Increase National Share up to 33% upon 'Daewang Whale' Success... Special Bonus for Investment Companies

Resolution of the Amendment to the Enforcement Decree of the
'Undersea Mineral Resources Development Act' at the State Council Meeting
Additional Royalties During High Oil Price Periods
1% Royalty Applied Initially and Payment Deferral Allowed to Reduce Corporate Burden

The national share ratio, or the maximum royalty rate, for the development project of deep-sea gas fields in the East Sea, including the 'Daewang Whale,' will be raised up to 33% if the project succeeds. To reduce the burden on investing companies, a 1% royalty rate will be applied during the early development stage, and investing companies will be able to receive a special bonus upon success.

The Ministry of Trade, Industry and Energy announced that the amendment to the Enforcement Decree of the Submarine Mineral Resources Development Act, which includes these details, was approved at the Cabinet meeting on the 24th. Previously, the ministry had announced the legislative notice of this amendment from October 4th to last month 13th.

West Capella arrived at the first drilling site on the 17th. (Photo by Korea National Oil Corporation)

An official from the ministry explained, "This amendment to the enforcement decree is aimed at restructuring the current royalty system, which was designed for small-scale oil and gas field development, to be suitable for large-scale development as well," adding, "It was promoted to facilitate appropriate profit distribution between the government and investing companies and to provide investing companies with a predictable investment environment."

First, the amendment raises the maximum royalty rate from the existing 12% to 33%, increasing the national share, and changes the existing royalty calculation method based solely on production volume to a system that reflects investment profitability. The concept of a 'ratio coefficient,' which divides net sales (sales revenue minus royalties) by investment costs, was also introduced. When this ratio coefficient is below 1.25, indicating low profitability, the royalty rate is set at 1%, whereas if the coefficient is 3 or higher, indicating high profitability, the maximum rate of 33% applies.

An 'additional royalty during high oil price periods' is also applied, imposing extra royalties when international oil prices rise significantly and the profits of development companies increase. The amendment allows for an additional 33% royalty on sales revenue when the international oil price for the year exceeds $85 per barrel and the oil and gas sales price surpasses 120% of the average sales price over the previous five years.

The amendment clarifies the legal basis for the special bonus system upon success while reducing the burden on investing companies. During the early development stage, the minimum royalty rate (1%) is applied to ease the initial burden on investing companies and promote the recovery of investment costs. Additionally, investing companies can reflect matters related to special bonuses upon success in the royalty contract through consultation with the government.

To alleviate the burden of large-scale restoration obligations incurred by investing companies at the end of the submarine royalty rights, a system was introduced allowing investing companies to accumulate restoration costs during the production period. From the point when cumulative production reaches 50% of the initially reported reserves, investing companies can annually accumulate restoration costs proportional to production volume, thereby reducing the future financial burden of fulfilling restoration obligations.

Procedures for deferring and installment payment of royalties were also established. To provide a stable investment environment for investing companies, if it is recognized that paying royalties is difficult due to natural disasters or significant crises in the project, the initial payment deferral can be up to 60 months, and if the reasons for deferral or installment payment persist, an additional deferral of up to 24 months is possible. The government plans to specify related details through amendments to enforcement rules early next year.

The amendment to the Enforcement Decree of the Submarine Mineral Resources Development Act, approved at the Cabinet meeting on this day, will take effect from the date of promulgation.