Freight rates for VLCCs from the U.S. to Asia hit $80 million; SK Energy fails to secure vessels despite aggressive bids.
Middle East dependency remains at 62.3%; government subsidies insufficient to offset surging procurement costs.
South Korea’s refining industry, which has been aggressively working to reduce its reliance on Middle Eastern crude, is being stymied by a surge in maritime freight rates. The cost to charter a Very Large Crude Carrier (VLCC) from the United States to Asia has climbed more than fivefold since the beginning of the year. SK Energy, a major domestic refiner, recently failed to secure a vessel even after offering between $76 million and $77 million. As firms look to diversify their import channels away from the Middle East, escalating procurement costs have emerged as a significant new fiscal burden.
According to Reuters on the 12th (local time), ministers from OPEC and non-OPEC oil-producing nations meeting on the sidelines of the International Energy Forum (IEF) and the World Petroleum Congress (WPC) in Saudi Arabia noted that transport and insurance costs for crude and petroleum products have now exceeded one-third of the total cargo value.
The producing nations called for greater security along maritime trade routes, warning that rising logistics costs are imposing a heavy burden on both producers and consumers, thereby exacerbating inflationary pressures on the global economy.
Transportation Costs Hit $40 per Barrel; SK Energy Struggles to Secure Tankers
Data from shipping brokerage Simpson Spence Young (SSY) shows that the freight rate for a VLCC transporting 2 million barrels of crude from the U.S. Gulf Coast to China reached $80 million in November. This represents a more than fivefold increase compared to the $10 million to $15 million seen early this year, effectively adding roughly $40 per barrel in transportation costs alone.
Operational disruptions in the Strait of Hormuz have led to increased ship-to-ship (STS) transfers in the Gulf of Oman, keeping tankers tied up for extended periods. Meanwhile, rising demand for transporting oil from regions like the U.S. to Asia has further tightened the supply of available tonnage.
Industry sources report that both SK Energy and global commodity trader Trafigura attempted to charter VLCCs in the $76 million to $77 million range, but failed to reach agreements. Japanese refiner Cosmo Oil, however, provisionally secured a VLCC at $81 million in mid-November to ship U.S. crude.
As shipping costs soar to $40 per barrel, the price competitiveness of U.S. crude in the Asian market is rapidly eroding.
June Goh, a senior crude market analyst at Sparta Commodities, stated that VLCC freight rates on routes from the U.S. Gulf Coast to Asia and from Fujairah to the East have surged by more than 300% since mid-August. This is primarily due to a shortage of available vessels driven by increased STS transfers—a workaround for the Strait of Hormuz—and a rise in trans-Atlantic shipments to Asia.
Middle East Dependency at 62.3%: Diversification Comes at a Price
Statistics from the Korea National Oil Corporation (KNOC) indicate that the proportion of South Korea’s crude imports from the Middle East in the first half of this year was 62.3%, a 6.4 percentage point decline from 68.7% during the same period last year. While import diversification is underway, the country still relies on the Middle East for more than 60% of its oil supply.
Domestic refiners are actively adjusting their procurement strategies to lower this share. SK Energy, for instance, has set a long-term goal to reduce its reliance on Middle Eastern crude from the current 70% level to 50%.
While sourcing oil from outside the Middle East mitigates the risk of regional supply shocks, it involves longer shipping distances. During periods of volatile tanker rates, these logistics costs can become prohibitive. Even if the base price of U.S. crude is lower, the landed cost in Korea—after factoring in exorbitant shipping fees—can exceed that of Middle Eastern supplies.
On September 23, the government reinstated measures to increase freight cost refunds for crude imported from non-Middle Eastern regions. The support, which was applied temporarily from April to June, was revived for the September-December period, with the refund cap raised from approximately 25% to a maximum of 100%. Requirements such as a minimum import volume of 4 million barrels and long-term contracts of at least one year were also waived.
This support is funded within the limits of the crude oil import levies paid by refiners; it does not constitute a full reimbursement of total shipping costs.
Securing Volume vs. The Burden of Prolonged High Freight Costs
At an emergency meeting on crude supply held by the Ministry of Trade, Industry and Energy on September 14, the refining industry announced it had secured over 100% of its planned import volumes for July and August, and more than 90% for September and October, compared to the same period last year.
Long-term shipping contracts held by domestic refiners have helped mitigate the immediate shock of short-term freight rate hikes. When vessels are operated under existing contracts, recent spot rate spikes are not immediately reflected in costs.
However, the situation changes as companies rely more on new charters or spot-market shipping. As higher freight costs are eventually reflected in actual procurement prices, profitability may diverge significantly among individual refiners based on their exposure to the spot market and their ability to pass costs on to the retail prices of petroleum products. In the process of reducing dependency on Middle Eastern crude, the domestic refining industry faces a dual challenge: ensuring a stable supply chain while simultaneously managing ballooning procurement costs.
