SEOUL, Feb. 8th, 2007 (WAM)--- SK Corp., South Korea?s largestrefiner, saw its net profit drop 15.7 percent annually last year,and No. 2 GS Caltex Corp. posted a 15 percent annual declinein earnings. Other smaller refiners have yet to announce their2006 results, according to Yonhap News reported on Wednesday.

S. Korean refiners saw good earnings in the first half of lastyear on improved refining margins, but their second-half netprofits were hit by lower refining margins stemming from fallingoil prices.

Refiners' earnings hinge largely on international crude pricesas South Korea has to import all its oil needs.

"The fall in their earnings last year resulted from lacklusterrefining margins and decreasing global demand for Bunker C oil,due to concerns over environmental pollution," Yonhap quoted J.J. Kim, an analyst at Woori Investment & Securities Co. ashaving said.

South Korean refiners have less equipment for heavy oil crackingthan oil companies in the United States, Japan and other industrializedcountries, according to the Korea Petroleum Association (KPA).

The portion of heavy oil processing units in South Korean refinersis only 21.8 percent, far lower than the 35 percent average ofthe developed countries, according to the association's latestdata.

"The construction of heavy oil refineries is the key for localrefiners to boost profits, as they have to import all of theircrude oil and their percentage of heavy oil cracking facilitiesis low," an association official said.

As of January this year, S-Oil Corp., South Korea's third-largestrefiner had the highest ratio of 32.4 percent, followed by GSCaltex with 23.7 percent, Hyundai Oilbank Corp. with 21.4 percent,SK Corp. with 17.4 percent and SK Incheon Oil Co. with 12.4 percent.

SK Corp. has no plan to build a heavy oil processing unit thisyear, but its arm SK Incheon Oil has been constructing a 60,000barrel-per-day unit in Ulsan, an industrial city about 414 kilometerssoutheast of Seoul, since September last year.

SK Incheon Oil said it will spend 1.6 trillion ($1.7 billion)on the construction of the plant, which is scheduled to be completedin 2008.

"SK Corp. last year handed over the construction of the plantto SK Incheon Oil to create synergy," said Won Jeong-ho at SKCorp. "It is more profitable that cash-rich SK Incheon Oil constructsthe plant, and then tech-rich SK Corp. operates it," he added.

GS Caltex is building its second plant to convert heavy oil intotransportation oil in Yeosu, a city about 455 kilometers southof Seoul, at a total cost of 1.5 trillion won, the company said.

S-Oil plans to build a 480,000 barrel-per-day crude distillationunit and a 150,000 barrel-per-day processing unit for heavy oilby 2010 in Seosan, a city on the western coast of South Korea.

Construction will cost about 3.6 trillion won, a company officialsaid.

Analysts say that local refiners have no choice but to ramp upinvestments in cracking facilities for heavy oil and other high-endproducts amid volatile crude prices and tougher regulations onhighly polluting products.

"In order to survive, refiners should spend more on facilitiesthat refine heavy oil into cleaner and more profitable products,"Kim said. "Those facilities are expected to help improve theirbottom lines."