The murky world of Seoul's ill-fated 'energy diplomacy'

Just a few years after he helped the government spearhead a bold overseas investment drive, Sung Wan-jong was found hanging by his tie from a tree in northern Seoul, undone by one of South Korea's most high-profile business scandals of recent years.

Sung's presumed suicide on Thursday came as an investigation gains pace into allegations of waste, mismanagement and corruption at the heart of a failed "energy diplomacy" platform conceived by former president Lee Myung-bak.

When Mr Lee took power in 2008, one of his top priorities was to secure the energy resources needed to underpin national growth: a vital concern for South Korea, which is almost devoid of hydrocarbon assets.

State-controlled companies - as well as private groups such as Keangnam Enterprises, chaired by Sung - were encouraged to raise debt to acquire energy assets abroad, from Iraqi Kurdistan to the Gulf of Mexico.

But there are growing complaints that the programme led to huge waste of public funds, with some allegedly lost to corruption. The national board of audit and inspection on April 3 estimated that state-controlled companies suffered net losses of Won3.4tn ($3.1bn) by pursuing overseas resource projects under Mr Lee.

At an impromptu press conference the day before his death, Sung had denied claims that he improperly secured Won80bn of government loans by exaggerating expected profits from an oil project in Russia, using some the money to create a Won25bn slush fund.

The failure of Mr Lee's resource drive helped seal the fate of Keangnam Enterprises, which filed for court receivership last month. And the ensuing investigation has ensnared some of South Korea's most important state-controlled companies, fuelling concerns about their excessive susceptibility to government pressure.

"The problem was that these companies . . . didn't have much authority when it came to deciding the details of the projects," said Park Hi-chun, an economics professor at Inha University.

Particular attention has focused on Korea National Oil Corporation, Keangnam's partner on the Russian oil project, which is accused of hugely overpaying for the Canadian oil company Harvest Operations, acquired for Won4.6tn in 2009.

<

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.

The losses from the Harvest deal amount to about $1.5bn, according to Kim Hyun-mee, a lawmaker from the liberal opposition New Politics Alliance for Democracy, who claims that KNOC bought Harvest without properly analysing its value.

Her party is seeking to force Mr Lee to testify in parliament over what NPAD leader Moon Jae-in this week called "the biggest waste of tax since South Korea's foundation".

While the ruling New Frontier party has dismissed this demand, some observers have linked prosecutors' investigation of Keangnam and KNOC to pressure from the central government, which last month declared an "all-out war on corruption".

"The prosecution should not give an impression that this is a vindictive investigation against the former administration," the conservative Donga Ilbo newspaper wrote in an editorial on Friday.

Foreign investment by state companies is one of the areas where policy has most sharply reversed under Mr Lee's successor, President Park Geun-hye, who has focused on pushing the enterprises to pay down debt.

KNOC said it will announce later this month its plans to offload non-core assets, with similar moves expected from other companies involved in the resource drive such as Korea Gas Corporation and Korea Resources Corporation.

But the government should avoid a fire sale of the assets accumulated under Mr Lee, regardless of the public anger at the losses they incurred, argued Mr Park at Inha University. "They should at least wait until the oil price goes up," he said.

Additional reporting by Tae-jun Kang

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation