Joining me is CFO JW Bang, IR team leader JW Ahn, and IR team members. Allow me to go over the financial highlights for Q3 2023. S-Oil recorded KRW 858.9 billion in Q3 operating income, which sharply went up quarter -on -quarter. The bearish Asia refining margin in Q2 made a steep turnaround, driven by strong demand in summer driving season and air travel peak season. It was the biggest contributor to a jump in operating income from the previous quarter. We had heavy T&I of major processes from early June and completed it one by one from end of June until middle of July, during when refining margin was at its lowest of the year. Startup coincided with the refining margins turnaround, which minimized the opportunity loss. International oil price jumped during Q3 in reaction to OPEC+'s voluntary output cut and the decision to extend it.
This resulted in roughly KRW 230 billion in inventory-related impact, which more than offsets roughly KRW -190 billion inventory-related loss in the first half of the year. As for the refining margin, global demand for refined product has been growing constantly despite economic uncertainties that have been lingering since the beginning of the year. The combination of demand recovered from pandemic shifting to endemic and summer peak demand in the Northern Hemisphere put latest outlook on this year's oil demand growth in between 1.8 MMbpd-2.4 MMbpd, which is very decent. Although post-pandemic run rate in the global refining industry went up, it did not fully catch up with the speed of demand growth, causing global refined product inventory to fall below historical levels.
We believe seasonal demand spikes for refined products, factors like startup delays in new facilities or interruption of existing ones that cause unexpected fluctuation in demand and supply could easily push up refining margin as it did in Q3. In this sense, we think Asia refining margin, which went down this month as summer peak season came to an end, will be able to bounce back when demand for heating oil picks up in winter. Next is about external financing for Shaheen project, which is making a smooth progress. The company agreed on major terms and conditions for KRW 780 billion in shareholder loan and KRW 700 billion in standby credit lines. We also signed KRW 1 trillion in bank loan agreement and secured both shareholder loan and bank loan at competitive rates below market interest rates.
This minimized the company's financing cost at a time when the market environment is dictated by high interest rates. KRW 1 trillion in bank loan, in particular, is policy-backed loan for investing in facilities emitting less carbon than conventional ones. It is a highly competitive low-interest facility loan. With low debt to equity ratio and outstanding cash generation capacity, we will be able to move on with the project as planned, maintain appropriate level of shareholder return and sound financial structure, even when assuming conservative marketing environment scenario during the project period. The company is throwing company-wide capabilities into successful completion of Shaheen project to take advantage of petrochemical upcycle in the midterm and to respond to energy shift in the longer term. We are, and we will keep pulling our best resources to take our corporate level to a higher level through the project's success.
Team leader JW Ahn will take over from me to share Q3 performance and other details.
Thank you. Good morning. This is JW Ahn, leading S-Oil IR team. Before going through the materials, please be noted that Q3 2023 financial results are provisional and subject to change according to outside independent auditor's review. Let me first touch on Q3 2023 performance and outlook. Please go to page five for Q3 2023 financial results. The company's revenue in Q3 rose by 15.1% quarter-on-quarter to approximately KRW 9 trillion. This is attributable to increased sales volume after the end of major T&Is and higher oil price compared to the previous quarter. Q3 operating income stood at KRW 858.9 billion, far outperforming cumulative operating income of KRW 552.1 billion in the first half of the year.
By segment, refining business contributed the most with a major turnaround as S-Oil's refining margin and international oil price resulted in inventory-related gains. As for petrochemical and lube, operating income in both segments declined quarter-on-quarter due to one-off opportunity loss associated with regular T&I of some processes that ended in July and lower seasonal demand. For your reference, G&I impact and inventory impact on the company's Q3 gain loss is -KRW 146.1 billion and KRW 234.3 billion. For finance and other income, the company incurred KRW 89.5 billion in FX loss due to higher FX and recorded KRW 737 billion in income before tax in Q3. But we have the company's FX risk management policy that offsets FX loss on the non-operating side with FX gains on the operating side on an annual basis.
The company's cumulative operating income and income before tax up to Q3 2023 is KRW 1.411 trillion and KRW 1.0581 trillion. Next is the company's financial status. Cash stands at KRW 1.47 trillion as of the end of Q3 this year, which is an appropriate level from income generation and external financing, despite expenditures on Shaheen project. It is smaller than the previous quarter because working capital went up after the end of G&I and higher international oil price. Net debt to equity ratio as of the end of Q3 is 54.2%. It is slightly higher than the end of previous quarter, but we are still maintaining stable financial structure. As for profitability indicators, return on equity marked 12.1%, and return on capital employed recorded 11.1%, driven by a sharp increase in operating income in Q3. Accumulated EBITDA up to Q3 recorded KRW 1.534 trillion.
