[Exclusive] Government: "East Sea Oil Drilling Not Subject to Preliminary Feasibility Study"

Uncertain Project with Around 20% Success Rate
Evaluation Based on Single Drilling Instead of Five Attempts
Project Cost Does Not Exceed Preliminary Feasibility Criteria

The government has tentatively concluded that the drilling project related to the development of deep-sea oil and gas fields in the East Sea does not fall under the scope of a preliminary feasibility study (PFS). Since it is uncertain whether the drilling project on promising structures (structures with potential oil and gas deposits) will actually lead to development, it is considered reasonable to view the project in drilling units of one time (100 billion KRW) rather than five times (500 billion KRW). The PFS for public institutions applies to projects with a total cost of 200 billion KRW or more.

According to related ministries on the 18th, the government is discussing that the drilling project off Yeongil Bay in Pohang, Gyeongbuk, does not fall under the PFS target. Government officials stated, "The Korea National Oil Corporation's oil field development investment project does not exceed the public institution PFS threshold of 200 billion KRW in total project cost, and since it has been ongoing since the 2000s and is not a new project, it is considered not subject to the fiscal PFS."

The public institution PFS is a procedure conducted to investigate the feasibility of large-scale new investment projects to ensure the financial soundness of public institutions. It applies to projects with a total cost of 200 billion KRW or more, and where the sum of national fiscal support and public institution contributions is 100 billion KRW or more. Although drilling a single well costs more than 100 billion KRW, it does not meet the 200 billion KRW total project cost criterion for public PFS, so it is judged not to be subject to investigation.

The government plans to drill at least five wells to confirm the presence of oil and gas. However, considering the high uncertainty, it is deemed reasonable to view the project in units of one drilling operation. Resources may be discovered immediately after the first drilling, leading to development and production. However, since the exploration success rate is around 20%, the possibility of failure is higher.

A government official said, "If drilling, development, and production are conducted as a single package, tens of trillions of won in funds would be required, so it would be appropriate to undergo a PFS all at once before drilling. However, since drilling has a higher chance of failure, there is no guarantee that the project will necessarily proceed to development and production stages." The official added, "There is uncertainty about whether to terminate after one drilling operation." This judgment is based on the fact that Korea National Oil Corporation and Act Geo have only confirmed the possibility of resource deposits using their own technology, and there may be various variables after the actual exploratory drilling process that involves digging the seabed.

The government also considers it difficult to view the drilling project as a new project, making it unlikely to be subject to the general fiscal PFS. The project is a government investment in oil field development conducted by the Korea National Oil Corporation, and government investments related to exploration have been steadily made since the 2000s. Another government official explained, "Since government investments related to resource exploration have been steadily ongoing for a long time, it is difficult to consider this a new project." The fiscal PFS applies to new projects with a total cost of 50 billion KRW or more and national fiscal support of 30 billion KRW or more.

There is also a practical judgment that even if a PFS is conducted, it is difficult to ensure the accuracy of economic analysis. In fact, in 2020, the government conducted a PFS for exploration in the central and eastern areas of the East Sea Gas Field 6-1 block. Until 2022, it met the public institution PFS criteria (total project cost of 100 billion KRW or more, institution and government burden of 50 billion KRW or more). However, in that investigation, the Korea Development Institute (KDI) concluded that economic analysis was difficult.

Another government official explained, "During the PFS process for the gas field exploration project that ended production in 2021, KDI also concluded that economic analysis was difficult at that time. This is because it is practically difficult to assess economic feasibility against the costs incurred when it is unpredictable whether exploration will succeed or fail." On the 8th, at the National Assembly Planning and Finance Committee, Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance, stated, "Looking at past cases, each drilling was considered a new project," and added, "We will proceed with PFS within a reasonable scope based on past cases."