Following the enactment of the Submarine Mineral Resources Development Act (SMRDA) and the establishment of the Korea National Oil Corporation (KNOC), the Korean government has actively engaged in petroleum exploration. Based on these efforts, an offshore natural gas field was first discovered in 1987, and two separate natural gas fields went into commercial operation in 2004 (Donghae-1) and 2016 (Donghae-2), respectively. Moreover, to discover additional oil/gas fields, the KNOC continues to explore the eastern and southern seas of the Korean peninsula. 

Once petroleum is located, the Korean government will maintain the exclusive right to mine such petroleum pursuant to the SMRDA, and any business owner will need to obtain a submarine mining concession right for a limited period.

The Ministry of Trade, Industry and Energy (MOTIE) is the primary government agency responsible for regulating the petroleum sector in Korea.

As explained in 1.1 System of Petroleum Ownership, KNOC is a national company which actively engages in petroleum exploration. Further, Korea Gas Corporation (KOGAS) is another national company responsible for importing LNG developed/produced in foreign jurisdictions and distribution thereof into the Korean market.

(upstream) Petroleum exploration is conducted mainly in the seas of Korea, and the SMRDA is the law applicable to such petroleum exploration. However, if petroleum exploration is conducted inland, it would be subject to the Mining Industry Act (MIA).

(downstream) The laws regulating businesses’ supply of petroleum or gas include:

• the Petroleum and Alternative Fuel Business Act (PAFBA);
• the Urban Gas Business Act (UGBA); and
• the Safety Control And Business of Liquefied Petroleum Gas Act.

Pursuant to the SMRDA, if qualified for technical personnel and financing capability, a business owner may obtain approval from the MOTIE to explore/extract petroleum for a limited period. 

Pursuant to the SMRDA, to obtain an approval to explore petroleum from the MOTIE, a business owner must submit:

• an exploration plan;
• a financing plan;
• a list of exploration equipment and technical personnel;
• the business owner’s track record of exploration experience; and
• economic benefits that the government expects to receive in return for the exploration approval. 

Further, a submarine mining concession right may be granted to those who obtained an exploration approval, based on the MOTIE’s review of:

• the target area for mining;
• exploration report;
• a mining plan;
• a financing plan; and
• the economic value of minerals to be mined, etc.

The maximum period for an exploration approval and a submarine mining concession right is ten years and 30 years, respectively (due to lack of related cases, it is difficult to provide any “typical‟ fiscal terms). However, in the case of the Donghae-1 gas field, while its commercial operation started in 2004, it was officially shut down in 2021 as the natural gas in the reservoir was depleted. 

There is no particular income tax regime applicable to upstream operations. However, under the Restriction of Special Taxation Act, if a business owner with submarine mining concession right imports machinery or equipment on or before 31 December 2022 for the purpose of using them for exploration/mining of submarine minerals, customs tax and VAT for that machinery or equipment will be exempted. 

In Korea, no special rights are granted to the national oil or gas company in connection with the upstream operation.

No such local content requirements exist in Korea.

As indicated in our responses to 2.2 Issuing Upstream Licences/Obtaining Petroleum Rights, a submarine mining concession right may be granted to those who obtained an exploration approval.

Pursuant to the SMRDA, a business owner must pay fees for the submarine mining concession right. For example, depending on the volume of petroleum to be extracted, the business owner must pay 3‒12% of the price for which the extracted petroleum is sold to a third party. Please see 2.3 Typical Fiscal Terms Under Upstream Licences/Leases for the applicable period for submarine mining concession rights. 

In principle, there is no restriction on transferring the right to explore/mine minerals inland.

On the other hand, a transfer of the right to explore/mine minerals offshore must obtain approval from the MOTIE, which will review whether the transferee/successor is qualified to obtain such a right. See 2.2 Issuing Upstream Licences/Obtaining Petroleum Rights.

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There is no legal or regulatory restriction on production rates. However, the MOTIE may restrict production rates within its discretion when it grants a submarine mining concession right.