Now, I will go into market environment and outlook by each business segment, starting with the refining business. In Q3, refining business recorded KRW 666.2 billion in operating income, which is KRW 958.3 billion higher than the previous quarter. Asia refining margin sharply rebounded on the back of strong demand in summer driving in the Northern Hemisphere and air travel peak season. On the supply side, run rate adjustment in some old refining facilities in Europe and elsewhere owing to unusually hot weather, partial facilities interruptions, and ramp-up delays in some new refineries in and out of the region failed to bring enough supply to the market, resulting in lower inventory and higher margins.
Thanks to these factors, Singapore refining margin jumped from $0.90 per barrel in Q2 to $7.13 per barrel in Q3, and it became the primary contributor to the company's performance improvement. Dubai crude price went up significantly from $75 per barrel in June average to $93.3 per barrel in September average. OPEC+'s announcement an additional output cut and period extension on the supply side serves as the key momentum for the oil price rally. As for Q4 outlook, we are projecting healthy Asia refining margin as demand will go up in winter amid low global inventory levels and conditions pointing to limited supply increase. Entering into October, refining margin adjusted downwards led by gasoline, this largely owes to the end of peak summer season.
With stockpiling activities for heating in winter starting this year, we believe refining margin will return to its bullish momentum that it did in Q3. The fact that new refining facilities have started up or are targeting startup this year are going through slow startup moves the industry to forecast that the tight supply situation won't go away in the near future. By product, we are expecting kerosene, jet fuel, and diesel to drive up refining margin in Q4. And based on our outlook, kerosene and jet fuel spread will be supported by winter heating oil demand growth and continued recovery of travel demand. Diesel spread will remain firm, driven by yield shift to meet kerosene demand in winter. And further details on the latest refining business environment and outlook will be shared in key business updates. Moving on to petrochemical business.
Petrochemical business recorded KRW 45.4 billion in Q3 operating income as olefin downstream margin deteriorated. Starting off with aromatics, PX spread in Q3 stood at $425 per ton, which changed little from the previous quarter, and benzene spread slightly fell from the previous quarter to stand at $251 per ton. Gasoline blending demand for feedstock aromatics during gasoline high season remained solid. An additional demand from new large-scale downstream facilities worked in favor of aromatics market environment. Aromatics spread may slightly adjust itself in Q4 when gasoline blending demand moderates with gasoline market environment entering into low season and aromatic production goes up. However, we believe the market will get a boost when regional downstream facilities start up after completing T&I schedules in September and October.
As for olefin downstream, PP and PO market in Q3 stayed weak due to new startups in the region, continuing downturn in Chinese manufacturing, real estate and construction industries, and shrinking downstream demand. Spread of PO, in particular, sharply went down quarter-on-quarter as new facilities started up in China at the end of June. We expect olefin downstream product demand to gradually get better in Q4 since China's consumer demand usually picks up before and after national holiday holidays, which support PP and PO markets. Also, China's consumption indicators have recently improved a little. The spreading perception that the current margin level is at the bottom level, where some players have no choice but to adjust down their run rate, is projected to support olefin downstream market conditions. Moving on to lube. Lube Base Oil recorded KRW 147.2 billion in Q3 operating income.
LVO spread in Q3 contracted quarter-on-quarter as off-peak season stagnated demand, major suppliers completed their scheduled maintenance, and lagging effects where feedstock price jumps get reflected in product prices with a time lapse. It posted $55.2 per barrel, which is a healthy one above historical average levels. In Q4, some suppliers have scheduled T&I, and Lube Base Oil supply could be limited if strong winter diesel demand causes yield adjustment. Demand from customers could gradually recover after low season. Given this, we forecast Lube Base Oil spread to show a modest upturn. Next, I will share the key business updates with you. First is global refined product inventory decline. Graph at the left shows trend of gasoline, kerosene, diesel, and heavy fuel stocks in major refined product trading hubs in U.S., Europe, Asia, and the Middle East.
Global refined product inventory in 2023 marked in green was slightly high in the first half of the year, but it's going down in the second half of the year consistently below the range in 2017, which was three years before the pandemic, and in 2019. In particular, inventory of diesel, kerosene, and jet fuel is at a low level across major regions like U.S., Europe, and Singapore. This year's inventory level, as well as last year's, is at their lowest since 2015, and this leads us to project an upward pressure on kerosene and diesel spread towards winter when heating demand goes up. The overall inventory decline of refined products is supported by solid fundamentals on the product demand side. Concerns around economic recession arising from monetary tightening policies in the U.S. and other major countries around the world, and subsequent questions over energy demand existed in the market.
