Power Struggles: Energy Security and Energy Diplomacy in the Asia Pacific 9811954739, 9789811954733

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Power Struggles Energy Security and Energy Diplomacy in the Asia Pacific Se Hyun Ahn

Power Struggles “Professor Se Hyun Ahn has provided timely, thoughtful, and comprehensive analysis of complex energy security challenges in the Asia-Pacific region. I highly recommend his book to those seeking to understand the interaction of energy policy, and diplomacy for energy security in a dynamic region where the growing demand for energy has profound implications for the international political economy and security.” —Charles W. Boustany, Jr., Member of U.S. Congress, 2005–2017 “Russia’s brutal invasion of Ukraine has brought misery and tragedy in untold ways. In the cascading energy shortages in Europe and around the globe, the war also serves to mark the return of power politics to international energy affairs. Professor Se Hyun Ahn’s most recent volume, Power Struggles: Energy security and energy diplomacy in the Asia Pacific, a deeply researched and timely consideration of the full range of energy security topics in Asia, serves the critical purposes of providing in-depth detail about the energy needs of Asia while also providing incisive analysis about what the international energy security environment will bear. Ahn concludes that the role of natural gas is ascendant, as an integral component of a successful energy transition and as a means for Asia’s democracies to deepen their partnerships with each other in the face of autocratic pressures. In particular, Professor Ahn judges that a US-ROK Alliance committed to effective energy security will make a huge difference. A must-read for specialists but accessible for generalists, Power Struggles is the right book for these confounding times.” —Roy D. Kamphausen, President, The National Bureau of Asian Research (USA) “This wide-ranging book is a must-read for any student of energy security in Northeast Asia. Dr. Ahn provides a wealth of information that maps existing and potential energy networks from Russia through the Korean peninsula. The chapter on energy security and the US-ROK alliance speaks to how much supply chain resilience has become a critical mission of the alliance. An excellent read for scholars and policymakers.” —Victor Cha, Vice Dean and D.S. Song-KF Professor of Government, Georgetown University and Senior Adviser at the Center for Strategic and International Studies in Washington, D.C. (USA)

“In this deeply-researched book, Se Hyun Ahn explores the challenges of the energy security environment in the Asia Pacific region as it eyes both conventional and renewable energy possibilities. As geopolitical tensions among the three great powers—China, Russia and the United States—are on the rise in Northeast Asia, the future for both military and energy security is uncertain, demanding creative solutions for this new reality.” —Angela Stent, author of Putin’s World: Russia Against the West and with the Rest, and senior adviser to the Center for Eurasian, Russian and East European Studies and professor emerita of government and foreign service at Georgetown University. She is also a nonresident senior fellow at the Brookings Institution and co-chairs its Hewett Forum on Post-Soviet Affairs “Covering a wide range of energy security and foreign policy considerations surrounding the Korean Peninsula, Dr. Ahn’s book provides highly valuable insights into how energy and the great power politics intersect in Northeast Asia. The details of major energy relations and projects in the region make it an excellent read for anyone who seeks to better appreciate the implications of the evolving energy geopolitics for Northeast Asia, particularly in light of the invasion Ukraine by Russia, a major energy supplier and a key geopolitical player in the world.” —Jane Nakano, Senior Fellow, Energy Security and Climate Change Program, Center for Strategic and International Studies (USA)

Se Hyun Ahn

Power Struggles Energy Security and Energy Diplomacy in the Asia Pacific

Se Hyun Ahn Department of International Relations University of Seoul Seoul, Korea (Republic of)

ISBN 978-981-19-5473-3 ISBN 978-981-19-5474-0 (eBook) https://doi.org/10.1007/978-981-19-5474-0 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover credit: Thatree Thitivongvaroon/Getty images This Palgrave Macmillan imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Acknowledgements

No writer ever completed a book on his own, and many individuals deserve and rightfully share the credit for my having completed this one. I have many people to thank and to acknowledge from my past I have worked on this book. Listing them here insufficiently acknowledges the gratitude that I feel. First, I would like to thank so many of my previous professors including Margot Light, Angela Stent, Victor Cha, David Loebsack for their excellent advice and support during my studies. I have been unusually fortunate to study under their direction. Especially, Margot and Angela had the remarkable ability to bring clarity to cluttered argument no matter what the topic, and this book has greatly benefited from their thoughtful counsel and attention to detail. They have been extraordinarily supportive and encouraging. Without their help, completion of this book would have been impossible. My deep thanks to them. Also at Palgrave Macmillan, I would like to express special appreciation to Jacob Dreyer, Senior Editor for politics and economics and Arun Kumar, Project Coordinator, Mahesh Meiyazhagan, Project Manager for the arrangement, intelligence, care, and very thoughtful editing. Jacob, in particular helped me immensely in many respects including deciding the title of this book and my former book, Policing Northeast Asia published by Palgrave. Here, I am also thankful to many world renowned energy scholars, government officials, colleagues, and people on energy field around the world including Dr. Paik Keun Wook, President Roy v

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ACKNOWLEDGEMENTS

Kamphausen, Secretary General Yang Yi, Dr. Daniel Yergin, Dr. Ryu Ji Chul, Professor Lee Wang Hwi, Professor Lee Chul Woo, Dr. Lee Sung Kyu and etc. At the same time, I would like to extend my additional thanks to the following global institutes including NBR, CIIS, KEEI, MOFA, MOTIE for wonderful gatherings, meetings, and conference on energy. They all inspired me and became important assets in my journey to publish this book for the past 20 years. At the same time, I appreciate Professor Jeong Won Bourdais Park from University of Nottingham Ningbo China who read parts of the manuscript and contributed to my thinking and understanding. Last, but hardly least, most importantly I have no doubt that without Professor Kwang Shik Ahn and Professor Sook Ja Lim, my parents’ love and unconditional support as well as Professor Lee Jee Won, my wife’s existence and love, and my three-year-old baby, Shin Hoo, as well as my sister, Mee Hyun, this book could never have been undertaken, let alone completed. I have drawn strength from their sacrifice, loyalty, and unwavering patience. I am the luckiest person in the world. Their love and support have been sustaining all along this considerable journey. No amount of thanks here can begin to repay my debt of gratitude to them. So it is to them that I dedicate this work. Last truthfully, my deep gratitude to God for everything. He has guided and formed my life. Se Hyun Ahn

Contents

1

Introduction

2

Framing Energy Security Between Russia and South Korea? Introduction Progress The Kovykta Gas Field at Irkutsk The Sakhalin Project Other Energy Projects Problems Bilateral Dimension The Limits of the RFE: Underdevelopment and Harsh Environment The Regional Dimension Prospects

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Northeast Asia’s Kovykta Conundrum: A Decade of Promise and Peril The Potential Benefits of Kovykta Gas Development Russia’s Untapped Potential South Korea’s Looming LNG Supply Gap China’s Promise as a Gas Market The Fight for Kovykta The Five-Country Feasibility Study (1996–2000)

1 7 7 8 8 11 14 16 16 20 23 25 33 34 34 35 39 40 41

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The Three-Country Feasibility Study (2000–03) Gazprom’s Strong-Arm (2004–Present) Obstacles to the Development of the Kovykta Gas Pipeline Transit Country Problems Complexities of Gas Investments Demand Security and Pricing Russia’s Resource Renationalization Balancing Russia’s Domestic and European Demand Russia’s New Subsoil Law Kovykta’s Periphery Future Outlook

42 44 46 46 48 50 52 56 57 57 60

Is Natural Gas the Answer for North Korea? Introduction Energy Crisis in North Korea North Korea’s Energy Dependence on China Natural Gas Remedy: Why Natural Gas for North Korea? Natural Gas Options for North Korea Siberian Potential and Russia’s Role PNG North Korean Route and LNG Power Plant Proposal The US Role Future Outlook

69 69 70 72 79 83 83

Framing Multilateral Energy Security Framework in Northeast Asia?: Lessons from KEDO and ECT Introduction The Experience of KEDO: “Why is KEDO Relevant for Future Energy Development?” The Lesson from the EU and ECT Anatomy of Future Regional Multilateral Energy Framework What Is to Be Done? & Outlook References Republic of Korea’s Energy Security Conundrum: The Problems of Energy Mix and Energy Diplomacy Deadlock Introduction ROK’S Energy Consumption and Demand Trend

84 87 89 97 97 98 104 109 111 114

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CONTENTS

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Global Supply and Demand Conditions Current Energy Consumption Problems of the Current Energy Policy Basic Direction of the Second Energy Master Plan Oil and Gas Supply and Demand Projection Alternative Energy Natural Gas The New Energy Security Concept ROK’S Energy Security Objetives What is the Most Important Current Issue and How is the Country Trying to Solve It? What Are the Biggest Foreseen Challenges in the Near Future? What Role Does the US-Japan-Korea Alliance Play for the Country’s Energy Security? Off-Shore Resource Development Energy Diplomacy Energy Power Mix Energy Scandal Conclusion References

118 118 121 121 124 126 128 130 133

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The US-ROK Energy Alliance Background Benefits Specific Projects Policy Implication and Outlooks

147 147 148 150 154

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Energy Alliance Between Canada and South Korea: Canadian Oil Sands Cooperation Energy Potentials of Canada Oil Oil Sector Organization & Trends Exploration and Production Western Canada Sedimentary Basin Offshore Pipelines Canadian Oil Sands Important Factors for Oil Sands South Korea’s Involvement in Alberta’s Oil Sands

159 159 162 162 164 164 164 165 167 171 172

133 136 136 136 137 138 140 141 142

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Limitation of Canadian Oil Sands Developments Oil Demand Crunched EnCana, Imperial, Suncor Environmental Problems Implications

173 174 174 175 175

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World Chokepoint Definition Strait of Malacca Strait of Hormuz Panama Canal History Expansion China Question Nicaragua Canal Greater Mekong Sub-Region (GMS) South Korea’s Current Engagement in GMS The Political Economy of World Chokepoint Chokepoint and International Law Implications of World Chokepoints

179 179 181 182 183 186 186 187 188 189 190 194 195 195

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Conclusion

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Bibliography

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Index

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List of Figures

Fig. 2.1

Fig. 2.2 Fig. 3.1

Fig. 3.2

South Korea’s Natural Gas Demand 2003–2017 (Source Ministry of Commerce, Industry and Energy [Seoul Korea, December 2009]) The Russian Oil and Natural Gas Pipeline Proposals in Northeast Asia (Source: Economist, July 11, 2004) Share of South Korea’s LNG Imports by Source, 1990–2020 (Source “KOGAS 2005 Annual Report,” Korea Gas Corporation, 2006—www.kogas.or.kr) South Korea’s Growing Gas Supply–Demand Gap (Source “Outlook for Energy Consumption in 2010,” MOCIE—www.mocie.go.kr; “BP Statistical Review of World Energy 2007,” BP p.l.c., 2007; and “KOGAS 2005 Annual Report.” Note Data for 2010, 2015, and 2020 is projected)

10 14

37

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LIST OF FIGURES

Fig. 3.3

Fig. 3.4

Fig. 3.5

Fig. 3.6 Fig. 4.1 Fig. 4.2

Fig. 4.3

Fig. 4.4 Fig. 4.5

Fig. 6.1

Fig. 6.2

Projection of China’s Gas Demand (Source “BP Statistical Review of World Energy 2007”; “2006 Energy Demand and Supply Outlook,” Asia–Pacific Energy Research Center (APERC), 2006; “2004 World Energy Outlook,” International Energy Agency (IEA), 2004; and “2006 International Energy Outlook,” Energy Information Administration (EIA), 2006. National Development and Reform Commission (NDRC) figure cited in Akira Miyamoto and Chikako Ishiguro, “Pricing and Demand for LNG in China: Consistency between LNG and Pipeline Gas in a Fast Growing Market,” Oxford Institute for Energy Studies, NG-9, January 2006 Note Actual figure in 2006 is 56 bcm) Kovykta’s Proposed Piplines (Source K. Kanekio, “Northeast Asia Natural Gas Trade Study: Developing Stable Supply of Cleaner Energy for Sustainable Development” [presented at the World Bank workshop, Beijing, June 24, 2004]) Distribution of Russia’s Oil and Gas Production, 1991–2006 (Source “BP Statistical Review of World Energy 2007”) Crude Oil Price per Barrel, 1970–2006 (Source “BP Statistical Review of World Energy 2007”) North Korea’s energy use composition DPRK energy supply situation (10,000 tons, 1000 bbl, 100 million kwh) (Source “DPRK Statistics,” 2012 Statistics, Statistics Korea [Seoul Korea, 2012]) DPRK foreign trade trends (US $ million) (Source “DPRK Trade Trends,” 2011 KOTRA [Korea Trade Investment Promotion Agency] [Seoul Korea, 2011]) North Korea’s long-term energy demand prospects (in tons) (Source KEEI Energy Statistics, 2010) North Korea’s long-term power electricity capacity prospects (in million kwh) (Source KEEI Energy Statistics, 2010) Final energy consumption trend by source (Unit:%) (Source Korea Energy Economics Institute 2014. “Yearbook of energy statistics” Korea Energy Economics Institute) Change in energy mix (2001 → 2012) (Source Ministry of Trade, Industry & Energy. 2014. “Korea energy master plan: Outlook & policies to 2030” Ministry of Trade, Industry & Energy. p. 28)

40

44

53 54 71

71

76 81

82

119

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LIST OF FIGURES

Fig. 6.3

Fig. 6.4

Fig. 8.1 Fig. 8.2 Fig. 8.3 Fig. 9.1 Fig. 9.2 Fig. 9.3

International Prices for Heavy Oil, LNG, and Electricity (USD/TOE) (Source Ministry of Trade, Industry & Energy. 2014. “Korea energy master plan: Outlook & policies to 2030” Ministry of Trade, Industry & Energy. p. 56) Self-sufficiency Rate (Source Ministry of Trade, Industry & Energy. 2014. “Korea energy master plan: Outlook & policies to 2030” Ministry of Trade, Industry & Energy. p. 110) The Map of Canada Total energy consumption in Canada (2021) (Source International Energy Annual 2005) Top Western hemisphere oil producers, 2007 (Source EIA International petroleum monthly) Panama Canal (Source Se Hyun Ahn’s Photo) Panama Canal Panama Canal

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123 160 161 163 184 185 187

List of Tables

Table 4.1 Table 4.2 Table 6.1 Table 6.2 Table 6.3 Table 6.4 Table 6.5 Table 6.6

DPRK foreign trade volume (Unit: US $ million) North Korea’s long-term energy demand prospects (Unit: TOE) Fossil fuel self-sufficiency rates of the world’s ten largest energy consumers (2011) Current and new policy paradigm Forecast by source: Total primary energy demand (business-as-usual (BAU)) Forecast by source: Final energy consumption (business-as-usual (BAU)) ROK government budget for alternative energy(Won: a hundred million) The present state of Alternative Energy Supply (unit: thousand toe)

77 81 119 123 125 125 126 127

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CHAPTER 1

Introduction

This book is about the landscape of Northeast Asian energy security that is being shaped by dramatic shifts in geopolitics and energy. This book seeks to examine the progress that has been made and the obstacles to the establishment of energy security in Northeast Asia, paying particular attention to a wide range of energy security elements around the Korean Peninsula and balancing of power relations among the U.S., Russia, and China. The book illuminates eight important cases of energy security cooperation in the region: (1) framing energy security between Russia and South Korea; (2) Northeast Asia’s Kovykta natural gas field conundrum; (3) North Korea’s energy security status; (4) the possibility and the tasks of establishing multilateral energy security framework; (5) South Korea’s energy security dilemma; (6) The US-South Korea energy alliance; (7) Energy cooperation between Canada and South Korea; (8) the implications of world chokepoint for East Asia. In addition, in each chapter, this book also deals with US-China energy relations, US-Russia energy great game as well as energy relations between China, Japan, and the two Koreas in detail. This is an important study of an understudied subject in East Asia and the world that has significant implications for the security, geopolitics, energy, and economy of the region. One thing we can be pretty certain that East Asia’s appetite for energy in the years ahead will continue to grow enormously despite energy transition fever. And current energy crunch and global economic crisis, along with the Russian invasion © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 S. H. Ahn, Power Struggles, https://doi.org/10.1007/978-981-19-5474-0_1

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of Ukraine will be a turning point to redefine energy security in East Asia. This book explores and anticipates the answers for future energy security in the region. This chapter explores the progress, problems, and prospects of RussianSouth Korean energy security cooperation, focusing on the Pipeline Natural Gas (PNG) project, the Sakhalin LNG project, Eastern Siberia Pacific Ocean Oil Pipeline (ESPO), Yamal Project, and other examples of energy cooperation. This chapter argues that several ongoing energy projects between Russia and South Korea are highly likely to enhance energy security needs for both countries. Nevertheless, the development of bilateral energy projects has been extremely slow due to the problems of bilateral and multilateral energy cooperation as well as external constraints. Obstacles specifically include Russia’s protectionist energy policy, South Korea’s lack of an energy strategy, North Korea’s nuclear proliferation problem, insufficient financing for the development of the RFE, the lack of multilateral institutional arrangements in Northeast Asia, US Shale gas revolution, and the war. Most of all, the competitiveness and reliability of Russia’s energy turns out uncertain. Chapter 2 examines the Kovykta Gas Pipeline, one of the largest gas fields on earth in detail. Despite the potential to provide greater energy security for Northeast Asia—a decade of negotiations over the Kovykta field has still not resulted in an agreement to construct the gas pipeline. The main argument of this chapter is that the vast amount of gas from Russia’s Kovykta field has the potential not only to drastically reduce Northeast Asia’s energy shortage but also to help diversify Northeast Asia’s traditional sources of energy away from the Middle East, along with distance advantage. The development of Kovykta gas is stalled because the Russian government has viewed this particular field as ad hoc secret weapon to utilize. Furthermore, the following factors obstructed developing this gas field: • The politics of route determination ~ Though routing the pipeline via North Korea and Mongolia would be cheaper, government and private sector sensitivities have resulted in proposed routes that circumvent the two countries and thus drive up the costs of any such pipeline. • Inherent complexities of gas investments ~ Natural gas is intrinsically more difficult to trade than oil, and gas deals require much more confidence, guarantees, and money from investors and governments.

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• Demand security ~ China’s market is important to Kovykta’s success. Despite plans for further gas market development, however, China’s reliance on cheap coal has created a soft market for higher-priced gas. • Russia’s resource nationalism ~ Rising oil prices have given Moscow impetus to renationalize Russia’s energy sector, thereby both complicating negotiations and causing investors to be wary of Russia that could use energy as a political weapon. Chapter 2 also argues that though a more centralized role for Russia in the Kovykta project could speed the decision-making process, striking a price that suits both China and Russia will be the key determinant in the fate of the pipeline. Gazprom is currently focused on other projects, however, and Kovykta will possibly remain idle for several years to come. Chapter 3 tells the little-known story of North Korea’s energy situation. It describes the serious collapse of North Korea’s current energy security situation and suggests several possible energy options for the country to overcome its energy shortage crisis. This chapter investigates the serious problems of North Korea’s heavily China-dependent energy structure, Moscow-Pyongyang energy transaction, and ultimately proposes ensuring North Korea’s energy security by promoting various natural gas aid programs over the longer term. The main purpose of Chapter 4 is to outline the possibilities of framing multilateral energy security institutions in Northeast Asia. This chapter elaborates the original idea and concept of both KEDO’s and EU’s limited achievements and applies them to the potential building regional energy security framework in Northeast Asia. The basic argument is that both KEDO and ECT approaches toward energy security are equally quite helpful to the case of Northeast Asia because they promoted the active role of government participation and intervention, although both cases are somehow incomplete and different from each other. Moreover, this chapter contends that as the natural gas age is approaching, natural gas trade among the Asia–Pacific states increases, and the establishment of multilateral energy security in the region is a must be done task in the region, in order to mitigate potentially both man-made and natural energy crises among states. Chapter 5 describes the Republic of Korea (ROK)’s energy security priorities and problems. During President Park’s administration, ROK faced a wide range of energy security problems. Almost nation’s energy

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diplomacy has virtually stopped functioning for mostly domestic political reasons. Furthermore, the nation’s energy security has been endangered because ROK’s energy security policy has been poorly implemented with no concrete goals and no rational choice of energy mix plan. This study seeks to examine ROK’s most urgent energy security agenda at the moment and how the country should respond to these specific issues. Moreover, this study will investigate ROK’s energy mix policy in detail according to various energy resources. This paper contends that the current problems of ROK’s energy security and the deadlock of ROK’s energy diplomacy stemmed from the ignorance of the exact definition of energy security at the national level among policymakers, academia, and various political groups including top leadership. ROK’s energy security is highly likely to experience significant disarray in the upcoming decades since the nation’s energy security clock has been reset back to 5 years before now during the Park’s administration. Chapter 6 describes the importance of the US-ROK energy security alliance. Shale gas revolution, perhaps the biggest game-changer in the global energy geopolitics since the start of the millennium century, has turned what was an imminent shortage in the U.S. into what may be a hundred year supply. This chapter argues that the traditional military and political US-ROK alliance has been rejuvenated with the economic security dimension. And energy posits the focal point of economic security between the two nations. Accordingly, a wide range of energy security cooperation can be anticipated and some of them are already in the process. And what is important, this bilateral energy security alliance is very significant not only within a regional context but also from a global standpoint because these two states are already crucially important for the global energy industry and market. The new US-ROK energy alliance could maximize their synergy in the third region such as Greater Mekong Sub-region (GMS), Open seawater as well as the European continent. Chapter 7 also uncovers the underrecognized story of the possibilities and problems of energy cooperation between Canada and South Korea. This chapter primarily centers on Canada’s energy potential to be the energy partner of Korea in the future. Chapter 8 deals with the energy security implication of the world chokepoint for East Asia, along with the US-China maritime competition. This chapter seeks to explore distinct features of Malacca, Hormuz, Panama Canal, Nicaragua Canal, and Greater Mekong Sub-region (GMS)

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and also explains the political and economic implications of energy chokepoints. The conclusion section lays out a brief summary of each chapter and discusses the highlights of the current global energy crunch phenomenon and implications for Northeast Asia as well as the Russian invasion of Ukraine. Specifically, this section also provides deep analyses about China questions with regard to its rivalry with the U.S. and its weakness. One thing that we need to bear in mind is that the current global energy crisis already began even before the Ukraine war broke out in 2022. In other words, green inflation started in 2021 as a result of Europe’s exceptionally low wind and accordingly the stop of windmill power. What is more important, at the same time the revenge of the old economy has begun to start since 2011, in order to resist Europe’s energy transition policy. And this green inflation, war, and global energy crunch appear to be prolonged for the time being at least 2 more years. These unusual crises will also clearly affect the energy security posture in Northeast Asia. Throughout the chapter, but of one thing we can be certain: the region’s appetite for energy in the years ahead will grow astronomically. In particular, the role of natural gas is crucially important in East Asia. Balance of power relations, especially trilateral relations among the U.S, China, and Russia is the key to understanding energy security geopolitics in the region. Whatever the future energy geopolitics landscape in Northeast Asia in the years ahead, energy alliance and energy security will be defining concepts for our future, especially amid the severe global energy crunch which started in the latter part of 2021. In this respect, this book primarily focuses on the energy great game while bringing comparative analysis of each different bilateral energy relations in different periods. Now, we shall begin exploring the potential, problems of prospects of establishing energy security in Northeast Asia.

CHAPTER 2

Framing Energy Security Between Russia and South Korea?

Introduction Energy cooperation is one of the important aspects of current RussianSouth Korean bilateral relations. This article deals with the progress, problems, and prospects of Russian-South Korean energy cooperation. The Sakhalin and Kovykta Gas projects illustrate how seriously both countries work to cope with their energy security issues and the importance they place on the potential for energy trade. Several ongoing energy projects are highly likely to meet energy security needs for both countries. Specifically, these projects could help Russia not only diversify its energy exporting market but also prompt it to become a regional player in Northeast Asia. The projects could also help South Korea solve its domestic energy shortage and diversify its current energy importing market. This bilateral energy cooperation is deeply rooted in Northeast Asia’s regional energy demands and security issues. Thus, this essay argues that energy diplomacy issues should be dealt with within a multi-cooperative framework that includes China, Japan, North Korea, Russia, and possibly Mongolia and Taiwan. Still, the development of energy projects between Russia and South Korea has been extremely slow and there have been no substantial benefits or concrete outcomes. Further, some efforts, such as the liquefied natural gas (LNG) trade in Sakhalin Island, are still primitive. Above all, the Kovykta pipeline natural gas (PNG) project is stalled at © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 S. H. Ahn, Power Struggles, https://doi.org/10.1007/978-981-19-5474-0_2

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this stage. And other obstacles continue to hamper the establishment of bilateral energy security. The article begins by discussing the development of specific energy projects, focusing on the Kovykta PNG project, the Sakhalin LNG project, and other examples of energy cooperation. It then analyzes the problems of bilateral energy cooperation. The final section assesses the prospects and implications of energy cooperation for bilateral energy security.

Progress In the past two decades, there have been several attempts by Russia and South Korea to capitalize on major energy projects in the Russian Far East (RFE) and Eastern Siberia. These are the Sakha, Kovykta, and Sakhalin gas projects, the West Kamchatka joint oil exploration, the construction of an oil complex in the Vladivostok area, and a power grid interconnection project involving North Korea. The Kovykta Gas Field at Irkutsk The Kovykta natural gas field in Eastern Siberia has proven reserves of 2,000 billion cubic meters (bcm) per year, enabling production for 30– 40 years. Development of this field could become a pivotal aspect of energy cooperation with East Asian economies in the next few decades. The Kovyktinskii gas condensate field, containing an estimated 870 bcm of gas and 400 million barrels of condensate, was discovered in 1987. The Russian company Sidanko was the main shareholder, along with Irkutsk Oblast (Province), Irkutskenergo, Angarsk Refinery, and East Asia Gas Co (EAGC). In July 1996, the EAGC, a subsidiary of the South Korean Hanbo Group, announced that it had purchased 27.5% ($25 million) of Russia Petroleum (RP)’s equity shares and would promote early development of East Siberia’s oil and gas reserves.1 As a result, the Hanbo Group became the largest shareholder of RP (46.1%). Russia’s United Export Import (UNEXIM) Bank and Sidanko were the other two major shareholders (25% each), the latter having acquired a 46.1% stake in the Angarsk Petrochemical Company (APC), one of RP’s founders.2 After the Hanbo Group went bankrupt in 1997, it sold off a large part of its equity share in RP to Sidanko, which then sold it to British Petroleum (BP) as part of a deal between BP, Sidanko, and UNEXIM

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bank. In 1997, BP renewed its interest in the Kovykta project by becoming a shareholder of Sidanko. In November, Sidanko and BP established a strategic alliance to develop this project. Meanwhile, EAGC was left with just a 7.5% share of a potential project to deliver natural gas from Siberia to China.3 The South Korean consortium conducted an eightmonth preliminary feasibility study on the Kovykta gas field starting in December 1996 that proved the project would be economically profitable to South Korea.4 In December 1997, Korea, Russia, Japan, China, and Mongolia agreed to initiate a feasibility study on natural gas fields in Siberia. The meeting collapsed on December 24, 1998 because China and Russia objected to Mongolian participation in this project. In particular, China strongly opposed Mongolia’s serving as a transit nation. In February 1999, RP and the Chinese National Petroleum Corporation (CNPC) signed a general agreement on carrying out a feasibility study on the Kovykta gas project. In November, Korea Gas Corporation (KOGAS) joined the agreement. A year later, RP signed a new trilateral agreement with CNPC and KOGAS for a feasibility study in Beijing. The projected total production volume was 30–35 bcm, and gas output and exports to China and South Korea were to amount to 20 bcm and 10 bcm, respectively. South Korea also proposed North Korea’s participation in the project.5 It was expected to take five to six years to develop the gas fields and construct the 4,100-kilometer gas pipeline, possibly linking Irkutsk in Russia, Ulaanbaatar in Mongolia, Beijing in China, and Pyongtaek near Seoul. However, the Mongolian route was ruled out by the Chinese authorities in 2002, even though it appeared to be the most competitive price option.6 The Chinese leadership was highly concerned that along with Mongolia, China’s Inner Mongolia Autonomous Region might benefit from transit fees, and that ethnic Mongolians there might demand autonomous social rights, perhaps leading to unrest. The Chinese also worried that Mongolians would cut off gas supplies en route to China. Moreover, Beijing observers concluded that considering China’s own current global and regional rivalry with the U.S., Ulaanbaatar had become too close to Washington. As South Korean-North Korean relations improved, South Korea also proposed that the pipeline should pass through North Korea. In February 2003, Gazprom chief Alexei Miller visited Seoul to discuss KOGAS’s proposal to build the China-North Korea-South Korea pipeline to Pyongtaek, and send Sakhalin gas exports to South Korea via North

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Korea.7 Energy experts and South Korean politicians emphasized North Korean involvement in order to minimize political instability on the Korean Peninsula—mostly related to the North’s nuclear proliferation and domestic economic difficulties—and to promote mutual economic prosperity. However, TNK (Tyumen Oil Company) and BP, which had merged in 2003 giving the new company TNK-BP a 62.89% stake in RP, strongly opposed the route through North Korea because of high costs and political risks. South Korea eventually abandoned the idea and stuck to the original plan to lay the pipeline on the bottom of the sea between China and South Korea.8 South Korea’s total investment in this project is projected to be approximately $12 billion: $5 billion for developing the gas fields and $7 billion for the pipelines.9 Once completed, the Kovykta gas field should provide a total of 21 million tons of natural gas to China, Russia, and Korea annually for 30 years.10 If the project succeeds, South Korea will receive seven million tons of gas annually, one-third of its total national gas demand (see Fig. 2.1). Success would also mean that Korea would purchase natural gas at a price 22%–25% lower than the current import price for LNG.11 Although the project was initiated in 1995, it is still awaiting approval from the Russian government. The main obstacle is Gazprom’s reluctance to sell gas to Western companies; this stems from new Russian nationalist views about protecting its natural resources in the region. For example, Gazprom, which has no assets in the Kovykta project, clearly has South Korea's Natural Gas Demand 2003-2017 35,000 30,000 1,000 Tonnes of Oil Equivalent

25,000 20,000 15,000 10,000 5,000 0

2003

2004

2005

2007

2010

2015

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Fig. 2.1 South Korea’s Natural Gas Demand 2003–2017 (Source Ministry of Commerce, Industry and Energy [Seoul Korea, December 2009])

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less incentive to develop this field, whereas it strongly advocates foreign participation in the Sakhalin-2 project, in which it recently acquired 25% of the assets of Shell, the main shareholder. Gazprom responded negatively to the Kovykta gas field feasibility study agreement that RP, CNPC, and KOGAS signed in Moscow in November 2003, arguing that priority should be providing gas to Russian consumers. And in January 2004, during a meeting with Viktor Vekselberg, TNK board chairman Alexei Miller declared that Gazprom would not permit the field to be developed outside its control. He maintained that instead of building an export pipeline, it was necessary to build gas and chemical facilities first and then to export the final products to Asian markets.12 In January 2007, Gazprom and the Kremlin declared that they wanted to take over TNK-BP’s Kovykta assets. Moscow accused TNK-BP of violating the terms of its license at Kovykta. Gazprom announced that it intended to direct a portion of Kovykta’s anticipated output to Russia’s domestic market immediately and another portion for export to China and South Korea, possibly starting in 2012. TNK-BP is highly likely to give up its majority stake in Kovykta to Gazprom, and is only negotiating about the price. Moscow also expects that the Kovykta field and production are to be integrated into Russia’s Unified Gas Supply System (UGSS).13 The final decision on Kovykta has not been made. Now the discussion of seemingly the most promising project between Russia and South Korea has completely faded away. Instead, Russia is hoping to deliver natural gas from Chayanda gas field, another Eastern Siberian gas field and Sakhalin-3, to South Korea. The Sakhalin Project In October 2006, Gazprom and KOGAS reached an intergovernmental agreement over Russia’s natural gas supply to South Korea. The Sakhalin2 gas project is one of the most immediately achievable projects. In fact, the Sakhalin oil and gas projects are based on decades of RussiaJapan exploration efforts. South Korea did not participate in any of the Sakhalin projects until 1994. The total resources of Sakhalin, including both inland deposits and those of the continental shelf, are 3,360 bcm of natural gas and 1,285 million tons (mt) of oil and gas condensate combined, along with 935 mt of oil.14 As Bradshaw notes, it is difficult to count the number of Sakhalin projects because their status varies. They range from Sakhalin-2 which is currently producing oil offshore, to

