SEOUL, Aug 12: South Korean oil companies, recuperating from a harsh setback a year ago, are likely to post sharply higher earnings for the first half of 1997, buoyed by improved refining margins, analysts said on Tuesday.

The fallout from a petrol price war in the last five months has been minimal, they said.

"Following deregulation in local oil product prices, oil firms kept product prices high, despite a fall in crude oil prices," said Park Yong-wan, an energy analyst at Daewoo Securities.

"Although they were engaged in heated competition, the prices were high enough to yield profits."

South Korea's move to open the energy sector has put refiners on a more solid footing since it allowed them to keep prices firm, analysts said.

On January 1 the government freed price controls on domestic petrol, kerosene, diesel and C-type fuel.

Those products previously were subject to a government-set monthly price ceiling.

Yukong Ltd, the nation's largest oil refiner, was expected to post a net profit of 70-84 billion won ($78-94 million) in the first half, more than double the 23.6 billion profit a year ago, analysts said.

Earnings of Ssangyong Oil Refining Co were forecast to rise to around 70 billion won from 64 billion, while Hanwha Energy's profits were seen at 7-10.5 billion versus 1.03 billion.

Official figures were due to be released on August 15.

The expected first-half results would be a significant improvement from the first half of 1996, when profits plunged on a combination of cut-throat competition, foreign exchange losses and strong crude prices.

"The Korean's won's fall against the dollar has stabilised compared to a sharp drop last year," said Kim Soon-young, an energy analyst at Sunkyong Securities.

Last year, refiners suffered heavily from the won's depreciation against the dollar despite reasonable operating profits.

Foreign exchange losses accounted for 70 per cent of total losses, analysts said.

The won fell 8.2 per cent against the dollar in 1996.

Analysts said the rosy outlook would be maintained for the rest of this year in the absence of drastic product price cuts.

"Although the possibility of further price cuts cannot be discounted, the refiners would only cut their prices to match corresponding changes in oil prices," said Bill Hunsaker, an energy analyst at ING-Barings Securities.

"The heated price competition is not likely to have a serious impact on cash margins, as petrol only accounts for 10 percent of total production," he said.

Analysts said refiners were also reducing their financial burden to improve earnings.

"Refiners have reversed their strategy by slowing the expansion of their petrol station network, while also demanding that distributors pay market interest rates on loans from refiners," said Hunsaker.

Previously, refiners had spent large sums of money to entice prospective franchisees with massive financial support, including low-interest or long-term loans.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.