Demand recovery of refined products for industrial use, which are affected by manufacturing, real estate, and construction industries, was rather slow. While demand for transportation fuel for vehicles and airlines is showing a healthy recovery throughout the year. Oil demand growth outlook for this year by major institutions ranges from 1.8 MMbpd-2.4 MMbpd, which is very decent. By product, demand for gasoline in the first three quarters of the year grew by roughly 860,000 BPD year-on-year. Demand for kerosene and jet fuel also jumped by 1 MMbpd during the same period. Diesel, by contrast, grew relatively less as industrial demand was weak. Demand for jet fuel recovered to 87% of pre-pandemic levels, which suggests there may be demand for further recovery in the future. By region, demand grew by 550,000 BPD in China, driven by reopening this year.
Demand also grew evenly in Asia, other than China, North America, Middle East and Europe. Next is progress of financing for Shaheen project. Total investment is KRW 9.258 trillion, out of which KRW 2.65 trillion or 29% will be financed externally. We will borrow KRW 780 billion, which is $600 million in the green bond, a shareholder loan from Saudi Aramco, which is the company's majority shareholder, to save costs of financing. The company agreed on the major terms and conditions and secured interest rate that is lower than that of normal facility loans from local and global financial commercial banks. For bank loans, the company completed KRW 1 trillion low interest facility loan agreement. It is a policy loan for investments into less carbon emitting facilities per intensity compared to existing facilities, and we have completed assessment and verification procedures for external certification agencies.
By financing long-term facility loans at a very low interest conditions at the early stage, we secured investment funds for the project and saved sizable amounts of financing costs at the same time. As for the corporate bonds, our plan is KRW 870 billion, which we will issue at the optimal timing from 2025 with consideration into bond market conditions and interest levels based on the company's outstanding credit rating. These diversified financing options will allow us to respond to uncertainties in the future financial market by optimizing execution timing and minimizing financing costs. For your information, Shaheen project is making a smooth progress as planned, with site preparation making a 31.4% and EPC 13.9% progress as of the end of September. We plan to communicate concrete progress of the project with analysts and investors on a regular basis. This is the end of my presentation. Thank you.
Please wait, this presentation in Korean has not finished yet.
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Now Q&A session will begin. Please press asterisk one, asterisk and one if you have any questions. For cancellation, please press asterisk two, that is asterisk and two on your phone.
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The first question will be given by Yoon Jae-sung from Hana Securities. Please go ahead.
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My first question has to do with the refinery capacity addition, which is scheduled for this year and up to next year and above. My second question is about the market situation that is getting better. This resulted in higher cash flow. If this level of cash flow is maintained, is there any chances for you to raise a dividend payout ratio?
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As for your question for the global refining capacity expansion, it is hard for us to find out the exact timeline of the capacity addition. The major institutions provide a wide range of outlook for this. We can provide the long-term based outlook of the financial institutions. The range of net capacity expansion schedules ranges from 4.2 MMbpd and 4.5 MMbpd between 2023 and 2030. Demand growth is expected to reach over 7 MMbpd. This means that excess demand situation where demand growth outstrips investment in the new refining capacity is expected to continue under global energy transition and greenhouse gas reduction trends.
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According to several institutions outlook based on each year, net capacity addition is expected to range between 1 MMbpd and 1.4 MMbpd for 2024, and it would be around 1 MMbpd for 2025. After 2025, less than 1 MMbpd of net capacity addition is expected. Afterward, it is expected to gradually go down.
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It is expected to take up to more than a year from six months for the normal operation and the startup of this project, depending on the project. The exact impact it will have on the market will be different depending on the project.
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This is CFO speaking. For your question on the chances of raising a dividend payout ratio. In July, we have provided dividend guidance. As it mentioned in there, even we are in the middle of progressing large scale project, we will maintain the dividend payout ratio of 20% of net income or above to protect shareholder value. As we are still at the early stage of the project, a conservative business case scenario was reflected to this. Once our funding for the investment is secured above a certain level, we said that we may be able to raise our dividend payout ratio even during the project period.
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As was mentioned, the company is expected to create a healthy income based on bullish refining margin scenario for the coming years. This will make us raise dividend payout ratio once we secure investment funding above a certain level at the later stage of the project.
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Since we are still at the initial stage of the project and as global economy situation comes with uncertainties, we are expected to make decisions complying with the dividend guidance we have provided. The final decision is subject to the board and ordinary general meeting of shareholders, which will be held in March next year.
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This concludes my answer.
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The following question is by [Non-English content] from [Non-English content]. Please go ahead.
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[Non-English content] from Shinhan Securities. Thank you for giving me the opportunity to pose my question. I have three questions. Recently, natural gas price increased, last year we had seen the gas to oil switching. Do you expect this to happen again in this winter? My second question has to do with the possibility of export quota issuance from China. Will it be issued for the third time this year? My third question is about your borrowing for Shaheen project. External borrowing may increase with the progress of the project. Can you tell us more details such as variable or fixed interest rate or the expected financing cost for the project?
