The lubricants divisions 73.6 billion won ($59.1 million) operating loss in the second quarter compared to an 81 billion won ($65.1 million) profit in 2008s second quarter.

In its earnings presentation, SK Energy cited several factors for its lubricants divisions second quarter performance, including reduced base oil margins from continued time-lag, depressed base oil prices from weak demand and inventory related loss. The company said it expected normalized third quarter profitability from factors such as an increase in base oil prices and demand rebound in new car sales.

Sales for SK Energys lubricants division reached 246.7 billion won ($198.2 million) in the second quarter, 48.5 percent lower than 478.9 billion ($384.7 million) in sales in the year-earlier quarter.

SKs lubricant business, which produces both base oils and finished lubricants, had reported U.S. $1.5 billion in revenue and $204 million in operating profit in 2008. The company holds more than 50 percent market share in the API Group III market. While 70 percent of its revenues come from exports, SKs ZIC-branded motor oils, made with the companys API Group II/III Yubase base oils, is a leader in South Koreas premium finished lube market. SK Energy forecasts that its new lubricant entitys total asset will reach almost $700 million.

By specializing in base oil and lubricants, the new lubricant entity will reinforce its specialty, enhance its speed in decision-making to better respond to ever-changing market conditions, and finance independently for its growth, said Tae-hang Jung, senior vice president of lubricant business at SK Energy. This is a definite win-win for both SK Energy, in securing more flexible business structure, and the new entity, in securing independence and growth momentum. Shareholders of SK Energy can also enjoy enhanced values if the value of the new lubricant entity rises.

SK Energy operates a 21,000 barrel per day refinery in Ulsan, South Korea, where Group II and III production is targeted at high quality passenger car motor oils.

An SK-Pertamina joint venture operates a 7,000-barrels-per-day Group III refinery in Dumai, Indonesia. The spinning off of the lubricants business will have no impact on the SK-Pertamina joint venture refinery and marketing of its products, said Yea-Sun Yoon, general manager of SK Energys lubricant business development team. The newly established company will take over SK Energys share of the joint venture.

One major reason for the spin off is to give SK more flexibility in decision making for investments, Yoon continued, hence the newly establishing company may speed up the materialization of its expansion plans.