Summary of "35조는 팔아야 '적자'를 면합니다...ㅣ왜 '기름'으로 돈 버는 게 어려울까?ㅣ재보자"

Summary of Financial Strategies, Market Analyses, and Business Trends in the Oil Refining Industry

Oil refining companies buy crude oil, refine it into various petroleum products (gasoline, diesel, naphtha, LPG, kerosene, asphalt, etc.), and sell these products.
The crude oil business is highly complex and volatile due to:
- Frequent fluctuations in crude oil prices influenced by global supply-demand dynamics and geopolitical instability (e.g., Middle East conflicts).
- Exchange rate fluctuations, especially the USD/KRW rate, since crude oil is traded in dollars.
- Environmental regulations and the global shift toward eco-friendly energy, including the rise of electric vehicles and alternative energy sources.
Refining margins (difference between petroleum product prices and production costs including crude oil, refinery operations, and transportation) are key profitability indicators.
High crude oil prices do not necessarily mean higher profits for refiners because demand for crude oil and refined products are interlinked and complex.
Oil refiners face risks from time lags between crude oil purchase and product sales, during which prices and exchange rates can change.

S-Oil (Ssangyong Oil):
- Majority-owned (63.4%) by Saudi Aramco, a Saudi Arabian national oil company.
- Operated under significant influence from Saudi Aramco, including management.
- Benefits from stable supply of homogeneous crude oil from Saudi Aramco but has less flexibility to optimize crude oil sourcing.
GS Caltex:
- Joint venture between Korea’s GS Group and Chevron (U.S.), each owning 50%.
- Originally Honam Oil Refinery, it became GS Caltex after separating from LG.
- Has access to global crude oil markets and benefits from Chevron’s expertise and supply chains.

Both companies experienced worsened financial performance in 2023 due to:
- Soaring international oil prices.
- Decreased demand for petroleum products.
- Strong U.S. dollar increasing costs.
- Geopolitical tensions (Russia-Ukraine war, Israel-Palestine conflict).
The refining industry is capital-intensive with very high fixed costs (about half of total assets are tangible fixed assets).
Operating profit is highly sensitive to sales volume due to economies of scale; fixed costs remain constant regardless of sales.
Break-even refining margin is around 4%-5%. Margins below this lead to losses.
Fixed costs for S-Oil and GS Caltex are approximately 1.2 trillion KRW and 1.7 trillion KRW respectively.
Variable costs and selling/general/admin expenses add further pressure on profitability.

Oil refiners use financial derivatives to mitigate risks from exchange rate and crude oil price fluctuations:
- Currency forward contracts: Agreeing in advance on exchange rates for future transactions to hedge against currency volatility.
- Hedging contracts (mathematical transactions): Fix crude oil purchase prices for a future period to reduce risk from price fluctuations during the lag between crude oil purchase and product sale.
Financial statement analysis shows:
- S-Oil incurred losses on derivatives in 2022 and 2023 due to mispredictions.
- GS Caltex made profits on derivatives in the same period, indicating better risk management.

Both companies are actively investing in renewable and eco-friendly energy sectors to adapt to the changing market:
- S-Oil:
  - Developing clean hydrogen, clean ammonia, bio-based and waste-based fuel production.
  - Participating in the Shine Project to expand petrochemical production capacity significantly.
- GS Caltex:
  - Investing 260 billion KRW in bio-raw material refinery in Indonesia.
  - Developing biofuels including aviation and marine fuels from renewable sources.
  - Engaging in waste raw material recovery projects.
The industry is mature, and demand for petroleum products is expected to decline due to the rise of electric vehicles and stricter environmental regulations.
Oil refiners are diversifying to maintain profitability and relevance.

Understand the refining margin: Calculate the difference between product prices and total costs (crude oil, operations, transport).
Monitor crude oil price trends and geopolitical risks: Track global supply-demand and political events impacting prices.
Manage currency risk:
- Use currency forward contracts to lock in exchange rates for future transactions.
Manage crude oil price risk:
- Enter into fixed-price contracts or hedging contracts to stabilize purchase costs over the lag period.
Analyze financial derivatives results:
- Review profit/loss from derivatives trading in financial statements to assess effectiveness.
Invest in diversification:
- Expand into renewable energy projects and biofuels to