As-is recognition and direction of change

Since its establishment in the 1960s and as Korea’s first domestic oil company, SK Energy has been at the forefront of building Korea into a global economic powerhouse and major exporter. It is a global refining company capable of producing 840,000 barrels of petroleum products per day with the best facilities and operational competitiveness among refineries and within the Asia Pacific region.

However, recently, the business environment surrounding the petroleum industry has been changing rapidly and powerfully. In the recent years, the spread of Green & Digital Paradigms, a foundational environmental change, has been continuing according to the signing and implementation of the Paris Climate Agreement, the development and rapid spread of electric vehicle technology, and the groundbreaking development in ICT technology as we entered the 4^th industrial revolution. And this year, in the context of COVID-19, these social changes in the non-petroleum oil and non-face-to-face directions are accelerating.

We believe the petroleum industry has already entered a structural decline in oil demand due to the current changes toward non-petroleum oil and non-face-to-face directions. Compared to the average in 2019, the global oil demand in the second quarter of this year decreased by about 20%. We think that this may not be a temporary decrease in demand, but a new normal of lower petroleum oil usage.

Even if the global COVID-19 situation eases, we expect that human civilization will continue to shift toward using less oil in all aspects of society, economy, education, and leisure.

Also, amidst this low-carbon energy paradigm shift, we cannot survive or grow in this new normal with only our existing business portfolio focused on the existing oil business. Moreover, if the opportunity cost for greenhouse gas emissions in the future becomes a carbon cost that is imposed on the company, the profitability of the existing BM will decrease even more.

Accordingly, SK Energy is pursuing a deep change that boldly breaks the mold of the existing business structure and working method.

The key to SK Energy’s deep change is to significantly reduce the proportion of oil business and change the BM to focus the company’s resources on promising businesses. Based on eco-friendliness and digital technologies, we are innovating the business model in the two directions of ‘Green’ and ‘Platform’. Through this, we plan to grow with our stakeholders and create social value. Considering the current rapidly changing business environment, it is necessary to transform the business model fast. To this end, SK Energy is concentrating all of its capacity.

Business Model Innovation ① Green

1.Securing carbon reduction technologies: SK Energy is making every effort to secure innovative technologies that can reduce greenhouse gases. A large quantity of greenhouse gas is generated in the process of producing petroleum products, which is why the oil industry is a representative greenhouse gas emission industry in Korea.

SK Energy is taking the lead in discovering CCU (Carbon Capture & Utilization) technology that captures greenhouse gases (CO₂) and reuses them as biofuels or raw chemical materials through chemical and biological processes. The head office and the technology institute are collaborating to research our own promising CCU technology, and we plan to invest actively in technologies or start-ups that are considered to have high future growth potential through collaboration with external technology experts.

2.Eco-friendly biofuel production and renewable energy business promotion: The need for eco-friendly low-carbon fuels is continuing to increase with the spread of the green paradigm. According to the risk of the carbon bubble (the bubble reflected in the value of fossil fuel companies with the premise of achieving the goals of the Paris Climate Agreement), the corporate value of existing fossil energy-related companies is continuously falling. Accordingly, major oil companies such as Shell and BP are reorganizing their portfolios around low-carbon businesses such as natural gas and renewable energy.

SK Energy is also participating in this trend and is considering new growth options for eco-friendly biofuels instead of the existing petroleum products. We are reviewing ways to produce eco-friendly biodiesel and bio aviation oil using the manufacturing facilities and infrastructure of the existing petroleum products. We plan to pursue global cooperation if necessary over the course of promoting the business.

In addition, we are continuously exploring renewable energy business opportunities. Currently, around 10 SK Energy gas stations and NeTruck Houses are producing electricity through solar panel installations. We plan to keep expanding and will continue to review eco-friendly businesses that are the best fit for oil companies based on renewable energy such as solar power and hydrogen.

3.Environmental business promotion in the water & waste areas: We are also considering ways to expand our business to the waste treatment area after entering the industrial water/waste O&M (operation & maintenance). SK Energy possesses the asset of a comprehensive wastewater treatment at the Ulsan Complex and has the capacity to effectively operate it. Based on this, we are reviewing entering the water treatment business and expanding the business area to the field of waste such as biogas production, waste energy conversion, land restoration, and waste landfill treatment. We will also continue to discuss ways to integrate and implement the water & waste businesses of other affiliates within SK Innovation such as recycling plastics.

