quota Tariffs
"Please Buy Even Strategic Reserves," Plea Made

[Image source=Yonhap News]

[Asia Economy Reporters Moon Chaeseok, Park Soyeon, Hwang Yoonju] As oil prices have plunged to the $10-per-barrel range for the first time in 18 years, putting the refining industry in crisis, the government has decided to extend the customs duty payment deadline for refining companies by two months. However, the industry says that a customs duty deferral alone is insufficient and is demanding stronger government measures.

According to the Ministry of Economy and Finance, Korea Customs Service, and the refining industry on the 31st, the government decided on the 27th to grant a two-month extension on the payment deadline for large refining companies that applied for the extension. According to Article 10 of the Customs Act, if a natural disaster occurs, the head of customs may extend the deadline by up to one year according to the law. According to the industry, the four major refiners?SK Energy (SK Innovation), GS Caltex, S-Oil, and Hyundai Oilbank?pay about 1 trillion won in customs duties.

A Ministry of Economy and Finance official said, "Due to the recent sharp decline in petroleum demand caused by the novel coronavirus disease (COVID-19) and the drop in oil prices, we consulted with the Korea Customs Service last week on related matters, and the Customs Service made the final decision." A Korea Customs Service official also said, "We concluded on the 27th to extend the payment deadline by two months," adding, "Any further extension will be decided based on the progression of COVID-19."

However, the government is not considering temporary measures such as duty-free import of crude oil, reduction of petroleum import surcharges, or reduction of tariff quotas, which the refining industry has continuously requested. The Ministry of Trade, Industry and Energy, the competent ministry, has not even discussed these matters with the Ministry of Economy and Finance, which manages tax revenue. A Ministry of Economy and Finance official said, "The Ministry of Trade, Industry and Energy has not yet formally requested inter-agency consultation." An industry insider said, "Since crude oil is entirely dependent on imports, a comprehensive review of crude oil import tariffs is necessary."

The government explained that the financial difficulties faced by the refining industry due to the drop in oil prices do not qualify for tariff quota reductions. A Ministry of Economy and Finance official said, "We judge that the current issue is the management difficulties of refining companies caused by low oil prices," adding, "It is difficult to apply the law because the conditions for applying tariff quotas stipulated in Article 7 of the Customs Act, such as stabilizing import prices and improving supply and demand conditions, are not met."

The industry appeals that if tax reform is difficult, the government should at least purchase Strategic Petroleum Reserves (SPR). An industry official lamented, "It would be better if the government actually bought reserves rather than just deferring customs duties." However, the government has only provided general responses regarding SPR acquisition. An official from the Ministry of Trade, Industry and Energy said, "We have been continuously purchasing SPR since the 1980s," adding, "Considering the recent fluctuating oil price situation, we may take this into account when purchasing SPR in the future."

The refining industry is suffering from ▲declining refining margins ▲sharp drop in gasoline and diesel demand ▲decreased sales of petroleum products and reduced marine fuel demand leading to lower plant operating rates.

According to the refining industry, the Singapore composite refining margin in the fourth week of March recorded minus $1.1 per barrel. This is the second consecutive week of negative margins following the previous week. Usually, the breakeven point is around $4 per barrel, so currently, the more they sell, the greater the losses. Although oil price crashes typically increase demand due to price effects, the COVID-19 crisis has caused a sharp drop in demand, putting refiners in an unprecedented situation. An industry insider said, "In my decades of experience in the refining industry, this is the first time I have witnessed a global decline in petroleum product demand."

The refining industry has been holding on by urgently dumping surplus domestic jet fuel into the regional market due to reduced demand caused by flight cancellations and reductions in air routes during the early stages of COVID-19. However, with gasoline and diesel demand also plummeting, the refining industry is facing a situation it cannot withstand on its own. S-Oil, a subsidiary of Aramco, is even considering voluntary retirement for the first time since its establishment.