South Korea pledged on Sunday to spend nearly $22 billion buying energy and mineral reserves over the next decade, enlisting its public pension fund to help beat out other state firms in the quest for stable resource supplies.
The National Pension Service, which manages over $200 billion of mainly stocks and bonds, said it would invest 20 trillion won ($21.5 billion) in anything from gas fields to nickel mines, one-upping Western pension funds like CalPERS that have piled into commodity markets for the first time.
The NPS funds will give South Korea's three state-owned resource firms the financial firepower they need to catch up with rivals like India's Oil and Natural Gas Corp or China's Sinopec Corp, which have led the race to secure energy and raw materials for fast-growing Asian economies.
"We will invest mostly in oil or gas fields that are already in production since it would be too risky to go for fields only under exploration," Kim Ho-shik, president of the NPS, told reporters at a signing ceremony, reaffirming Seoul's strategic shift away from high-risk, low-cost exploration bids.
That should help Seoul achieve its aim of producing one-fifth of its own energy needs within about five years, and allow the fund to diversify its portfolio in pursuit of the higher returns needed to meet growing payment demands in coming decades.
The NPS, which already owns about 3 percent of South Korean stocks by market value and expects to double that by 2012, has said previously it intends to become the world's second-biggest pension fund with a forecast 400 trillion won in assets by 2012.
"In the past the pension fund usually invested in bonds and stocks, but this is not enough to generate the level of profits needed," Kim said. The NPS collects 9 percent of wages from a third of the country's 48 million people and their employers.
In addition to the purchase of oil, gas and coal mines, the new war chest will be used to buy reserves of minerals like nickel and bronze to help guarantee resources for the country's resource-intensive industries like shipbuilding and electronics.
Soaring prices have made commodities an increasingly popular complement to traditional financial holdings for many of the world's big pension funds, but most, like the $230 billion California Public Employees Retirement System (CalPERS), have opted for smaller bets in indices that track futures prices.
STRATEGIC DRIVE:
South Korea, the world's fifth-largest crude oil buyer, has been hunting for overseas energy projects for years, but has been thwarted on at least two occasions this year.
Korea National Oil Corp (KNOC) lost out last month in its bid to buy UK-listed Burren Energy, a small oil producer with operations in the Republic of Congo, for which Italy's ENI had agreed to pay $3.6 billion.
Against 217 million barrels in proven and probable working interest reserves, Burren cost ENI nearly $17 a barrel. At that price Seoul's new fund could buy over 1.2 billion barrels of oil-enough to meet South Korea's demand for a year and a half.
It was also tipped to lead a $2 billion bid for an unnamed North American field early this year, but the deal never materialised. In 2006 KNOC led a number of deals to get the right to drill for oil or gas in central Asia and Nigeria, and bought into an oil sands patch in Canada, but it has yet to clinch a major corporate acquisition that could catapult it ahead of rivals.
Even the biggest South Korean-led overseas project has held its share of disappointment, with the Myanmar government pushing through a deal to sell natural gas from Daewoo International's big offshore discovery to China, not South Korea.
KNOC President Hwang Doo-Yul told Reuters on Friday that the firm was still on the hunt and believed there were many modest-sized operational fields of the sort KNOC hopes to buy for about $2.5-$3.5 billion each. Backed by a government with nearly $1.5 trillion in foreign currency reserves, Chinese firms have led the charge in recent years, although they fell quiet this year as the rally in crude prices to nearly $100 a barrel put a hefty premium on firms, limiting the number of attractive targets.
In addition to KNOC, Korea Gas Corp (KOGAS) - the world's biggest buyer of liquefied natural gas (LNG) - and Korea Resources Corp (KORES), which invests in natural resources, will also be able to utilise the pension service's funds. NPS's Kim said an operating committee of officials from all three companies would be responsible for planning deals.
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