At the same time, we are working on the conversion of existing petroleum products into eco-friendly products. In order to respond proactively to the strengthened marine oil sulfur content standards, we have built eco-friendly Vacuum Residue Desulfurization (VRDS) and started manufacturing eco-friendly marine oil this year. In addition, we developed and are supplying eco-friendly asphalt, such as ‘premium asphalt’ that can be used to pave roads more quickly at lower temperatures. This ‘PMA (polymer modified asphalt)’ can be used twice as much as the existing asphalt and another product, ‘recycled asphalt’ uses recycled asphalt cement.

Business Model Innovation ② Platform

The platform business that SK Energy is aiming for, along with the online and mobile platforms, is a business that offers new values in the areas of ① convenience, ② mobility, and ③ energy solutions to the gas stations and nearby customers by dramatically transforming the offline network of about 3,000 gas stations distributed nationwide.

This is also an example of SK Group’s representative business model innovation that incorporates the concept of shared infrastructure.

SK Energy’s current core platform projects are LDP (Local Delivery Platform), CCP (Car Care Platform), and Energy Solution Platform.

1.LDP (Local Delivery Platform), Living Convenience: In 2018, we successfully introduced a new concept delivery service “Home Pick” that enables goods to be picked up at a designated time and place as ordained by the customers based on gas stations.

Based on Home Pick, we are reviewing platform businesses in Returns (collect/store products returned by customers and resell), Reform (matches verified reform craftsman with customer to deliver reformed products), and within the field of recycling

2.CCP (Car Care Platform), Mobility: Recently, we launched a platform service called “Muffin” that can manage integrated vehicle management services such as smart refueling, car washing, valet parking, and maintenance.

Among the various services of Muffin, smart fueling, which premiered last June, is a service that offers new values to fueling customers based on digital technology. Fueling customers can pre-pray on their smartphones using a one-touch methods and can also use voice fueling, which fuels the car using a voice recognition method.

In the future, Muffin is considering the changes in the mobility industry and is reviewing electric vehicle charging services, and through this we plan to evolve it into a “comprehensive platform for electric vehicle solution.”

3.Energy Solution Platform: We are also considering an energy solution platform based on future energy such as solar power and hydrogen. We are considering the direction for the electric vehicle or commercial hydrogen vehicle charging business by producing electricity and hydrogen through installation of fuel cells or solar power generators in over 3,000 gas stations nationwide. Through this, we plan to use gas stations as a base for the energy solution business, rather than centrally as the existing oil business. In the long term, we are also considering entering the Micro Grid business that supplies electricity to nearby areas.

SK Energy’s Future Vision

SK Energy intends to convert its business model into one with a focus on ‘Green’ and ‘Platform’ in order to become a company that survives and grows despite changes in the business environment.

Through this, we plan to dramatically transform the Ulsan Complex into an <Eco-Friendly Low Carbon Business Hub> and gas stations into <Mobility & Energy Solution Hubs>.

Also, in order to succeed through these significant changes we are pursuing, we cannot simply pursue business model innovation. Comparing to a car, if the business model innovation is the body of the car, I believe the wheels that actually enable the car to move are the “fast and bold organizational culture” that is different from the existing culture.

To this point, SK Energy maintained a very cautious and meticulous organizational culture due to the nature of the oil business, wherein small mistakes could lead to major accidents. However, on the other hand, I believe this type of organizational culture became a barrier preventing fast and bold decision-making, and it was a factor that inhibited business model innovation.

The new motto of SK Energy’s organizational culture is, “There are no failed executions.” The world is rapidly changing in complex ways, so it is important to execute tasks quickly. After the execution, it is important to continue to modify and change little-by-little to upgrade the BM.

I will try my best to change the organizational culture so that more members ask, “how can I make this work?” or “if I’m not sure, should I try it first?” before asking “will this work?”

Ultimately, it is our goal that SK Energy is recognized as a promising and forward-thinking company in the future by all financial societies, and that we continue to grow. In order to achieve these goals, we will quickly and powerfully implement disruptive innovation that breaks the mold of the existing oil business.