Korea's energy transition: What are the risks for investors?

As one of the four so-called Asian Tigers, South Korea's industrialisation and economic growth since the 1960s have been rapid.  Yet Korea's advanced economy is highly dependent on energy imports.  While its energy dependence has decreased slightly over the past decade, as of 2021, Korea still relied on imports for over 92% of its energy. And with no physical energy links to its partners in East Asia – whether in the form of pipelines, electricity interconnectors or road links – energy is primarily imported through its ports and liquefied natural gas (LNG) terminals.

Global investment for increased energy security

With energy security and a successful energy transition at stake, it is hardly surprising that Korean energy diplomacy has been particularly busy in recent years. In particular, Korea has sought to diversify the sources of its energy imports and to strengthen its connections with existing partners to ensure a reliable supply of hydrocarbons and renewable energy.

Korean energy companies, both state-owned and private enterprises, have played a crucial part in this policy.  Under the protection of more than a hundred free trade agreements and multilateral or bilateral investment treaties, Korean investors have been actively investing in energy projects abroad, particularly in renewable energy projects such as solar, hydrogen and ammonium projects.

Benefits of foreign investments

Korea benefits from these investments in multiple ways, not just through the potential for returns, but through strengthened intergovernmental ties and ensuring Korean companies develop and retain the engineering expertise to construct and operate a variety of power plants and other infrastructure in the energy value chain.

In addition, there is the potential for Korean partners to establish an entire energy supply chain: clean energy produced abroad can be guaranteed to be delivered to Korea under long-term offtake agreements.  It is no surprise that Korean investments have focused on countries benefitting from abundant hydro or solar power, and equipped with sophisticated ports and terminals, allowing the green energy to be shipped and delivered to Korea.  An example of this is private Korean investors E1 Corporation who in late 2023 announced an early-stage investment in a low-carbon hydrogen/ammonia production facility in Canada. Another is SK Ecoplant, part of the SK Group, who made a similar announcement in December regarding green hydrogen and green ammonia production facilities in the UAE and Oman. 

The key players

Korea Electric Power Corporation (KEPCO), a majority government-owned enterprise and one of the 500 largest corporations in the world, has invested in overseas projects since the mid-1990s but has recently increased its activities abroad, including through its subsidiaries such as Korea Western Power (KoWePo) and Korea South-East Power.

State-owned Kogas has invested in gas and LNG projects in Australia, Canada, Indonesia and the Middle East, whereas K-Water, the Korean government agency for development and management of water resources projects has provided direct investment, project management support and development assistance for projects across the world.

Korea's well-known conglomerates, chaebols (재벌), such as Samsung C&T Corporation and the SK Group, frequently invest in power projects abroad, including through their construction arms or in co-operation with Korean construction companies like Daewoo, DL and Hyundai.

Independent power producers such as POSCO Energy, E1 Corporation and suppliers like SeAH Wind are also making investments abroad, focusing on different aspects of energy projects.

Funding for projects is often provided by the Export-Import Bank of Korea (KEXIM), Korea Trade Insurance Corporation (K-Sure), Korea Development Bank, the sovereign wealth fund Korea Investment Corporation (KIC) or banks such as Shinhan Financial Group.  Korea had historically provided significant funding for coal projects abroad; with the phase-out of funding for coal, Korean funders may look to new opportunities especially in the hydrogen/ammonia sector.

A successful investment requires the support of the host state

An investment in another country's energy sector inevitably involves a contractual relationship with the host state.

This might take the form of a joint venture relationship with a state-owned energy enterprise, implementation or host government agreements with the relevant ministry or government agency, long-term supply or offtake agreements with governments and SOEs, as well as governmental licences for the use of both land and sea.

In addition, Korean investors benefit from certain protections set out in Bilateral Investment Treaties and free trade agreements, in which the host government promises the Republic of Korea the fair and equitable treatment of Korean investors and affords other guarantees and protections.

No investment comes without risk

Against the background of these complex contractual and treaty relationships between states and investors, disputes can arise at every stage of the life cycle of energy investments.

Disputes in the early stages

Two recent examples of treaty claims involving Korean energy investors show the potential for disputes even before a project is off the ground.

In 2015, Samsung started an arbitration against Oman under the Oman-Korea BIT. The dispute related to the bidding process for the upgrading of a refinery run by state-owned Oman Refineries and Petroleum Industries Company. While Samsung had been the preferred bidder submitting the lowest bid, reportedly worth $1.2 billion, the contract was ultimately awarded to a joint venture which had submitted a bid with a higher headline figure.  The claim was ultimately settled but demonstrates the potential difficulties that can arise in bidding processes, where investors seek certainty as to their position whereas the state or government entity organising the bidding may wish to retain a discretion to choose its preferred contractor.

Korean oil company KNOC, KEPCO and shipbuilder Hanwha (formerly part of Daewoo) are currently involved in an arbitration against Nigeria regarding the withdrawal of oil exploration licences. The claim is currently pending but shows the disputes that can arise in respect of fundamental project requirements. These may arise from changes in government, with the new government keen to pursue new policies.

Construction disputes

Samsung had been constructing a desalination plant in Saudi Arabia, which would provide both drinking water and energy, before the contract was terminated by the host government at a time when more than half of the construction work had been completed. This reportedly led to an arbitration against Saudi-Arabia in 2017 which concluded in 2021.

Korean investors may of course be at the receiving end of claims by host governments as well, for example where the construction is delayed or defects are identified following completion.

Disputes during the economic life of a project

The successful completion of construction is usually only the start of a project.  The long-term nature of energy projects means investors are exposed to the risks and rewards of the project over an extended period of time, and changes in relationships or circumstances over time can lead to disagreements. In 2019, KoWePo started an arbitration against the Republic of India alleging a failure to honour a long-term gas supply commitment in relation to a plant in India operated by KoWePo and its JV partners.

Long-term supply contracts often contain price review or adjustment clauses and other provisions requiring the co-operation of the parties, all of which can be contentious, particularly when markets are volatile or macroeconomic factors change.

Even an exit can be difficult

Exiting a project can also be a contentious process. Contractors will want to limit their liabilities, while host governments may want to control any exit process. Two recent examples involving Korean investors relate to their exits from investments in Peru.

In 2021, SK Energy commenced an arbitration against the Latin American country regarding its attempts to sell its interest in a gas pipeline project which was allegedly blocked by the government.

KNOC, POSCO Daewoo and SK Energy also resorted to arbitration against Peru in order to confirm that their termination of a 30-year hydrocarbon exploration licence agreement had been valid.

New technology – Same disputes

A number of the examples mentioned above arose out of Korean investments in hydrocarbon projects abroad.  This is likely a consequence of those projects having been the dominant target for Korean investments in earlier decades.  With the recent push for investments in the solar, hydrogen and ammonia sectors in particular, it is likely that disputes of the same types will arise in renewables projects as well.