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speculative acquisition of offshore acreage from companies without the technical capacity to develop offshore fields.15 Sakhalin-1 and Sakhalin-2, the first generation of Sakhalin projects, have been declared commercially viable and are at the development and delivery stage. Proven reserves of Sakhalin-1 include 324 mt of oil and gas condensate and 420 bcm. Reserves of Sakhalin-2 include 600 mt (4.5 billion barrels) of crude oil and condensate, and gas condensate of more than 700 bcm. In 2000, the total estimated cost for Sakhalin-1 and Sakhalin-2 were $15.2 billion and $10 billion, respectively.16 However, the original estimate of $10 billion for Sakhalin-2 was revised in 2005. The current cost estimates for the Sakhalin-2 project are $ 20 billion, twice as much as expected. Moreover, some Russian agencies estimate the final investment at $ 28 billion.17 Among the six Sakhalin projects, Sakhalin-2 has made the most progress. Its fields are approximately 15 kilometers off the northeast coast in waters that are frozen for five to six months of the year. The Sakhalin2 project comprises two fields: Piltun-Astokskoye, primarily an oil field, and Lunskoye, predominantly a gas field with recoverable reserves of 185 mt of oil and 800 bcm of gas.18 The first phase of LNG production at Sakhalin-2 took place in 2009. According to reports from several years ago, “The Sakhalin-2 oil reserves are equal to more than one year of total crude oil exports from Russia at the current level of around 2.5 million barrels per day. The vast gas reserves represent nearly five years of Russian gas exports to Europe, or enough to supply current global LNG demand for four years. This proven resource base will supply more than 9 mt of LNG for at least 25 years.”19 Between 1999 and 2004, the project produced over 60 million barrels of oil. Oil from Sakhalin-2 is exported to China, Japan, the Philippines, South Korea, Taiwan, Thailand, and the U.S.20 The Sakhalin-2 project was the first production-sharing agreement (PSA) signed in Russia and the first to go into production. The first phase of oil production occurred in the summer of 1999. By the end of 2002, more than 38 million barrels of oil had been produced and exported.21 The project was originally operated by Sakhalin Energy and its shareholders are Royal Dutch Shell (55%), Mitsui (25%), and Diamond Gas Sakhalin, a subsidiary of Mitsubishi (20%).22 However, in 2006 the consortium was heavily criticized over environmental issues by the Kremlin, and the legal action was taken for violation of the Russian environmental regulations. The consortium was forced to sell a majority stake to Gazprom in 2006. After 2006, Gazprom controlled a 50% stake in the

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project, whereas Shell, Mitsui, and Mitsubishi shared the rest of stake, with 27.5%, 12.5%, and 10%, respectively.23 South Korean companies are involved in the project as subcontractors, the first energy project in which Russia and South Korea have cooperated. The first shipment of Sakhalin2 LNG to South Korea took place in April 2009.24 The Sakhalin-2 gas is the closest source of LNG to Korea, taking only two to three days for delivery.25 Nonetheless, the Sakhalin-2 does not satisfy South Korea’s long-term gas demand. In fact, South Korea’s interest in Sakhalin gas dates back to 1994, when the South Korean government and companies showed interest in initiating LNG supplies from the Lunskoye gas field, the centerpiece of Sakhalin-2 development. However, serious discussion of the project only became possible in 2000. The late Sakhalin regional governor Igor Farkhutdinov stated that the Sakhalin region was interested in supplying gas to Korea; Shell, which had a 55% equity stake in Sakhalin Energy, lobbied hard to secure an early commitment from the Korean government. Because of the privatization drive in Korea’s gas industry, however, the Sakhalin Energy Investment Corp’s (SEIC) lobbying to penetrate Korea’s gas market was not successful.26 Nevertheless, the Korean government and private sectors have continued to negotiate deals with Russia for this project. Samsung Heavy Industry, for example, signed a contract in 2003 for the construction and installation of two platform topsides valued at approximately $500 million. The Lunskoye Platform topsides were installed in June 2006. Another Korean company, Poong Lim, is engaged in infrastructure work on Sakhalin Island, including building Sakhalin Energy’s project office as a major subcontractor.27 In August 2004, KOGAS invited bids for the long-term supply of 5.3 mt per year of LNG to replace its current contract with Exxon Mobil for gas from Indonesia, which expired in 2007. SEIC’s bid was included in the short list of five potential supply sources. Sakhalin Governor Ivan Malakhov stated that 80% of the profit from LNG should remain at the disposal of the regional authorities.28 In July 2004, Gazprom agreed to swap assets in return for entry into the Sakhalin-2 project.29 Gazprom was to take 25% equity in the Sakhalin2 project and, in return, Shell would take 50% in the Zapolyarnoye oil field, which was located in Western Siberia and owned by Gazprom. This development strengthened the chances for SEIC’s LNG supply contract (1.5mt/year) with KOGAS.30 Having won the tender in February 2005, Sakhalin Energy that July signed a sales agreement to provide 1.5 mt of

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Fig. 2.2 The Russian Oil and Natural Gas Pipeline Proposals in Northeast Asia (Source: Economist, July 11, 2004)

LNG yearly for 20 years to KOGAS. This was the first long-term agreement between Russia and South Korea for the supply of energy. The first Russian LNG was supplied from Sakhalin Energy’s LNG plant at Prigorodnoye at Aniva Bay on the south Sakhalin Island in April 2009.31 Meanwhile, South Korea also imports crude oil from SEIC. SEIC has exported a total of 32 million barrels of “Sakhalin Vityaz Crude Oil” (this is the brand name) to South Korea since 1999 through 2009. Korea was a foundation customer and took the majority of oil in the first few years of production. In the mid-2000s, however, the Japanese have offered higher prices for the oil than the Koreans, resulting in the Japanese acquisition of larger volumes of oil. As Fig. 2.2 indicates, Korea and Japan are the two main importing countries of Sakhalin oil because of their geographic proximity to Sakhalin Island. Sakhalin oil is considered to be light and sweet (low in sulphur) with a high middle distillate yield, which means good quality for refineries for producing diesel and kerosene.32 Other Energy Projects Energy cooperation between the two countries has also expanded to joint oil exploration and power grid connection projects. President’s Roh’s trip to Moscow on September 21, 2004 was mainly a quest for energy supplies. During the summit, Vladimir Putin and Roh Tae-woo signed

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a total of primarily oil contracts worth $4 billion. The biggest was a $3 billion project between LG, South Korea’s second largest conglomerate, and Tatneft, Russia’s sixth largest oil producer, to construct an oil refinery and petrochemical complex in Tatarstan, a Russian republic. This project involves the construction of a new polystyrene and polyethylene plant in Nizhnekamsk with a throughput capacity of seven million tons of oil per year.33 According to Interfax, the Export-Import Bank of Korea (EXIM) signed a memorandum with the government of Tatarstan to open a $1.3 billion credit line. The state-owned Vneshtorgbank also signed a $50 million deal with the EXIM to finance acquisition of Korean equipment by Russian companies. Samsung signed a $500 million, 10-year deal with Russia’s Alliance Group to modernize a refinery in Khabarovsk that was partially backed by a $50 million financing deal between the EXIM and Russia’s largest bank, Sberbank. The third deal, between Rosneft and a Korean consortium including Korea National Oil Corporation (KNOC), was a $250 million agreement to explore West Kamchatka and Sakhalin Island oil reserves in a 60,000 square kilometer area. The two sides set up a joint venture on February 14, 2006, and drilling at various sites was supposed to be carried out before August 2008. Rosneft had a 60% asset stake in the project and the South Korean consortium held 40% (of this, major holders are KNOC, 50%; KOGAS, 10%, SK, 10%, GS Caltex, 10%; Daewoo International, 10%; Kumho Petro Chemical, 5%; and Hyundai Corporation, 5%. South Korea expected to secure 1.7 billion barrels of oil reserves from the deal.34 In August 2008, however, KNOC was notified by the Russian government that the extension of its 10 billion barrel exploration project in West Kamchatka had been invalidated. The Kremlin decided not to extend Rosneft’s license for this project, which expired on August 1, 2008, partly because of Rosneft’s exploration delays but mainly because Gazprom wanted to take over this project instead of Rosneft.35 Russia and South Korea also discussed investing in the construction of an oil complex at Kozmino oil export terminal near Vladivostok, where the East Siberia Pacific Ocean Pipeline (ESPO) ends. Russia and South Korea are involved in power grid interconnection projects too. To maximize economic interests and energy efficiency for both countries, Russia proposed to deliver its electricity from Bureya Hydro Power Plant in Primorskii Krai (Territory) to both North and South Korea. Since 2002, the three nations have held several high-level talks and feasibility studies over transferring electricity. Unresolved North

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Korean nuclear proliferation remains the problem in terms of the pace of this project. Conversely, the general view has been that once the North Korean crisis is resolved, the power grid project would likely be facilitated in the near future. However, the March 2010 alleged sinking by North Korea of a South Korean naval ship has turned any prospect of trilateral economic cooperation into a major hurdle. Nevertheless, Moscow has agreed to give South Korean companies an opportunity to participate in Russia’s multi-billion-dollar power grid upgrade project within Russian territory.36

Problems Despite efforts by Russia and South Korea, a number of problems and obstacles still hinder regional energy security cooperation. Bilateral and multilateral energy security cooperation in Northeast Asia has been delayed because of the relative underdevelopment of an energy market infrastructure and the lack of mutual trust. But other factors— persisting harsh conditions in the RFE, the Northeast Asian energy pattern including the lack of efficient energy distribution networks, the North Korea problem, and Russia’s unpredictable energy policy toward foreign energy companies—also present obstacles, as will be discussed below. Bilateral Dimension Most important, the pace and time of development of the gas pipeline and LNG project are determined by the price of gas as well as the will of foreign investors. As long as the delivered pipeline or Sakhalin LNG gas price is competitive with LNG from the Middle East or Southeast Asia, there is a high possibility that Russia’s gas supplies will be developed. If the price is not competitive, the incentive for developing Russian pipeline gas and LNG will remain low. Yet, in recent years, Russian pipeline gas has not been introduced at all, and only small amounts of the first Sakhalin-2 gas were shipped to South Korea in April 2009. Regardless of price advantage, the imported volume of Sakhalin-2 LNG constitutes only 6% of South Korea’s annual gas consumption. Most important, Sakhalin-2 gas is still insufficient to satisfy South Korea’s current gas demand. Only adding combined Sakhalin-3 and Chayanda or Kovykta

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gas would meet the South Korea’s current demand and enable competition against its traditional Southeast Asian and Middle Eastern suppliers. Again, the problem is that despite the advantages that Russian gas enjoys in terms of delivery distance and winter usage potential, there remains doubt that the delivered price will be competitive with gas from Yemen, Qatar, Indonesia, Brunei, or Australia.37 However, it is equally important that price competitiveness not be required when a buyer’s market becomes a seller’s market. In Northeast Asia during the last few years, the turnaround was made; LNG sellers are no longer interested in price competitiveness because the supply shortage demands a maximum price. The development of the Kovykta and Sakhalin gas projects has also been affected by the general sluggishness of Russian-South Korean bilateral diplomatic relations. It is also clear that active government policies in favor of gas are essential for the market penetration of gas. The transborder gas projects in the RFE will not materialize unless they receive the active political support of all the states involved. For example, the South Korean government has not actively promoted the use of Russian oil and gas, especially the Kovykta pipeline gas project or other South Korean-Russian projects. Governments set the rules and partly determine the costs and benefits of economic activities.38 State-authorized thirdparty access or open access to essential facilities such as LNG terminals, pipelines, and storage allows both suppliers and consumers easier access to the gas market. This facilitates the substitution of natural gas for other fuels. Governments could also promote competition among gas suppliers, forcing existing facilities to be used more efficiently and thereby reduce gas supply costs. Increased competition produces higher profits for facility owners while inviting more participants to the market.39 Although a number of energy agreements were reached during the summit between Putin and Roh in 2003, in general, diplomatic relations between Moscow and Seoul have been stagnant and have not facilitated greater cooperation in energy projects. Another problem is South Korea’s inexperience in doing business in Russia, especially with regard to the energy sector. This has made South Korean policymakers concentrate on short-term deals rather than longterm projects and has led to reluctance in Korean business circles to invest in Russia. In other words, Korean business sectors have been relatively preoccupied with selling consumer goods and making short-term profits.40 Thus, most of the trade with and investment in Russia has been limited to a very few export categories by small and medium enterprises.

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The concentration on exports has meant that the possibility of effective cooperation in developing Russia’s great potential energy resources was neglected until 2005, when KOGAS and Sakhalin Energy concluded a long-term LNG contract. The lack of information about Russia among South Koreans and the absence of South Korean experts on the Russian economy further slowed the pace of energy cooperation. In Korea, energy specialists are rare, especially those capable of resolving complex government-related issues and administrative litigation. South Korea’s 2005 Sakhalin oil scandal illustrates its inexperience and lack of strategy in dealing with the Russians. On April 30, South Korean prosecutors issued an arrest warrant for a senior railway official in connection with a failed Russian oil deal that cost the state-run railroad agency millions of dollars. Wang Young-yong, a director at the state-run Korea Railroad, was convicted of pursuing the project without properly investigating its profitability. In 2004, Korea Railroad had agreed to invest in an oil project on Russia’s Sakhalin Island and had paid a deposit of $6.2 million to the Russian investment group Alfa-Eco. The Russian government later denied approval for the project and Korea Railroad withdrew from the contract. In April 2005, Alfa-Eco announced that according to the terms of the agreed contract, it would return only $2.7 million to Korea Railroad. The Board of Audit and Inspections of Korea accused the railroad agency of causing damage to the nation by jumping into the project without a legal basis or survey of profitability.41 Although this incident had nothing to do with government-to-government miscommunication, it fueled a general skepticism about the energy infrastructure in the RFE among the Korean public and in the private energy sector. In short, until now, South Korean investors have been skeptical about investing in Russia because of the unstable political and economic situation and Russia’s patchwork reform. Direct foreign investment is the key to developing the RFE. Russia’s investment climate is crucial because the combination of taxes, tariffs, laws, and regulations determines the extent and speed of such investment flows. In general, a sound legislative and regulatory base in the energy sector promotes standardization, certification, and better licensing of energy market participants. On the other hand, changing legislation and an unstable tax regime acts as disincentives to developing effective businesses.42 Russia has failed to provide the legal and institutional infrastructure for external economic transactions.

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It needs a more efficient cost accounting system, price reforms, a freely convertible ruble, and a bureaucracy that is easier to deal with.43 More specifically, institutional barriers such as Russia’s PSAs concern investors. In the upstream operations of oil and natural gas, although a PSA law has been adopted, it is always subject to revision at the Russian government’s convenience. Russia has not been particularly successful in energy price reform. Nor has it made dramatic improvements in corporate transparency and energy efficiency, or in ensuring proper safeguards against the adverse environmental effects of increased energy production and use.44 Regulatory reform has also been slow and this has deterred potential investors. In short, for long-term investment, political risks are still high for foreign investors. Most important, the Kremlin has become reluctant to encourage foreign participation in the Far Eastern energy projects, especially in the Eastern Siberian gas pipeline project. Russia’s natural-resource nationalism is the most formidable barrier to regional energy security. It is important to understand that Russia’s resource nationalism reflects its economic priorities and both Putin’s and Dmitry Medvedev’s personal philosophy toward Russian energy resources. For Putin and Medvedev, the energy sector is too important to be left entirely to market forces.45 As Putin has stated, “regardless of whose property the natural resources and in particular the mineral resources might be, the state has the right to regulate the process of their development and use.”46 Russian leaders consider its hydrocarbons, in particular natural gas, as their most important lever to restore Russia’s position as a major global power. Therefore, the Russian leadership is not allowed to accept “levels of foreign investment that would compel greater transparency or restructuring,” especially in the energy sector.47 The state has endeavored in every possible way not to lose control over the energy industry. For example, Kremlin leaders promoted Gazprom’s involvement in every gas project. Ever since Gazprom was assigned as chief negotiator of the Kovykta Project and Russia’s 1992 subsoil law on natural resource use was amended, regional authorities lost control over subsoil use. Rights to issue or revoke mineral resource licenses were retained by Gazprom and the Kremlin.48 Accordingly, the Kovykta Project was suspended in 2007, and still remains stranded in 2022. Both Chinese and Koreans, as potential Russian gas investors, were stunned to see that in January 2007, the Kremlin appointed Gazprom as the sole director of all gas projects in the country, including Kovykta.

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Beijing and Seoul officials were confused about whether business negotiations should be held with RP, BP-TNK, or Gazprom. And the situation was aggravated by the fact that the negotiating working groups had not met for almost six months.49 As a result, Kovykta disappeared from all levels of official discussion between Russia and South Korea. Prior to 2007, the Russian ambassador to Korea had often mentioned the importance of the Kovykta Project during his speeches. However, after Gazprom decided to intervene, and once China and Russia were disputing gas prices in early 2008, there was hardly any mention of Kovykta in talks between Seoul and Moscow. In short, Gazprom’s objection to TNKBP’s developing Kovykta gas and Gazprom’s attempts to divert foreign investors’ attention to the Sakhalin project both show that the Russians were insisting on protecting their largest gas fields in the Far East. As well, they were using them as a potential secret weapon for the regional energy game over the next few decades.50 Russia’s primary energy interest in the region is to create a Russia-friendly energy market system and also to encourage price competition among the Northeast Asian states. Specifically, Russia is hoping to play a leading role in creating energy alliance among itself, China, Japan, Mongolia, and Korea by building pipeline networks and exporting its gas. Yet, at the same time, Russia enjoys pursuing a wait-and-see policy to earn the best gas deals among the world’s three largest natural gas consumers, China, Japan, and South Korea, while making them compete against one another. In this context, Russia clearly tends to prefer bilateral negotiation with each Asian state instead of multilateral talks. The Limits of the RFE: Underdevelopment and Harsh Environment The inherent problems of the RFE also contribute to delaying energy cooperation in the region. Despite its vast energy resources, the RFE still faces a severe energy crisis because of its poor infrastructure and ineffective economic policies. The lack of an efficient land-based transportation infrastructure connecting this region with the country’s major fuel sources in Siberia and European Russia means that only summer seaborne transportation is possible. Moreover, long-haul deliveries of liquid and solid fuels are too costly because of high railroad tariffs and sea freight costs. Harsh environmental conditions hinder the development of the region’s energy resources. Climatic and operating conditions in the

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Far East are extremely tough. From October to June, these conditions are characterized by an ice cover both on the ground and at sea exceeding two meters thick, icebergs in the sea up to 20 meters thick, frequent typhoons, currents with widely varying directions, and low air temperatures. Developing energy fields under such conditions requires technologically advanced and capital-intensive ice resistant fixed platforms for drilling and production, and underwater pipelines protected against icebergs.51 It is important to point out that the harsh environmental conditions often create an unexpectedly wide gap, in terms of project cost, between the initial feasibility study and the actual process. In July 2005, for example, Yuzhno-Sakhalinsk executives at the Sakhalin-2 project announced that the project might cost $20 billion, twice as much as expected, partly because of overruns and delays caused by the company’s failure to properly model the geology of the area and to prepare for the effect of ice on the pipeline.52 Sakhalin Energy chief executive Ian Craig agreed that the company underestimated ice-related working limitations during the operational setup of the platforms: “Speed is greatly reduced by sea freeze in winter... and time is cost, without detailing the overruns.”53 According to Japp Guyt, Sakhalin Energy’s pipeline manager, insufficient data led to a decision to reroute a subsea pipeline, leading to more overruns. Following a late 2003 survey, Sakhalin Energy announced in April 2004 that ice extended even deeper into the seabed than previously expected. As a result, the pipeline would have to be buried deeper, which implied the use of more powerful and expensive equipment. Guyt added that Sakhalin Energy had relied on old data that underestimated the depth. In short, the harsh climatic conditions contributed to a delay in gas production. The chronic economic, social, and political underdevelopment of the region remains a problem affecting the development of future energy markets. Rozman lists five negative tendencies that hinder the area’s further economic development. They include: Localism flirting with separatism, including threats to revive the short-lived Far Eastern Republic of the early 1920s; near domination by organized crime in a region already criminalized by Stalin’s labor camps; xenophobic paranoia about international conspiracies; dictatorship by local demagogues; and an economically inspired population exodus—an inviting vacuum for nearby overpopulated China.54

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The economically depressed RFE is represented by only 4% of Russian Duma seats but covers 36% of Russia’s territory.55 The loss of federal support has further eroded what was once a relatively prosperous region. Some skeptics believe that its future is bleak. Among the five tendencies identified by Rozman, Russian nationalism associated with xenophobic paranoia, especially toward China, appears to be a major impediment in energy deals between the states in the region. In other words, current Russian nationalism in the region (the so-called Yellow Peril syndrome) undermines the potential for energy cooperation with Northeast Asian states. It is quite ironic to observe that on the one hand, the Kremlin seeks to develop the RFE with the aid of Northeast Asian capital and people. Indeed, Putin and Medvedev stressed more participation and investment from each Northeast Asian state. Gazprom and the Kremlin even promised to increase natural gas exports to Northeast Asia to a level comparable with those to Europe. On the other hand, the Kremlin’s worst nightmare is that the northeastern parts of China could become more prosperous than the RFE. Indeed as the history of Sino-Soviet conflict suggests, Russia is clearly seeking to limit China’s growing power with the use of Russia’s strategic energy resource, natural gas. That is why gas price negotiations continued to fail in recent years; the price dispute will remain the major obstacle in bilateral diplomatic relations. Moreover, it is undeniable that China has set the Russian gas price too low in the past until 2014. Although Beijing and Moscow made extensive progress toward settling the price dispute from the fall of 2009 up to 2014, pricing gas deal issue is not an easy task for either. Another example is that in the later part of 2007, Kovykta’s original plan of routing the pipeline through Chinese territories was quickly abandoned by Russia. Instead, Gazprom favored having the Kovykta pipeline follow the proposed ESPO oil pipeline route. The Kremlin stressed that every gas pipeline, including branch lines, should be constructed within Russian borders, although bypassing China—and instead going through the permafrost in Siberia—would significantly increase project costs and final export prices.56 New energy projects in the RFE can welcome large number of Asian people to work in Russian territory. It is undeniable that opening national borders and creating networks of trust with neighboring states could help Russia integrate into Northeast Asian communities. Yet, Russian authorities are equally concerned that East Asians would reshape their own

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communities as sojourners or as long-term residents within Russian territories. Russians in the Far East already worry that both legal and escaped North Korean lumberjacks who work in the slave labor camps in Siberia are causing regional social problems. There are also suspicions about increases in the number of Korean residents in Russia’s Primorskii Krai territory and concerns that they might establish an autonomous region in the near future. Chinese are often viewed as security threats who seek to exploit Russia’s mineral resources and land, and Russians frequently complain that the Chinese invest little, sell their own commodities, and leave before taxes can be collected.57 The Regional Dimension For natural gas markets to form and for projects to proceed and retain their value as energy sources, the development of local distribution networks is crucial. However, efficient distribution networks in the region are scarce. There is no denying that bilateral and multilateral energy cooperation within Northeast Asia both have the potential to bring shared prosperity. Each country, taking advantage of the diverse energy profiles based on economies of scale, can advance the frontiers of cooperation in areas such as trans-boundary power interconnections, natural gas pipeline networks, joint use of existing supply infrastructure, transfer of technology and know-how, and joint exploration and development of energy resources. However, energy cooperation among Northeast Asian nations is a relatively new phenomenon. Northeast Asia has no general economic or institutional arrangements like the EU, the Association of Southeast Asian Nations (ASEAN), OPEC, the European Energy Charter (EEC), or the ASEAN Council on Petroleum (ASCOPE). Until recently, what arrangements there were, were based on bilateral relations rather than a multilateral framework. Political tensions, cultural, ethnic, and institutional obstacles, as well as economic differences among the Northeast Asian states had compelled each country to cope individually with its own energy problems—while blocking development of an effective regional system of energy security. Some experts suspect that competing national rivalries for energy projects create tension rather than cooperation. Moreover, there are currently no legal and institutional frameworks for energy cooperation in Northeast Asia. Only Russia and Japan have signed the

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EECand the Energy Charter Treaty,58 and South Korea and Japan are the only members of the International Energy Agency (IEA) in the region. Although Northeast Asian countries believe that energy projects in the RFE could play a crucial role in integrating the Northeast Asian community and promoting regional energy cooperation, at the same time each fears that giving other Northeast Asian countries access to Russian energy supplies will lead to its own exclusion. For example, China is clearly concerned about the possibility of exclusive access by Japan to future supplies from Russia, whereas Japan has a similar concern about China. Many of the projects under consideration are oriented to the Chinese market. Russia also worries that if China becomes the monopoly consumer of Russian energy resources, it will come to dictate their price. As for South Korea, it is afraid of possible disruptions in pipeline supplies through North Korea and China. Perhaps, the most important factor that will determine the success of energy cooperation between Russia and South Korea is North Korea. The opening up of North Korea is a prerequisite for the realization of their smooth energy collaboration, particularly in terms of power grid connection and pipeline projects. In other words, the relationships between Pyongyang and Seoul and Pyongyang and Moscow are the key variables in deciding the pace of further development of energy cooperation. It is also interesting to see that Russia remains suspicious of possible US future intervention in energy collaboration in the region. Russia has seen throughout its history that in almost every part of the world, especially where energy issues were strategically important, the U.S. has always played the role of bugbear, trying to weaken Russian influence. Russia’s worst nightmare is that the U.S. collaborate with China or other Asian states as major gas-demanding nations, pushing the Kremlin to lower its gas price. This hypothesis cannot be totally overlooked, given that the U.S., with an insufficient domestic supply, has no alternative to importing natural gas from the RFE in the near future. In this context, Russia has expressed some concerns about China, notably when China and the major US energy company Exxon Mobil, which possessed the Sakhalin1 asset, agreed that China would import significant amounts of oil from Sakhalin-1. In my opinion, rather than focusing on either the supply or the demand side, it would make more sense to broach a multilateral energy framework in the RFE on the basis of the region’s energy importers and exporters, since experience suggests that any attempt to enhance energy security by

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focusing on one side turns out to be unsustainable in the end. Multilateral cooperative frameworks involving both exporters and importers are more advantageous because they reinforce stability and support economic development. Therefore, it is necessary to diversify the export markets for Russian energy resources in Northeast Asia with the active involvement of China, Japan, the U.S., the two Koreas, and other nations, possibly Mongolia. There are already examples of such multilateral frameworks including the Council for Mutual Economic Assistance’s energy programs and trade protocols, the Caribbean’s San Jose Pact, and the ASEAN Council on Petroleum and its Petroleum Sharing Agreement. There is another indication in favor of a multilateral energy framework on the Korean Peninsula. As part of the main scheme to solve North Korea’s severe domestic energy shortage problems and minimize its nuclear ambitions, several nations unofficially showed some interest in constructing gas pipelines across the North Korean border to link with pipelines from Russia. With international collaboration including American capital, South Korean LNG technological skill, and North Korean labor, Northeast Asia’s pipedream might become a reality in the near future.59 Just as happened on the European continent nearly half a century ago, the establishment of Russia’s natural gas pipeline infrastructure in the region is essential and the beginning stage for a multilateral energy framework.

Prospects Energy issues are becoming a part of the security agenda in international relations because energy plays an important role in economic development and national security. Russia’s abundant oil and gas resources have the potential to contribute to enhancing its bilateral energy security relationship with neighboring states—and to regional security more broadly. This potential is based on a long-term vision of energy security interests and economic efficiency. Indeed, energy cooperation is regarded as one of the most promising issues in diplomatic relations between Russia and South Korea. Ensuring access, not only to the resource base of oil and gas but also to the transport networks delivering them, has been the primary focus of energy policy and energy security in South Korea. In this sense, the use of regional sources of energy will enhance South Korea’s energy security because they insure against disruptions and serve competitive pricing.60 For South Koreans, Russian oil and gas provide

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enormous opportunities to solve their energy shortage and thus diversify their existing energy markets. Russian energy is very attractive, particularly considering the current instability in the Middle East and China’s rising demand for oil for its fast-growing industries. Russian oil and gas pipeline projects also have the potential to contribute to strengthening Russian national interests. With its enormous energy production and export potential, Russia has an economic interest in expanding its energy markets on the Korean Peninsula as well as in the Asia–Pacific region. Since the dissolution of the Soviet Union, Russia has wanted to become a pivotal regional player in Asia. President Putin clearly hopes to upgrade Russia’s prestige and influence on the Korean Peninsula by promoting his country’s role as an objective mediator. Nevertheless, since the end of the Cold War, Russia has often been portrayed in South Korea as a waning political and economic force. In other words, over the past 20 years, the collapse of the Soviet Union, Boris Yeltsin’s corruption, various mafia phenomena, Russia’s 1998 financial crisis, and its inability to pay the national loans from Korea61 have all damaged the image of Russia among South Koreans. It is undeniable that the negative images created the sense that Russia is an unreliable and unpredictable political and economic partner. However, it is no exaggeration to note that Russia simply cannot be ignored in the new geopolitics of energy. The energy issue is gradually replacing the ideological confrontation that was characteristic of the Cold War. For the long term, energy is central in the formation of a new security paradigm in the Asia–Pacific, one where Russia, not the U.S., may be cast in the leading role in Northeast Asia. Moreover, as Fig. 2.2 shows, energy cooperation between Russia and South Korea cannot be viewed simply in bilateral terms but must be considered within the regional energy security framework: China and Japan are also involved in energy projects in the RFE. Russia’s oil and gas pipeline projects in Eastern Siberia as well as the Sakhalin projects are aimed at attracting Chinese and Japanese energy import markets. The Chinese and Japanese governments have shown their economic and strategic security interest in the Russian energy sector by actively lobbying for access to pipeline routes. For example, as we have seen previously, oil and gas from Sakhalin-2 is exported to China, Japan, and South Korea. The Kovykta project has been under evaluation by BP and CNPC since the mid-1990s, with the idea of transporting the gas by pipeline to northeast China. The Chinese government considers it one of the most economically viable overseas gas

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projects. Although South Korea is not yet very involved in the Eastern Siberian oil pipeline project, future energy cooperation between Russia and South Korea, particularly in terms of an Eastern Siberian gas pipeline route, is still affected by this project. Moreover, South Korea will have an opportunity to invest in the construction of an oil complex in Vladivostok, where this oil pipeline route ends. It is important to understand that from the geographical perspective, none of the bilateral energy agreements for new pipeline routes takes into account the whole region. The problem is that it is extremely difficult to solve pipeline route disputes simply on the basis of bilateral negotiations because there is an interplay among the various energy relationships. Russian-Japanese and Russian-Chinese energy relations have implications for Russian-Korean energy relations. Any bilateral arrangement may affect other relations and interests because they share the same area and use the same pool of energy resources. Therefore, a multilateral and regional approach is much needed in the energy diplomacy between Russia and South Korea. Russian oil and gas projects in the region require an expensive cross-border delivery infrastructure. This means that financing the projects is complex and finding a solution will be closely related to the ability of governments to cooperate. There are other important issues that require collective approaches, including regional energy efficiency and the potentially adverse regionwide environmental impacts of expanding energy consumption. In short, secure and sustainable energy cooperation between Russia and South Korea can be achieved only through a comprehensive and multilateral approach. Despite the potential, the reality is that the energy projects have not emerged as a substantial functioning unit of economic activity so far. There have been many talks and proposals in recent years about oil and gas pipeline routes. However, most projects have either ceased to exist or have developed slowly because of the obstacles discussed above. The Kovykta gas pipeline project is stalled, and the Sakhalin project is progressing, but the scale of production remains insignificant at this stage. Obstacles include Russia’s protectionist energy policy and its domestic petroleum industry interests, South Korea’s lack of an energy strategy, the Northeast Asian competition for Russia’s oil and gas pipeline routes, the unstable situation on the Korean Peninsula, insufficient financing for the development of the RFE, and the lack of multilateral institutional arrangements in Northeast Asia. Most of all, the competitiveness of Russia’s oil

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and gas prices in the Northeast Asian energy market is also often questioned. Given that energy pipeline issues are transnational, there is still a lack of understanding of transnational energy diplomacy. What has been achieved for energy policy in the region is still primitive. As a result, Russia’s oil and gas projects have so far established neither bilateral energy nor economic security between Russia and South Korea.

