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       ▪ Resource & International Business

SK Energy is currently engaged in twenty-four blocks across fourteen different countries for E&P Business. Operational efficiency is being raised in the seven current production blocks to strengthen the revenue structure, and exploration is underway in the Majunga Block of Madagascar, four North Sea blocks of the UK and Block 8 in Kazakhstan. Importantly, SK Energy is conducting these activities as an independent development and production. Meanwhile, local subsidiary SK Australia is operating three coal mines in Australia and exploring four other projects. SK Energy’s equity share currently stands at 1.1 million tons a year, and the Company traded approximately 5 million tons of coal worldwide during 2006.

Operating income for the lubricants business reached at ￦100 billion for the first time in 2005, followed by an additional seventy-seven percent increase to ￦178.6 billion in 2006. This strong performance, achieved despite the appreciating Won currency and rising crude oil prices, was made possible because the Company revamped production facilities and maintained close relations with customer. Exports of the Company’s ZIC brand motor oil and transmission fluid line have grown steadily in recent years, reaching 240,000 barrels in 2006. In another development, an agreement was reached with Indonesia’s state-run oil company Pertamina to establish a joint venture to produce base oil in order to keep up with surging demand. Further on, that offshore operation will help SK Energy to increase its share of the U.S. and European base oil markets. The global oil trading market has been expanding steadily and market activities have been robust. SK Energy traded an average of 10 million barrels a month in 2005, and in 2006, the Company’s export volume exceeded domestic sales for the first time ever.

The global market is uncertain in 2007, with the persistently strong Korean Won and high oil prices. However, SK Energy is stepping up its overseas energy resource development activities and will begin commercial production in Brazil’s BMC-8 Block. In addition, the Company will take part in promising exploration projects in Vietnam and other strategic markets. The base oil joint venture will move forward and the Company will make inroads into the lubricants markets of China and Russia. At the same time, Singapore-based SK International will seek out new business opportunities in the global market and help to elevate the efficiency of existing overseas business activities.

1) E&P
SK Energy was very active in E&P Business during 2006. Sales revenue was maximized by the continuing high oil prices and more efficient management of production blocks.

As of the end of 2006, SK Energy is engaged in twenty four oil and gas blocks in fourteen countries, among which seven blocks in six countries were already in production. Daily production of 20,000 barrels of oil and gas per day, achieving ￦215.1 billion in operating income in 2006.

Exploration, development and production activities were ongoing from the beginning of the year, raising the operation efficiency of existing blocks for a more stable revenue structure. At the same time, the Company searched for new business opportunities and increased the portion of LNG in the overall portfolio, helping to establish new growth drivers.

Development activities proceeded on schedule at BMC-8 Block in Brazil, which is expected to begin production from the second half of 2007, and at Block 56 in Peru, scheduled to go into production in the second half of 2008. In addition to the ongoing projects, new exploration work began at the Majunga Block in Madagascar and four North Sea blocks after SK Energy joined the E&P consortia in June 2006. The following month, SK Energy finalized equity participation in Block 8 in Kazakhstan, and exploration started soon after. Block 8 will be operated jointly, providing an opportunity for the SK Energy to expand its technical competencies.

Meanwhile, Yemen LNG Project, finalized the investment decision on building an LNG liquefaction plant in Yemen in 2005, is expected to supply 6.5 million tons a year to KOGAS and the U.S. buyers from the end of 2008. Moreover, commercial production at the Peru LNG project with Repsol YPF in Spain is planned to begin in the first half of 2010.

In 2007, E&P Business will manage activities at current blocks with maximum efficiency to ensure a stable source of revenue. Commercial production will start at BMC-8 in Brazil, while development work will proceed at the LNG projects at Peru’s Block 56 and in Yemen. Meanwhile, the division will continue to seek out new ways to provide stable supplies of energy at the most economical price in the future. To this end, ongoing efforts will be made to take part in new, highly potential exploration projects in Vietnam, along the Caspian Sea and in other strategic regions as well as to secure additional proven reserves.

2) Lubricants
The lubricants business reached a new milestone in 2005 by breaking ￦100 billion in operating profit, which then rose by seventy-seven percent in 2006. Importantly, this performance was achieved under unfavorable business circumstances, demonstrating that the revenue structure has advanced to a new level.

The value of the ZIC brand is widely recognized. SK Energy’s popular lubricants line has placed first on the Power Brand Survey in Korea for the past eight straight years. ZIC was also named a super brand at the Brand Olympics, sponsored by the Institute for Industrial Policy Studies, and received the government’s Green Management Prize.