There is neither government nor private monopoly in midstream/downstream operations. However, businesses often operate projects with KNOC or KOGAS. 

There is a separate regulation on LNG downstream. In particular, to import LNG into Korea, a business must obtain a license from MOTIE in accordance with the UGBA. However:

• only KOGAS is allowed to import LNG for wholesale distribution as an “urban gas retailer”, which is obligated to supply gas (regasified at the LNG receiving terminal) to city gas companies; and
• as an exception, independent power producers such as POSCO, GS Energy, and SK E&S or petrochemical manufacturers import LNG only for their own use as they obtained approval from MOTIE.

Further, regarding LNG retail, the prerequisite license is the City Gas Business License (License). This License is issued by a metropolitan city mayor or province governor, as applicable, which has jurisdiction over the applicable service area. This License grants a city gas company the exclusive right to supply gas in a specific service area, accompanied by an obligation to supply city gas to that service area. 

As explained in 3.1 Forms of Allowed Private Investment in Midstream/Downstream Operations, regarding LNG downstream operation:

• KOGAS has a de facto exclusive right to import LNG (except for direct imports allowed to certain industrial consumers for their own consumption) and supply regasified LNG to city gas companies; and
• city gas companies have the exclusive rights to supply gas to consumers.

In this regard, under the UGBA, the National Gas Supply Regulation was promulgated to set forth the general terms and conditions that apply to the supply of natural gas by KOGAS. On the other hand, the City Gas Supply Regulation contains the general terms and conditions that apply to city gas companies’ distribution of city gas to customers, including residential and industrial customers. This regulation is drafted and proposed by each city gas company and approved by the municipal government with jurisdiction over the company.

These regulations provide detailed standards on supply period, volume, metering, etc pursuant to which LNG is supplied.

Please see 3.1 Forms of Allowed Private Investment in Midstream/Downstream Operations.

Regarding midstream operation, the typical fiscal terms applicable to upstream operation (as explained in 2.3 Typical Fiscal Terms Under Upstream Licences/Leases) are also applicable. 

Regarding downstream operation, the License referenced in 3.1 Forms of Allowed Private Investment in Midstream/Downstream Operations does not have any specific expiry date.

There is no particular income tax regime applicable to midstream/downstream operations. 

In Korea, no special rights are granted to the national oil or gas company in connection with midstream/downstream operations. However, as explained in 3.1 Forms of Allowed Private Investment in Midstream/Downstream Operations, KOGAS has a de facto exclusive right to import LNG (except for direct imports allowed to certain industrial consumers for self-consumption) in connection with LNG downstream operations.

No such local content requirements exist in Korea.

Please see 3.2 Rights and Terms of Access to Any Downstream Operation Run by a National Monopoly.

There is no condemnation/eminent domain right specifically established for private investors constructing infrastructure. However, among those large-scale projects, if a project obtains approval from the central or local government in accordance with the Act on Public-Private Partnerships in Infrastructure or the National Land Planning and Utilization Act, the project may be granted with such condemnation/eminent domain rights.

Please see 3.1 Forms of Allowed Private Investment in Midstream/Downstream Operations and 3.2 Rights and Terms of Access to Any Downstream Operation Run by a National Monopoly.

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Any person intending to import petroleum or petroleum products must register as petroleum exporter/importer in accordance with the PAFBA. Other than this requirement, there is no particular restriction. 

For your information, any person, who intends to sell to general consumers any petroleum products supplied by petroleum refiners or exporters/importers, must register as a petroleum retailer. However, are already registered as either the petroleum refiner or exporter/importer, such requirement will be waived. 

In the case of LNG, please see 3.1 Forms of Allowed Private Investment in Midstream/Downstream Operations and 3.2 Rights and Terms of Access to Any Downstream Operation Run by a National Monopoly

If a company wishes to export LNG, the company must register with the MOTIE as engaging in the “business of exporting and importing natural gas” under the UGBA.