Notes 1. Keun-Wook Paik and Jae-Yong Choi,” Pipeline Gas Trade Between Asian Russia, Northeast Asia Gets Fresh Look,” Oil and Gas Journal, August 18, 1997, pp. 41–45. 2. Nodari Simonia, “Russian Energy Policy in East Siberia and the Far East,” The Energy Dimension in Russian Global Strategy, Report Paper (The James A. Baker III Institute for Public Policy, Rice University, October 2004), p. 5. 3. Chongbae Lee and Michael J. Bradshaw, “South Korean Economic Relations with Russia,” Post-Soviet Geography and Economics, 38:8 (1997), pp. 463–464. 4. Korea Gas Corporation (KOGAS), “The Irkutsk Natural Gas Project,” January 2000, http://www.kogas.or.kr/homepage/news.htm. 5. Nezavisimaya Gazeta [Independent Newspaper] (Moscow, Russia), September 9, 2000; Vedemosti [The Record] (Moscow, Russia), November 3, 2000. 6. Glada Lahn and Keun-Wook Paik, “Russia’s Oil and Gas Exports to North-East Asia,” Report from Sustainable Development Programme, Chatham House, April 2005, p. 3. 7. Kommersant-Daily [The Businessman] (Moscow), February 27, 2003. 8. Simonia, “Russian Energy Policy in East Siberia and the Far East,” p. 11. 9. Yonhap News Agency (Seoul), September 17, 2004. 10. South Korea is seeking to bring seven million tons of natural gas a year, while China is planning 14 million tons. See Yonhap News Agency (Seoul), September 17, 2004. 11. Seung-Ho Joo, “Russia and Korea: The Summit and After,” Korean Journal of Defense Analysis 13:1 (Autumn 2001), pp. 124–125. 12. Simonia, “Russian Energy Policy in East Siberia and the Far East,” p. 11. 13. Vladimir Socor, Eurasia Daily Monitor 4:21, January 30, 2007. 14. Vladimir I. Ivanov, “The Energy Sector in Northeast Asia: New Projects, Delivery Systems, and Prospects for Co-operation,” North Pacific Policy Papers 2 (Vancouver, Program on Canada-Asia Policy Studies, Institute of Asian Research, University of British Columbia, 2000), p. 16.

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15. Michael Bradshaw, “Prospects for Russian Oil and Gas Exports to Northeast Asia from East of the Urals,” presentation paper for the conference, The Regional Cooperation of Northeast Asia and Russia’s Globalization for the 21st Century (Seoul, Korea, June 22–24, 2003), p. 6. 16. Ivanov, “The Energy Sector in Northeast Asia,” pp. 16–17. 17. “Sakhalin II Crude Oil and Liquefied Natural Gas, Sakhalin Island, Russia,” Hydrocarbons- Technology 2010, http://www.hydrocarbons-tec hnology.com/projects/sakhalin2/, accessed on 31 May, 2010. 18. The Russian Oil and Gas Report, October 1, 2004. 19. Sakhalin Energy, April 2003. 20. Prime-Tass Business News Agency (Moscow), August 26, 2005. 21. Sakhalin Energy Investment Company (SEIC), The Road Ahead: Sakhalin Energy Review 2002, p. 9. 22. The Russian Oil and Gas Report, October 1, 2004; and Prime-Tass Business News Agency, August 26, 2005. 23. “Gazprom, Shell, Mitsui and Mitsubishi sign protocol on Salhalin-2 Project,” December 21, 2006, Gazprom Sakhalin News Archives, http:// www.gazprom-sh.nl/news/2006/26/, accessed on May 31, 2010. 24. “Sakhalin-2 LNG Import,” Seoul Economy (Seoul), April 26, 2009, http://economy.hankooki.com/lpage/economy/200904/e20090 42616371170060.htm, accessed on May 31, 2010. 25. “South Korea to receive Sakhalin gas in 2008,” Business CustomWire, November 16, 2004; and Abraham Bernstein, “Sakhalin II LNG Project: A Strategic Source of Natural Gas for Northeast Asia,” Report prepared by General Manager, Northeast Asia Sakhalin-II LNG Marketing Services for the International Conference: Sakhalin & North Asia Oil, Gas & Pipelines 2003 (Seoul, Korea, November 12–13, 2003). 26. Paik, Keun Wook, “Pipeline Gas Introduction to the Korean Peninsula,” Report submitted to Korea Foundation, Korea Foundation Project ‘Energy and Environmental Cooperation in the Korean Peninsula, January 2005, p. 19. 27. Bernstein and Sakhalin Energy, Archives, Project Updates, August 2005, http://www.sakhalinenergy.com/news/nws_updates.asp, accessed on December 25, 2007. 28. The Russian Oil and Gas Report, October 1, 2004. 29. Moscow Times, November 29, 2004. 30. Paik, “Pipeline Gas Introduction,” p. 19; International Oil Daily, July 18, 2005. 31. Korea Gas Union News (Seoul), April 10, 2009. This was the first LNG plant to be built in Russia. See also Interfax News Agency (Moscow), July 20, 2005. 32. Alan McCavana (Export Manager, Sakhalin Energy Investment Corporation), email interview, September 9, 2005.

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33. The Economist Intelligence Unit Business Asia, October 4, 2004; Itar-Tass News Agency, September 21, 2004; and Interfax News Agency, September 21, 2004. 34. The Energy Economic Newspaper (Seoul), February 16, 2006. 35. Korea Times (Seoul), June 16, 2009. 36. YTN NEWS (Seoul), May 23, 2010. 37. According to Keun-Wook Paik [Russian Gas Expert and Associate Fellow, Sustainable Development, Chatham House, London, UK], personal interview, London, UK, September 6, 2005, and the head of Shell Russia, John Barry, the Sakhalin-2 plant will be able to supply more gas in winter than in spring, and this is what Korea needs. See also The Russian Oil and Gas Report, October 1, 2004. 38. APEC Energy Demand and Supply Outlook 2002, Asia Pacific Energy Research Center, p. 70. 39. Ibid. 40. Jeongdae Park and Jaeyoung Lee, “Industrial Cooperation between Korea and Russia: Current Situation and Prospects,” Journal of Asia Pacific Affairs 3:2 (February 2002), pp. 60–63. 41. The Associated Press, April 18, 2005. 42. APEC Energy Demand and Supply Outlook 2002, pp. 211–215. 43. Joo, “ROK-Russian Economic Relations, 1992–2001,” Korea and World Affairs 25:3 (Fall 2001), p. 373. 44. “IEA Commends Russian Efforts on Energy Security, Calls for Full Implementation of Reforms,” Russian Energy Survey 2002, International Energy Agency (IEA)/PRESS (02)05, Moscow, March 6, 2002, http://www.iea. org/new/releases/2002/Russia.htm, accessed on January 10, 2006. 45. Harley Balzer, “The Putin Thesis and Russian Energy Policy,” Post Soviet Affairs, 21:3 (2005), p. 218. 46. Putin, V.V., “Mineral’no-syr’evyye resursy v strategii razvitiya Rossiyskoy ekonomiki (Mineral Natural Resources in the Strategy for Development of the Russian Economy),” Zapiski Gornogo Instituta [Gorny Institute Notes], 144, 1999, p. 3. 47. Harley Balzer, “Russia and China in the Global Economy,” Demokratizatsiya [The Journal of Post-Soviet Democratization], 16:1 (Winter 2008), p. 46. 48. Se Hyun Ahn and Michael T. Jones, “Northeast Asia’s Kovykta Conundrum: A Decade of Promise and Peril,” Asia Policy 5 (January 2008), pp. 131–132. 49. Simonia, “Russian Energy Policy in East Siberia and the Far East,” p. 9. 50. Five anonymous people from Russian government and gas companies, personal interviews, September 2–6, 2008, Irkutsk and Kovykta field, Russia. [All of them prefer not to be identified due to security reasons.];

2

51.

52.

53. 54.

55. 56.

57. 58. 59.

60.

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One anonymous Russian diplomat and one anonymous Russian intelligence member in Seoul, personal discussions, Seoul, between 2006 and 2009. Eugene M. Khartukov, “Russia,” in Rethinking Energy Security in East Asia, ed. Paul B Stares (Tokyo: Japan Center for International Exchange, 2000), p. 145. Benoit Faucon, Dow Jones Newswires, in “Shell Ties Woes of Russia Project to Lack of Data,” Wall Street Journal Europe, 23:157, September 12, 2005. Ibid. Gilbert Rozman, “The Crisis of the Russian Far East: Who Is to Blame?,” Problems of Post-Communism 44:5 (September/October 1997), p. 5; and Viktor Larin, “‘Yellow Peril’ Again? The Chinese and the Russian Far East,” in Rediscovering Russia in Asia: Siberia and the Russian Far East, eds. Stephen Kotkin and David Wolff (Armonk, NY: M. E. Sharpe, 1995), pp. 296–299. Tom Wuchte, “Northeast Asia’s Forgotten Worry: Russia’s Far East,” Pacific Focus, 16:2 (Fall 2001), p. 47. Keun-Wook Paik, three personal interviews [London, November 6, 2005; Seoul, January 16 and September 15, 2009]; and phone interview, December 20, 2009. Rozman, p. 9. Khartukov, p. 176. This view was shared through interviews and personal discussions among the author and several scholars and policymakers from the U.S, South Korea, North Korea, and Russia who attended the Korea Conference: “The Six-Party Talks and Korea’s Energy Security,” held in Atlanta, Georgia, on February 26, 2009. It was hosted by the Sam Nunn School of International Affairs, Georgia Institute of Technology. Fereidun Fesharaki, “Energy and the Asian Security Nexus,” Journal of International Affairs 53:1 (Fall 1999), p. 86; and Ivanov, “The Energy Sector in Northeast Asia,” p. 28. Russian Federation took over the $3 billion loan that Soviet Union had borrowed from the South Korean government in both 1990 and 1991. In January 1991, Soviet Deputy Prime Minister Yuri Maslyukov’s mission to Seoul resulted in an agreement to supply a further $1.5 billion in loans to finance of plants and other capital goods. Together with the $1 billion bank loan obtained by Deputy Foreign Minister Igor Rogachev, the total Russian national debt to Korea was estimated at $3 billion.

CHAPTER 3

Northeast Asia’s Kovykta Conundrum: A Decade of Promise and Peril

Energy security is gradually replacing the previous ideological confrontation that was characteristic of the Cold War to form a new security paradigm in the Asia–Pacific. Maintaining strong relations with Russia is extremely advantageous to regional states given that the import of oil and gas from Russia’s Far East has the potential to enhance Northeast Asia’s energy security interests by reducing domestic energy shortages and diversifying energy imports. Since the end of the Cold War, Russia has often been portrayed in Asia as a waning political and economic force. Since the dissolution of the Soviet Union, however, Russia has sought to become a pivotal regional player in Asia. Russian president Vladimir Putin clearly hopes to upgrade Russia’s prestige and influence in the region by promoting his country’s role both as an objective mediator and as a reliable energy supplier. In the last several years, in particular, Russia has demonstrated power and influence in the new geopolitical environment of high energy prices. With enormous oil and gas reserves in Siberia and the Far East, Russia has an economic interest in expanding the country’s energy markets into the Asia–Pacific region. Despite this great potential, the reality is that Russian energy projects have not emerged as a substantial functioning unit of economic activity thus far. The many efforts in the last ten years by Northeast Asian states—notably China, South Korea, and Japan—to exploit opportunities in Russia’s Far East have had only marginal success. Gazprom is now in © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 S. H. Ahn, Power Struggles, https://doi.org/10.1007/978-981-19-5474-0_3

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the midst of taking over controlling stakes in Russia’s remaining foreignowned energy projects. In mid-June of 2007, Gazprom took a majority share of the Kovykta gas field project by forcing TNK-BP out of the consortium. For ten years this gas field, located in Russia’s Irkutsk region, has promised to be a keystone for physically connecting the nations of Northeast Asia in a way that no other energy project could. Though governments of China, Mongolia, South Korea, North Korea, and Japan have actively discussed Kovykta’s development over the last decade, the development of gas pipelines from Russia has been extremely slow. Several factors have impeded progress, including China’s underdeveloped and unpredictable gas market, issues related to regional distrust, political and commercial risks regarding pipeline routing options, the Asian financial crisis in the late 1990s, and Russia’s renationalization of the energy sector. Gazprom’s focus on westward exports and lack of technological expertise could seriously impair Russia’s prospects for a greater share of Asian gas exports. As such, many consumer countries in Northeast Asia have held off on dealing with Russia and are beginning to turn elsewhere to fulfill future gas needs. With little development having ensued since Gazprom’s takeover of the Kovykta project, the fate of this venture is uncertain. This chapter uses the case study of the Kovykta gas pipelines proposed in the region to illustrate both the potential for and the major obstacles to Russia becoming a major provider of energy security for Northeast Asia.

The Potential Benefits of Kovykta Gas Development Russia’s Untapped Potential Russia has been described as the world’s “treasure trove” of gas. Around twenty new giant gas fields have been discovered in the last couple of decades, each containing over 500 billion cubic meters (bcm). These twenty fields comprise close to three quarters of Russia’s total gas reserves. Capable of producing as much as 130 bcm of natural gas by 2020— equivalent to the current level of Russia’s gas exports to Europe—the Russian Far East can play a very important role in shaping cooperative energy schemes in Northeast Asia.1 In the last ten years, Northeast Asian governments and companies have made several attempts to capitalize on a number of major energy projects in the Russian Far East.

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One of Russia’s largest gas fields is the Kovyktinskoye (Kovykta) gas condensate field. Discovered in 1987, this field contains an estimated two trillion cubic meters of natural gas and condensate.2 Put into perspective, Kovykta contains more gas than the entire nation of Canada, the major supplier of gas to the U.S. Due to the sheer size and location of the field, Kovykta’s development represents a timely and important opportunity for China and South Korea. Development of this field as last proposed by the consortium—with 20 bcm per year going to China and 10 bcm per year going to South Korea—could hold many benefits for Russia. Development at this level could facilitate diversification of Russia’s Europe-centric export market, increase government revenues, spur economic development in the desolate regions of the Russian Far East and Siberia, and promote regional energy integration. With Gazprom’s recent takeover of the project (discussed in detail below), pipeline development into Northeast Asia could—if planned carefully—represent a significant opportunity for Russia. The projected $1.2–1.4 billion per year in annual tax revenues from the export of Kovykta gas by 2020 would benefit both the federal and local governments.3 In 2006, gas rents accounted for approximately half of Russia’s total energy rents. Furthermore, Gazprom currently exports all of Russia’s gas to Europe and Eurasia; a major pipeline to Northeast Asia could therefore diversify the company’s export portfolio. In 2006, Gazprom produced 556 bcm of gas and exported around 260 bcm—approximately half the total—to Europe, the Baltic States, and Central Asia.4 Thus, potential Kovykta gas exports of around 30 bcm per year would represent over 10% of Gazprom’s current exports. As of early 2007, however, domestic consumption of gas supplied from the Kovykta field amounted to only 2 bcm. The main consumers of this initial production have been the sparse populations of Angarsk, Sayansk, Irkutsk, and Usolye-Sibirsk.5 These populations will never consume as much gas as this field could potentially produce. For the benefit of both the project consortium and the Russian state, Kovykta gas must reach Asian markets. South Korea’s Looming LNG Supply Gap In the last few decades, South Korea has been one of Asia’s fastestgrowing and most dynamic economies. Vast amounts of natural resources

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will be needed to maintain this economic growth. Due to the expansion of energy-intensive industries and to increases both in income and in the number of motor vehicles, total primary energy demand in South Korea has skyrocketed to 226 million tons of oil equivalent (mtoe) in 2005, approximately 78 mtoe higher than in 1995.6 Having very limited domestic sources of energy, South Korea relies almost completely on imports. Energy imports as a percentage of total demand rose from 73.5% in 1980 to 96.8% in 2005. The world’s fourth largest oil consumer, South Korea presently relies solely on imports to meet oil needs and uses oil as the primary fuel source; demand for oil as a percentage of total energy demand is, however, projected to fall from 53% in 2003 to 39% by 2030.7 In the mid-1980s, Seoul introduced tax incentives to promote widespread use of natural gas. With the rapid expansion of the country’s natural gas industry from 1987 to 2002 and establishment of a nationwide trunk pipeline network, South Korea has become one of the world’s most dynamic gas markets. Natural gas continues to be the fastest-growing energy resource in South Korea due both to the convenience and to the environmental friendliness of natural gas relative to oil. As such, forecasts are that South Korea’s demand for gas will increase by 150% (from 20 bcm in 2000 to 53 bcm) by 2020.8 In short, natural gas has been and will remain the fastest-growing energy source in South Korea. South Korea is currently the second largest importer of liquefied natural gas (LNG) and home to the world’s largest LNG importer, Korean Gas Corporation (KOGAS). KOGAS has a de facto monopoly on South Korean gas imports, which thus far have been exclusively in the form of LNG.9 KOGAS’s imports have traditionally come from Southeast Asia; many of these long-term KOGAS contracts are ending in 2007–08, however, and their renewal is not always certain.10 Therefore, a growing proportion of South Korea’s LNG is coming from the Middle East. South Korea began importing LNG from Oman and Qatar in 1999 and has secured a contract for large shipments from Yemen beginning in 2008. By 2020, nearly 80% of South Korea’s LNG imports will come from the Middle East (see Fig. 3.1). Imports of LNG to South Korea will increasingly need to traverse long distances through vulnerable chokepoints such as the Hormuz and Malacca straits. Furthermore, the Middle East is facing a shortage in liquefaction capacity, traditional LNG suppliers (Yemen, Oman, and the United Arab Emirates) all have virtually run out of new supplies, and approximately 80% of the potential LNG supplies of Qatar—just emerging as one of the world’s largest LNG

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exporters—are already committed.11 For South Korea, these phenomena make neighboring Russia an extremely attractive source of gas. Since KOGAS is the main LNG importer, South Korea’s economy is dependent on winning new long-term LNG contracts. Although KOGAS’s contracted supplies roughly matched total gas demand in 2001, the supply–demand gap has recently noticeably widened due to South Korea’s seasonal demand fluctuations (see Fig. 3.2). South Korea consumes around eleven times as much LNG in the winter as in the summer. Given that traditionally strict LNG contracts forbid customers to sell excessive supplies to third parties, South Korea has in effect been forced to buy contracted gas below demand and to make up the difference with spot-market cargoes.12 South Korea’s 2005 spot-market purchases came to around 8 mtoe of gas—or approximately 9 bcm—an amount the equivalent to about one-third of the country’s total gas consumption (see Fig. 3.2). Reliance on the spot market to make up for gas shortfalls is a major problem for Korea. Although purchases on the spot market have 100 90 80

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Fig. 3.1 Share of South Korea’s LNG Imports by Source, 1990–2020 (Source “KOGAS 2005 Annual Report,” Korea Gas Corporation, 2006—www.kogas. or.kr)

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become increasingly commonplace in the Asia–Pacific, spot market LNG is vastly more expensive than gas obtained through long-term contracts, including pipeline gas.13 Kovykta could be a source of both stable and predictably priced gas for South Korea. As mentioned above, South Korea is solely reliant on LNG. The proposed Kovykta pipeline would therefore allow Seoul to diversify not only the sources of gas but also the modes of gas transportation available to South Korea. For Seoul, the Kovykta pipeline is extremely attractive as such a line could disperse risk among the multiple parties involved (both government and private)—rather than bilaterally as is the case with LNG deals—and balance South Korea’s reliance on tanker gas coming from the Middle East. 50 Demand Supply gap Supply contracts

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Fig. 3.2 South Korea’s Growing Gas Supply–Demand Gap (Source “Outlook for Energy Consumption in 2010,” MOCIE—www.mocie.go.kr; “BP Statistical Review of World Energy 2007,” BP p.l.c., 2007; and “KOGAS 2005 Annual Report.” Note Data for 2010, 2015, and 2020 is projected)

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China’s Promise as a Gas Market Natural gas currently comprises only 3% of China’s total energy consumption mix, a percentage that is significantly less than the world average of approximately 23%.14 The lack of gas demand is predominately due to China’s reliance on coal for electricity. Accounting for 70% of total energy consumption in China, coal is slated to remain “king” in China’s energy mix for the next several decades. Beijing is, however, beginning to realize the limitations of coal for providing a stable supply of electricity in China. Rampant electricity demand has placed serious stress on China’s rail transportation system and has created major transportation bottlenecks that triggered a rise in coal spot prices and caused severe power outages in many parts of the country. Faced with these coal shortages, many manufacturers have resorted to using gas- and diesel-powered generators to meet factory electricity needs, a substitution that in turn raises China’s overall oil demand. The grave environmental and health implications of China’s coal use have received extensive media coverage. The International Energy Agency (IEA) predicts that China will overtake the U.S. in carbon dioxide emissions in 2008.15 Additionally, the coal industry in China sorely lacks safety standards. In 2005, nearly 6,000 deaths in coalmine accidents were reported in China. According to Zhao Tiechui, chief of China’s State Administration of Coal Mine Safety, China closed a total of 8,984 small coalmines in the first half 2007 and will close another 2,811 small coalmines by the end of the year.16 China’s coal industry will require around $100 billion in further investments to meet projected demand in 2025.17 Rather than making these needed investments in the coal industry, China could direct investment toward establishment of an integrated gas system. With 70% of China’s economy relying on the coal industry, prospects for diversified gas introduction will remain a top priority for Beijing. Investments in efficient and clean gas-fired power stations would play a critical role in alleviating many of China’s coal-related environmental and health problems. Domestic gas production has risen, dramatically, up 17% between 2005 and 2006. Despite this change, China must increasingly look abroad for supplemental gas supplies. Until recently, China was completely self-reliant on domestically produced gas. Because China’s national gas network is not even remotely comparable to that of South Korea or Japan, the country’s domestically produced gas is consumed in close proximity to

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Fig. 3.3 Projection of China’s Gas Demand (Source “BP Statistical Review of World Energy 2007”; “2006 Energy Demand and Supply Outlook,” Asia–Pacific Energy Research Center (APERC), 2006; “2004 World Energy Outlook,” International Energy Agency (IEA), 2004; and “2006 International Energy Outlook,” Energy Information Administration (EIA), 2006. National Development and Reform Commission (NDRC) figure cited in Akira Miyamoto and Chikako Ishiguro, “Pricing and Demand for LNG in China: Consistency between LNG and Pipeline Gas in a Fast Growing Market,” Oxford Institute for Energy Studies, NG-9, January 2006 Note Actual figure in 2006 is 56 bcm)

the production fields. No consensus has emerged among analysts over the shape Chinese gas demand will take in the next twenty years (see Fig. 3.3). As economic development and manufacturing further stretch into China’s hinterland, Beijing will need to build gas pipeline networks and effectively implement policies for promoting pipeline use. As the majority of China’s gas consumption and pipelines (though sparse) are in the country’s northeastern region, Russia is an extremely attractive gas supplier—and Kovykta gas is optimally located for transport to China.

The Fight for Kovykta In 1989 Chung Ju-Yung, chairman of the Hyundai Group, proposed running a gas pipeline from Yakutsk to South Korea via North Korea. He

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hoped that this project could both enhance South Korea’s energy security and advance the idea of a unified Korea.18 In 1994, the presidents of South Korea and Russia agreed to jointly develop natural gas from a field in Yakutia (Republic of Sakha) in Eastern Siberia to supply gas through a pipeline to Seoul. South Korean president Kim Yong-sam stated that this pipeline would “promot[e] the economies of the two countries…[and] contribute to forming a basis for unification of the two Koreas.”19 In late 1995, Moscow and Seoul completed a preliminary study of the technical and economic feasibility of Sakha gas development. Under the agreement, a 6,600 km (4,125 mile) natural gas pipeline would extend from Sakha through Khabarovski and Primorski krais. Expectations were that the annual output of gas would total 30 to 45 bcm, 15 to 28 bcm of which would be exported to the Korean Peninsula and that the project would be shared between Russia (70%) and foreign investors (30%). Pyongyang approved the transit of the gas pipeline through North Korean territory because the project would be economically beneficial to the country. Estimates for the total cost of the project were between $17 and $23 billion, with supplies expected to last fifty years.20 The regional pipeline idea was abandoned, however, because the fields in Sakha Republic were deemed unprofitable due not only to the huge costs associated with a pipeline of this length and the harsh climate and geological conditions but also to the uncertainty of future South Korean demand for gas. International focus thus quickly turned to the Kovykta gas field in Irkutsk. The Five-Country Feasibility Study (1996–2000) Following the discovery of the gas field in 1987 and several short-lived attempts by Western oil companies to take part in Kovykta’s development, Russia’s prime minister ordered that Sidanco—a newly formed regional oil company owned jointly by Russia Petroleum (RP) and the Export– Import Bank of Russia—should become the major Russian stakeholder in the project. In 1996, a subsidiary of South Korea’s Hanbo Group, the East Asia Gas Company (EAGC), took the initiative of purchasing 27.5% of the equity shares in the project for $25 million and promoting early development of East Siberia’s oil and gas reserves. 21 As a result, the Hanbo group (with 46.1% ownership) became the largest shareholder of the project. Having invested $40 million in the field development, the consortium began looking for supplemental foreign investment by 1997. That year, Russia’s Ministry of Fuel and Energy and China National

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Petroleum Corporation (CNPC) signed an agreement to bring Kovykta gas to northeast China via Mongolia. At that time, total project costs were expected to amount to $5–7 billion.22 South Korea’s stake in the project was short-lived; in 1997, a bankrupted Hanbo Group was forced to sell off a majority of its equity shares. British Petroleum’s $571 million purchase of the bulk of Hanbo shares left EAGC with just a 7.5% share. Sidanko and BP established a strategic alliance to develop the project.23 Projections at this time for the proposed pipeline put delivery of Kovykta gas to China at 20 bcm per year, with the possibility of extending pipelines to service Korean and Japanese markets. In 1998, Russia, Japan, China, South Korea, and Mongolia signed a memorandum of understanding to execute a feasibility study.24 During this phase of negotiations, the pipeline route deemed most economical was one running from Irkutsk to Beijing via Ulaanbaatar, Mongolia—a total distance of 3,364 km. The planned 1,420 mm-diameter pipeline would require capital investments of nearly $7 billion.25 Several issues began surfacing at this time. Although the proposed route was the most economical, China was staunchly opposed to Mongolia as a transit country. Additionally, although China was the main market for the gas, a large portion of the investments would need to come from South Korea and Japan. Under these prerequisites, companies from the two countries would need to be rewarded with larger stakes in the pipeline development. Project plans collapsed at a December 1998 meeting. In 1999, the development of the pipeline was revived by a cooperation agreement signed in February 1999 between the prime ministers of Russia and China, Yevgeniy Primakov and Zhu Rongji.26 By the end of 1999, China and Russia had invited South Korea to join in another feasibility study that began in early 2000. The remainder of that year was defined by BP taking further control of RP with the acquisition of EAGC’s remaining shares. The Three-Country Feasibility Study (2000–03) During a November 2000 meeting in Beijing, the BP-controlled RP signed a new tripartite agreement with CNPC and KOGAS for a feasibility study.27 Shortly after the agreement, South Korea proposed that the study included the potential for North Korean participation in the project. South Korean energy experts and politicians emphasized that

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by giving Northeast Asia a truly integrated pipeline system, the North Korean routing option would both minimize the unstable political situation in the Korean peninsula and promote mutual economic prosperity for each participating state. In 2002, before the feasibility findings were even announced, Tyumen Oil Company (TNK)—a significant shareholder (26%) of RP—proposed the idea of completely bypassing China by directing the pipeline to Nakhodka for LNG exportation.28 A year of shuttle diplomacy and wrangling between stakeholders, local and federal governments, and Russian gas giant Gazprom ensued, due in large part to Moscow’s 2002 appointment of Gazprom—not even a stakeholder—as the main coordinator for all gas exploration and production (E&P) and export projects in East Siberia. Moscow specifically asked Gazprom to coordinate all of Russia’s gas sales to the Asian markets, as the company does with European exports.29 In February 2003, Gazprom chief Alexei Miller visited Seoul to discuss KOGAS’s proposal to build the Kovykta pipeline into China through North Korea, finally reaching Pyongtaek in South Korea. TNK and BP (which had merged in 2003 giving the new company TNK-BP a 62.5% stake in RP) strongly opposed the route through North Korea, however, because of the increased costs and potential political risks. South Korea eventually abandoned the idea and returned to the original plan to lay the pipeline on the bottom of the sea between China and South Korea (see Fig. 3.4). The three-country feasibility study was eventually conducted and finalized in the summer of 2003. The study found that the project was commercially sound and projected that the total production volume of gas from the Kovykta field would reach 30–35 bcm per year, of which China would receive 20 bcm per year and South Korea would receive 10 bcm per year. The proposed gas pipeline would have a total length of 4,887 km, starting from Irkutsk, wrapping around the southern tip of Lake Baikal, running parallel with the Mongolian boarder, and crossing the Russia-China boarder at (Manchuria). In China, the pipeline would run through Qiqiha’er, Harbin, Changchun, and Shenyang. From Shenyang, the pipeline would split—one line going to Beijing and the other line going to Dalian. From Dalian, a pipeline would run 536 km under the Yellow Sea to the Korean city of Pyongtaek.30 The study also found that the pipeline would take five to six years to build and could ultimately supply South Korea with gas beginning in 2009–10. The study projected that the project costs would reach $17 billion. According to

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Chayandinskoye Gas-Oil Field

Kovykta Gas Field

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Fig. 3.4 Kovykta’s Proposed Piplines (Source K. Kanekio, “Northeast Asia Natural Gas Trade Study: Developing Stable Supply of Cleaner Energy for Sustainable Development” [presented at the World Bank workshop, Beijing, June 24, 2004])

KOGAS, the price of Kovykta pipeline gas would have been 20% to 30% lower than Korea’s established LNG prices.31 Gazprom’s Strong-Arm (2004–Present) Before the three parties were able to sign an intergovernmental agreement, however, Gazprom declared that it would support neither the proposal nor the export of Kovykta gas to international markets, arguing that the gas should be sold on Russia’s domestic market.32 During a January 2004 meeting with TNK Chairman Viktor Vekselberg, Gazprom Chairman Alexei Miller declared that Gazprom would not permit the field to be developed outside Gazprom’s control and insisted that the

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priority should be Russia’s domestic market, noting that “supplying gas to Russian consumers must be a priority in development of East Siberia. This principle is not reflected in the feasibility study. Nor are the costs of gasifying regions around the field taken into account or the potential for developing petrochemical projects using resources from Irkutsk fields.”33 Two months later, Gazprom even suggested that Kovykta gas be linked to the unified system of gas supply to be diverted toward European markets.34 Alexander Medvedev, deputy chairman of Gazprom stated: “we told [TNK-BP] that we could consider Kovykta as a part of the export base, but in no way we would discuss supplies from Kovykta to China. That makes no economic sense.”35 Gazprom clearly desired an equity stake in the project, larger than the 11% share that Irkutsk State Property Committee had offered. As holder of the largest stake in the project, TNK-BP quickly became Gazprom’s target. Although realizing early on the need to effectively work with Gazprom, TNK-BP sought to bring Gazprom in only if on fair commercial grounds. Working through the Ministry of Natural Resources, Gazprom soon brought to the limelight some of the details in TNK-BP’s license agreement and the possible consequences for TNK-BP of not meeting the contract terms. Under this agreement, TNK-BP was required to produce a minimum of 9 bcm per year from the Kovykta field by 2006 or risk losing the project. In a last-minute effort, TNK-BP built a small pipeline from the Kovykta field to Zhigalovo, a logging village with only 5,000 residents. TNK-BP sold the gas for $30 per thousand cubic meters, well below market prices; Gazprom sells gas to Europe at an average price of $250 per thousand cubic meters.36 When TNK-BP’s deadline closed in June 2007, Gazprom agreed to make a nominal payment of $700–900 million to TNK-BP and “promised” shares in other projects in Russia in return for TNK-BP’s 62% stake in Kovykta. Although not yet having made public its official export plans, Gazprom officially stated that China and South Korea are regrouping on gas talks. Although some analysts believe that takeover of the project by Gazprom could actually expedite the development of an export route (whether through China and South Korea or to Nakhodka for LNG shipment), such an outcome is doubtful for several reasons. Most recent reports suggest that Kovykta gas will not be completely developed until 2017, ten years later than originally planned. The next section analyzes

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both past and current obstacles for successful development and export of Kovykta’s gas into Northeast Asia.

