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On Nov. 14, the Korea National Oil Company (KNOC) announced it had completed the sale of NARL, a subsidiary of Canadian oil developer Harvest, to an American bank. The sale netted KNOC 33.8 billion won (US$30.68 million), not even 3% of the exorbitant 1.24 trillion won (US$1.13 billion) it paid, along with a premium for management rights, when it acquired the company in Dec. 2009.

Concerns were raised about the project from its very inception. Around the signing of the contract, the Calgary Herald, a Canadian daily newspaper, ran an article titled, “What were the Koreans thinking?” The article asked why in the world the KNOC would want to buy such a troubled company, even paying a 47% premium.

The minutes of a KNOC board meeting in Oct. 2009, around the time when such concerns were being raised in Canada, show the KNOC management assuring directors that there was no need to worry and painting a rosy picture about the investment’s prospects. Why did this sort of thing happen?

KNOC non-permanent director: “What’s the point of buying 15% and then selling it again? It looks like the government may have been a little more concerned with policy goals than profitability.”

KNOC president: “Of course, profitability is the priority. . . As for government policy, they tell us to reduce the company debt, but they keep telling us to invest more as well.”

KNOC executive: “They’re telling us to increase our share of independent development.”

This exchange between directors and managers at a KNOC board meeting on June 29, 2010, concerned a decision to invest in a stake of Australia’s GLNG gas fields. The focus of the conversation was less on profitability or economic feasibility, and more on the “government policy aspect” and “achieving autonomous development targets” - an all-too-familiar refrain for the Lee administration’s resource development policy. In Dec. 2010, the administration released its fourth overseas resource development framework plan, which set a goal of raising the autonomous development ratio for crude oil and gas from 9.0% in 2009 to 30% in 2019.

The ratio, which divides resource yields developed directly overseas by domestic consumption quantities, is an indicator of energy independence. But it can also be raised when public energy enterprises or private companies own overseas companies or shares - regardless of whether the resources actually make it into the country. Achievement of ratio targets was also used as a metric to assess public enterprise performance. Those assessments were life-of-death matters for energy corporations that were being shifted to market-based models under the Lee administration (2008-2013).

This has also been the basis for criticisms from the New Politics Alliance for Democracy’s fact-finding committee on the Lee administration’s resource diplomacy, which has called the development efforts a “fiction” and a “waste of national resources.” The committee‘s claim is that public energy corporations simply invested blindly to pad their ratio numbers, without doing the necessary due diligence.

“They were doing exploration that takes 20 to 30 years, and they figured they weren’t going to produce results within [Lee’s] five-year term, so they just bought or invested in mines that other companies had been developing, without checking first,” said Hanshin University economics professor Ko Ki-young.

“They were hoping to hit the jackpot, and they ended up going bust,” Ko added.

The Lee administration’s resource development tinkering happened at a time when the countries of the world were racing to securing their own resources. China in particular was emerging as a major player in the resource development market. But some critics charge that the Lee administration‘s version was focused too much on publicity for Seoul - a strategy that has proven costly.

In a March 2012, a deeply emotive Lee announced in a radio address that an oil field development deal had been signed with the United Arab Emirates.

“We’ve got our oil field,” Lee said at the time.

Meanwhile, his older brother, former lawmaker Lee Sang-deuk, had visited Bolivia five times since 2009 for a lithium development deal. “Never tell the media before the deal is done,” the older Lee wrote in his book “Manage Your Resources.” But his and his brother’s resource diplomacy efforts were heavily promoted in agency press reports and various media.

The results have been disappointing to say the least. The UAE oil field project, with an investment of more than 80 billion won (US$72.5 million) behind it, has an estimated rate of return of just 9%. The lithium project hasn’t even gotten off the ground.

“Of the 45 projects pushed as part of the president’s ‘diplomacy’ efforts, just three or four are under way now,” said lawmaker Noh Young-min, who heads the NPAD’s fact-finding committee.

A source at one public energy corporation seemed aggrieved over the “politicized” demands for a parliamentary investigation into the resource development efforts.

“Most of the 300-plus overseas projects pushed by the Lee administration are still ongoing,” the source argued, speaking on condition of anonymity. “You’ve got to take the long view.”

A former energy executive echoed the complaint in a telephone interview.

“If this is how it’s going to be, then we just can’t do any more resource development at all,” the executive said.

But the estimated 41 trillion won (US$37.1 billion) invested in overseas resource development by the Lee administration amounts to over 70% of the 57 trillion won (US$51.6 billion) total invested by South Korea since 1977. The project failures are turning into red ink for the public energy corporations - and the taxpayers are footing the bill. The NPAD committee is currently claiming that just 5 trillion won (US$4.5 billion) of the 41 trillion won has been recovered, with another 31 trillion won (US$28.1 billion) to come in later.

By Lee Seung-joon, staff reporter

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