Similarly, any exportation of crude oil requires registration with the MOTIE as engaging in the “business of exporting and importing petroleum” Under PAFBA. 

There is no particular restriction applicable to transfers of interests in midstream/downstream licenses and assets. However, regarding LNG, in the event that a city gas company intends to transfer its business, the city gas company must report it to the MOTIE (or the head of the local government in case of a general urban gas business).

When a foreign investor intends to make an investment in Korean companies by way of incorporation or acquisition of existing shares, it may choose to make a foreign direct investment under the Foreign Investment Promotion Law (FIPL).

The FIPL and related regulations stipulate that a purchase of shares in a Korean company (whether listed or non-listed) by a foreigner is classified as a “foreign direct investment” if:

• (i) the amount of such shares purchased will be equal to or greater than 10% of the then outstanding voting shares of such Korean company, or (ii) the amount of shares purchased is less than 10%, but the foreign purchaser intends to participate in the management of such Korean company (which is generally evidenced by its appointment of one or more directors thereof); and
• the investment value is KRW100 million or more. 

Under Korean law, certain industries are subject to foreign ownership limitations based on laws specifically applicable to such companies. However, there are no such limitations with respect to the petroleum industry in Korea.

There is no particular sanction imposed on anyone (other than North Korea) by the Korean government. However, the Guideline for Payment and Receipt to Participate in International Peace and Security issued by the Ministry of Economy and Finance (2018) restricts trade and other certain commercial activities in Iran or with/against certain Iranians that are subject to US and/or EU sanctions, which may limit Korean businesses to conduct business activities in the oil and gas sector. 

The major environmental laws applicable to upstream/downstream operations in the petroleum industry are summarised as follows.

Upstream

Environmental Impact Assessment Act (EIAA)

This statute requires large-scale projects to conduct environmental impact assessments to protect the environment. The Ministry of Environment is responsible for enforcing this statute.

Act on Conservation and Utilization of the Marine Environment (ACUME)

In addition to the Environmental Impact Assessment Act, this statute sets forth general principles of conserving and utilising the marine environment so that the seas are managed in a systematic and sustainable manner. The Ministry of Oceans and Fisheries is responsible for enforcing this statute.

Maritime Environment Management Act (MEMA)

Regarding marine projects, this statute establishes detailed standards for the prevention, improvement, response, and recovery with regard to marine pollution by managing the discharge of marine pollutants (eg, oil and hazardous liquid substances), etc. The Ministry of Oceans and Fisheries is responsible for enforcing this statute.

SMRDA

As explained above, this statute prescribes specific requirements applicable to the exploitation/mining of minerals. The MOTIE is responsible for enforcing this statute.

Downstream

The EIAA and the MEMA apply to downstream operations. 

Pursuant to the EIAA, an environmental impact assessment must be conducted when a project aims for energy development by engaging in businesses associated with the exploration/mining of submarine minerals (ie, processing, transportation, or storage). 

An owner of such a project must prepare a draft environmental impact assessment report in accordance with the guideline published by the MOE. Thereafter, the project owner must gather/reflect opinions from local residents and obtain final approval from the Minister of Environment. During this process, the Minister of Environment may impose restrictions on the project under applicable circumstances, which the project owner must incorporate into their business plan.

The Mining Safety Act applies to environmental, health and safety issues relating to upstream oil and gas activities. A mining concession right-holder must take necessary measures for the following purposes:

• prevention of cave-in, collapse, spring water, gas leakage, an explosion of gases or coal dust, spontaneous combustion and fire, and maintenance of ventilation;
• prevention of hazards and mining damages that may be accompanied by the treatment of gases, dust, noise, vibration, waste rocks, mine wastes, mine water, waste water and metallurgical smoke;
• prevention of hazards that may be accompanied by the handling of machines, equipment, explosives and other materials, power and fire;
• preservation of mining facilities;
• establishment of rescue teams, securing of safety equipment, provision of safety education to miners, and enactment of safety regulations;
• protection of underground resources; and
• prevention of mining damages and other safety measures.