Obstacles to the Development of the Kovykta Gas Pipeline Since discovery of the Kovykta oil fields, companies and governments from Europe and Asia have been vying for a stake in their development. Most of the European companies, however, quickly abandoned their interests deeming the project uneconomic. Since these companies backed out, efforts on the part of both Russia and Asia have notably shifted largely from company level to that of the state. The companies have merely been appointed as negotiators on behalf of the states involved. As such, state enthusiasm has been trumped by several economic realities. This next section overviews several of the prevailing economic obstacles to Kovykta’s development. Transit Country Problems From 1995 to 2007, the Kovykta project has had five major ownership changes—each bringing a change in routing options. Although proven reserves of the field have increased by 1 trillion cubic meters, the cost of the proposed pipeline has increased by $10 billion (see Table 1). The periodic inclusion of Mongolia and North Korea has indeed hindered plans for development of the Kovykta pipeline and has highlighted the complexities involved when companies and governments are forced to balance the economic validity of the project with regional politics and international security. The South Korean government has often discussed energy cooperation between the two Koreas, apparently with the primary goal of constructing an integrated pipeline and electricity network across the Korean Peninsula. Both China and South Korea are clearly aligned in desiring a stable and benign North Korea—and resolving North Korea’s energy insecurities could undoubtedly help achieve this goal. Though the political costs and risks associated with North Korea are well-known, the extension of Russian pipelines to South Korean (and Northeast Asian) markets via North Korea has economic as well as political merit. A Northeast Asian pipeline system that is unable to traverse North Korea might inevitably leave both suppliers and consumers alike worse off. Without competitive

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market outlets for Russian gas, LNG supplies from the Middle East and Australia could take over the gas markets in Asia—a situation that would leave less market share for Russia and higher energy costs for Northeast Asian and US consumers.37 China’s recent LNG deals with Australia highlight this growing trend. North Korea lies directly between Northeast Asia’s major buyers and sellers. Leaving North Korea out of Northeast Asia’s energy corridor would have worldwide commercial and political implications. The inclusion of North Korea in the route, however, temporarily increased both commercial and political costs to the pipeline. The additional 246 km of pipeline needed for the North Korea route increased costs by $2 billion. Moreover, routing the pipeline through North Korea could have allowed Pyongyang to easily control the flow of gas to South Korea for strategic purposes. Although some sectors of the South Korean government and some in various international organizations agreed in principle to this route, the 2003 feasibility study—led by TNK-BP—ruled out this option on both commercial and political grounds.38 The six-party talks, however, are becoming more sanguine. Given that pipeline projects are extremely slow to develop, the possibility for North Korea to take part in a regional pipeline scheme in the future is not completely out of the question. Mongolia also figured in the pipeline scheme in 1997. Although the most economic and cost-effective way to transport gas from Kovykta into China, this possibility of routing the pipeline through Mongolia was quickly abandoned by China due to domestic concerns. China feared both that the autonomous region of Inner Mongolia might demand to be a benefactor of transit fees along with Mongolia and that social unrest might occur if China’s ethnic Mongolians felt that they were receiving the short end of the stick.39 China worried that Mongolia could easily become an “eastern Ukraine” that would siphon off gas supplies en route to China. More recently, China has had concerns that Mongolia has become too subject to US influence, especially given Mongolia’s support for the war on terrorism after September 11, 2001. The inclusion of both North Korea and Mongolia in the Kovykta routing options would have been both economically and politically beneficial. The Mongolian route was the cheapest option for all parties involved. Bypassing Mongolia by instead routing the pipeline through the permafrost lands in Siberia would have significantly increased project costs. Although more expensive than the Mongolian route, the North

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Korean option was considerably cheaper than the most current route consisting of an underwater pipeline from Dalian to Pyongtaek. The higher construction costs of the diversions will increase the end-user gas price; Russia will have little room left to negotiate gas pricing with China, and South Korea will continue to rely on imported LNG as a more attractive option. Complexities of Gas Investments Not often reported in the media is the fact that natural gas is intrinsically more difficult to trade than oil and requires greater confidence, many more guarantees, and much more money from investors and governments. The Kovykta pipeline deal is no exception. Pipelines are rather inflexible—they require substantial reserves at one end to sustain and fill the pipeline and a significant market at the other end to justify the investment. Once built, pipelines cannot be moved and thus lock the seller and buyer into a long-term relationship. Whether by LNG or pipeline, the natural gas market is vastly different than the oil market. There is in fact no world gas market—the majority of the world’s gas is both produced and consumed domestically and hence lacks a standardized benchmark price. Furthermore, striking natural gas deals between two parties (let alone three or more parties) involves a highly sophisticated set of plans and calculations. The huge amounts of front-end investments and the difficulties and expense of storage and transportation force parties to make long-term “all-or-nothing” deals. Gas trade has been traditionally characterized by extremely inflexible contracts arranged between one concrete buyer and one concrete seller. On average, gas supply contracts commit two parties to a business relationship for twenty years under tough “take-or-pay” and destination clauses that essentially prohibit buyers from either decreasing supplies or selling surplus supplies to third parties. Oil, on the other hand, is a widely traded commodity that has matured to a stage where uniform benchmark prices are firmly in place.40 In the world oil market, as long as consumers have spare refinery capacity, engaging in a short-term, low-risk, low-investment contract with a producer is fairly easy. Likewise, having surplus oil allows producers to find a willing buyer with relative ease. The combination of the benchmark pricing system and the fluidity at which physical commodities can be bought and sold with little risk and investment makes oil deals much less cumbersome and much less strategic than is the case with gas.41

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Though Kovykta has been proposed as a cross-border pipeline project, Gazprom has recently favored having the Kovykta pipeline follow the proposed East Siberian-Pacific Ocean (ESPO) oil pipeline route. This route would not cross international boundaries but would run from Irkutsk to Nakhodka—a pipeline over 4,000 km in length. A LNG terminal would be built at Nakhodka so that LNG could be shipped to several Northeast Asian states without relying on only one or two markets. This proposal, however, poses several technical and commercial challenges for Gazprom. First, although extremely capable in pipeline construction, the company has no experience with LNG. Gazprom would need a major international partner to provide the technology and experience required not only to build and operate the terminal but also to manage the LNG supply chain. Second, this proposal makes little economic sense. LNG is a capital-intensive business and requires up-front investments in a facilities chain (upstream production rigs, liquefaction facilities, LNG tankers, regasification facilities, and local distribution pipelines). Such a chain could cost as much as $5 billion.42 For LNG to be a profitable business, the gas deposits need to be relatively close to the terminal; most LNG gas therefore has come from fields just offshore. Furthermore, LNG facilities are usually upgraded before new terminals are built. The cost of an upgrade, however, is astronomical in comparison to an equal capacity upgrade for a pipeline. Roughly speaking, pipelines can double capacity for only an additional 10–20% of original investment; LNG, however, would require an additional 50–60% for the same capacity upgrade.43 After decades of technological advances that have slowly reduced construction costs of LNG plants, costs are now again on the rise. In 2005, LNG plant construction was below $200 per ton per year of production capacity. Due to rising raw materials and equipment costs and a growing shortage of experienced engineers, today these costs are around $500 per ton per year, with some projects even approaching $1000 per ton per year. These cost hikes have caused delays of up to three years for several new LNG projects. In sum, whether by pipeline or LNG, gas investments are extremely complex and risky. Gas projects not only need reliable, long-term commitments from consuming countries but also require financial commitments and technological expertise to sustain a profitable gas business. Kovykta has been and will remain subject to these problems, which are inherent in gas investment and export.

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Demand Security and Pricing During the ten-plus years of negotiating over the price and timing of the Kovykta pipeline, gas markets have gone through three distinct phases. During the first phase (1996–2000), gas contracts were extremely rigid and prices were high. During this period, South Korea and Japan, the only importers of natural gas in the region, had government policies and infrastructure that favored the use of gas. The second phase (2000–05) was a buyer’s market; this phase was defined by lower oil price linkages, lower gas prices, and more flexible contract terms. The third (and current) phase—a seller’s market—is characterized both by prices that link closer to oil and by stricter contract terms. Since the price of gas and contract terms determine the pace and time of the development of the gas pipeline as well as the will of foreign investors, the characteristics of each phase have had distinct implications for the development of the Kovykta gas pipeline. Furthermore, each party involved in the Kovykta pipeline negotiations has had different alternatives for gas use—and thus has employed a different set of calculations when formulating the price of Kovykta gas. For South Korea, the main alternative to pipeline gas is LNG, and for China the main alternative is coal. First phase~During the first phase, from 1996 through 1999, China’s domestic gas production of 17.9 bcm per year could clearly cover the country’s domestic consumption of 17.4 bcm per year. Gas in China was (and today largely still is) used to produce fertilizer, rather than in gas-fired power plants. Gas pipeline grids were sparse, and industrial gas use was concentrated in China’s northeastern coastal cities. Thus during this phase, high costs and inflexible contract terms made gas a less competitive option compared to China’s domestic coal supplies. Though indeed having much potential, China simply did not have a gas market. South Korea therefore was brought in to act as a stable “anchor” for the project—a new factor that could make the Kovykta pipeline feasible. In the wake of the Asian financial crisis, however, gas development plans in all of Asia slowed to a snail’s pace. South Korea’s gas demand decreased by 800,000 Mt (or 1 bcm).44 KOGAS’s LNG storage was at full capacity, and from 1997 to 2002 South Korea abandoned a total of 76 energy projects.45 As one example, the Hanbo Group lost most of its stake in the Kovykta project after going bankrupt in 1997. China, less deeply affected by the financial crisis, became the silver lining in the project.

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There is no consensus as to just how Chinese gas demand will take shape in the next twenty years. Projections of China’s energy demand made by various energy agencies differ by as much as 143 bcm (see Fig. 3.3). This projection gap is roughly equivalent to the average capacity of 47 LNG terminals or around five Kovykta fields. At a March 2005 seminar, the National Development and Reform Commission (NDRC), China’s main economic and energy policymaking apparatus, projected that China’s energy demand could reach 250 bcm per year by 2020— representing a 200% increase over today’s figures.46 Even with an optimistic domestic gas production outlook of 150 bcm per year, China would still be required to import approximately 100 bcm per year. Beijing’s plans to build fourteen more LNG terminals by 2020 calls into question the need for Kovykta gas, given that the capacity of these proposed LNG terminals is roughly equivalent to 48 bcm per year. If Russian, Eurasian, and Southeast Asian pipeline gas is introduced, supply would be approximately 36 bcm per year above projected demand.47 Although development of several of these pipelines is highly speculative, building the Kovykta pipeline to China presents a potentially nightmarish investment decision. If anticipated sales fall through because China is unable to pay for the gas, investors will have no way to recover sunk costs. Few experts doubt that in the near future, China’s gas consumption will undergo extraordinary growth; yet how China will rapidly develop the country’s gas market is unclear. To what extent will gas account for China’s power generation? How much investment will China make in municipal gas distribution systems? Developments related to these questions could ultimately affect the future of the Kovykta pipeline. Second phase~During the second phase in natural gas markets, negotiations over the pipeline were promising but slow-going. With rigorous diplomatic support, China aggressively pursued development of an LNG industry. In 2003, North West Shelf Australia LNG won a tender to supply China’s Guangdong LNG terminal with 3 bcm per year for twenty years at approximately $3.20 per million British thermal unit (Btu). At that time, the cost of coal in China was approximately $2 per million Btu and the average cost of China’s domestic natural gas—specifically from the Tarim Basin—was close to $4 per million Btu. The anticipated price of natural gas from the Guangdong LNG terminal, however, is $2.80

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per million Btu (including freight) plus $0.40 per million Btu for regasification.48 At a price of $3.20 per million Btu, coal lost some of its competitive edge, making gas a more attractive option. Third phase~Since 2006, the global gas market has experienced a third phase—a seller’s market. Russia has recently demanded higher prices for nearly all of the country’s exported gas, including gas from Kovykta, insisting on the need to be competitive with LNG from the Middle East. China is in no rush, however, to commit to such a high price. In early 2007, Russia offered gas to China for $300 per 1,000 cubic meters ($8.24 per million Btu), yet China claims that the country can afford to pay only $180 per 1,000 cubic meters ($4.90 per million Btu).49 In the industry, $3.34 per million Btu is a significant price gap to overcome; that China and Russia are arguing over dollars rather than cents suggests that the issues will not be quickly resolved. Recent developments, however, indicate that China might be ready to accept higher prices for gas imports. In September 2007, after years of hesitation, China secured a long-term LNG supply contract with Australia’s Woodside Petroleum worth $45 billion. Russia was quick to express satisfaction, as a China that is prepared to pay market prices to Australia might likewise be willing to pay what Russia wants. This optimism, however, ignores two possibilities: that China may be demonstrating a preference for LNG over pipeline gas, and that Australia is associated with much less political risk than is Russia.

Russia’s Resource Renationalization As outlined above, many impediments to development of the Kovykta project have been economic in nature. In the context of Gazprom’s recent takeover of the Kovykta project, however, understanding how the changing economic environment has affected the political and legal landscape in Russia’s energy sector is particularly important. As the result of post–Soviet era economic reforms, Russia’s energy industry had become increasingly competitive and privatized by the mid1990s. Within ten years of the Soviet Union’s demise, the coal and oil industries were nearly completely privatized and product prices were deregulated. According to some calculations, government ownership of oil and coal companies was below 10% by 2004.50 Russia’s gas industry, however, has not seen similar reforms for several reasons. First, gas has been a more stable contributor to Russia’s economy than oil, providing

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the federal government with a steady revenue stream throughout the periods of steep decline in oil prices and production. In 2006, gas alone accounted for around 50%—or $200 billion—of Russia’s total oil and gas rents.51 Second, although having the largest proven gas reserves in the world, Russia—which consumes approximately 70% of the country’s total gas production—ranks second in the world in natural gas consumption (see Fig. 3.5). Domestic oil consumption, on the contrary, constitutes only 30% of total production. Although rising, Russia’s domestic gas prices are fixed well below market price, especially for residential users. These price distortions have kept domestic demand high, tightly linking the gas sector to economic development and social stability. During the presidency of Boris Yeltsin (1991–99), world oil prices averaged around $14 per barrel, dropping as low as $8 per barrel in the late 1990s (see Fig. 3.6). Under these conditions, Russia became more open to foreign investments and began to allow foreign ownership of energy resources. Since Vladimir Putin’s rise to the presidency in 2000, however, skyrocketing oil prices have brought the average world crude price over the past seven years to approximately $34 per barrel.52 In the Gas

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Fig. 3.5 Distribution of Russia’s Oil and Gas Production, 1991–2006 (Source “BP Statistical Review of World Energy 2007”)

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last two years, crude oil prices have hovered around $70 per barrel and even topped $100 per barrel. By some estimates, federal earnings from oil and gas under Putin are ten times greater than under Yeltsin.53 As oil and gas have become central to Russia’s economy, Putin has taken great strides toward gaining control of the energy industry. In 2001, Putin appointed three high-level executives at Gazprom, all of whom were either friends of Putin or former Putin administration officials.54 As aptly characterized in a Swedish defense analysis, “Putin is creating a culture of a politically correct market economy.”55 With the oligarchs that run Russia’s energy companies voluntarily and naturally placing state interests on par with commercial ones, direct state intervention no longer seems necessary. In the mid-1990s when Asian companies entered into the Kovykta pipeline negotiations, energy prices were low and the Kremlin was weak. The autonomous rights of regional authorities (such as those in Sakha and Irkutsk) were also at a peak, enabling these locales to have greater influence and independent decision-making regarding resource planning and management. Irkutsk’s remoteness from Moscow contributed to this 100 90 80

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autonomy as well. Known as the “two key” system, Russia’s Subsoil Law of 1992 gave both the regional (oblast) and federal governments authority over subsoil use. With the assignment of Gazprom as chief negotiator of Kovykta and a series of amendments to the law, however, regional authority over subsoil use was stripped and all rights over the issuing or revoking of subsoil licenses were solely retained by the Kremlin. 56 Apart from a role as a small shareholder, the Irkutsk regional government was removed as the central negotiating authority in the Kovykta pipeline. In response to these power shifts, China, South Korea, and TNK-BP became heavily involved in a type of shuttle diplomacy, with representatives travelling between Irkutsk and Moscow in attempts to figure out who was in charge. Both China and South Korea were often confused as to with whom or what company—the project’s main shareholder and operator (TNK-BP), Russia’s export monopoly (Gazprom), or the federal government (the Kremlin)—negotiations ought to be conducted. On the sidelines of recent Kovykta negotiations, South Korea and China uncharacteristically publicized frustration regarding Russia’s ambiguities. Discussing the state of Sino-Russian energy cooperation and the proposed pipeline, in an interview in 2006, Zhangguo Bao, former vice-director of China’s NDRC made the following statement: Currently, the Sino-Russia pipeline question is one step forward, two steps back. Today is cloudy with a chance of rain while tomorrow is sunny with a chance for clouds, just like a weather forecast. One minute Russia has said they have made a decision, the next saying that no decision has been made…Truthfully, we’ve been in contact with Russia for such a long time, but we still don’t understand Russia, I feel. We don’t know who can make a decision, or who to seek out…We’ve talked to Putin and department heads. We’ve talked to everyone in the government. They say they can’t make a decision, and that we should talk to the private sector. We’ve meet with every company. They say they can’t sign an agreement and we should talk to the government.57

The lack of transparency in Russia’s energy policy has clearly left all negotiating parties in limbo.

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Balancing Russia’s Domestic and European Demand Gazprom’s entire gas production (apart from that which is consumed domestically) is exported directly to European and Eurasian markets; Germany, Italy, and Turkey are Gazprom’s largest and most important customers. Nine out of Russia’s top fifteen importers rely on the company for over 50% of their gas needs.58 Some European countries, although hoping to diversify gas imports, are locked in to dependence on Russian imports by decades-old pipelines. Because Russia keeps domestic prices well below international market prices, Gazprom is completely reliant on Europe for revenues. Geopolitically, Gazprom is currently attempting to create a European monopoly by undermining efforts by Iran, Turkmenistan, and Kazakhstan to export gas to the European market. Because the majority of Russia’s pipelines are aimed toward Europe, Gazprom has focused on Europe and placed Asia on the backburner. Russian domestic demand is another factor behind the politicization of Russia’s gas industry. Although Russia currently ranks second in the world in gas use (behind the U.S.), the Russian economy is only onetwentieth the size of the US economy. Low-priced gas fuels much of Russia’s industrial sector, and fixed prices allow household energy bills to remain low. Although Gazprom is lobbying hard for a sharp increase in domestic prices, the Kremlin remains reluctant to raise prices for fear of provoking economic and social stresses. The political aspects of the recent price debacle with Ukraine received much attention, yet the move to shut off the gas spigot clearly was an indication of Russia’s fear of overstretching Gazprom’s other export commitments.59 An overcommitment to European consumers would require Russia (Gazprom) to decrease supplies (i.e., raise prices) to domestic users. Either choice packs a political punch that neither Gazprom nor the Kremlin wants to feel. In a worst-case scenario, Russia could also connect Kovykta with the country’s existing unified gas supply system for domestic consumption in order to relieve other gas fields that could supply exports to Europe. If Russia continues to focus on Europe without increasing production, raising domestic gas prices, and curbing domestic demand, how can Gazprom justifiably export Kovykta gas to China that refuses to pay market prices?

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Russia’s New Subsoil Law As mentioned above, Russia’s subsoil law, implemented in 1992, gave considerable power to regional authorities over subsoil exploitation. The law has, however, been amended several times since then. In 2005, the Kremlin submitted to the Duma a new subsoil law—the Draft Law—that merely legally enforces what has already been in practice for several years. The major issue that concerns international oil companies (TNK-BP in this case) is the clause on foreign ownership and “strategic” resources. According to the new law, no foreign entity can have controlling stakes (over 50% plus one share) in any of Russia’s “strategic” resources. The Draft Law defines as strategic (1) various rare resources such as diamonds, uranium, or quartz; (2) deposits from any oil field containing over one billion barrels or any gas field containing over one trillion cubic meters of gas; and (3) any reserve in close proximity to a military base.60 With two trillion cubic meters of gas, Kovykta is deemed a “strategic” resource. As stipulated in the law, neither Gazprom nor the government could strip any foreign owners of their assets if a license or production-sharing agreement (PSA) was conducted before the amendments to the law came into effect. Aware that TNK-BP was not living up to its production requirements, Gazprom waited to “legally” take over the project. Kovykta’s Periphery For years, Gazprom has considered several pipeline options to China and East Asia and even the construction of an integrated oil and gas supply, storage, and transition system that would tie together all of the country’s major fields for export to Asia and beyond. In an energy strategy document, the Russian Ministry of Energy outlines the country’s farreaching goals to take over 25% of Northeast Asia’s gas market before 2020.61 Russia has no pipelines in the region, however, and until recently, Gazprom has had no major stakes in any of the key fields in East Siberia and the Russian Far East. As such, Gazprom has begun to force its way into all of the major oil and gas fields in the region; using environmental NGOs and the Ministry of Natural Resources to “soften up” the international oil companies (IOC), Gazprom has managed to get in on favorable terms. Gazprom is in essence “expropriating” these fields with a nominal financial recompense.62 This use of strong-arm tactics by Gazprom shows that Russia is bent only on controlling these last “strategic” resources

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on the country’s frontier, not on controlling the actual means of gas transportation and export. Because Gazprom lacks an open and coherent strategy and Russia’s PSA laws are deteriorating, both international oil companies and East Asian consumer countries have come to seriously question Russia’s reliability as an energy partner. Both the IOCs and Russia have been competing to gain entry into Asian markets, peripheral export options that have also undermined Kovykta’s positioning. Altai~Gazprom’s most recent gas export proposal to China has not been Kovykta but “Altai.” Gazprom has proposed building a pipeline to China that crosses the western most point of the Russia-China border over the Altai (or Altay) mountain range. According to Russia, the Altai pipeline is to be the first of two potential pipelines to China. Altai gas would come from fields in Western Siberia and connect with China’s West–East pipeline, which carries gas from fields in Xinjiang to markets in Shanghai. Notable, however, is that the Altai pipeline proposal was set forth shortly after the Ukrainian gas price debacle—which temporarily halted gas exports to many European countries—when European policymakers began discussing “diversifying” gas sources. Viewed by analysts more as a political rebuttal than as a sound commercial pursuit, this proposal seems designed to show that Russia can easily divert gas away from Europe to other markets should Moscow choose to do so. Moreover, political leaders in the Republic of Altai have expressed fears that Chinese labor could expand China’s influence and presence in the region.63 Chayanda~With gas reserves of 1.2 trillion cubic meters, the Chayandinskoye (Chayanda) field in Yakutia (like Kovykta) was officially deemed strategic in 2005. Although Chayanda contains only approximately half as much gas as Kovykta and is far behind Kovykta in the development process, Russia seems determined to develop this field before Kovykta. The Sakha government has held several meetings with representatives from China and South Korea over future exports. In an effort to undermine Kovykta, the Republic of Sakha formed a strategic alliance with Gazprom in 2002 and began promoting the development and export of Chayanda gas. For Gazprom, the Chayanda field represented a timely and strategic potential investment. Chayanda was in fact one of the only major fields in Russia’s eastern frontier that was not operated by international oil companies. Gazprom could thus use the threat of Chayanda exports to bypass TNK-BP’s export plan.64 There have even

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been reports of Russia offering China 10% of Sakha reserves free of charge if China were to commit to early development of the field.65 In 2003, the Kremlin held a cabinet meeting to discuss the concept of a unified pipeline system in Eastern Siberia and the Far East. This concept envisioned a pipeline network connecting all the major eastern gas fields—Tomsk (which would link up to Russia’s western gas supply system), Chayanda, Khabarovsk (where the pipeline would connect to a pipeline that routed the off-shore Sakhalin gas), and Vladivostok (where it would terminate). Expected to extend more than 6,000 km, this pipeline did not, however, include Kovykta in the first set of plans. Since Kovykta was at that time majority owned by TNK-BP, Gazprom viewed Kovykta exports as endangering not only the merit of the other fields in the region but also the potential company and state revenues that could be gained from Chayanda.66 Since gaining control of Kovykta, however, Gazprom’s tone has changed. Kovykta will be included in this proposed pipeline system, though the time line is for Chayanda to be online by 2016 and Kovykta by 2017. Large-scale exploration is not yet underway and may not even begin until Gazprom has an exploration permit. Gazprom has been aggressively negotiating with the Ministry of Natural Resources to receive a production license for the Chayandinskoye field without having to compete with other companies in an open auction. Looking at Gazprom’s record, it will be surprising if the company fails to take over this project. Sakhalin~To date Sakhalin has been the most successful of the oil and gas fields in Eastern Russia. Sakhalin’s success is largely due to fact that for the most part, foreign oil companies have undergone the exploration, production, and development of these fields, which are protected under a PSA.67 Because the three largest gas markets—Japan, the U.S., and South Korea—are in such close proximity to the projects, Gazprom has grown convinced that the company would miss out on a huge commercial opportunity if not involved. Sakhalin also represents a good opportunity for Gazprom to begin learning the LNG business. For Russia, LNG exports are both commercially and geopolitically safer than cross-border pipelines, given that LNG can more easily avoid being trapped in a monopsony. Of the six Sakhalin projects, Sakhalin-1 and -2 have the greatest production potential and have moved along the fastest. Though not yet exporting LNG, Sakhalin-2 has already committed all of the project’s future LNG exports.68 After months of complaining about environmental concerns and increasing costs associated with Sakhalin-2, Gazprom

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managed to obtain Shell’s position as majority shareholder—acquiring a 50% (plus one share) stake in the project for $7.45 billion in December 2006. Not surprisingly Gazprom ceased accusations over the project’s negative environmental impacts after the takeover. Exxon operates Sakhalin-1 and for years has had plans to build a pipeline to China. In 2006, Exxon signed an agreement with CNPC to supply China with 8 bcm of gas. Sakhalin-1 is currently the only PSA project outside Gazprom’s control, and Exxon’s unilateral export of this gas could potentially undermine Gazprom’s price negotiations with China over gas supply from any field. Gazprom has therefore severely criticized Exxon’s plan, claiming that the company will buy all future gas production from the consortium to supply the domestic market in the Khabarovsk and Primorye regions.

Future Outlook Gazprom’s consolidation of gas projects in Siberia and the Far East has allowed Russia to present several export options to Northeast Asia. Including Kovykta, Russia has proposed nearly 60 bcm of gas to both China and South Korea. As a result of Gazprom’s aggressive behavior in eastern Russia and threats to target proposed gas for domestic use, Northeast Asian countries have been turning elsewhere for gas supplies. China in particular is hedging its bets by looking to Turkmenistan and Myanmar for pipeline gas and to Australia for LNG. Turkmenistan is vitally important to Russia, which is dependent on Turkmen gas imports to meet European export obligations. That China has approached Turkmenistan could set a negative tone for any Russian-Chinese gas discussions.69 China has also been courting Myanmar, and the junta recently awarded CNPC with a supply contract of 16 bcm per year. The deal is geopolitically strategic in nature for China; not only does negotiating with Myanmar place China in a stronger position to negotiate with Russia and Iran over gas supply contracts, but a pipeline from Myanmar to Kunming would also establish the groundwork for building additional oil pipelines that would allow China’s imports to bypass the Malacca Strait. Although Gazprom’s takeover of the project in the summer of 2007 could in theory expedite the development of Kovykta, other considerations suggest that the pace may not increase. Gazprom has now assumed controlling stakes in the largest gas projects in Eastern Siberia and the Russian Far East and is able to coordinate all gas exports to China, South

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Korea, and Japan. Gazprom’s controlling stakes give the company the upper hand in price negotiations with Northeast Asia, as countries from the region can no longer negotiate with the international oil companies to get a lower price. The future of Kovykta, therefore, now depends both on the resolution of price negotiations between Russia and China and on Gazprom’s ability to successfully finance and operate several new projects simultaneously in Eastern Russia. Even if China and Russia should reach a price agreement, will Gazprom be able to competently finance, operate, and manage all of these new projects? Gazprom is among the world’s least efficient energy companies; the company uses export earnings to subsidize loss-incurring domestic sales at only approximately 20% of world market prices. Although Gazprom has access to foreign lending to fund its capital expenditure, the company’s investment plans are affected by high levels of debt and continued uncertainty about gas market reform. The government hopes that by removing the “ring-fence”—limiting foreign share ownership in the company—Gazprom will be better positioned to raise much-needed investment capital. Foreign banks have, however, been slow to come forward with funding for Gazprom lately. The European Bank for Reconstruction and Development, for instance, pulled out of negotiations on providing $600 million worth of funding Sakhalin-2 after Gazprom took control of the project. When Gazprom controls all the major fields in Eastern Siberia and the Russian Far East, the company will have to reevaluate its relationships with the IOCs. Although in some regards Gazprom has an advantage in that the IOCs have fewer places to turn for new investments, Gazprom will nevertheless need to rely on the technology and management skills of these IOCs to effectively develop and export Eastern Siberian and Russian Far Eastern gas. As a notable observer of the Russian Far East has observed, “only the IOCs have the experience to delimit the reserves and deliver a commercially viable development strategy.”70 Judging from the fact that Gazprom revises its investment program several times per year, Gazprom evidently has few strategies or plans to deliver such skills. Political expediency has thus far dictated Gazprom’s export policy. Although some foreign investors remain in Russia, the IOCs will likely reassess political and commercial risk at some point, which may have consequences for any future investment. With Gazprom’s attention on Sakhalin and further European expansion, for the foreseeable future, Kovykta will likely either sit idly or be used

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to supply the domestic market. Though neither option may be the most attractive for Gazprom, the company can afford to allow either to happen in this high-price environment. Both of these scenarios present formidable implications for Northeast Asia and the U.S. Japan, South Korea, and the U.S. are the world’s largest natural gas consumers, and China will join the ranks. If Russia’s giant gas fields are not permitted significant market outlets in Asia, global supply will fall, thus effectively keeping gas prices higher than they would be otherwise. The fate of Kovykta therefore has direct energy security implications for the U.S. As seen through its recent Australian deal, China is turning toward LNG rather than waiting for the Kovykta pipeline issue to be resolved. Increasingly China, South Korea, and Japan will look further west of the Malacca Strait for LNG supplies as well, putting those countries in direct competition with the U.S. and potentially reducing LNG supplies to the US West Coast. Increased competition for new supplies may also give further impetus to perceptions of energy insecurity among the consumers. Although competition is indeed a positive factor in the energy industry, in an environment of high prices and limited supplies, company-level competition can quickly turn into state-level competition, especially given the growing perception that many oil companies are partially controlled by their home governments. In the absence of Russian gas supplies, China, Japan, and South Korea may decide to increase diplomatic and strategic ties with many of the gasproducing countries that the U.S. deems unsavory—particularly Iran and Myanmar. Therefore, should Russia increase supplies to Northeast Asian markets not only will those consumers directly benefit but the U.S. will indirectly benefit from declining prices, easing anxiety over supply security, and softening (potentially) greater strategic ties between Northeast Asian states and “problem” gas-producers. To paraphrase Daniel Yergin, the largest obstacles to the development of new supplies are not the factors below ground, such as geology, but are rather factors above ground, such as international affairs, politics, and investment.71 The Kovykta pipeline is merely a microcosm of the major energy issues entrenched in the region. Kovykta or any other trans-border project in the Russian Far East will not materialize unless such projects are actively supported by favorable domestic and international policies. Regional long-term gas deals also require competent corporate management, contract sanctity, and adequate and secure financing. Most of these necessities are, however, far from being in place in Russia’s Far East.

