South Korean construction firms hit hard by Iran sanctions

A general view shows a bridge under construction on the Han river in Seoul. Korean overseas contruction orders have been hit by sanctions against Iran. (AFP)

• Seoul imports about 12m barrels per month of oil from Iran.
• Contractors feel impact of sanctions on overseas orders.

SEOUL: South Korea may have won an exemption from the US to continue Iranian oil imports, but major construction companies here are still reeling from the renewed American sanctions against Tehran.
Hyundai Engineering & Construction (E&C), a business arm of Hyundai Group, announced on Oct. 29 that it had scrapped a deal with Iran’s Ahdaf Investment Co. to build a petroleum refining facility in Iran.
The deal was worth $520 million — about 15 percent of the $3.4 billion construction project led by Hyundai Engineering consortium. Hyundai Engineering is an infrastructure unit owned by Hyundai Motor Group.
“We had no choice but to cancel the deal,” Yum Dong-yeon, a spokesman for Hyundai E&C, told Arab News. “We’re just sorry to lose the deal, and it is difficult now to anticipate if and when we will be able to be engaged in Iran businesses again.”
The remaining project led by Hyundai Engineering is expected to be nullified.
“It’s impossible now to carry out the deal, as a grace period of the preliminary contract has already expired,” a Hyundai Engineering public affairs official said, asking not to be named.
SK Engineering & Construction (E&C) has also been hit by the renewal of US sanctions against Iran. The firm, affiliated with South Korea’s third largest conglomerate SK Group, signed a $1.6 billion preliminary contract last year to upgrade a refinery in Tabriz, some 600 kilometers northwest of Tehran.
The firm also bagged a $3.6 billion contract to build and operate new power plants in Iran under a joint project with Turkey’s UNIT International. The contract is Iran’s largest private energy project, to produce combined generation capacity of 5,000 megawatts.
“We have yet to enter main contracts with Iranian counterparts, so we haven’t suffered any financial loss at the moment,” said Yeom Suk-bae, a senior communications manager at SK E&C. “However, it’s a setback obviously to our plan to make inroads into Iran, a new and growing market in the Middle East.”
Daelim Industrial is also one of the South Korean construction firms that have canceled projects in Iran. The company revoked a $2 billion deal in June with an Iranian oil refining company.
Kim Jong-gook, head of the Middle East and Africa business bureau at the International Contractors Association of Korea, painted a grim picture of South Korean construction projects in Iran in the long-term.
“South Korean construction firms have already been affected by the feud between the United States and Iran before the sanctions come into force,” Kim said.
The restored US sanctions, focused on banning any financial transaction with Iran, would hinder South Korean firms from going ahead with any contract with Tehran, he said.
“For South Korean construction companies, Iran is regarded as a new market with great potential,” Kim said. “As Iran’s oil exports are to be reduced in the aftermath of the restored US sanctions, energy corporations of the Middle East nation will likely suffer the shortage of foreign exchange, which will lead to the shrinkage of their construction projects.”
Oil refineries and petrochemical firms in South Korea breathed a sigh of relief about the “temporary waiver” for Iranian oil imports, but braced for risks down the road.
As one of the eight countries exempted from the US sanctions, South Korea is allowed to buy Iranian oil over the next six months on the condition that the imports volume should be reduced significantly. Any payment must be made through a bilateral Korean won currency account.
The South Korean government did not disclose the scale of reduction in Iranian oil imports, but oil refinery industry sources estimate that they are allowed to import about 4 million barrels per month, more than half of last year’s imports volume. South Korea imported an average of 12 million barrels per month of crude and condensate from Iran last year, according to the state-run Korea National Oil Corp.
South Korea in particular is a large buyer of Iranian condensate, a super light form of crude oil used by its large petrochemical industry. Of the Iranian oil imported last year, condensate accounted for some 70 percent.
“We’re trying to diversify sources of oil imports in the wake of Iran sanctions, but it’s not so easy to find alternatives for condensate,” an official of SK Innovation, the largest petrochemical company in South Korea, said on condition of anonymity.
Amid a sharp drop in imports from Iran, Qatar has emerged as the biggest export of condensate to South Korea, according to the Korea Petroleum Association. Qatar accounted for slightly more than 80 percent of South Korean condensate imports in September, with other countries such as Nigeria, Norway and Libya being considered as alternative sources.
The South Korean government is seeking to come up with measures to minimize the impact of the US sanctions on Iran.
“We’ll keep discussing with the United States and Iran over measures related to the sanctions and their effects on the Korean industry,” said Kim Jang-hee, head of the Ministry of Trade, Industry and Energy’s Americas Division.