Pursuant to the MIA and SMRDA, a mining concession right-holder must restore the mining area to the original state (eg, retrieving artificial structures, equipment, facilities, etc) upon the expiration of the concession right.  If the mining concession right-holder fails to do so, the MOTIE may order the mining concession right-holder to restore the mining area within a designated period (up to one year). 

On a related note, the Mining Damage Prevention and Restoration Act obligates the mining concession right-holders to implement a mining damage prevention plan (otherwise known as a decommissioning plan), which includes:

• prevention of mining damages that occurred or are expected to occur in active, inactive or abandoned mines;
• restoration of deteriorated mining areas; and
• removal and disposal of facilities, materials, and others not in use. Moreover, the mining concession right-holders must bear 20‒40% of the project costs under the above mining damage prevention plan. 

The Framework Act on Carbon Neutrality and Green Growth to Cope with Climate Crisis (Carbon Neutrality Act) is the main statute that sets forth Korea’s carbon neutrality goals and regulatory foundations for transitioning into a carbon-neutral society. The ACUME further requires the central/local governments to develop policies necessary for investigation, impact assessment and adjustment of the marine environment in response to climate change pursuant to the Carbon Neutrality Act. 

While there has been no specific requirement or policy in connection with the oil and gas industry, the MOE separately announced a CCS-related plan, as explained in our responses to 6.3 Energy Transition Considerations. 

As indicated above, the MOTIE is the government agency with sole authority to grant a mining concession right. However, local governments may also restrict projects during consultations on environmental impact assessment or issuance of permits for occupying certain public waters. 

There is no special scheme relating to unconventional upstream interests.

There is no special scheme relating to LNG projects. Korea relies on overseas importation for 99.9% of gas demands in Korea, and KOGAS, the government entity obligated to provide stable supply under the Urban Gas Business Act, is carrying out various projects to import LNG from overseas. Also, there are multiple regasification terminals and new projects to build the same in Korea.

There have been certain movements toward energy transition-related legislation/policies. For example, in December 2016, the MOE proposed legislation related to carbon storage, etc, but the National Assembly ultimately decided not to pass it. Further, the MOE announced that it plans to:

• commercialise CCU technology and conduct mid-to-large scale CCS demonstration to achieve the 2030 National Determined Contribution; and
• develop core technologies for carbon neutrality by 2050: technology optimisation through demonstration and self-reliance of core storage technologies (eg, low-cost collection technology, the economic feasibility of CCU product line, 15 million tons of CCS core technologies per year, etc).

The MOE also announced in November 2021 that it plans to proceed with a project to implement an integrated CCS demonstration utilising the Donghae gas fields, and KNOC is considering utilising one of its offshore platforms located in the East Sea for the development of offshore wind farms.

Korea’s petroleum industry focuses on downstream, not upstream: while there are some upstream businesses, almost 100% of the domestic oil consumption is dependent on importation from other countries. 

That said, petroleum is considered a strategic asset in Korea, and various acts govern Korea’s response to an oil emergency. Most importantly, there is the Petroleum and Petroleum Substitute Fuel Business Act of 2017 (PAPSA).

The PAPSA provides for two levels of emergency measures. The first level is triggered when the uninterrupted supply of oil and the satisfaction of Korea’s oil demand is threatened by events in Korea or abroad or when disturbances in the oil market threaten Korea’s public order or national economy.

An aggravated energy emergency exists when the uninterrupted oil supply is threatened in Korea or abroad by war, natural disasters or similar situations and it is deemed impossible to stabilise the situation by means of orders enacted pursuant to Article 21 PAPSA and as noted in Article 22 (1) PAPSA.

In addition, the PAPSA also allows for the taking of specific measures at times when oil prices are or are expected to severely fluctuate so as to threaten Korea’s public order and national economy.

There has been no material change in oil and gas law or regulation in the past year.