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Notes 1. See Stephen White, “Is Russia a Country in the Globalization Era?” (Presentation prepared for conference on the Regional Cooperation of Northeast Asia and Russia’s Globalization for the 21st Century, Seoul, South Korea, June 22–24, 2003); and Eugene M. Khartukov, “Russia,” in Rethinking Energy Security in East Asia, ed. Paul B. Stares (Tokyo: Japan Center for International Exchange, 2000), 141. 2. “Kovykta Project,” TNK-BP http://www.tnk-bp.com/operations/explor ation-production/projects/kovykta/. 3. Ibid. 4. “Gazprom Annual Report 2006,” OAO Gazprom, 2006 http://www.gaz prom.com/documents/Report_Eng.pdf. 5. Ibid. 6. “BP Statistical Review of World Energy 2006,” BP p.l.c., June 2006. 7. Ministry of Commerce, Energy, and Industry of the Republic of Korea (MOCIE) http://www.mocie.go.kr. 8. Ibid. 9. Due to privatization efforts that began in 1999, the South Korean government allowed POSCO (a large steel maker) to make a rare “spot” purchase of 500,000 tons of LNG in 2006. POSCO and K-Power also signed a long-term LNG contract in 2004 for 550,000 and 600,000 million tons, respectively, of LNG from Indonesia’s Tangguh project that will be delivered by the end of 2008. 10. Indonesia is one such example. Although much of South Korea’s LNG in the 1990s came from Indonesia, the future of Indonesia’s LNG industry is uncertain. Due to a lack of both favorable investment policies and general resource nationalism, this OPEC country became a net importer of oil in 2004, with plans to further develop the country’s LNG for export currently in limbo. An overall push to develop a domestic gas market is emerging to make up for this energy gap. Indonesia already has to import LNG from other countries in order to meet existing long-term supply contracts. 11. Fereidun Fesharaki, “Energy Issues in Iran: It Helps to Know a Few Facts Before Reaching Conclusions!” (Presentation given at the 27th Annual Oil & Money Conference, London, September 18–19, 2006). 12. Spot markets allow producers of surplus gas to instantly locate available buyers, negotiate prices, and deliver actual commodities to the customer in real time and are either privately operated or controlled by industry organizations or government agencies. Spot markets frequently attract speculators because spot-market prices are known to the public instantaneously.

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13. The growth of the spot market in Asia is in part due to South Korea’s seasonal gas demand swings, a nuclear plant shutdown in Japan, and gas supply interruptions in Indonesia. 14. “BP Statistical Review of World Energy 2006.” 15. Richard McGregor, “Rampant Growth Spurs Emissions,” Financial Times, April 19, 2007. 16. “China to Stay Coal Net Exporter through 2007,” Energy Economist, no. 310 (August 2007): 38. 17. James P. Dorian, “Global Implications of Rising Chinese Energy Demand” (paper presented at annual energy security conference of The National Bureau of Asian Research, Washington, D.C., September 25–26, 2005). 18. Keun-wook Paik, Gas and Oil in Northeast Asia: Policies, Projects, and Prospects (London: The Royal Institute of International Affairs, 1995). 19. “Russia and South Korea Agree to Develop a Gas Field and Construct a Pipeline,” BBC Monitoring Service: Asia Pacific, June 3, 1994. 20. Ekonomicheskii Soyuz Supplement, Rossiskaya gazeta, March 30, 1996. 21. Unless noted otherwise, all monetary values are in U.S. dollars. 22. “Russia and China to Build Gas Pipeline to Yellow Sea,” BBC Monitoring Service: Former Soviet Union, July 18, 1997. 23. Jeanne Whalen, “BP and Uneximbank Close Sidanko Deal,” Moscow Times, November 19, 1997. 24. “E. Siberia Gas Feasibility Study to Be Agreed,” Reuters, September 23, 2006. 25. Keun-Wook Paik and Jae-Yong Choi, “Pipeline Gas Trade between Asian Russia, Northeast Asia Gets Fresh Look,” Oil and Gas Journal 95, no. 33 (August 18, 1997): 41–45. 26. “Russian Agency Details Sino-Russian Energy Cooperation Projects,” BBC Monitoring: Asia–Pacific, February 24, 1999. 27. “Russia,” Platts Oilgram News 78, no. 215, November 7, 2000. 28. “Russian TNK Urges OK for Kovykta-Nakhodka Gas Pipeline,” Dow Jones International News, March 15, 2002. 29. “Gas Pipeline to China and Korea,” APS Downstream Review Trends, September 4, 2006. 30. Jiqiang Ma, “Substantial Result Achieved for Russia-China-ROK Gas Cooperation Project,” China Oil and Gas, no. 4 (2003): 42–45. 31. Chang Duckjoon, “Northeast Asia Energy Cooperation and the Russia Far East,” Korea Focus, May–June 2004. 32. “Gazprom Says Kovykta Project ‘Unattractive’ in Current Version,” Prime-TASS Energy Service, January 29, 2004. 33. “Gazprom Outlines Disagreements with TNK-BP over Kovykta Project,” Platts Commodity News, January 29, 2004. 34. Nodari Simonia, “Russian Energy Policy in East Siberia and the Far East,” James A. Baker III Institute for Public Policy, Rice University, October 2004, 11.

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35. “Gazprom: Gas Deal with China to Be Finalized by First Half of 2006,” Caijing Magazine, September 26, 2005 http://www.caijing.com.cn/ newcn/English/Industry/2005-10-03/13870.shtml. 36. “The Russian Oil and Gas Producers,” APS Review Downstream Trends, August 21, 2006. 37. Peter Hartley, Amy Myers Jaffe, and Kenneth Medlock, “Economic Issues of Natural Gas Trade in Northeast Asia: Political Bridges and Economic Advantages,” in “New Paradigms for Transpacific Collaboration,” Korea Economic Institute, Academic Study Series, 2006 http://www.keia.org/ 2-Publications/2-3-Monograph/Monograph2006/04Jaffe.pdf. 38. “Pyongyang Could Be Left Out of Russian Gas Pipeline to Korean Peninsula,” Agence France Presse, November 12, 2003. 39. Kaoru Yamaguchi and Keii Cho, “Natural Gas in China,” The Institute of Energy Economics, Japan, August 2003. 40. The marker crude system was introduced in the mid-1980s. The spot trade of three main types of crude (West Texas Intermediate, Brent Lend, and Dubai) acts as a barometer of the overall market level. Using this pricing system, different grades of oil are priced on negotiable differentials to the marker grade. The rationale is that the spot price represents the balancing point of supply and demand. Even though the volumes of oil that trade daily on a term-contract basis between companies or governments are much larger than those that traded on a spot basis, price is determined at the margin in the spot market. 41. The authors would like to thank Mikkal Herberg for bringing these points to their attention. 42. Linda Cook, “The Role of LNG in a Global Gas Market” (Presentation at the 27th Annual Oil & Money Conference, London, September 18–19, 2006). 43. Al Troner, “Natural Gas: A Natural Choice?” CLSA Quarterly 1, no. 4 (February 2007): 76. 44. “Asia–Pacific Gas Projects Hit the Wall amid Regional Economic Slump,” Oil and Gas Journal 97, no. 6 (February 8, 1999): 23–27. 45. Keun-Wook Paik, Valerie Marcel, Glada Lahn, John V. Mitchell, and Erkin Adyiov, “Trends in Asian NOC Investments Abroad,” Chatham House, Working Background Paper, March 2007. 46. See Akira Miyamoto and Chikako Ishiguro, “Pricing and Demand for LNG in China: Consistency between LNG and Pipeline Gas in a Fast Growing Market,” Oxford Institute for Energy Studies, NG-9, January 2006. 47. These figures include high projections of proposed pipelines from Kazakhstan, Turkmenistan, Myanmar, as well as Kovykta and Sakhalin in Russia. See “Price, Russia Weaken Case for China LNG,” Petroleum

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48.

49. 50.

51. 52. 53. 54.

55.

56.

57. 58.

59.

60. 61.

62.

Intelligence Weekly 44, no. 44 (October 31, 2005); and Miyamoto and Ishiguro, “Pricing and Demand for LNG in China.” “2006 World Energy Outlook,” U.S. Department of Energy, Energy Information Administration, 2006, 45–46 http://www.eia.doe.gov/oiaf/ ieo/pdf/0484(2006).pdf. “China’s Foreign Plans Have a Long Way to Go,” International Gas Report, no. 568, February 26, 2007. Vladimir Milov, Leonard L. Colburn, and Igor Danchenko, “Russia’s Energy Policy: 1992–2005,” Eurasian Geography and Economics 47, no. 3 (2006): 286. Clifford Gaddy and Fiona Hill, “The Russian Federation,” Brookings Institution, Energy Security Series, October 2006, 10. Based on authors’ own calculations using “Crude Oil Price Summary,” Energy Information Administration, 2007 www.eia.doe.gov. Gaddy and Hill, “The Russian Federation,” 7. These appointees are Dmitry Medvedev (chairman), Aleksei Miller (president), and Igor Yusufov (board of directors). See Michael Fredholm, “The Russian Energy Strategy and Energy Policy: Pipeline Diplomacy or Mutual Dependence?” Conflict Studies Research Centre, September 2005. Robert Larson, “Russia’s Energy Policies: Security Dimensions and Russia’s Reliability as an Energy Supplier,” Swedish Defence Research Agency, Defence Analysis, March 2006 http://www2.foi.se/rapp/foi r1934.pdf. Jennifer Josefson, “Policy Challenges: A Russian Perspective,” in Energy Futures, ed. Ralf Boscheck (New York: Palgrave Macmillin, 2007), 98– 107. “China Energy Report Weekly,” Interfax Information Services, March 4– 10, 2006, 27–28. “Country Analysis Brief: Russia,” U.S. Department of Energy, Energy Information Administration, April 2007 http://www.eia.doe.gov/emeu/ cabs/Russia/Background.html. Due to disagreements over natural gas prices, Gazprom shut off gas supplies to Ukraine on January 1, 2006, a move that also affected gas supplies to other parts of Europe. According to the U.S. Department of Energy, this was the first time that a supply disruption from Russia affected flows to Europe. Josefson, “Policy Challenges,” 104–105. “The Summary of the Energy Strategy of Russia for the Period of up to 2020,” Ministry of Energy of the Russian Federation, (Moscow 2003), 12 http://ec.europa.eu/energy/russia/events/doc/ 2003_strategy_2020_en.pdf. “Kovykta–Why Not Call It Expropriation,” Energy Economist, no. 309 (July 2007): 3.

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63. “Altai Community Approves Gas Pipeline Construction to China Following Harsh Argument,” Republic of Altai http://eng.altai-republic. ru/modules.php?op=modload&name=News&file=article&sid=597. 64. Jonathan Stern, The Future of Russian Gas and Gazprom (Oxford: Oxford Institute for Energy Studies, 2005), 155–6. 65. Xu Yihe, “South Korea May Lose Out on Russia Gas,” Dow Jones Newswire, March 7, 2001. 66. Keun-Wook Paik, “Pipeline Gas Introduction to the Korea Peninsula,” Chatham House, January 2005. 67. For in-depth analyses of the tax structures and PSA arrangements of the Sakhalin projects, see Judith Thornton, “Sakhalin Energy,” Comparative Economic Studies 43, no. 4 (Winter 2001): 9–32. For a good comparative overview of energy fiscal regimes, see David Johnston, “Petroleum Fiscal Systems: Royalty/Tax Systems, Production Sharing Contracts and Service Agreements Compared,” in Boscheck, Energy Futures, 27–71. 68. Of the total supplies 2% are being retained for operational flexibility. See Michael Bradshaw, “Sakhalin-2 in the Firing Line: Environmental Protection or Administrative Leverage,” Pacific Russia Oil & Gas Report, Winter 2006, 11–8. 69. Rachel Graham, “What Gazprom Wants Gazprom Gets,” Energy Economist, no. 309 (July, 2007): 27. 70. Michael Bradshaw, “Striking a New Deal: Cooperation Remains Essential,” Pacific Russia Information Group, Pacific Russia Oil and Gas Report, Summer 2007, 14. 71. Daniel Yergin, “Ensuring Energy Security,” Foreign Affairs (March/April 2006): 75.

CHAPTER 4

Is Natural Gas the Answer for North Korea?

Introduction North Korea’s nuclear program has raised a great deal of international political concern for the past two decades because of the threat of potential widespread destruction from its nuclear arsenal. North Korea has been eager to possess nuclear weapons in order to boost its global prestige and diplomatic clout. Indeed, the Pyongyang leadership seeks to create powerful leverage in its relations with other countries, primarily the USNorth Korea’s possession of nuclear weapons allows it to be bolder in pursuing its national interest.1 It has tested them three times since 2006. It is estimated to have 10 nuclear weapons at maximum and missile delivery capacity now, although it is unlikely to have the capability of attacking the U.S. The scope and magnitude of nuclear attack threats aimed at the U.S., Japan, and South Korea grew significantly in 2013 with a verbal declaration of war and a statement terminating the 1953 armistice. Nonetheless, there is another way to assess North Korea’s pursuit of its nuclear program. Apart from its goals of regime survival and gaining the upper hand in negotiating with the U.S., North Korea’s nuclear project is also closely related to its domestic energy shortage crisis. For North Korea, ensuring energy security is crucial to the stability of the nation and the survival of the Kim dynasty. In other words, North Korea’s nuclear program can be also assessed as being part of a grand scheme to achieve its © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 S. H. Ahn, Power Struggles, https://doi.org/10.1007/978-981-19-5474-0_4

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goal of energy independence in order to cope with the country’s domestic energy crisis.2 The chronic energy shortage became particularly acute following moves in the 1990s and after by the U.S. and its allies to cut heavy-oil supplies to North Korea. This was exacerbated by Pyongyang’s continued policy privileging the military. Together, these factors immensely hobbled domestic fertilizer production. The resulting deficit helped to spur severe food shortages and, ultimately, reports of numerous deaths nationwide from starvation.3 The main purpose of the article is to outline possible options that exist for North Korea to overcome its chronic energy shortage and how it could adopt appropriate and safe energy programs to replace its current controversial nuclear energy program. This study also seeks to explore the current problems of North Korea’s heavily Chinadependent energy structure, and to suggest solutions to ensure long-term energy security by adopting a natural gas program.

Energy Crisis in North Korea North Korea has suffered from severe energy shortages for around a half century. Especially in the past two decades, it has been largely stymied in its efforts to produce adequate domestic energy or to import it. In short, there is no denying that North Korea’s energy security system has completely collapsed. As Fig. 4.1 shows, its major energy resources are mostly hydro and coal-fired thermal power, plus tiny levels of nuclear power. Limited volumes of oil are imported from China. In fact, energy production in North Korea in 2010 was below half the level of its peak in 1990/1991.4 The country’s energy shortage stemmed largely from abrupt cuts in energy aid from the former Soviet Union and Eastern European countries after the former’s collapse, as indicated by Fig. 4.2. The energy situation in North Korea was further aggravated by improper use of fuels such as low quality coal, shredded rubber tires, as well as seriously outdated hydropower facilities. A few severe floods in the 1990s also hurt domestic hydro and coal producing power. North Korean floods and storms destroyed coal mines and processing infrastructure and damaged hydropower plant as well both in the 1990s and the 2000s. A significant volume of coal was washed away and hundreds of pieces of equipment at major mining complexes and railways serving them were damaged. Floods were crippling: the country’s energy strategy was coalfocused, and 84% of total energy production was from coal.5 From a total

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Nuclear, 37%

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Thermal, 28% Hydro, 35%

Fig. 4.1 North Korea’s energy use composition 20,000 18,000 16,000 14,000 12,000

Crude Oil Import 10,000 8,000 6,000

Coal 4,000 2,000

Electricity Generation Capability

0 1989 1990 1992 1994 1996 1998 2000 2002 2004 2006 2007 2008 2009 2010

Fig. 4.2 DPRK energy supply situation (10,000 tons, 1000 bbl, 100 million kwh) (Source “DPRK Statistics,” 2012 Statistics, Statistics Korea [Seoul Korea, 2012])

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of 37 million tons in 1985, coal production dropped to 24 million tons in 2006.6 Electricity shortages also grew worse in recent years. In 2007, electric power generating capacity peaked at 7.95 million kilowatts (kw). Since then it has decreased, reaching 6.93 million kw in 2009. At present (2013), domestic factory operation rate is below 30%.7 Even Pyongyang, which had traditionally avoided the country’s standard of only four hours of power supply per day, was not immune: in November 2011, the capital’s daily electricity supply dropped to two hours per day.8 Hence, North Korea has desperately needed immediate foreign energy assistance––or to take the path toward widespread nuclear power. The nuclear energy card is tempting because it provokes international tension at the diplomatic negotiating table while potentially helping with energy independence. As previously mentioned, the North Korean leadership faces extreme hurdles to enhance coal production because of outdated facilities and technologies. The development of hydropower is hampered by a limited national budget. Pyongyang’s efforts to import heavy oil were curtailed by a shortage of hard currency and a series of international sanctions. As early as the 1960s, North Korea decided to adopt a nuclear power generation program, establishing its national nuclear complex at Yongbyon in the north with Soviet aid in 1965. North Korea has been hoping to utilize nuclear power as a primary energy resource along with coal in order to generate its domestic electricity for the mid- and long-term. North Koreans argue that nuclear is the most suitable energy option given that nuclear power can be cost competitive with other forms of electricity generation, except where utilities have direct access to low-cost fuels including coal and natural gas.9 They also appear to be drawn by the fact that nuclear operating costs are relatively low compared with other sources.

North Korea’s Energy Dependence on China Perhaps one of the best ways to evaluate the current energy security situation is to examine North Korea’s foreign energy dependence. The country used to heavily rely on Russia and Eastern European countries, but the collapse of the Soviet Union changed the whole energy landscape. Russian energy aid was suddenly abandoned, and North Korea was forced to rely only on domestic coal and limited hydro resources. The

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fragility of its energy security was highlighted in the wake of its nuclear weapons development program in the 1990s and 2000s: five states among the members of the Six-Party Talks suspended their supplies of heavy oil to North Korea. During the energy aid embargo initiated by the U.S. and its allies, China became the only nation continuing to provide energy assistance to North Korea. Every year 0.5 million tons of oil have flowed 11 km along a Yalu River pipeline from Dandong City in China’s Northeast to Sinuiju in North Korea.10 In fact, China began oil shipments as early as 1974. The main problem is that China often capriciously modifies the whole volume of oil shipped, at least in the North Korean view. For example, when bilateral relations rupture, Beijing often significantly reduces the whole volume of oil or completely bans its transport. The case of Chinese oil shipments to the DPRK (Democratic People’s Republic of Korea, i.e., North Korea) illustrates only the tip of the iceberg in the two countries’ currently fraught energy relations. It is no exaggeration to note that at the moment North Korea relies on China for more than 90% of its crude oil imports. Moreover, between 2000 and 2008, the DPRK’s expenditure on Chinese crude increased more than five times, while the quantity of imports grew by only 36%.11 As for energy vulnerability, if the rate of one country’s energy dependency on another exceeds 30%, the energy security of the importing nation is severely threatened. According to the energy security index, there is also a high probability that the energy importing country may easily become an energy colony of the exporting nation, with energy dependency exceeding 90%.12 Moreover, as Aden points out, energy transfers between North Korea and China are quite unbalanced. For example, while North Korean electricity and iron ore exports are sold at sub-market friendship prices, Chinese coal and oil products are sold to North Korea at a premium.13 In other words, North Korea’s energy security is too vulnerable to be left in the hands of Chinese foreign policymakers. Considering that energy is a critical human commodity that supports a nation’s political, social, and economic needs, it is becoming ever more clear that China holds a brilliantly calculated, well-disguised ambition to control North Korea’s energy over the long term. This process is generating significant regional and national security concern from the Korean people over North Korea’s energy, economic, and political future. In fact, as a US Congress report issued by the Committee on Foreign Relations in December 2012 reveals, China is implementing two major long-term

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strategies toward North Korea and the Korean Peninsula. One, entitled “Northeast Borderland History Research Project,” reimagines the length of the existing Great Wall.14 In the past four years, the Chinese have allegedly made a decision to stretch the Great Wall up to Dandong, a border city between China and North Korea, even though for a millennium the eastern end of the Great Wall has been at Shanhaiguan, where it abuts the sea. The Great Wall of China suddenly tripled in size since 2009! The other long-term strategy, according to energy experts, is a project of “Investment in Energy Infrastructure within North Korean Territories.”15 Both projects appear to emphasize Chinese future territorial claims over North Korean lands. As Kissinger recently stated, “China’s imperial expansion in Northeast Asia has historically been achieved by osmosis rather than conquest, or by the conversion to Chinese culture of conquerors who then added their own territories to the Chinese domain.”16 Dominating North Korea militarily or culturally is no longer possible for China. Yet, Pyongyang’s most vulnerable spot, poor energy structure, appears to be a temptation for Beijing to maximize its influence over Pyongyang. It is crucial to note that Chinese energy strategy is not confined to extracting North Korean mineral resources or transferring crude oil or electricity. Primarily, it is focused on investing in energy infrastructure where North Korean mineral resources are concentrated or adjacent to electricity facilities, dams, or power plants near the border. In short, there are flashing signs that China is using its energy assistance and wide range of financing packages in line with its traditional imperial policy to expand its economic territory, perhaps even to control North Hamgyong and North Pyongan Provinces. There is also a possibility that China might take over these two provinces by force if a sudden crisis such as a coup d’état were to occur in North Korea, perhaps with Beijing using the excuse of protecting its energy infrastructure assets. North Korea’s current energy relations with China indeed create a number of serious problems both in the near and longer term. In the immediate term, Beijing is the only option to resolve Pyongyang’s current energy shortage problems because China is the only nation supplying crude oil to North Korea at the moment. In the longer term, China will likely possess the full capacity to control North Korea’s economy beyond Pyongyang’s will and power. In other words, China could impose favorable (or unfavorable) terms for energy joint production and export to

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North Korea. China could strengthen its competitive edge at the SixParty Talks and on any issues regarding various energy aid programs to North Korea, at Beijing’s convenience. China’s ambition to maximize its influence over North Korea is vividly embedded with its energy policy, even though details are not conspicuously reported in the open media. China has scrutinized the details of North Korea’s energy program and is deeply engaged in every single energy infrastructure project there, including oil drilling in the sea off Nampo, Pyongnam Province. China is also involved in a number of hydro and power plant developments. It has funded a number of hydropower projects for many years, including several small and elderly plants near the Yalu River, and currently shares a substantial portion of the DPRK’s hydropower assets.17 Nowadays, a significant number of North Korean hydro and thermal power plants are being operated with Chinese collaboration as a type of joint venture. Kim Jong Il was particularly concerned about Chinese involvement in North Korean hydropower plants. Before his death, during a visit to China in 2011, Kim allegedly refused further collaboration for joint projects.18 Furthermore, the Suhan Bay oil exploration project in North Korea’s northwest is also bound by a joint oil exploration contract. This project was supposed to be the only offshore oil project in the entire Korean Peninsula. North Korea announced in 1997 that it had found oil reserves of around five billion to 40 billion barrels in the offshore area. The Irish-based energy firm Aminex previously had showed interest and had worked closely on this offshore development. Aminex first signed a petroleum agreement for cooperation in oil and gas with Pyongyang in 2004.19 However, for reasons that are unclear, there was no actual progress, and Aminex withdrew from the project. The Chinese took over Aminex and now hold 50% of the project. Beijing and Pyongyang agreed to jointly exploit offshore oil fields. The Chinese oil authorities believe the reserves to be up to five billion barrels. The main problem is that the Chinese have been extremely slow in developing this field and are reportedly hoping eventually to purchase its entire assets.20 North Korea’s important mining resources are exclusively exploited by Chinese business persons initially and the Chinese government later. The DPRK’s mineral exports to China, mostly anthracite coal, have rapidly increased in recent years, tripling in 2011 from the previous year.21 And the volume of coal exports to China from 2007 through 2009 exceeded

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the total volume of exports over the previous 11 years.22 It is important to understand that the DPRK’s coal imports have gradually declined, whereas coal exports to China have increased. In fact, the DPRK became a net coal exporter in 2002; by 2009, it exported almost 40 times more coal than it imported. This phenomenon is closely related with China’s accession to the World Trade Organization (WTO) in December 2001.23 Minerals are traditionally the most important export commodities in North Korea. For example, between 2000 and 2009, the minerals share of North Korean exports grew from 11 to 24%.24 Also, minerals and their products constituted more than 60% of the total value of North Korean exports in 2009. Yet, most mineral exports go to China.25 It is important to understand that “a de facto barter arrangement”26 between Beijing and Pyongyang has operated in recent years: Chinese oil, machinery, manufactured goods, and food are exchanged for North Korean coal and mineral resources. Since 2008, as Fig. 4.3 and Table 4.1 show, mineral trade volume between North Korea and South Korea significantly decreased, whereas the volume between Beijing and Pyongyang increased astronomically.27 Mineral transfer is closely linked to North Korea’s power generation and electricity situation. For example, the DPRK’s coal exports to China 7,000 6,000

Total Sum

5,000 4,000 DPRK-China 3,000 2,000 1,000

DPRK-S. Korea

0 1991 1993 1995 1997 1999 2001 2003 2005 2006 2007 2008 2009 2010

Fig. 4.3 DPRK foreign trade trends (US $ million) (Source “DPRK Trade Trends,” 2011 KOTRA [Korea Trade Investment Promotion Agency] [Seoul Korea, 2011])

2833 899 186

1993 2339 549 287

1995 2485 656 308

1997 1813 370 334

1999 2673 737 403

2001

Source 2011 Korea Trade Investment Promotion Agency (KOTRA) DPRK Trade Trends

2695 610 112

1991

DPRK foreign trade volume (Unit: US $ million)

Total sum of trade Trade between DPRK & China Trade between DPRK & S.Korea

Table 4.1

3115 1022 724

2003 4057 1580 1055

2005

1346 1699 1350

2006

4731 1974 1798

2007

5635 2787 1820

2008

2010 5093 6086 2680 3472 1679 1912

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had a detrimental effect on North Korea’s power shortage problem. One anonymous North Korean government official noted that as the amount of coal exported to China increased in recent years, domestic power plants began running out of coal to generate electricity. For example, in January 2012, Pyongyang, which unlike most other cities had traditionally avoided power blackouts, experienced severe outages. It turned out that the power plant providing electricity to the capital ran out of coal because much of it had been suddenly transferred to China.28 In this regard, it is essential for North Korea to diversify its current energy import market and to strongly curtail China’s influence over North Korean energy. In the long term, it is highly likely that Chinese energy interests in North Korea will collide with neighboring states’ energy security interests, notably those of Russia, South Korea, and the U.S. It is crucial to see that in the past few years China has approached the North Korean energy and mineral resources issue very strategically. As noted, Beijing’s focus has been on investing in power plants and power generation. China has also invested in other infrastructure facilities not necessarily related to energy but located in resource-rich areas; these include road construction, port renovation, and railroads, especially at the border.29 China has taken long-term leases in two North Korean ports in the East Sea, Rajin and Chongjin. Initially, a Chinese private company based in Dalian acquired the lease right of Port Number 1 among three ports in Rajin Harbor; later, the Chinese government took over the lease and now fully manages Port Number 1 itself.30 Both countries signed an accord on the construction of a highway between Hunchun and Rajin, and they are discussing plans to build a railway between Tumen and Chongjin. In addition, China recently acquired the contract to modernize the port of Danchun, situated in the richest mineral region in North Korea. China has also signed an agreement with the North to invest US$2 billion on building power plants, mineral distribution centers, etc.31 These infrastructure-driven investment trends represent China’s current resource strategy toward North Korea. It is compelling because it departs from the previous strategy: China no longer focuses on providing direct energy facilities but rather on building other infrastructure. This means that China can always claim the right to manage and protect its existing infrastructure on North Korean soil, along with controlling power generation capacities from Chinese heavy oil or electricity from the northeastern part of China.32

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Natural Gas Remedy: Why Natural Gas for North Korea? In fact, five of the countries among the Six-Party member states have few viable solutions to negotiate with or induce Pyongyang to denuclearize, because they lack leverage. They failed to offer North Korea any bargain of equal value to its nuclear program in the context of Pyongyang’s concerns with regime perpetuation, system maintenance, and energy security.33 In this regard, promoting a natural gas option for Pyongyang––either as pipeline natural gas (PNG) or liquefied natural gas (LNG)––could be an alternative solution to discourage North Korea’s nuclear pursuits on many levels and for both the short and long terms. In North Korea, no gas is used at present except at Kaesong Industrial Complex, where South Korean gas is provided. It is more realistic for gas use to start in port towns and to introduce local gas distribution in bottles via trolleys, or to run a gas pipeline north from South Korea just as is done with the Kaesong complex. Prior to adoption of the natural gas option, the introduction of a liquefied petroleum gas (LPG) infrastructure into major North Korean cities could be practicable in terms of projecting the total cost of natural gas projects. Also, an LPG option is quite rational, in that a few major North Korean cities had used the system previously. In short, the natural gas option could also downgrade China’s continued excessive energy influence over North Korea. Why should North Korea specifically pay attention to natural gas? First, it could become the best alternative energy to replace the nuclear program. There is no denying that around the world, nuclear power has been a trendy energy phenomenon in the past few decades because it embodies promises of energy efficiency, low carbon emissions, relatively cheap operating costs, and a means to diversify the domination of petroleum. The North Korean leadership has often emphasized these pros to its neighboring states to justify its nuclear program while also enjoying the privileges of nuclear weapons club membership. Nonetheless, the nuclear power program still posits a number of obstacles. As we saw from the March 2011 Japanese tsunami, nuclear energy is not immune to unexpected natural disasters. There are several indications that a number of countries including Germany, Japan, China, and Malaysia withdrew their plans to build additional nuclear power plants after the Fukushima catastrophe. Fukushima’s deadly accident has produced radiation levels estimated to be almost 10 times higher than in

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Russia’s 1986 Chernobyl disaster, even though the Japanese government keeps denying this. The biggest obstacles to setting up nuclear power generation are not only the potential for incidents but also the problem of disposing of nuclear waste. Some of the soils where nuclear wastes are buried will take hundreds or thousands of years to recover. Hence, it is not a particularly desirable project for a country of limited geographical territory such as North Korea, South Korea, or even Japan. A few nuclear power experts have argued that the advanced nuclear waste disposal technique called deep borehole disposal (DBD) might be an apt program for North Korea, although DBD takes years to become commercialized and does not solve the nuclear waste contamination problem entirely. DBD also requires further study to identify relevant technical issues and earn public and local support.34 Second, a natural gas option is even more attractive for Pyongyang considering the new global energy trend. North Korea could join the leading global energy group and enjoy some early-bird natural gas market advantages as one of the few gas-using countries in the world. In other words, the natural gas golden age is imminent. Natural gas became a global commodity because of significant reductions in gas liquefaction and transportation costs, originally caused by technical developments. Growth in the global LNG trade, both at the spot trade and long-term contract level, and advances in the development of unconventional gas resources such as gas hydrates or the shale gas revolution in the U.S., are transforming the global gas supply and demand balances. For Northeast Asia, recent developments in the global gas market, changing supply and demand patterns, increasingly burgeoning spot markets, and––more important––geopolitical rivalry are indeed changing the dynamics of the regional gas trade and raising questions about how gas will be priced and purchased in the future. Natural gas would help to boost electrification rates and aid in the replacement of coal fired with gas fired power plants, while drastically reducing carbon emissions. North Korea is no exception to this, as Fig. 4.4 and Table 4.2 indicate. In this regard, North Korea’s energy diversification policy program could be further enhanced by adoption of a natural gas-driven energy policy in the near future (see Fig. 4.4 and Table 4.2). Coal, oil, natural gas, nuclear energy, and various renewable forms of energy all have important roles to play in the Asia–Pacific’s energy, economic, and political future. However, among the options available

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60,000 50,000 Others 40,000

Nuclear Hydro

30,000

N. Gas 20,000

Oil Coal

10,000 0 2004

2007

2012

2017

2022

Fig. 4.4 North Korea’s long-term energy demand prospects (in tons) (Source KEEI Energy Statistics, 2010)

Table 4.2 North Korea’s long-term energy demand prospects (Unit: TOE)

Coal Oil N. Gas Hydro

2004

2007

11,400 (68.9) 1230 (7.4)

11,986 (69.1) 1409 (81)

3125 (18.9)

3125 (18.0)

Nuclear Others Total

780 (4.7) 16,535

834 (4.8) 17,354

2012 15,285 (67.9) 2384 (10.6)

2017

15,589 (50.0) 4243 (13.6) 1654 (5.3) 3800 4930 (16.9) (15.8) 3285 (10.5) 1043 (4.6) 1484 (4.8) 22,513 31,184

2022 30,376 (54.1) 10,974 (19.5) 4371 (7.8) 5100 (9.1)

’04–2022 5.6 12.9

2.8

3285 (5.8) 2071 (3.7) 56,176

5.6 7.0

Source KEEI Energy Statistics, 2010

today, natural gas is best positioned in the region, specifically for the current North Korean energy dilemma. This is because gas can both fuel economic growth and meet increasing demand for power. It is also purely a civilian energy. Unlike diesel or bunker fuel, which could be used for tanks, tractors, trains, and ships, natural gas is not prone to

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being diverted to military use in North Korea. Even though many vehicles can be converted at low cost, the real constraint is the lack of a fuel supply system and POL (petroleum, oil, lubricants) storage in areas where military vehicles could use gas. Yet, it is still highly unlikely that North Korea could realistically afford the conversion process. Therefore, providing natural gas and related technology assistance to North Korea turns out to be an ideal method to resolve its current domestic energy crisis and redevelop its energy sector, as Fig. 4.5 indicates. Also, natural gas can effectively collaborate with renewable energies to promote a low carbon economy.35 In short, natural gas could bring peace and stability to the Korean Peninsula while facilitating regional energy integration. Yet, we should point out that the natural gas market is still limited because of technology, financing requirements, and geographical factors in Northeast Asia. China is moving very slowly toward more natural gas use. It is only beginning to develop its domestic natural gas infrastructure and is struggling to import natural gas from Russia because of a decade of unresolved gas price problems. Although natural gas use is expected to double in China by 2030, it is still small in scope.36 Thus, it will be very difficult to see how China could seize control of the North Korean natural gas industry in the near future. Still, it is quite possible that China is eager

80,000 70,000 60,000

Hydro

50,000

Nuclear

40,000

N. Gas

30,000

Oil Coal

20,000 10,000 2004

2007

2012

2017

2022

Fig. 4.5 North Korea’s long-term power electricity capacity prospects (in million kwh) (Source KEEI Energy Statistics, 2010)

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to help establish various type of natural gas infrastructure in North Korea, as it has done with other parts of the DPRK energy sector for the past several years. Third, inter-Korean cooperation can be anticipated if North Korea turns to natural gas. The required infrastructure is highly capital intensive, technically complex, and requires substantial market demand and years of reliable operation in order to be economically viable. The cost of setting up storage facilities, processing stations, and production platforms, and building pipeline grids, must be factored into planning. This means that gas infrastructure requires long-term financing, strategic planning, cost management, reliable public–private partnerships, and most of all, confidence among states. In this regard, South Korea, a world leader in LNG and PNG construction skills and technologies, turns out to be the perfect energy partner for North Korea. Consequently, North Korea’s adoption of a natural gas program would help bring electricity to isolated communities, raise living standards, and provide significant national health benefits by enhancing outdated heating and cooking facilities. North Korea has several gas options to diversify its current heavy reliance on China for energy.