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First, on your questions about the chances of gas to oil switching in this winter. Recently, European natural gas price increased because of the damages to natural gas pipeline and the shutdown of the gas fields on sea near area of conflict between Israel and Hamas. On a dollar per MMBTU basis, the price of natural gas climbed up more than that of LSFO and HSFO. This may push some European regions to replace natural gas with fuel oil. However, still the price of natural gas is not reaching the price of diesel. We have to monitor market situation more to find out whether gas to oil switching will occur in winter or not.
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As for your question on the chances of issuing export quota from China. Chinese Ministry of Commerce issued export quota for light oil three times this year, which amounts to 40 million tons. This is slightly higher than the total export quota issued last year. In Q3, only the issued export quota was 12 million tons.
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In the third quarter, the issuance of third export quota and improvement in refining margin pushed up export of Chinese refining products. However, still refining margin remained firm.
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There was a news report in late September referring to Chinese government view that the chances are not high for issuing the fourth export quota. The industry expects exports to go down because not enough export quota is remaining.
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From Q1 to Q3, light oil export from China reached around 900,000 BPD. Based on the remaining amount of quota, the export from the remaining period of this year is expected to be less than that of Q1 from Q1 to Q3.
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As for your question on the financing for Shaheen project, 29% of our financing for Shaheen project will be secured through external financing. As for major shareholder loan and facility loan, we will apply interest rates that is related to CD rates, one-year maturity of Industrial Finance Bonds and SOFR, we will apply a variable interest rate.
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As for the corporate bond you mentioned before, we will apply a fixed-rate interest rate and issue it at the optimal timing given the condition of corporate bond market and interest rate condition. About interest expense, since interest rate level may vary, it is hard to give you exact details at this time. However, as you mentioned, it will go up gradually, we already reflected the interest rate hike outlook for this. Interest rate expense, the capitalized interest expense was already reflected to the project budget, there will be capitalized interest expense for existing borrowing, too. Its impact on the quarterly net income would not be that big compared to the level of 2023.
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As we move toward 2025 and 2026, the later stage of the project, we expect interest rates to stabilize and interest rate uncertainties with the financial market to ease. We will optimize our financing plan to minimize borrowing costs for the project.
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This concludes my answer.
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The following question is by Cho Hyun-ryul from Samsung Securities. Please go ahead.
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Thank you for giving me an opportunity to pose a question. I have two questions. Can you give me the breakdown of inventory impact and T&I impact based on each business segment? My second question has to do with your new business. Refineries are recently increasing announcing the import of bio fuels. Do you have any plan for that? Other than Shaheen projects, are you considering any new business for your planning?
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First, about the inventory impact based on each business segment for 3Q, it was KRW +210 billion for refining business, KRW +26 billion for petrochemical business, and KRW 11 billion for base oil business.
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As for the T&I impact, the company had T&I for No. 3 CDU, CFU, Hydrocracker and No. 2 PX and related units during June and July. In the third quarter, we had a T&I impact of minus KRW 67 billion for refining business, minus KRW 39 billion for petrochemical business, and minus KRW 41 billion for lube base oil business.
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For the remaining year, no T&I is scheduled for our major units. We will try to maximize our process operation given market conditions to maximize our profitability.
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As for your question on new business, including biofuel, as part of a green initiative that the company is pushing forward in response to energy transition, we are planning for biofuel, hydrogen and waste plastic based circular economy business. For this, we are planning to establish a cooperative system with Saudi Aramco and other partners, we are also planning to conduct feasibility studies and business model development.
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As for biofuel business, for the fast entry into the market, we are pushing forward co-processing to produce a biofuel by treating biofuel stock into existing refining process as priority. We are also reviewing the construction of a biofuel-dedicated plant construction.
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The company is also pushing forward a circular economy business that utilizes waste plastic-based pyrolysis oil business. We already gained exemption for the regulation to produce green petrochemical products by treating our pyrolysis oil into the existing refining business. For this, we are conducting activities to secure business stock and supplement related equipment.
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As for the hydrogen business, we are collaborating with Saudi Aramco to import low-carbon ammonia that is produced from Saudi Arabia. We are cooperating to establish infrastructure that includes site and storage facilities and a pipeline for the overseas low-carbon ammonia imports. For that, we have signed LOI with Saudi Aramco on October 22nd for the low-carbon ammonia importation.
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However, during the project period, we will conduct a feasibility study for the business that is optimal for future growth. We will put priority on the investment that can utilize existing facilities, for example, co-processing. For the larger project, that will be pushed forward after the Shaheen project. The new business that I just mentioned do not come with a big investment.
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This concludes my answer.
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I would like to thank analysts and investors for
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The results will always
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Close today's conference call. Thank you very much.