South Korean refiners' bid for higher loss compensation faces hurdles

A significant gap has emerged between South Korea's oil refining companies and the government regarding the calculation of compensation for losses under the recently implemented price cap system for petroleum products. The industry is advocating for compensation to be based on Singapore's Mean of Platts Singapore (MOPS) export price, a benchmark they typically use for pricing.

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The industry wants the compensation standard to be set at a level close to Singapore's oil product export price (MOPS), but the government plans to calculate the compensation amount based on a standard amount that adds a reasonable profit margin to the cost.

However, the government intends to calculate compensation based on production costs plus an appropriate profit margin. This approach, outlined in a government notice, excludes the MOPS benchmark that refiners had pushed for until the final stages of the administrative notice period. Refiners argue that without the price cap, they could have sold products at prices close to MOPS, and they seek compensation for the difference.

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The industry argued that if there were no price cap system, they could have sold products at prices close to MOPS in the domestic market, and requested that the difference between MOPS and the price cap be recognized as a loss.

Further complicating the issue are several factors. The government's definition of 'cost' remains a point of contention, as it lists items like crude oil purchase prices, transportation, insurance, labor, and domestic distribution costs, but omits interest expenses, currency fluctuation losses, and inventory losses. The allocation of overall production costs across different refined products like gasoline, diesel, and kerosene also presents a challenge.

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While the industry's logic of viewing the difference between international and domestic prices as a loss has merit, it may be difficult to reflect this entirely as a loss considering government funds and performance.

The timing of recent developments has also weakened the refiners' negotiating position. The industry faces charges of collusion and price-fixing, and is anticipating substantial second-quarter operating profits, potentially in the trillions of won. This financial strength and the ongoing legal scrutiny diminish the industry's leverage in demanding compensation from the government. One industry source noted that while the refiners' logic of viewing the gap between international and domestic prices as a loss has merit, it may be difficult for the government to reflect this entirely as a loss, considering public funds and the companies' strong performance. Compensation is likely to be limited, focusing on domestic sales volumes of products subject to the price cap.

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It is not in line with the principle of loss compensation to use international prices as the standard, although international prices can be referenced when reflecting reasonable profits.