Natural Gas Options for North Korea Siberian Potential and Russia’s Role North Korea has roughly four natural gas import options: Russian PNG, Russian LNG, South Korean LNG, and possibly US LNG in the longer term. Regardless of the differences, what is critical to all options is that the roles of Russia, South Korea, and potentially the U.S. are more crucial than those of China and Japan in framing energy security in North Korea. Notably, North Korea is desperately in need of South Korea’s natural gas infrastructure-building technologies and capital. Pyongyang should also pay more attention to natural gas development in the region of Eastern Siberia and the Russian Far East, instead of seeking immediate heavy-oil assistance from China or relying on nuclear power generation. Russia, the world’s major global oil and natural gas supplier, could be more significant than any other nation in building energy security in North Korea. In the past couple of decades, around 20 new giant gas fields have been discovered in Siberia, each containing over 500 billion cubic meters (bcm). These constitute around three-quarters of Russia’s

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total gas reserves. The Russian Far East capable of producing as much as 130 bcm of natural gas supply by 2020—equivalent to the current level of Russia’s gas exports to Europe—can play a very important role in not only shaping cooperative energy schemes in Northeast Asia but also in providing North Korea with natural gas.37 In particular, the Kovykta or Kovyktinskoye gas condensate field in the Irkutsk region—one of the largest gas fields in the world—contains more gas than the entire nation of Canada, on which the U.S. relies for a majority of its gas supply. Because of the sheer size and location of the field, Kovykta’s development represents a timely and important opportunity for China and both Koreas. If this field was developed as recently proposed—20 bcm going to China and 10 bcm going to South Korea— Russia could begin balancing its Europe-heavy export market, increase government revenues, spur economic development in the Russian Far East and Siberia, and promote regional energy integration.38 Note that the original gas resource that North Korea will consume, whether LNG or PNG, will come from the Kovykta field. PNG North Korean Route and LNG Power Plant Proposal For the past 20 years, as part of several schemes to cope with North Korea’s severe domestic energy shortage and in a bid to minimize its nuclear ambition, several nations including Russia, South Korea, and China have unofficially showed interest in constructing gas pipelines across the North Korean border, linking pipelines starting from the Kovykta Gas Field near Lake Baikal in Eastern Siberia all the way to South Korea. With international collaboration that might include Russian gas technology, South Korean LNG and PNG knowhow, North Korean labor, and possibly US capital, this possible PNG project has drawn some international attention. Many observers deem the possible establishment of Russia’s natural gas pipeline in Northeast Asia to be essential; this PNG project could become the first realization of a multilateral energy framework in the region. In particular, as South Korean-North Korean relations improved during the Kim Dae Jung and Roh Moo Hyun regimes, or even recently under Lee Myung Bak, Northeast Asia’s dream proposal began to reemerge. A specific plan for this project was first implemented in 2003. In February, Russia’s Gazprom chief Alexei Miller visited Seoul to discuss the proposal to build a Russia-China-North Korea-South Korea pipeline

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carrying Russian gas starting from the Kovykta field to Pyeongtaek, a port on South Korea’s western coast, and gas from Russia’s fields in Sakhalin, just north of Japan, to South Korea via North Korea. In fact, this North Korean pipeline option originated in the 1960s when the late Hyundai head Chung Joo Young showed much interest over Sakha Gas in Eastern Siberia. However, the unstable political situation in the Korean Peninsula remained the main obstacle to developing this project until 2003.39 Energy experts and South Korean politicians have often emphasized the importance of North Korean involvement in this PNG project, both to minimize the instability (mostly related to North Korea’s nuclear proliferation and its domestic economic difficulties) and to promote mutual economic prosperity for participating states. However, TNK (Tyumen Oil Company) and BP, which merged in 2003 giving the new company TNK-BP a 62.89% stake in RP (Russia Petroleum), strongly opposed the route through North Korea because of high costs and political risks.40 South Korea eventually abandoned the idea and stuck to the original plan to lay the pipeline under the West (or Yellow) Sea between China and South Korea.41 Nevertheless, a North Korean route proposal recently reemerged on the diplomatic agendas between Russia and South Korea, and between Russia and North Korea during President Lee Myung Bak’s term. In fall 2011, three nations including North Korea resumed discussion of extending the commissioned Sakhalin-Khabarovsk-Vladivostok pipeline within Russia to traverse North Korea all the way to the South. This project is estimated to cost $102 billion.42 Despite widespread concern that Pyongyang, a transit country, might disrupt the flow of the natural gas pipeline, Lee was exceptionally eager to initiate this project.43 It is even more compelling to see that North Korean officials expressed some positive signals: previously the leadership had been extremely pessimistic over security reasons. What changed Pyongyang’s stance on this PNG project? With the lessening of the DPRK’s burden to pay off national debt to Russia, Pyongyang also sensed an urgent need to ensure energy security and diversify its sources of imported energy. Furthermore, Japan’s Fukushima nuclear incident in 2011 dramatically altered the DPRK’s energy policy. As with other nations that dumped their nuclear power programs in the wake of the disaster, Pyongyang found it urgent to locate alternatives to nuclear power, evincing interest in natural gas development for the first time. Kim Jong Il equally wanted to minimize the Chinese influence on

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North Korean energy. North Koreans clearly felt that the Russian PNG project could be effective in using Russia as leverage against the Chinese. The Russians were extremely enthusiastic about this project. For the past few years, strong indicators, including a number of conversations with Russian diplomats and high ranking officials who wish to remain anonymous, suggest that Russia prefers the two Koreas to China or Japan as future regional energy partners. This reflects the traditional geopolitical rivalry between China and Russia as well as mutual distaste between Japan and Russia. Thus, the Russian leadership and Gazprom have been keen for the past decade on building a natural gas pipeline across the North Korean border. They have been extremely active in this project since 2011, despite the political risk and in view of the North Korean appetite for PNG. Therefore, DPRK and Russian energy relations have rapidly regained some momentum. On September 15, 2011, a memorandum of understanding was signed between Gazprom and North Korea’s Ministry of Oil Industry. Pyongyang and Moscow agreed to establish a joint working group to implement the PNG project in the Korean Peninsula.44 Still, it is also important for North Korea to recognize Russia’s real PNG strategy. For Kremlin leaders, Russia’s PNG proposal makes little economic sense, especially considering the fact that PNG is traditionally cheaper than LNG. Therefore, Russia must be approaching trilateral PNG cooperation within the Korean Peninsula from the geopolitical standpoint, hoping to maximize its regional influence before and after Korean reunification. In this regard, Russia is very willing to finance and construct a pipeline across the North Korean border on its own, without help from other nations. By playing its natural gas card, Russia clearly wants to exercise significant muscle in the new gas game in the Korean Peninsula and to control energy flows to Northeast Asia. For those reasons, there is considerable concern among Korean experts that the pipeline within North Korea should not be built by Russian hands under any circumstances.45 Russia’s dream is also currently rather clouded by the shale gas boom in North America: massive amounts of natural gas from both the U.S. and Canada will be delivered to the Korean Peninsula from 2017. Another option to frame energy security in North Korea is to build natural gas infrastructure there for the long term. As for the PNG project above, the DPRK was supposed to garner transit revenues of some $500 million per year, solely for participating. Russia agreed to write off $10 billion of North Korea’s $11 billion national debt to Russia.46 Even with these positive steps, North Korea is still far from ensuring its own

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energy security. It is essential for Pyongyang to fundamentally transform the domestic energy structure, rather than simply seeking ad hoc foreign energy assistance. Needed will be natural gas power plants, national trunk pipelines, and LNG terminals and gas storage facilities within the country’s borders sufficient to provide humanitarian services and residential fuel for its people. More specifically, it would be realistic to construct very small demonstration power plants fired with LPG that is imported first to small storage facilities. Next, piped gas could provide humanitarian services and residential fuel to the adjacent region. If successful, North Korea could proceed with building a small LNG terminal and trunk pipeline network similar to South Korea’s.47 Compared with the heavy-oil assistance program from foreign nations, the natural gas option is more desirable for the DPRK because it is indeed a civilian energy that has little chance of being converted for military purposes. Regardless of how the PNG project turns out, the early introduction of LNG facilities and construction of a city gas purpose-related trunk pipeline might produce a very attractive energy aid system for North Korea, both in the short and the longer term. Mitigating the country’s high level of energy dependency on China, the use of Russian natural gas (or US natural gas via South Korea’s infrastructure) would be a smart decision for Pyongyang. The US Role During North Korea’s nuclear crisis in the mid-1990s, the US Clinton administration, as a stimulus package, had considered constructing a natural gas power plant if Pyongyang would abandon its nuclear program. However, the idea faded away once the following Bush administration decided to pursue a hard line policy toward North Korea. Almost 17 years later, it is again conceivable that the U.S. could play a very substantial role in building North Korean energy security. There has been a significant development in the world energy market in recent years: the discovery of massive amounts of shale gas in the U.S., and its proven commercial viability, has transformed the landscape of the global natural gas market. Thanks to the evolution of modern technology and large investment from major oil companies, the US shale gas boom has rapidly turned the U.S. from being a gas importer into a major global gas producer. In fact, the country, along with Canada, has already finalized several gas contracts with South Korea and Japan, and is on course

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to become a major natural gas exporter to the Asia–Pacific energy market in the foreseeable future. At this time, eight LNG export projects are proposed for the U.S., and three for Canada. Their combined capacities are estimated at 136 million tons (mt) of gas, which is 177% of the installed capacity of the world’s number one gas exporter, Qatar.48 Many energy experts still wonder whether the U.S. will eventually export its natural resources abroad or not. For the past 40 years, Washington has adhered to its energy independence policy of not exporting its domestic natural resource materials. Some experts contend that it is more likely to see snow in Miami in July than to see exports of gas from LNG terminals in the U.S. Nonetheless, there is substantial evidence favoring a potential reversal. US energy companies including Cheniere, Cameron, and Freeport have actually asked for gas export licenses. And Kitimat in British Columbia, Canada, will begin its exporting natural gas to Asia in 2014. Moreover, unless the U.S. completely transforms transportation fuels from oil to natural gas nationwide, it will be in a position to adopt alternative energy policies to deal with the upcoming massive surplus of shale gas production. This grew significantly in the past few years to five trillion cubic feet (tcf) in 2010 and 6.4 tcf in 2011. These figures represent 23% and 28% of US total gas production in those years, respectively.49 The export infrastructure limits on the US west coast are not a major concern. The government has never planned to build LNG export or import terminals in the area, except one in Long Beach, California, in 2007. This was withdrawn for a number of reasons including strong opposition from Californians and environmental concerns. The Department of Energy and commercial firms use existing east coast facilities via the Panama Canal; Canada uses LNG terminals on its west coast. South Korea and Japan have already concluded gas deals with US companies and the government and will begin to import gas from Louisiana and Texas terminals in 2017 or sooner. The contracted export volume is significant indeed for both. South Korea, in particular, is well positioned to import US gas, in that US Department of Energy approval is automatic for Free Trade Agreement (FTA) countries. A third US gas project has been approved for LNG exports, illustrating how the North American shale gas revolution is expanding the supply options for big Asian customers such as Japan, South Korea, Taiwan, China, and India. The new 15 million ton three-train terminal at Lake Charles on the Louisiana Gulf Coast is expected to begin exports in 2018.50 It is highly

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likely that the U.S. will export its domestic natural gas to the world’s largest LNG consuming region, the Asia–Pacific. North Korea, as well, might be able to receive US LNG from either Alaska or the Gulf of Mexico. At the moment, despite all the friction and periodic collapse of the Six-Party Talks, Pyongyang is looking for any possible way to enhance relations with the U.S.51 The subject of energy, including shale gas, could be a timely item on the diplomatic agenda to spur resumption of bilateral talks, beyond the food aid issue. Ironically, considering the regional military tensions, Pyongyang will likely be more eager to accept an energy aid package from the U.S. than from any other nation, in part because North Korea still suspects that Chinese energy assistance will produce negative outcomes in the end. North Koreans still tend to consider Russia as an unreliable neighbor. Also, from a traditional balance of power perspective, US shale gas could become a favorable energy option for North Korea and Northeast Asian states because it can substitute for Russian gas. This means that Russian gas must somehow compete with the US product in terms of price and market demand. In short, there is little doubt that the US shale gas option could curb both Chinese and Russian influence over North Korea and the region. Nonetheless, any US gas export scheme remains a daunting task tied tightly to domestic politics and energy policy. Ever since the fourth Middle Eastern war in 1973 imperiled global oil supplies, the U.S. has kept to its policy of no energy exports at all. Yet, the shale gas trove could be wielded as a fresh, effective diplomatic instrument for Washington to help solve the North Korean problem while containing US rivals in the Asia–Pacific. It is evident to observers that the potential of the US shale gas boom has devastated Russia’s ambitions to enter Northeast Asia as a major energy player.

Future Outlook Despite its inherent energy shortage problem and the ongoing regional political instability, North Korea has several options to ensure its energy security and bolster its economy. At the center is a compelling need to recognize the importance of energy flows in Northeast Asia and catch up with new regional and global energy trends, including (1) Russian natural gas pipeline dynamics, (2) China’s seemingly boundless energy ambitions, (3) the US shale gas revolution, (4) the ramifications of Fukushima, and (5) the dwindling popularity of nuclear power. Most of all, North Korea

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must understand the growing popularity of and astronomical demand for natural gas. From the perspective of the Korean Peninsula, maintaining or gaining access to Russian natural gas and North American shale gas is the most important wellspring of energy security. With various natural gas aid options, North Korea could solve its domestic energy shortage and, indeed, potentially play a very important role in the regional energy great game. In fact, North Korea occupies the critical position in the future grand regional energy cooperation schemes as a transit country, specifically regarding the promise of the Russian gas pipeline or the Eastern Siberian Pacific Ocean Oil (ESPO) pipeline or power grid project. Opening up North Korea is a prerequisite for bolstering smooth energy collaboration among Northeast Asian nations, particularly for transborder projects. As well, as a potential leader in using natural gas, North Korea has opportunities to join in regional energy cooperation over this relatively young emerging resource. The country’s new leader Kim Jong Un will have to bear in mind not only the importance of Russia and the U.S. as energy partners for the Korean Peninsula. In the next few decades, an energy alliance among these nations will be both essential and imminent.52 Substantial dialogue over regional natural gas cooperation has not yet shifted into gear. China is setting up its domestic natural gas policy and searching for supplies beyond its borders. Its northeast region near the Korean Peninsula is a stranger to natural gas usage. Russia, one of the most experienced and skilled PNG players, is somehow stranded in its plans to distribute massive amounts to Northeast Asia in the future. The U.S. is now poised to decide whether it should export its potential LNG produced from domestic shale gas to the Asia–Pacific. Against this backdrop, Pyongyang will need to shift its political bugbear stance so that it is perceived as a predictable and reliable state. In this regard, North Korea’s rocket launch in April 2012 cost its future dearly. It did not help enhance international prestige, and it failed to provoke food and energy aid from abroad. By now it should be clear to Kim and the North Korean leadership that launching rockets or nuclear tests does not ensure energy security. Indeed, the energy situation in North Korea is probably more serious than they acknowledge. With several viable but still potential options for the future, Kim faces a momentous decision: whether North Korea should proceed as an isolated rogue state or cooperate with external forces in hopes of ensuring energy security and becoming an important regional energy player.

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Notes 1. Victor Cha, “North Korea’s Weapons of Mass Destruction: Badges, Shields, or Swords? Political Science Quarterly 117:2 (Summer 2002), p. 227. 2. This view was shared through several discussions among several anonymous experts from the two Koreas and Germany attending the 59th Pugwash Conference on Science and World Affairs, Berlin, Germany, July 1–4, 2011. 3. Starvation deaths were most common between 1994 and 1998 during the North Korean “Arduous March” period. The deaths peaked in 1997. See Thomas Spoorenberg and Daniel Schwekendiek, “Demographic Changes in North Korea: 1993–2008,” Population and Development Review 38:1 (2012), pp. 133–158. 4. “Energy Profile of North Korea,” Encyclopedia of Earth, May 2012, http://www.eoearth.org/article/Energy_profile_of_North_Korea. 5. ROK Unification Ministry, 2012 Bookhan Ihae [Understanding North Korea], March 2012, p. 152. 6. Se Hyun Ahn, “Energy Security and Cooperation Between DPRK and ROK,” ROK Unification Ministry Policy Making Project, Korea University Press (October 2009), pp. 55–74. 7. “DPRK Inherent Power Shortage Problem,” Voice of America, February 28, 2012, http://www.voanews.com/korean/news/-0208-special-NKelectricity-shortage-138928044.html. 8. “Pyongyang in Trouble of Power Shortage,” Asia Economics, March 23, 2012, http://www.asiae.co.kr/news/view.htm?idxno=201203231405420 9230, accessed July 21, 2012. 9. Yun Zhou, “Why Is China Going Nuclear?” Energy Policy 38:7 (July 2010), pp. 3755–3762. 10. “Yalu River Underground 11 km Oil Pipeline,” Ohmynews (Seoul), April 5, 2010, http://www.ohmynews.com/NWS_Web/view/at_pg. aspx?CNTN_CD=A0001358346, accessed March 20, 2012. 11. Nathaniel Aden, “North Korean Trade with China as Reported in Chinese Customs Statistics: 1995–2009 Energy and Minerals Trends and Implications,” Nautilus Special Report, June 7, 2011, http://nautilus. org/napsnet/napsnet-special-reports/dprk-prc-trade-aden/#axzz2REtc KFbA, accessed July 4, 2013. 12. Author interview with Keun-Wook Paik, Russian and Chinese Gas Expert (Oxford Institute for Energy Studies, Oxford, U.K.), Seoul, June 20, 2012. 13. Aden, “North Korean Trade with China.” 14. Minority Staff Report from the Committee on Foreign Relations, United States Senate, 112 Congress, 2nd Session (Washington, D.C.: U.S

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15.

16. 17.

18.

19. 20.

21.

22. 23.

Government Printing Office, December 11, 2012), pp. 1–78. Since 2002, in other words, China has initiated its “Northeast Project” of distorting the history of Manchuria and three ancient Korean kingdoms, Kogurea, Balhae, Gojoseon. Specifically, China has appropriated its world renowned cultural icon, the Great Wall, into this scheme. The Chinese fully took advantage of the notion that the Great Wall belongs to China, yet not many people around the world recognize its exact span. This information was shared through several meetings among North Korean energy experts in Seoul attending the KOGAS Oil and Gas Meeting Energy Conference, Seoul, November 2012; and two closed government meetings among policymakers from the ROK Ministry of Strategy and Finance, Seoul, Korea, between 2012 and 2013. Henry Kissinger, “The Future of U.S-Chinese Relations,” Foreign Affairs 91:2 (March/April, 2012), pp. 44–52. This information was shared through personal discussions among several anonymous government officials from the ROK Ministry of Unification attending a closed meeting, Seoul, between May 2011 and February 2012. This view was shared through personal discussions between the author and an anonymous North Korean energy expert in China. Author prefers not to expose the interview dates and venues because of security reasons. Aminex PLC, http://www.aminex-plc.com/projects/, accessed September 20, 2012. “China Taps North Korean Resources,” United Press International, March 4, 2007, http://www.energy-daily.com/reports/China_Taps_N orth_Korea_Resources_999.html, accessed August 20, 2012. Chosun Ilbo [Chosun Newspaper] (Seoul), January 14, 2010, http:// blog.chosun.com/blog.log.view.screen?blogld=178&logld=442738, accessed September 2, 2012; and “North Korea’s Mineral Exports to China Tripled from Last Year: Study,” Yonhap News Agency (Seoul), November 6, 2011. Aden, “North Korean Trade with China.” Before China became the member of the WTO, DPRK was a net coal importer. Yet, following China’s WTO accession, DPRK export prices for coal began to rise, though not as quickly as export volumes. Coal imports to the DPRK from both Russia and China declined in 2009, to about 28,000 and 90,000 tons, respectively, along with about 4000 tons of coal from China. Exports of coal to China rose to 3.6 million tons, rising again to 4.6 million tons in 2010. In fact, after China’s WTO accession, China’s total coal export volumes to all countries dropped at an average annual rate of 10% between 2000 and 2008, while its imports from all countries have increased at 58% per year during this period. See both David von Hippel and Peter Hayes, Foundation of Energy Security for the DPRK, report prepared by the Nautilus Institute for Security and Sustainability

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26. 27.

28.

29. 30. 31. 32.

33.

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in collaboration with the KEEI, September 13, 2012; and Aden, “North Korean Trade with China.” Aden, “North Korean Trade with China.” Woojin Chung, director and senior research associate at Resources Development Research Division, International Energy Cooperation Group, KEEI, “North Korea’s Mineral Resources and Challenges in InterKorean Cooperation,” presentation report, Global Forum on North Korea Economy 2011, Millennium Seoul Hilton, Seoul, Korea, April 7, 2011. Aden, “North Korean Trade with China.” Since 2008, trade volume between the North and China comprised more than 50% of the total trade volume between the North and foreign countries. Besides the trade with the South, China volume occupies 73%. See Nambukkyungje Tonghab ui Gil [The road to economic integration between the South and the North], annual report from the Hyundai Research Institute, February, 2011, p. 23. “Pyongyang in Trouble of Power Shortage,” Asia Economics (Seoul), March 23, 2012, http://www.asiae.co.kr/news/view.htm?idxno=201203 2314054209230, accessed March 3, 2012. Author interview with Chung (KEEI), Seoul, September 17, 2012. Choongang Ilbo [Choongang Newspaper] (Seoul), September 17, 2012. Chung, “North Korea’s Mineral Resources and Challenges in InterKorean Cooperation”. This view was shared through personal discussions among the author and several North Korean energy experts and policymakers attending the closed meeting for KOGAS Oil and Gas Study Association, Renaissance Hotel, Seoul, Korea, September 17, 2012. Benjamin Habib, “Rogue Proliferator? North Korea’s Nuclear Fuel Cycle and Its Relationship to Regime Perpetuation,” Energy Policy 38:6 (January 2010), p. 2833. In recent years, the DBD technique has been receiving global attention because of its potential technical and cost advantages when compared with normal geologic disposal. The basic idea of DBD is to drill into crystalline basement rocks to a depth of 3 to 5 km, then place waste canisters in the bottom 1–2 km of the boreholes and cap them such that the wastes are permanently isolated. See both David von Hippel and Peter Hayes, “Deep Borehole Disposal of Nuclear Spent Fuel and High Level Waste as a Focus of Regional East Asia Nuclear Fuel Cycle Cooperation,” Austral Special Report, 10–03 A, December 15, 2010, http://nautilus. wpengine.netdna-cdn.com/wp-content/uploads/2012/01/von-hippelhayes3.pdf, accessed June 20, 2013; and Jung-min Kang, “An Initial Exploration of the Potential for Deep Borehole Disposal of Nuclear

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36. 37.

38.

39. 40.

41. 42. 43.

44.

45.

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Wastes in South Korea,” December 13, 2010, http://nautilus.wpengine. netdna-cdn.com/wp-content/uploads/2011/12/JMK_DBD_in_ROK_ Final_with_Exec_Summ_12-14-102.pdf, accessed June 20, 2013. David von Hippel and Peter Hayes, “DPRK Energy Sector Development Priorities: Options and Preferences,” Energy Policy 39:11 (November 2011), pp. 6781–6789. Helen Cabalu, “Indicators of Security of Natural Gas Supply in Asia,” Energy Policy 38:1 (January 2010), p. 221. Se Hyun Ahn and Michael T. Jones, “Northeast Asia’s Kovykta Conundrum: A Decade of Promise and Peril,” Asia Policy 5 (January 2008), p. 108. Se Hyun Ahn, “Can Korea, Russia, and China Form a Strategic Energy Alliance?” Journal of International Politics 15:1 (Spring 2010), pp. 105– 135. Ahn and Jones, “Northeast Asia’s Kovykta Conundrum,” pp. 105–140. Se Hyun Ahn, “Framing Energy Security Between Russia and South Korea? Progress, Problems, and Prospects,” Asian Survey 50:3 (May/June 2010), pp. 591–614. “Russia, China, Two Koreas: Gas Games,” Financial Times, August 26, 2011. Author interview with Lee Sung Kyu, Russian energy expert, KEEI, Seoul, September 19, 2011. Se Hyun Ahn, “Global Insider: North Korea the True Target for ChinaSouth Korea Pipeline Proposal,” World Politics Review, April 23, 2012, http://www.worldpoliticsreview.com/trend-lines/11874/global-insidernorth-korea-the-true-target-for-china-south-korea-pipeline-proposal. Alexander Ananenkov and Kim Yong Jae, “Prospects for Cooperation in Energy Sector between Russia and North Korea,” report paper from Gazprom OAO [Open Joint Stock Company], November 22, 2011. This view was shared thorough numerous conversations among the author, energy policymakers, and high profile government officials attending numerous energy meetings in Seoul, Beijing, and Washington, D.C., from 2008 to 2013. See remarks by both Keun-Wook Paik and author, in “Russia: Korean Pipe’s Surprising Progress,” Energy Compass, Energy Intelligence, November 4, 2011. This idea was shared through personal discussion with Lee Sung Kyu (KEEI) following his presentation on the Korea-Russian Natural Gas Import Project during the KOGAS Study Association meeting Seoul, Korea, September 19, 2011. See also David F. Von Hippel, Peter Hayes, James H. Williams, Chris Greacen, Mick Sarillo, and Timothy Savage, “International Energy Assistance Needs and Options for the Democratic People’s Republic of Korea (DPRK),” Energy Policy 36:2 (2008), p. 551.

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48. Author interview with James T. Jensen, president of Jensen Associates Energy Companies (Weston, Mass., U.S), Boston, July 19, 2012. 49. KEEI Weekly Global Energy Market Insight, 12:29, August 3, 2012. 50. “U.S Approves Third LNG Export Terminal,” The Australian, August 13, 2013, http://www.theaustralian.com.au/business/mining-energy/ us-approves-third-lng-export-terminal/story-e6frg9df-1226696476712, accessed August 20, 2013. 51. This view was shared through several meetings among North Korean experts in South Korea attending dozens of closed government meetings in Seoul, between 2009 and 2013; and anonymous policymakers from Northeast Asia attending the 59th Pugwash Conference on Science and World Affairs in Berlin, July 1–4, 2011. 52. See author’s remark in John Power, “How Can Korea Ensure Energy Security?” Korea Herald (Seoul), August 14, 2012.

CHAPTER 5

Framing Multilateral Energy Security Framework in Northeast Asia?: Lessons from KEDO and ECT

Introduction In recent years, the Northeast Asian region has been undergoing fundamental changes in terms of energy security: Demand growth from China dominates the regional growth and is now affecting global oil and natural gas prices. Japan and South Korea are eager to locate energy resources to maintain their economic status. North Korea is desperately in need of any type of energy assistance from outside nation. Nevertheless, the region is facing a number of challenges and obstacles of establishing multilateral energy security framework capable of both resolving possible energy disputes and creating energy collaboration among states in the region. In this end, the Korean Energy Development Organization (KEDO) and European Union experience may serve as a useful guide model for regional framework to enhance future energy security cooperation in the region. In fact, KEDO has emerged originally to defuse a traditional security crisis, rather than to address a non-traditional security economic agenda. Despite tenacious efforts by any related states, KEDO turned out to be an “improbable, inadequate, incomplete, and unintended model” for institutionalization of multilateral cooperation in Northeast Asia in the end (Snyder 1997). Yet, at the same time nobody can equally dispute that KEDO is “the most institutionalized concrete example of functional multilateralism or practical multilateral structure with concrete © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 S. H. Ahn, Power Struggles, https://doi.org/10.1007/978-981-19-5474-0_5

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security objectives ever in Northeast Asian context (Snyder 1997).” Therefore, the lessons derived from KEDO could still become a useful future guidelines to implement the formally institutionalized framework in Northeast Asia, particularly with regard to energy security cooperation. The building KEDO type of multilateral energy framework is both essential and imperative in the region because of the importance of global energy interdependence between states in Northeast Asia, and between Northeast Asia and North America as well. Despite the nature of national energy policy of which primary objective is to achieve national interests, it would be highly unlikely for any state in Northeast Asia to achieve their energy security goals without seeking some sort of collaboration with other states in the region. Although KEDO did not succeed in terms of managing North Korean nuclear crisis, it still provides a number of practical lessons and guidelines for both creating any type of future energy multilateral framework and managing potential energy crisis in the region (Ha 2011). Once again, the purpose of this article is neither to discuss KEDO in detail nor to deal with North Korea’s nuclear proliferation issue, nor to focus on EU energy policy but to elaborate original idea and concept of both KEDO’s and EU’s limited achievements and to apply them to the potential building regional energy security framework in Northeast Asia. Moreover, European approaches toward energy security are equally helpful in understanding the case of Northeast Asia because European energy security approaches were quite successful examples of framing multilateral security institution although they were somehow different in that it focused on economic priorities over political ones. And more importantly, Europeans were also fully backed by government support. In short, both cases emphasize the importance of the role of active government participation and intervention in enhancing regional energy security. As far as the methodology of this research is concerned, this study relies on a number of interviews that the author conducted for the past several years in South Korea, the U.S, Russia, China, UK, Indonesia, and Singapore, rather than citing secondary sources.