ZIC brand recognition among Russian consumers rose from twenty-nine percent in 2005 to forty-two percent in 2006 after SK Energy ran a promotion campaign that included TV commercials. Accordingly, lubricants sales rose thirteen percentage point in Russia and twenty percent in China year-on-year. SK Energy’s lubricants exports for the year totaled 240,000 barrels, registering fifteen percent growth over 2005.

In 2006, SK Energy and Pertamina, Indonesia’s state run oil company, signed a joint venture agreement to build and operate a base oil plant, which is now under construction at the Dumai Refinery in Indonesia. Start-up is scheduled for 2008.

The lubricants business is looking forward to another strong year in 2007. Rising sales in the premium synthetic motor oil ZIC XQ will bolster SK Energy’s position in the domestic market. SK Energy will also continue developing Russia and China markets into new growth drivers, and that effort will lay the groundwork for expanding into other national markets.

The base oil plant construction project in Indonesia is expected to proceed on schedule, and the Company will improve base oil marketing systems in the U.S. and Europe. Its efforts to penetrate new base oil markets will be stepped up as well, helping SK Energy to maintain its leadership in the global segment for Group III base oils.

3) Coal
The Coal Business achieved satisfactory results in 2006, overcoming unfavorable market conditions such as sharp price fluctuations from unstable supply in the international coal market. The Company imported 5 million tons of high quality bituminous coal from China, Australia and Indonesia for supply to KEPCO, cogeneration power plants and cement manufacturers. The Company also strengthened its position as a stable supply source by providing eight percent of the coal used at five KEPCO subsidiaries.

SK Energy has been in the coal development business since1990. The Company’s coal investments currently involve three working mines and four exploration projects in Australia, after the Company joined two new exploration projects in Queensland State in 2006. These efforts are helping to ensure that Korea has long-term access to stable energy supplies. The Company also plans to secure more coal mine projects in China and Indonesia, invest in solid infrastructure such as shipment facilities and expand the business to mineral resources in the future.

4) China Business
SK Energy extended the local sales base in China for petroleum, petrochemical, asphalt and other business lines during 2006. As a result, its China-based subsidiaries achieved ￦11.3 billion in operating income on ￦528 billion in sales for the year. Moreover, the Company accelerated its drive to make China its “second home market,” putting the China Regional Headquarters under the direct control of the CEO’s Office. Now, the unit can pursue projects with greater authority and volition.

The Petroleum Business proceeded to develop a distribution network as part of the effort to secure a firmer business base in China. The Tianjin lubricants subsidiary achieved sales of ￦17.1 billion and traded 2.8 million barrels of oil. The Company is now pursuing comprehensive cooperative ties with leading Chinese oil companies in order to advance all along the value chain. In 2007, additional concrete steps will be taken to advance this business. The Company plans to enter the wholesaling, retailing and logistics sectors and will develop business models for working with domestic enterprises.

Sales for the petrochemical products from China subsidiaries totaled ￦475.5 billion in 2006, exceeding the target by ￦75.5 billion. The strong showing strengthened the subsidiary’s financial structure with a capital increase and an extended line of credit. At the same time, the foundation for future development was firmed up. For example, the internal sales network was expanded; differentiated products were offered for sale, and trading activities were increased.


The Company has announced a vision to be a top-tier petrochemical player in Asia by 2015, with annual sales of ￦20 trillion and operating income of ￦1.5 trillion. In 2007, the Company will make headway toward this goal. Progress is expected in the new cracker and paraxylene projects as well as the polymer processing business.

The local production and sales network for value-added asphalt products is being expanded in China. In 2006, four new subsidiaries were established: two for the production and sale of modified asphalt, one for the production and sale of asphalt concrete, and one for the import and sale of asphalt. Thus, SK Energy now operates seven asphalt-related subsidiaries in China, and more will be established in major markets as well as regions where logistics centers are located.

Meanwhile, the advancement of China operations is being accelerated, and SK Energy is strengthening the management support systems for each business areas. New business lines are being developed and organizational strengths are being improved. Umbrella organizations are being used and business development infrastructure is being built. Personnel are being hired and trained to work in China; project support functions are being upgraded and support capabilities for each field are being enhanced.

The steadily growing demand in the Chinese petrochemical market during 2007 will present new opportunities. On the other hand, the Chinese government will continue to restrict directly and indirectly in order to protect the domestic industry, and SK Energy needs to develop a sustainable business model in China.

SK Energy will expand business alliance with Chinese companies and begin to build a petroleum wholesale and retail network to expand the operational scope. The Petrochemical Business division, meanwhile, will boost its local marketing competencies and broaden its network base to expand the overall market foundation. Finally, strategies for the asphalt business include developing value-added products and diversifying product lines. Overall, the Company will continue to localize Chinese operations and cultivate China into its “second home market.”