The Experience of KEDO: “Why is KEDO Relevant for Future Energy Development?” KEDO was a unique multilateral body that was established to implement the 1994 U.S-North Korea Agreed Framework and designed to stop North Korea’s nuclear weapons program. KEDO was perhaps the

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first multilateral institutional framework that dealt with exclusively energy issues in the region. The members of KEDO included the U.S, Argentina, Australia, Canada, Czech Republic, Chile, the European Atomic Energy Community (EURATOM), Indonesia, Japan, New Zealand, Poland, Republic of Korea, and Uzbekistan (Snyder 1997). The uniqueness of creation of KEDO attributed to the fact that KEDO was a “bilaterally negotiated agreement that required a multilateral regime to implement (Christoffersen 2010).” In other words, the U.S. and North Korea were the main players, yet other players including South Korea joined the KEDO later. And it is also important to point out that South Korea provided most financing for this organization with some support from the U.S, Japan, and the European Union. (Von Hippel and Hayes 2012). In particular, KEDO had been initially viewed as one of the successful Agreed Framework between nation states to control North Korean nuclear proliferation. Even though KEDO did not achieve what it intended to do, KEDO’s approach and experience clearly suggest a relevant guideline for the further establishment of future energy multilateral organizations in Northeast Asia. And those organizations should clearly require the creation of a KEDO-type entity to implement the agreement and manage complex, technical demands. Under the October 1994 Agreed Framework, KEDO had an obligation to supply 500,000 metric tons of heavy oil to North Korea annually until the nuclear reactors were completed. The oil transferred by KEDO was supposed to be used to generate electricity and local-heating facilities (Von Hippel and Hayes 2012). It is important to note that during the mid-1990s, KEDO agreement was somehow tempting for both North Korea and other states in that the agreement meet the interests of two groups. North Korea used the agreement as an instrument to both a civilian nuclear program and a military nuclear threat. Other counter states were highly motivated by the KEDO arrangement because KEDO served as a means to defrost frozen relations with North Korea at first, then to discourage Pyongyang’s will over nuclear proliferation, and finally to exercise better international control over the North Korea’s nuclear program (Von Hippel and Hayes 2012). In short, the KEDO experience offers important lessons for the future energy multilateral institution-building. Future energy-related multilateral efforts can actually learn from KEDO’s experience, especially regarding organizational, budgetary, and policy challenges, to avoid the collapse of other important multilateral agreements. For example, perhaps since

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the mid-1990s, none of energy options except the PWR transfer seems to be viable for North Korean leadership. Yet during the international energy conference at Georgia Tech Institute in 2009, several energy aid program has been mentioned with North Korean delegation’s presence. And especially following the Fukushima incidence, North Korea showed their interests toward gas plant and power. This is quite significant in that North Korea did not show any interest toward gas pipeline scheme or natural gas. It is important to note that during the 1990s, the PWR transfer was being used as a necessary first step to a political opening by North Korea (Von Hippel and Hayes 2012). And PWR arrangement also signaled North Korea’s permitting foreign investment somehow including investments in energy efficiency not to mention integration with other economies of the region. As long as future KEDO type of arrangement provides almost same energy services equivalent to the PWR transfer, the end or decrease of North Korean leadership’s will over nuclear power might be achieved, although it seems to be very hard at the moment. In this respect, considering the world energy trend and North Korea’s flexibility over energy diversification phenomenon, the future KEDO-type arrangement could focus on energy efficiency and natural gas assistance program. Moreover, the past 14 years made it pretty clear that the present North Korean nuclear proliferation crisis can be more effectively solved through negotiations within multilateral framework rather than other methods. There is no doubt that it would be rather difficult to conclude that KEDO’s performance was success or failure regarding North Korean problems. Yet one thing for sure is that as Snyder stated, KEDO created useful interpersonal networks between North Korea and the rest of world, while promoting significant technical accomplishments in consolidating US-Japan-Korea triangular relations (Calder 2004). KEDO clearly contributed to defusing a security crisis and resolving energy problems, although in a somewhat different way that traditional energy security approach had pursued previously. It slowly and quietly but gradually built interpersonal networks, mainly through the channel of technical specialists between North and South Korea. It also provided a stepping stone for creating of framework for trilateral collaboration among the U.S, Japan, and South Korea. Furthermore, as Snyder indicated, as a predecessor of the Four Party Proposal, the practice of cooperation through KEDO involving North Korea created the idea of forming a multilateral approach to initiate dialog with North Korea although bilateral official

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dialog opportunities were absent during that time (Ha 2011; Snyder 1997; Ryu 2007). A future KEDO-type organization may face the challenge of how to transform adverse relationship into a cooperative one. Overtime, through the series of negotiation and bargaining games, however, KEDO succeeded to foster relatively good relations with North Korea. The importance of KEDO approaches cannot be overstated. From the beginning, the relationship between North Korea and KEDO began as antagonistic and adversarial. As time goes on, however, North Korea began to accept KEDO gradually. Initially, it was only because the U.S. insisted North Korea that such a multilateral organization was the only way to move forward with the LWR project. At first, Pyongyang was very hesitant to work with other KEDO staffs other than the Americans working for the organization. However, within short period of time, the situation had drastically changed as North Korea and KEDO began to engage in the practical work of implementation, one that branched out to quickly include South Koreans working for the organization. In 2002, following a direct clash between the North and South Korean navies, the two sides carried out a newly institutionalized KEDO direct means as a way of defusing tensions. It is interesting to note that even after the 1994 USNorth Korea Agreed Framework began to unravel in late 2003, North Korea did not seriously threaten KEDO personnel but rather maintained a productive working relationship with the organization. KEDO had also both directly and indirectly contributed to generating a number of other ideas for multilateral cooperation in response to regional security concerns. Specifically, KEDO addressed energy security concerns, again although somehow in quite different terms clearly departing from the elements that were explained within the most common energy security discussions these days. The active exploration through the Committee on Security Cooperation in the Asia Pacific (CSCAP) working group on confidence-building measures to test possibilities for a cooperative regional approach to management of civilian nuclear power issues, including managing safety and proliferation concerns related to the back end of the nuclear fuel cycle, provides the good examples for energy security (Snyder 1997). In Snyder’s terms, the European institutional precedent of cooperation through the European Atomic Energy Community (EURATOM) was perhaps the most relevant organization to benchmark future energy multilateral framework, it is important to point out that the creation of KEDO indirectly facilitated

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the need of multilateral cooperation especially in the context of Asia’s growing development of civilian nuclear energy (Lee 2010; Snyder 1997). Therefore, the implications of the KEDO experience can serve as a foundation to study multilateral energy institution building both regionally in Northeast Asia taking into distinct political culture of the region and, indeed, in the larger context, globally. Moreover, a KEDO-type organization posits more promising aspect because it can invite more important externalities too. While the organization’s work may be primarily technical, it can produce a wide range of positive externalities. More specifically, KEDO was able to produce a series of forum inviting more member states including the U.S, Japan, South Korea, and others to speak with one voice regarding North Korea. It also served as a vehicle to engage the European Union on the Korean Peninsula. Even, outside the member of KEDO did play a certain role while supporting the KEDO regime. As far as China is concerned, China did not join KEDO but clearly made some efforts to encourage North Korea to sign the KEDO agreement. China later emphasized that China had been able to do a better job for KEDO because China did not belong to KEDO at that time (Christoffersen 2010). KEDO demonstrated that multilateralism could work in Northeast Asia (Ha 2011). In short, KEDO was an important institutional mechanism to promote harmonizing national policies, not only providing South Korea, Japan, and, later, the European Union a seat at the table in resolving an important security issue but also in terms of leading to the practice of consensus-building procedure. The future energy multiframework-type KEDO should be able to create more space for externalities too to mitigate potential energy dispute crisis while inviting multinational oil and gas private companies and even consulting institutions (The Stanley Foundation 2006). Perhaps most important, KEDO’s experience illustrates that technical problems of North Korean nuclear proliferation can, or very often will become political problems easily, while provoking mistrust among states and slowing down the implementation process of the program. Any kind of complicated agreement is likely to occur throughout every phases of KEDO program. It is important to point out that every phases, schedules, and facets within KEDO program will be hardly in perfect alignments. Any single major disruption or delay in any of the three will bring about significant consequences. This problem was vividly detected in the case with KEDO particularly regarding where the multibillion dollar project was subject to delays, giving rise to North Korean charges that the U.S.

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was not particularly serious about implementation. In this sense, KEDO’s experience also serves as the guideline for future energy framework how to manage the technical details from the political perspective. The relevance of KEDO for establishing regional energy security scheme is much more compelling if we look how the role of political leadership of nation states was handled in energy diplomacy. The case of KEDO clearly demonstrated that the mission of a technical organization charged with implementing diplomatic agreements must be backed by full and continued high level of political leadership (The Stanley Foundation 2006). Many inevitable problems with complicated agreements can sometimes be solved by bureaucrats of representative states, but often require high political intervention or mediation. Without that intervention or mediation, the agreements can suffer and perhaps even collapse easily at the end. Some critics even contend that framing regional energy security in Northeast Asia seems to be rather idealistic for two reasons. One is the general lack of understanding the regional concept among surrounding states. The other is the illusion that conflict happens more frequently than collaboration between nation states over any regional security issues, particularly regarding resource allocation and energy issues. In the past few years, moreover, territorial issues become so prevalent among China, Japan, and Korea, especially in the sea water area. It is highly likely that this territorial dispute related to undersea mineral resources will occur more frequently in future. Hence, KEDO type of multilateral institution must be formed to mediate political or military clash between the states. It is essential to outline that energy disputes originally stem from political issues. And these conflicts can only be solved through political compromise between nation leaders. It is extremely important to remember that the most fundamental energy issues are overwhelmingly political in nature. In other words, energy issues are the political processes that operate both within and outside nation states. Politics plays an important role in making key tradeoffs, such as between cheap energy and secure supplies, or between self-sufficiency and environmental quality. Indeed, in Northeast Asia energy decision of each country is implemented to serve its national interests. Yet in the case of energy disputes or collaboration scheme, politics and leadership are the key driving forces to determine its national energy policy. Thus, some sort of formal institutionalized framework is required, as we already have seen in the case of KEDO.

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The Lesson from the EU and ECT Accordingly, we must understand that the question of building a multilateral energy framework is closely associated with balancing the relationship between energy and politics. In other words, the regional energy security building process also raises perhaps the most fundamental energy security debate —whether energy issues can be substantially separated from political question. The common answer would be “no” in most cases. Here the energy calculation means economic issue overwhelmingly. The role of politics in energy issues is much more compelling in the Asian context, particularly in Northeast Asia compared with elsewhere in the world. For example, with regard to energy security consideration, European countries tend to put more heavy weight on market forces and mechanism, whereas East Asian countries rely on more geo-political and strategic considerations. In contrast with the U.S. which encourages domestic energy supply, as far as energy security objective is concerned, in European Union energy security priority has been given to controlling demand and securing supply. There is a widely consensus in Europe that most long-term energy security threats may be mitigated through an effective market system. In this sense, the liberalization move which had taken place in the former Soviet Union in the late 1990s should be deemed as a positive development from an energy security perspective, as is the emergence of a global market resulting from the declining cost of transportation of LNG. So market approach to energy security assumes that the market will make sure energy will be made available. However, it is crucially important to note that even in European continents some components of energy security cannot be simply dealt with only by market forces. Politics overrule economics. As for energy efficiency matter, in particular, government intervention is even necessary in Europe too. Energy efficiency enhancement policy probably requires some form of government intervention, while the market cannot enforce CO2 reductions policy itself. This applies equally to environmental considerations too. Meanwhile, while energy demand factor also ranks high within energy security barometer in Asian countries such as Japan and Korea, the approach to supply differs from the European option, with a much heavier emphasis on a strategic and security approach. In other words, governments in East Asia are more often involved in energy policymaking or diplomacy process in general compared with European ones. Several Asian

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countries tend to privilege a strategic approach over economic calculations. This stemmed from the fact over dependence on Middle Eastern oil was perceived as a matter of fundamental national security in Asia. This approach favors more states a hands-on approach toward energy security. Typical good examples are as follows: 1. Strong government monopoly policy toward indigenous energy production happening in countries like China, Myanmar, or Indonesia or Korea somehow 2. Strong government monopoly on energy investments and on enhancing relationships with energy-producing nations (Francoise et al. 2004). A large component of energy diplomacy in Asia is achieved by political and financial factors, and diplomatic relations accompanied by the sale of key economic goods and important investments. It is undeniable that the strategic approach is more evident in East Asia, China, in particular. For instance, the Chinese government has emphasized strategic measures such as maximizing domestic production of petro resources, investing on overseas production, and enhancing diplomacy with oil and natural gas exporting nations. On the other hand, EU countries adopted some form of regional energy collaboration approaches very early compared with other regions. They have been engaged in a series of cooperative schemes. These include the integration of the European market for gas and electricity; research and development activities in energy-related projects; and R&D sectors specifically focusing on renewable energy. Besides EU context, other European countries also cooperate in the framework of the Energy Charter Treaty (ECT) (Lee 2012). The ECT is legally binding multilateral instrument dealing specifically with inter-governmental cooperation in the energy sector, the fundamental aim of which is to strengthen the rule of law on energy issues in order to minimize the risks associated with energy-related investment and trade (Francoise 2004). The aim of the ECT was to establish a legal framework to promote longterm energy cooperation focusing on the protection of investment, trade in energy materials and products, and transit and dispute settlement. The character of the ECT resembled KEDO somehow because it established a framework for international cooperation between European

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countries and other industrialized countries with the aim of developing the energy potential of relatively economically backward region such as central and Eastern European countries and of ensuring security of energy supply for the European Union. The original background of ECT traces back to June of 1990. In June 1990, the Prime Minister of the Netherlands proposed energy cooperation with the Eastern European and former Soviet republics, in order to stimulate economic growth and to ensure energy supply of EU at the Dublin European Council. Accordingly, the council proposed the European Energy Charter in 1991, and negotiations on this Charter began in Brussels in July 1991. And on 17 December 1991, Europeans signed the treaty at Hague. (European Energy Charter, http://europa.eu/legislation_summaries/energy/ external_dimension_enlargement/l27028_en.htm). The ECT was also a concrete-institutionalized framework because it specifically dealt with all aspects of commercial energy activities including trade, transit, investments, and energy efficiency as well as dispute resolution process. In particular, among the ECT set of rules, in the Northeast Asian context, dispute settlement and transit protocol are the key elements to keep in mind. First, dispute settlement rule aims at the resolution of disputes between two energy contracting states, and in the case of investments between investors and host countries, as can be documented in Article 26 and Article 27 from the Charter. There are also special provisions, which are based on the WTO model, for the resolution of inter-state trade issues. And the Treaty also offers a conciliation procedure for transit disputes too. It is equally important to note that the Treaty assumes some enforcement action and mediation roles. For instance, for the past several years since the Treaty had entered into force, the investorstate dispute settlement mechanism demonstrated a proven operational record. If an investor decides to bring a dispute to arbitration, there are three specific possible avenues to handle: “the International Centre for the Settlement of Investment Disputes (ICSID—an autonomous international institution with close links to the World Bank); a sole arbitrator or an ad hoc arbitration tribunal established under the rules of the United Nations Commission on International Trade Law (UNCITRAL); or an application to the Arbitration Institute of the Stockholm Chamber of Commerce. International arbitral awards are binding and final, and each

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Contracting Party is obliged to make provision for the effective enforcement of such awards in its area (Energy Charter, http://www.encharter. org/index.php?id=7&L=0%3B).” Moreover, the Energy Charter Treaty also provides a set of rules that covers the entire energy supply chain, including not only investments in production and generation but also the terms under which energy can be traded and transported across various national jurisdictions to international markets (Energy Charter Treaty, http://en.wikipedia.org/wiki/ Energy_Charter_Treaty). The Treaty is responsible for discussion of all issues related to cross-border energy flows that are covered by the Treaty. Its main tasks are as follows: • “Monitoring and assistance in the implementation of the Treaty and related instruments on trade and transit, suggesting recommendations for improvement of compliance; • Facilitation to the discussions among the members of the Charter constituency on promoting and securing cross-border energy flows based on the Energy Charter Treaty; • Analyzing the ways to facilitate the development of open, competitive and sustainable energy markets, and energy flows across the Charter constituency (Energy Charter, http://www.encharter.org).” This set of legal components can be very useful in Northeast Asia considering the fact that the Treaty’s provisions on trade and transit are based on WTO rules. Moreover, the ECT extends WTO rules for the energy sector even to non-members of the WTO. The ECT also sets out rather strict rules of energy transit in detail. For example, current Treaty provisions bind participating states to take the necessary measures to facilitate transit of energy, while emphasizing the principle of freedom of transit, and to secure established energy flows. Transit countries are also obliged not to interrupt or reduce existing transit flows, even though they have disputes with another country concerning this transit. What is more interesting, the ECT also supports the establishment of new transportation capacity and thereby advocates the diversification of supply and of export. The substantial components of the Treaty are quite enforceable through a state-to-state dispute settlement mechanism. And for example, in European context, this provision can be particularly valuable and effective for coping with complex cross-border infrastructure projects, like

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the Baku-Tblisi-Ceyhan and Baku-Tblisi-Erzurum gas pipelines (Energy Charter, http://www.encharter.org). In short, the ECT provides certain guidelines that require the consent and agreement of multiple governments. These guidelines can be very effectively applied to the case of Northeast Asian energy flow, particularly Russia-North Korea-South Korea natural gas pipeline project. Unlike European region, in Northeast Asia, energy security issues are primarily addressed at the national level. Any energy security agenda or policy has been interpreted in more national terms. Cooperative initiatives are far less developed in the region due to regional rivalry, lack of trust, unsolved history dispute, and more diversity in terms of politics, economics, demography, culture, and race, although there has been recently a rising awareness of the need for cooperation: alleviating the dependence on Middle Eastern Oil and cooperating on natural gas price mechanism dealing with both Russian gas and North American shale gas. Given the diversity among Asian countries, it is no surprising that there is still no cohesive policy and strategy in approaching and ensuring energy security. What most countries in the region have in common, however, is their heavy dependence on oversea energy resources. The situation is more evident in oil, where even oil-producing countries in the region primarily rely on imported supplies. And more important, as the natural gas age is imminently approaching, natural gas is no exception to this. Nonetheless, there is a positive sign that most countries somehow admit that energy security policy goal can be made through cooperative initiatives involving certain country groupings and associations in the region (Prawirratmadja 2004). In this end, cooperation on energy issues may also serve as a stimulus to more broadly defined economic cooperation and as a means of enhancing confidence building process among states. Although this may be a questionable assumption, the idea that cooperation on energy security issues may facilitate regional economic cooperation and possibly integration seems to be quite convincing, despite many obstacles laid out previously. This means that forming any sort of institutionalized framework is necessary to guide energy security cooperation in the region. In short, once again the energy issues are strictly market forces. But energy issues are not merely economic factor but a strategic and political factor. When energy disruptions occur, it is highly probable that political intervention will occur. When energy access is disrupted, tempers and suspicions rise and manipulations quickly follow. In such circumstances,

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as Yergin pointed out in his account of energy security, the temptation becomes very strong for governments to manage energy markets (Yergin 2006, 2012). In other words, more states are involved in energy policymaking, more political energy issues become. This means that when the energy disputes between nation states take place in a particular, they can be solved through political compromising. And a regional institutionalized framework clearly helps mediating or mitigating the disputes. Hence, the establishment of multilateral framework involving regional energy players is essential in Northeast Asia to resolve possible energy security conflict or to deal with future energy threats.

Anatomy of Future Regional Multilateral Energy Framework In the final analysis, how can the lessons from KEDO and EU approaches be applied to similar multinational efforts in future? The major ideas of framing energy security should aim at the following issues which had been stated from KEDO. 1. “establishing effective multilateral organizations designed to implement their missions; 2. managing relations between the organization’s member countries, between countries and the organization’s secretariat, and between the organization and the host country in the case of nonproliferation agreements; 3. securing stable financial arrangements; 4. understanding how issues of phasing spelled out in the original diplomatic agreement may not translate well into the actual process of implementation (The Stanley Foundation 2006).” More specifically the KEDO II- or KEDO III-type framework must include the following main tasks such as reducing the potential energy crisis as well as enhancing energy efficiency and environmental related issues in the region. In conclusion, basic role of the multilateral framework should be able to enhance the overall energy security and also to reduce the overall unit cost of energy in the region in a number of ways:

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• By creating super grid in the region (Herberg 2013). • By providing a framework within which trans-boundary oil, gas, and electricity networks can be constructed. For example, modernizing the North Korean electric power grid (Han 2012), with an emphasis on increased efficiency and building trans Korean natural gas pipeline access to Russia. • By providing means to more effectively react to oil supply crises and high oil prices • By providing a framework for the joint development of resources in disputed territory and waters, and for deposits which straddle defined borders. • By reducing environmental impact of energy production and consumption. • By establishing oil futures and trading market in the region (Jensen 2013). • By forming natural gas price mechanism specifically dealing with • Russian Siberian natural gas and North American shale gas (Kim and Boustany 2013). Desirable Institutional framework in Asia could also pay attention to the following specific tasks, in more realistic and concrete terms: • Research &Development sector focusing on the environmental aspect and energy efficiency. • China, Japan, and Korea work together working on energy-saving steel mills and electrical power generators. • Technology transfer such as hybrid car production-promoting energy efficiency and sustainable development. However, it is important to understand that the possible new energy multiframework should definitely include Russia and China since they are very important casts in the energy great game in the region. Multilateral energy framework should keep its energy-specific character, but stretch the notion of its traditional energy security approach, and focus particularly on the development of natural gas and oil resources, and pipeline issues in the region as well as the safety of the whole energy security infrastructure and the entire supply chain recognizing the vulnerabilities that come from terrorism, war, piracy, accident, and natural disaster.

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Most of all, in order to keep its value as a source of energy, the development of local distribution networks is particularly crucial for natural gas markets to form and for projects to proceed. However, efficient distribution networks are lacking in the region. There is no denying that both bilateral and multilateral energy cooperation within Northeast Asia has the potential to bring shared prosperity. While taking advantage of the diverse energy profiles of each country based on economies of scale, they can advance the frontiers of cooperation in areas such as transboundary power interconnections, natural gas pipeline networks, joint use of existing supply infrastructure, transfer of technology and know-how, and joint exploration and development of energy resources. However, energy cooperation among Northeast Asian nations is a relatively new phenomenon. Northeast Asia has no general economic or institutional arrangements like the EU, ASEAN, OPEC, the European Energy Charter (EEC), or the ASEAN Council on Petroleum (ASCOPE). Until recently, what arrangements there were, were based on bilateral relations rather than a multilateral framework. Political tensions, cultural, ethnic, and institutional obstacles, as well as economic differences among the Northeast Asian states had compelled each country to cope individually with its own energy problems while blocking the development of an effective regional system of energy security. Some experts suspect that the competing national rivalry for energy projects creates tension rather than cooperation. Moreover, there are currently no legal and institutional frameworks for energy cooperation in Northeast Asia. Only Russia and Japan have signed the EEC and the Energy Charter Treaty, and South Korea and Japan are the only members of the International Energy Agency (IEA) in the region.

What Is to Be Done? & Outlook Regional energy cooperation is extremely difficult to achieve, especially considering the nature of energy politics itself. Energy game or transaction is strictly based upon zero sum game rules. Also, national energy policy or energy information is obviously classified information, and government tends to be highly reluctant to publicize their national energy data to outside nations, especially their rival states for national security purposes. Moreover, considering the inherent complexities of Northeast Asian relations throughout the histories, any type of regional security cooperation between the nation states looks quite even more pessimistic.

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Nonetheless, energy cooperation in the region is not the matter of choice any longer but the matter of must be done task. In other words, northeast Asian states are destined or condemned to cooperate. This is because the future energy demand in this region is projected to be the highest in the world especially both in oil and in natural gas demand, and currently world number one oil and natural gas-producing nation, Russia and the future number one oil- and natural gas-producing nation, the U.S., and the number one oil and natural gas consuming nation, China, they all belong to this region. And also there is high possibility that energy dispute or conflict between the states is highly likely to occur in the next century in this region with Russian and the North American natural resources over the upcoming few decades. Therefore, in order to mitigate or prevent future energy conflict, or to avoid the unexpected unfavorable outcome, some sort of preliminary agreement among the neighboring states or any type of multilateral energy consortium has to be implemented in advance. In this sense, KEDO and EU efforts to build regional energy security clearly delivers a perfect prototype to future regional energy security in Northeast Asia. It then, what would be the possible common interests, which all of the states might agree or could share, or perhaps what would be the appropriate subjects or goals could satisfy each of northeast Asian countries’ national energy needs within the multilateral framework. As discussed previously, a number of projects including building local energy distribution network, which is overwhelmingly, creation of super grid in the region including construction of trans-boundary oil, gas, and electricity networks, more specifically, modernization of the North Korean electric power grid, regional oil, and natural gas futures trading market, the joint development of resources in disputed territory and waters, energy efficiency enhancing program and technology transfer, and so on. And in the immediate terms, the multilateral energy consortium could also focus on the following issues how to cope with North Korean energy shortage problems, the development of unconventional natural gas such as shale gas and CBM, gas hydrate in the region, as well as the adoption of Northeast Asian natural gas pricing mechanism, which is distinct from oil-related or Henry Hub pricing system. In particular, it is crucially important to keep up with global energy trends. I would like to stress that coal, oil, natural gas, nuclear energy and other renewable energy all have important roles to play in the Asia Pacific’s energy and economic future.

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But among the options available today, natural gas is uniquely positioned to fuel economic growth. It also can meet increasing demand for power. It also supports the transition to a low-carbon economy. Regional natural gas market is going to grow astronomically in Northeast Asia. This is because mainly North American shale gas revolution dramatically changed the global energy trading landscape. The U.S. and Canada became the major natural gas exporting nations to Northeast Asia. The U.S. and Canadian governments have been extremely aggressive locating Northeast Asian investments and Asian buyers in their shale gas. There have been substantial evidence for this. The U.S Cheniere, Cameron, and Freeport asked for gas export licenses. And for example, Kitimat in British Columbia will begin its exporting natural gas to Asia from 2014 (Jensen 2013). The global number one LNG consuming and importing continent, Northeast Asian nations should equally bear in mind the creation of regional natural gas hub center dealing with pricing and futures market issue. Moreover, as far as the role of multilateral energy institution, instead of focusing on general issues, it would be more realistic and substantial to bring large scaled local projects such as Mongolian Tavan Tolgoi project (Ryu 2010) or East Siberian Kovykta gas pipeline or Trans Korean natural gas pipeline projects among two Korea an Russia into the table. Furthermore, on condition that energy cooperation between the states in this region goes smooth, we could take further step, which is rather ambitious but not totally impossible task, and that is the creation of another Asia Pacific version of global commodity futures exchange system just like NYMEX (New York Mercantile Exchange) or ICE (Intercontinental Exchange) in London. It is also important to add that energy efficiency, which is one of the energy security elements, could be listed in the multilateral energy framework. This is because energy efficiency is regarded as one of the few positive-sum game factor, whereas other energy security talks are viewed zero sum game most of time. Indeed the member states could develop joint R&D type of fuel efficiency program inviting national private companies. In terms of the energy consortium structure matter, the energy consortium could follow the ARF pattern: both governmental and nongovernmental track. Moreover, since a great deal of energy projects are implemented in the sea water, as we have seen at East China Sea, East Sea, and West Sea, maritime security approach is also essential. It is important to stress that energy developments in the region is highly associated with

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managing maritime security. We could also apply some of the code of conduct or multilateral framework or arrangement from ASEAN or ARF to the region. In particular, the case of the South China Sea experience would provide a perfect fit to handle a wide range of maritime security issues including the maintenance of oil and gas offshore platform, terrorist attack, and the management of natural or manmade catastrophic situation. Perhaps, this consortium cannot be the dominating institution which actually controls or monitors every energy activities in Northeast Asia. Yet, some of the natural disaster-type accident such as Fukushima disaster can be effectively managed by this consortium. In this aspect, furthermore, South Korea’s President Park’s recently suggested Eurasian Initiative to promote construction of super-grid project among East Asian States and Eurasian states seems to be very promising and actually could turn out a stepping stone to implement multilateral energy framework. Finally, in order to achieve the favorable outcome through energy consortium in the region, as KEDO suggests, government-togovernment negotiations are crucial to implementation of multilateral energy framework. In this aspect, specifically Russian-Chinese gas cooperation is essential (Ahn 2010). At the same time Russian-the US relations are equally important too. It is important to note that the US–Russian energy rapprochement in the region does not necessarily hurt Russia’s position to become a major player in the region or to pursue its national interests. In my conclusion, regardless of many challenges and obstacles ahead, it is quite certain that more frequent talk, more communications among the member states will create some opportunities and will bring resolution. Consequently, incomplete yet applicable wisdom of KEDO and EU is desperately needed in the region in order to cope with future energy crisis.

References Agreement between the European Atomic Energy Community and the Korean Peninsula Energy Development Organization, 2001, The Korean Peninsula Energy Development Organization, New York, December 18, 2001. Ahn, Se Hyun, “Energy Security in Northeast Asia: Putin, Progress, and Problems.” LSE Asia, 2007. Ahn, Se Hyun, “Energy Alliance among South Korea, Russia and China: Potentials and Problems.” The Journal of International Studies 15(1), 2010, pp. 105–135.

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Calder, Kent, “The Geopolitics of Energy,” Presentation Materials at the Korean Institute for Energy Economics, Seoul, Korea, March 16–17, 2004. Christoffersen, Gaye, “Historical Review of Oil Cooperation in Northeast Asia: an American View,” A Report prepared for the conference Northeast Asian Energy Security Cooperation: Past, Present and Future, Shanghai, China, October 21–22, 2010. Energy Charter, on http://www.encharter.org/ accessed on September 20, 2013. Energy Charter Treaty, Wikipedia, on http://en.wikipedia.org/wiki/Energy_ Charter_Treaty accessed on September 22, 2013. European Energy Charter, Europa Summaries of EU legislation, on http://eur opa.eu/legislation_summaries/energy/external_dimension_enlargement/l27 028_en.htm accessed on september 22, 2013. Falola, Toyin and Ann Genova, The Politics of the Global Oil Industry. London: Praeger, 2005. Francoise, Nicolas, Francois Godement, and Taizo Yakushiji, Asia and Europe: Cooperating for Energy Security. Paris, Centre asie ifri Institut francais des relations internationals, 2004. Jensen, James, “US LNG Exports-An International Perspective,” A Presentation to the Washington LNG Forum Material, 2013. Kalicki, Jan H. and David L. Goldwyn, Energy and Security. Washington, DC: The Johns Hopkins University Press, 2005. Klare, Michael, Resource Wars: The New Landscape of Global Conflict. New York: Metropolitan Nooks, 2001. Klare, Michael, Rising Powers, Shrinking Planet: The New Geo-Politics of Energy, 2008. Mills, Robin, The Myth of the Oil Crisis, London: Praeger, 2008 Pacific Energy Summit Document, 2010, 2011, 2013. Conference Materials. Seattle: NBR, 2010, 2011, 2013. Prawiraatmadja,Widhyawan, “An Asian Approach to Energy Security,” in Francoise Nicolas, Francois Godement, and Taizo Yakushiji, Asia and Europe: Cooperating for Energy Security. Paris, Centre asie ifri Institut francais des relations internationals, 2004. Snyder, Scott, “The Korean Peninsula Energy Development Organization: Implications for Northeast Asian Regional Security Cooperation?” North Pacific Policy Papers 3. University of British Columbia, 1997. The Stanley Foundation, “What Did We Learn From KEDO?” Policy Dialogue Brief, November 2006. Von Hippel, David and Peter Hayes,“Foundations of Energy Security for the DPRK,” The Nautilus Institute Report. September 13, 2012. Yergin, Daniel. 1993. The Prize. New York: Free Press.

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Yergin, Daniel, “Ensuring Energy Security,” Foreign Affairs, March/April 2006, p. 75. Yergin, Daniel, The Quest, New York, Penguin Press, 2011, pp. 281-283.

Interviews Ryu Ji Chul, Korea Energy Economics Institute (KEEI), Seoul, 2006~2013. Paik Keun Wook (Oxford Institute for Energy Studies, London & Seoul, 2006~2013). Lee, Sung Kyu (KEEI, Seoul, 2008~2013). Kim, Nam Il (KEEI, Vancouver, 2013). Oh, Sung Hwan (Ministry of Foreign Affairs and Trade, Republic of Korea, Vancouver, 2013). Han, Dongman (Ministry of Foreign Affairs and Trade, ROK, Seoul, 2012, 2013). Ha Yong Chool (University of Washington, Seoul, 2011). Cha, Victor (CSIS/Georgetown University, Washington, DC, Atlanta, 2009). Loebsack, Dave (Member, House of Representatives, United States, Washington, DC, 2009). Tong, Kurt (State Department, United States, Atlanta, 2009). Yergin, Daniel (CERA, Washington, DC, 2012). Jensen, James (Jensen Associates, Zakarta, DC, 2010, 2012, Phone Interview, 2013). Boustany, Charles (Member, House of Representatives, United States, Vancouver, 2013). Herberg, Mikkal (The National Bureau of Asian Research, Unites States, Zakarta, and Washington, DC, 2008, 2011, 2013).

CHAPTER 6

Republic of Korea’s Energy Security Conundrum: The Problems of Energy Mix and Energy Diplomacy Deadlock

Introduction This chapter explores Republic of Korea (ROK)’s energy security priorities and problems. During the President Park’s administration, ROK has faced wide range of energy security problems. Almost all of the nation’s energy diplomatic efforts have virtually stopped to function for mostly domestic political reasons, and energy security has been endangered because ROK’s energy security policy has poorly implemented with no concrete goals and no rational choice of energy mix plan. Regardless of ROK’s current energy security policy problems, this study intends to examine ROK’s most urgent energy security agenda at the moment and how the country should response to these specific issues. Before examining the individual energy security issues, this chapter also outlines the exact definition of energy security and how this concept has evolved in the past century. Moreover, this study seeks to highlight ROK’s energy mix policy in detail according to various energy resources. This study contends that the current problems of ROK’s energy security and the deadlock of ROK’s energy diplomacy stemmed from the ignorance of the exact definition of energy security at the national level among policymakers, academia, and various political groups including top leadership. In the upcoming decades, ROK’s energy security is likely to experience significant disarray since nation’s energy security clock has been reset back to 5 years before during the Park’s administration. There is a grave © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 S. H. Ahn, Power Struggles, https://doi.org/10.1007/978-981-19-5474-0_6

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concern that ROK’s energy diplomacy has lost 5 years and will face a great deal of setback in future.

ROK’S Energy Consumption and Demand Trend South Korea is desperately in need of vast amounts of natural resources to keep up with its fast economic growth. Nonetheless, South Korea has very limited domestic sources of energy, and relies almost completely on imports. As an energy-poor country with insufficient natural resources, as Table 6.1 indicates, ROK has an energy import dependency ratio of 96% while ranking 10th in the world in energy consumption. Consumption of oil, gas, and coal ranks 9th, 16th, and 13th in the world, respectively, and imports of oil, gas, and coal ranks 5th, 6th, and 3rd in the world. For instance, energy imports as a percentage of total demand rose from 73.5% in 1980 to 96.8% in 2005. And South Korea imports all of its oil needs. While South Korea remains the world’s fourth largest oil consumer, and at present is the main fuel used in Korea, demand for oil as a percentage of total energy demand is projected to fall from 53% in 2003 to 39% by 2030 (Ministry of Trade, Industry & Energy 2014). Global Supply and Demand Conditions See Table 6.1 Current Energy Consumption The ROK’s average annual growth rate (AAGR) of final energy consumption from 2000 to 2012 was 2.8%, as Fig. 6.1 suggests. In fact, the AAGR, which was 7.2% during the 1990s, decreased significantly following the financial crisis in 1998. It is also important to note that the share of energy consumed in the industrial sector has been increasing and currently constitutes more than 60% of final energy consumption, whereas the portion of the household, commercial, public, and transportation sectors decreased steadily (Ministry of Trade, Industry & Energy 2014). As for oil, the total share of oil in ROK’s final energy consumption reached a record high of 68.2% in 1994 but since then began to decrease to 48.4% in 2013. Also, ROK’s oil AAGR reached 8.0% in the 1990s but also decreased to 1.0% in the 2000s. ROK’s oil AAGR by product is as

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Table 6.1 Fossil fuel self-sufficiency rates of the world’s ten largest energy consumers (2011) Ranking

Country

Oil

Gas

Coal

1 2 3 4 5 6 7 8 9 10

China U.S. India Russia Japan Germany France Canada Brazil Korea

0.46 0.46 0.26 3.25 0.00 0.03 0.01 2.12 1.03 0.01

0.78 0.93 0.76 1.41 0.03 0.16 0.01 1.58 0.62 0.01

0.98 1.12 0.77 1.55 0.00 0.60 0.01 0.72 0.14 0.01

Source Ministry of Trade, Industry & Energy. 2014. “Korea energy master plan: Outlook & policies to 2030” Ministry of Trade, Industry & Energy. p. 52

Fig. 6.1 Final energy consumption trend by source (Unit:%) (Source Korea Energy Economics Institute 2014. “Yearbook of energy statistics” Korea Energy Economics Institute)

follows: gasoline 1.2%, diesel for transportation 1.4%, kerosene/light oil –2.9%, heavy oil –8.2%, and naphtha 4.4%. Also, oil share by sector is as follows: Industry 55.6%, transportation 36.3%, and household/commerce 6.9%. Furthermore, excluding feedstock is as follows: Industry 14.5%, transportation 70.2%, and household/commerce 13.1% (Ministry of Trade, Industry & Energy 2014).

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As far as the electricity consumption is concerned, it increased from 10.8% in 1990 to 19.3% in 2012, primarily because the electricity price in ROK is exceptionally low, compared to other energy resources, and the use of electricity was quite convenient in ROK. As for city gas: Consumption of city gas in the ROK increased quite dramatically at an AAGR of 30.5% in the 1990s, as Fig. 6.2 indicates, but this increase also declined somehow to an AAGR of 5.9% after 2000 due to saturation of infrastructure. AAGR by sector from 2000 is as follows: industry 9.3% and household/commerce 3.6% (Ministry of Trade, Industry & Energy 2014). Coal consumption also gradually began to increase. The share of coal use remained in the 13% range in the 2000s, but since then rose up to 15.4% in 2012 because industrial coal consumption increased. Moreover, the share of bituminous coal in total coal consumption, which was 50.4% in 1990, increased sharply to 91.8% in 2012 due to a decrease in anthracite coal consumption and an increase in the use of bituminous coal for power generation (Ministry of Trade, Industry & Energy 2014).

Fig. 6.2 Change in energy mix (2001 → 2012) (Source Ministry of Trade, Industry & Energy. 2014. “Korea energy master plan: Outlook & policies to 2030” Ministry of Trade, Industry & Energy. p. 28)

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Problems of the Current Energy Policy A general trend of low-price policy motivated by social and economic domestic pressures at the national level has facilitated energy overconsumption patterns and accelerated the social trend toward disproportionate use of certain types of energy, mostly electricity. In particular, exceptionally low electricity price in ROK turns out also a significant obstacle to the creation of new markets in less economical arena, such as renewable energy and smart grid sector. The current energy mix is also problematic because it did not fully take external environment into account. In this regard, there should be many considerations of external factors including environmental pollution caused by nuclear and coal-fired plants, public safety concerns, opposition from local residents, security costs, etc. (Ministry of Trade, Industry & Energy 2014). Basic Direction of the Second Energy Master Plan Transition to Demand Management Policy The ROK’s second energy master plan aimed at demand management policy, more specifically, adjustment of domestic energy prices. Due to the ROK government’s price liberalization policy, as Fig. 6.3 indicates, the price of electricity has consistently been lower than the price of oil, which was taxed at a rate of up to 50%, worsening distortions in energy consumption. Another explanation of energy price distortion in energy consumption is that electricity rates do not sufficiently reflect the environmental and social costs of power generation in Korea. For example, even though bituminous coal used for power generation emits more greenhouse gas and pollutants than LNG, LNG is taxed at a rate of 16%, while bituminous coal is not taxed at all. Therefore, ROK clearly needs to readjust energy taxation policy. It is essential to impose a consumption tax on bituminous coal used in power generation, and lower the tax on LNG, which is an alternative to electricity. In this respect, industrial uses, such as steel making and cement production, will be exempted from the tax to avoid hampering industrial competitiveness (Ministry of Trade, Industry & Energy 2014).

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Fig. 6.3 International Prices for Heavy Oil, LNG, and Electricity (USD/TOE) (Source Ministry of Trade, Industry & Energy. 2014. “Korea energy master plan: Outlook & policies to 2030” Ministry of Trade, Industry & Energy. p. 56)

Enhancement of Energy Security ROK government also stressed the reinforcement of overseas resource development, in order to strengthen resource development capability. ROK has been relatively successful in achieving energy quantitative growth. In other words, the amount of oil and mineral resources successfully secured increased over a short period of time, as Fig. 6.4 illustrates. Nonetheless, there are still limitations such as excessive emphasis on quantitative growth; weakened investment efficiency; and insufficient infrastructure for growth. Therefore, ROK’s second energy master plan focuses on the following four specific goals, in order to enhance its national energy security: 1. Enhancing capabilities for long-term energy security 2. Strengthening the foundation of public energy enterprises 3. Promoting private sector investment in overseas resource development 4. Strengthening industrial infrastructure by training high-quality workers and conducting practical R&D (Ministry of Trade, Industry & Energy 2014) (Table 6.2).

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Fig. 6.4 Self-sufficiency Rate (Source Ministry of Trade, Industry & Energy. 2014. “Korea energy master plan: Outlook & policies to 2030” Ministry of Trade, Industry & Energy. p. 110)

Table 6.2 Current and new policy paradigm Current policy paradigm

New policy paradigm

Policy Target

Secure Larger amounts of over seas resources (enlargement of public enterprises)

Key Player Funding

Public enterprises Financed mainly by public enterprises M&A, buying shares in production fields

Improve the government’s capability to develop resources (Strengthening industrial competitiveness and creating jobs) Public and private enterprises Financed mainly by the private sector Securing operating licenses in exploration fields

Method

Source Ministry of Trade, Industry & Energy. 2014. “Korea energy master plan: Outlook & policies to 2030” Ministry of Trade, Industry & Energy. p. 110

Establish a Stable Supply System for Each Energy Source ROK government’s energy plan also emphasizes the establishment of a stable supply system for each energy resources. ROK relatively, as illustrated in Fig. 6.4, secured a stable supply of conventional energy sources, such as oil and gas. More specifically, the second energy master plan aims at diversifying the existing energy routes and expanding domestic stockpiling capacity. As for oil, ROK hopes to reduce dependence on certain oil-exporting countries by diversifying oil import routes, and also to improve the industrial structure by establishing a Northeast Asia oil hub within the Korean Peninsula. ROK government also focuses on the following goals:

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responding aggressively to changes in the global market, such as the emergence of shale gas, and expansion of the supply infrastructure for domestic stockpiling (Ministry of Trade, Industry & Energy 2014). Nonetheless, ROK government also needs to keep up with five mega trends of global energy market. Oil and Gas Supply and Demand Projection Oil Global short-term oil supply and demand is anticipated to improve, and mid- to long-term supply and demand is expected to remain stable. ROK’s future oil supply–demand balance is expected to remain stable in the mid- to long term. In the domestic context, for the short-term oil demand increase is due to an increase in the use of feedstock, such as naphtha, for industrial purposes and an increase in demand from the transportation sector with about 1.1% growth in 2014, despite the downward trend in demand for oil for heating and power generation. In the mid- to long term, meanwhile, as Tables 6.3 and 6.4 illustrate, due to a continuous decrease in demand from non-transport sectors, total oil demand is projected to fall from 2020 at an average annual rate of 0.15% to approximately 773.9 million barrels by 2035. For example, ROK’s domestic oil dependency is decreasing, as Table 6.3 suggests, 52.0% (2000) → 38.1% (2011) → 34.1% (2020) → 26.9% (2035) (Ministry of Trade, Industry & Energy 2014). Natural Gas In general, the Asian natural gas demand is expected to grow, and the supply of natural gas is also expected to increase due to shale gas revolution in North America. As Table 6.3 indicates, ROK’s domestic demand for natural gas has also gradually increased at an annual rate of 7.9% over the past 10 years due to increasing popularity of city gas and increased gas demand for power generation and industrial use. For example, ROK’s domestic natural gas demand increased as follows: 18.45 (2003) → 23.50 (2006) → 24.64 (2009) → 36.55 (million tons) (2012). ROK’s mid- to long-term gas demand will be much increased because of high demand for the industrial and transport sectors use. Moreover, gas demand will be very attractive because ROK’s domestic gas demand for the power generation sector will depend on greenhouse gas emission reduction aims, base

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Table 6.3 Forecast by source: Total primary energy demand (business-as-usual (BAU)) Source

2011

2025

2030

2035

Coal Ishare %) Oil

83.6 (30.3)

100.2 (28.3) 111.0 (31.3) 64.8 (18.31) 1.7 (0.5)

107.7 (29.1) 107.1 (29.0) 69.8 (118.9) 1.9 (0.5) 65.3 (17.7)

112.4 (29.7) 101.5 (26.9) 73.3 (19.4)

Natural Gas Hydro Nuclear Renewable & Others Total

105.1 (38.1) 46.3 (16.8) 1.7 (0.6) 32.3 (11.7) 6.6 (2.4) 275.7 (100.0)

59.6 (16.81) 16.8 (4.7) 354.1 (100.0)

18.0 (4.9) 369.9 (100.0)

Average annual growth rate 1%) 1.24 −0.15 1.93

2.0 (0.5)

0.70

70.0 (18.51) 18.8 (5.0) 377.9 (100.0)

3.28 4.44 1.32

Source Ministry of Trade, Industry & Energy. 2014. “Korea energy master plan: Outlook & policies to 2030” Ministry of Trade, Industry & Energy. p. 44

Table 6.4 Forecast by source: Final energy consumption (business-as-usual (BAU)) Source

2011

Coal (share %) Oil

33.5 (16.3) 37.4 (15.0) 38.8 (15.3) 38.6 (15.2)

City Gas Electricity Heat energy Renewable [non-electricity] Total

2025

2030

2035

Average annual growth rate l%l 0.58

102.0 (49.5) 23.7 (11.5) 39.1 (19.0) 1.7 (0.8) 5.8 (2.8)

109.1 (43.9) 32.5 (13.1) 59.7 (24.0) 2.9 (1.2) 7.1 (2.9)

105.1 (41.3) 34.4 (13.5) 65.6 (25.8) 3.1 (1.2) 7.4 (2.9)

99.3 (39.1)

−0.11

35.3 (13.9) 70.2 (27.6) 3.3 (1.3) 7.4 (2.9)

1.68 2.47 2.82 1.01

205.9 (100.0)

248.7 (100.0)

254.3 (100.0)

254.1 (100.0)

0.88

Source Ministry of Trade, Industry & Energy. 2014. “Korea energy master plan: Outlook & policies to 2030” Ministry of Trade, Industry & Energy. p. 45

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load power reserve ratios, etc. (Ministry of Trade, Industry & Energy 2014). Alternative Energy During the1970s, Korea invested in “alternative energy” but failed to proceed due to a number of limitations (Kim 2015). In 1987, Korea enacted the “Alternative Energy Development Promotion Act,” and launched the new renewable energy technology development projects in 1988 (So 2011). Yet the IMF crisis in 1998 downgraded the importance of alternative energy and delayed nation’s alternative energy program. Recently, however, in 2008 Korea has reestablished the “third basic energy plans for renewable energy technology development,” and increased the government budget for renewable energy, as illustrated in Table 6.5. Moreover, the government is currently developing various plans for the promotion of renewable energy industry, as Table 6.6 demonstrates. The plan sets the goal of boosting the use of alternative energy with 3.5% in 2012; 6.1% in 2020; and 11% in 2030, respectively. Until 2030, the core strategy of the plan was to promote R&D related to industry, to expand industrial infrastructure by enhancing fuel efficiency as well as maintaining low cost. The ROK Ministry of Trade, Industry and Energy has been in charge of the renewable energy program, and the Alternative Energy Center for the task of the office of Energy and Resources within the Korea Energy Agency has been also supporting this program. Table 6.5 ROK government budget for alternative energy(Won: a hundred million) The name of the projects

2007

2008

2009

2010

2011

2012

Total Alternative energy technology development Supply business for alternative energy Support for development differences Supply loan

4,350 1,326

5,326 2,079

6,877 2,445

7,958 2,520

9,283 3,125

8,309 2,306

1,541

1,431

1,637

1,202

1,290

1,340

270

513

1,492

3,318

3,950

3,950

1,213

1,303

1,303

740

918

713

5,225.20 2.2 33 7.8 274.5 3,975.30 867.1 59.7 6.2 1.7 –

2006 5,608.80 2.4 29.4 15.3 370.2 4,319.30 780.9 80.8 11.1 1.8 –

2007 5,858.50 2.4 28 61.1 426.8 4,568.60 660.1 93.7 15.7 4.4 –

2008

Source http://www.index.go.kr/potal/main/EachDtlPageDetail.do?idx_cd=1171

4,879.20 2.1 34.7 3.6 181.3 3,705.50 918.5 32.5 2.6 0.5 –

2005 6,086.20 2.5 30.7 121.7 580.4 4,558.10 606.6 147.4 22.1 19.2 –

2009

2010 6,856.30 2.6 29.3 166.2 754.6 4,862.30 792.3 175.6 33.4 42.3 0.2

The present state of Alternative Energy Supply (unit: thousand toe)

Supply Supply percent Solar heat PV Bio Waste Water power Wind power Geothermal Hydrogen Fuel cell Marine resources

Table 6.6

7,582.80 2.8 27.4 197.2 963.4 5,121.50 965.4 185.5 47.8 63.3 11.2

2011

8,850.70 3.2 26.3 237.5 1,334.70 5,998.50 814.9 192.7 65.3 82.5 98.3

2012

9,879.20 3.5 27.8 344.5 1,558.50 6,502.40 892.2 242.4 87 122.4 102.1

2013

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Source Kim Jung-In et al., 2012, “A Comparative Study on a Policy of New Alternative Energy,” Journal of Northeast Asian Economic Studies, vol. 24 No. 1, Northeast Asian Economic Studies Association, p. 80 From 2011 to 2015, photovoltaic (PV) and wind power oriented investment plan launched with 33 trillion Won. This plan includes PV with about 20 trillion, wind power with about 10 trillion, fuel cell with about 1 trillion, as well as bio energy with about 1 trillion Won. As Table 6.6 indicates, in particular, the supply portion of PV between 2005 and 2013 has astronomically increased. Moreover, the third basic plans aimed at establishing grounds for short-term commercialization of renewable energy within 5 to 10 years, and replacing energy sectors by renewable energy with securing core technology in the long term. Also, another objective of third basic plans is to promote private led of renewable energy industry (So 2011). In fact, RPS (Renewable Portfolio Standards) which was a government’s mandatory policy of substituting alternative energy for certain amount of electric power production came into effect in 2012. This policy focused upon reducing CO2 emission and expanding the market size, while enhancing competitiveness for alternative energy. In 2012, the electricity supplier had to substitute alternative energy for 2% of the total electric power production. And this ratio must be increased by 10% until 2020. It is expected that the electricity supplier must abide by the rules in order to increase the proportion of renewable energy for the national power generation (“RPS”, http://www.ecotiger.co.kr/ news/ articleView.html?idxno = 14,499(date: 2015. 9. 9). Besides that, RPS is demanding the supplier’s obligation through the policy improvement, gathering opinions from experts, and managing the market with the supply certificate, monitoring the proper use or illegal abuse of equipment (Nam 2013). Natural Gas In the mid-1980s, Seoul introduced governmental tax incentives to promote widespread use of natural gas. In the course of fast expansion of South Korea’s natural gas industry from 1987 to 2002, ROK established a nationwide trunk pipeline network, which has made ROK one of the global most dynamic gas markets. Natural gas continued to grow in ROK, both because of its convenience and because of environmental

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merit. Accordingly, it is anticipated that gas demand in ROK is to grow by 150%, from 20 billion cubic meters (bcm) in 2000 to 53 bcm by 2020. ROK is the second largest importer of liquefied natural gas (LNG) next to Japan at the current. And ROK is also home to the world’s largest LNG importer, Korean Gas Corporation (Kogas). Kogas has a monopoly over the all of ROK’s gas imports, which thus far are entirely in the form of LNG, which generates some social agenda at home from the energy security aspect. Thanks to privatization efforts started in 1999, ROK has allowed POSCO (a large steel maker) to make a rare “spot” purchase of 500,000 tones of LNG in 2006. POSCO and K-Power have also signed a long-term LNG contract in 2004 for 550,000 and 600,000 million tons, respectively, of LNG from Indonesia’s Tangguh project delivered by the end of 2008. Kogas’s imports have traditional came from Southeast Asia, but purchased a great deal of volume from Qatar and Oman, and additionally made a contract with the U.S shale gas in 2012 (Ahn and Jones 2008). KOGAS’s purchase of Southeast Asian volume has gradually decreased. For example, Indonesia is an example of such doubt. Much of ROK’s LNG in the 1990s came from Indonesia; however, the future of Indonesia’s LNG industry is uncertain. Due to a lack of favorable investment policies and general resource nationalism, this OPEC country turns into a net importer of oil in 2004 and plans to further develop its LNG for export is currently in limbo. An overall push to develop a domestic gas market is emerging to make up for this energy gap. Indonesia already has to import LNG from other countries in order to meet its existing long-term supply contracts. Therefore, ROK decided to increase the LNG volume from the Middle East. South Korea began to import LNG from Oman, Yemen, and Qatar in the late 1990s. By 2020, a significant portion of Korea’s LNG imports will be delivered from the Middle East, especially Qatar volume. Accordingly, it is important to point out that South Korea’s LNG will increasingly have to travel long distances through world energy chokepoints such as the Hormuz and Malacca straits. Moreover, the problem is that the Middle Eastern liquefaction capacity is in shortage these days. In other words, ROK’s traditional LNG suppliers such as Yemen, Oman, and the United Arab Emirates have all virtually exhausted new supplies. And even Qatar, which is the world’s largest LNG exporters, has already produced approximately 80% of its potential LNG supplies allegedly. These shaky Middle Eastern options make the U.S. and Russia

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an extremely attractive source of gas for ROK. At the moment, ROK purely relies on LNG, so the Russian gas pipeline and the U.S shale gas would definitely help South Korea diversify its sources of gas. For Korea, the Russian PNG is extremely attractive as it could diminish risk among the multiple parties involved (both government and private), compared with bilateral LNG deals. Both Russian and the US gas can balance its reliance on tanker gas coming from Qatar (Ahn and Jones 2008).

The New Energy Security Concept It is essential to point out that not many people realize the exact meaning of the concept of energy security. This is considered to be one of the major energy security threat at both inside and outside the country these days. The ignorance of this particular term generates for the national leader to take irrelevant and irrational energy security decision-making, and this also leads to the failure of domestic energy policy and energy diplomacy. Energy security is an important element of national and regional security today. It is a strategic factor in ensuring the economic development and stability of states. Because of the “increasing importance of traded energy, increasing dependence on Middle East Oil, no sign of slackening demand rise, continuing volatility of oil prices, and environmental and sustainability concerns,” energy issues are an increasingly important part of the security agenda in international relations in general (Andrews-Speed 2003). Energy security is defined as the securing of reliable and affordable energy supplies that are sufficient to support social, economic, and military needs, while at the same time being environmentally sustainable (Doh 2003; Willrich 1975). Willrich defines energy security as, first, the guarantee of sufficient energy supplies to permit a country to function during a war; second, and more broadly, the assurance of adequate energy supplies to maintain the national economy at normal levels. He argues that the first definition is too restrictive, and the second too permissive and expansive. Therefore, he proposes that for most purposes, the definition of energy security as the securing of reliable and affordable energy supplies that are sufficient to support social, economic, and military needs, while at the same time being environmentally sustainable is the most plausible approach (Willrich 1975). More specifically, “in a state which enjoys energy security, consumers and their governments are able to believe that

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there are adequate reserves from sources at home or abroad, and production and distribution facilities available to meet their requirements in the near future, at costs that do not put them at a competitive disadvantage or otherwise threaten their well-being (Lieber 1980; Deese 1979/1980).” In other words, energy security emphasizes economic factor, which is namely, affordable prices. On the other hand, energy insecurity arises when the welfare of citizens or the ability of governments to pursue their other normal objectives are threatened, either as a result of physical failure of supplies or as a result of sudden and major price changes (Belgrave et al., 1987). In this sense, it can be argued that energy security constitutes an important part of economic security because it is the core prerequisite for sustainable development (Doh 2003). In traditional terms, one way to estimate the level of energy security is to measure the extent to which a country is dependent on particular types of energy and whether these can be obtained within its territory or must be imported. In the latter case, a second question emerges relating to the level of the dependency, the diversity of foreign sources, the relative vulnerability of the source areas to political turmoil, and hostile control. Similar questions apply to transportation routes and carrying systems. In the end, as most people realize, the energy security of a state is evaluated by its level of self-sufficiency and its ability to adapt to temporary and prolonged supply interruptions without serious economic and military consequences (Stares 2000). More specifically, a useful distinction can be made between energy importing and exporting countries. An importing country is primarily concerned with the security of its energy supplies. However, each importing country tends to view foreign energy supplies as more or less vulnerable to interruption (Willrich, 1975). Although interruptions, disruptions, and manipulations of existing supply arrangements can be caused by accidents and natural disasters, they are more vulnerable to potential political instability, economic coercion, military conflict, and terrorist acts. These concerns apply not only to the source of energy supplies but also to the routes and means by which they are transported (Yergin 1988; Stares 2000). Energy exporters, on the other hand, are concerned with access to markets and security of demand. An exporting country may perceive energy security as national sovereignty over its energy resources, or it may view it more broadly as sovereignty over resources plus guaranteed access

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to foreign markets (Willrich 1975). Moreover, an exporter may view security as sovereignty plus market access plus financial security for the assets it receives in exchange for energy raw materials. An exporter may adopt, as a result of sovereignty over its basic raw materials, a concept of energy security that includes guaranteed access to foreign markets. In short, demand security may be as important to energy exporters as supply security is to importers. As Willrich notes, “this raises possibilities for mutually beneficial negotiations between exporters and importers, based on overlapping areas of interest in stability and equilibrium. In addition to sovereignty and market access, an exporter may extend the concept of energy security to cover financial security for the investments made with its export earnings. This scenario may seem exaggerated but energy resources below ground are a precious national heritage. Once extracted, that heritage can easily be lost by an improvident government or eroded by inflation (Willrich 1975).” What seems to be more important about energy security these days is that the concept of energy security is no longer confined the term ‘access’ or ‘diversification’. These two above concepts were the primary issues during the 1920s and 1960-70 s, as previously mentioned. The millennium concept of energy security stretches far beyond access and diversification. It expands up to the resilience and integration, not to mention information. Moreover, the national government’s energy diplomatic skill is also another important component of energy security these days. This includes the political leaders’ basic knowledge about energy security and tactics of energy diplomacy and energy mix plan. It is quite stunning to point out that a number of national leaders are not quite familiar with the exact concept of energy security, which is considered to be national energy security threat for the longer term. More important, energy diplomacy is the part of energy security these days. In other words, the notion of energy security is no longer the separate meaning from energy diplomacy.

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ROK’S Energy Security Objetives What is the Most Important Current Issue and How is the Country Trying to Solve It? From the ROK perspective, the primary objectives of energy security are as follows: 1. ROK government hopes to implement nation’s smart future power mix plan. ROK has promoted the use of nuclear power and renewable energy in the past few years despite the Fukushima incident. Nonetheless, this has turned out to be a major policy failure. This is the prevailing consensus among energy experts in Korea. It is essential for the ROK government to turn to more natural gas use considering the recent dramatic increase of micro-dust in the nation in the past few years. Also, the country must reconsider its most recent energy policy of building additional nuclear power plants, and definitely should cut down the use of coal. ROK’s energy mix policy will be more elaborated in the later part of this paper. 2. How to frame DPRK energy security and thus how to prepare for the energy security framework for the possible reunified Korea is one of ROK government’s most important energy security objectives. DPRK’s energy security has completely broken down for the past several decades and is desperately in need of foreign assistance at the moment. Accordingly, natural gas remedy seems to be a perfect solution to DPRK due to its diverse supply options either from Russia or from the North American states. It is essential to point out that DPRK’s energy security issue should not be accounted from the commercial perspective but the larger geo-political framework in the longer term (Ahn 2013c). 3. Accessing the Russian oil and gas in the Eastern Siberian region is another key component of ROK’s major energy security priority. In fact, ROK is located in the middle of between energy continental power group and sea power. And recently following the shale gas revolution, ROK was actively courted by both sides to join their each alliance. In particular, Eastern Siberia turns out to be very promising region considering the short-distance advantage, just as Russian-German energy rapprochement demonstrated in the past few decades. Recently, natural gas pipeline project linking two

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Koreas and Russia has been actively brought to the diplomatic table, and still remains the focal point of Northeast Asian energy security cooperation. At the same time, Sino-Russian energy relations should be carefully examined and analyzed in detail to understand the current Northeast Asian energy flow. It is crucially important to point out that Korea is the perfect energy partner for Russia more than anybody else such as China, Japan, and India. Energy cooperation between Russia and South Korea is extremely important but both sides are not moving fast as it should be. Gas from Russia’s Eastern Siberian field has the potential to not only drastically reduce Northeast Asia’s energy shortage but also help diversify Northeast Asia’s traditional sources of energy from the Middle East and Southeast Asia. Up to this stage, however, the potential for Russian natural gas reaching any Northeast Asian country including ROK, however, has been delayed for almost two decades due to following reasons: • Delayed gas price negotiation between Russia and China in 2007 and 2008: oil cooperation is relatively moving smooth, yet gas still remains problematic in Northeast Asia. Nonetheless, gas flow is more important to Korea, China, Japan, and Russia, compared to oil since gas is global and regional energy phenomena. • Asset disputes between Gazprom and BP-TNK; and Gazprom and Rosneft: Korean government welcomed Gazprom’s complete take over Kovykta’s asset because it would facilitate government-to-government cooperation and development of gas project more quickly. And yet, power struggle within Kremlin turns out the key issue to delay Russian gas to Northeast Asia. In fact, Putin prefers Rosneft with Igor Sechin to Gazprom with Alexei Miller. • Global economic crisis was the major hurdle for energy cooperation between Russia and South Korea in the late 1990s • The politics of route determination has been very sensitive and the primary discussion of Russian gas transfer to Northeast Asia. Although to route the pipeline via North Korea and Mongolia would economically makes more sense, government and private sector sensitivities have led to proposed routes that circumvent the two countries thus driving up costs of any such

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pipeline. And yet transit country discussion still remains the focal point of pipeline gas mechanism. • Confidence and gas investments. Natural gas is genetically more difficult to trade than oil and requires much more confidence, guarantees, and money from investors and governments. In this respect, the lack of confidence among states in the region diminishes the possible natural gas collaboration. • China factor. China’s market is a key to Russian PNG success but not a necessary condition. Despite plans for further gas market development, however, China’s reliance on Turkmenistan, Kazakhstan, Myanmar, and Australia has led to a soft market for relatively high-priced gas. And yet, China-Russian gas cooperation is the main key for Russian gas transfer to Asia. In other words, it is highly unlikely to anticipate Russian gas flow to Asia without Chinese market (Ahn and Jones 2008). • Wary Kremlin’s resource diplomacy. Rising oil prices has traditionally given Russia impetus to use energy as a political weapon. In Eastern Europe, near abroad, or elsewhere except toward Western Europe, Russia tended to pull some political strings in the course of gas diplomacy. East Asia still perceives Russia as a bug bear in the gas transfer from Russia. 4. How to build further strong energy alliance with the U.S: ROK and the U.S. could elevate current strong alliance beyond up to the level of special energy alliance through free trade agreement between the two sides. In particular, two sides could tighten energy alliance with the transfer of the US natural gas and crude oil. Perhaps, the U.S. could use Korean natural gas terminal to expand its Asian export market in the longer term. 5. How to establish global oil and gas hub in the Korean Peninsula: Korea is where the future massive amount of Russian gas and the North American gas will be imported simultaneously and posits a perfect location to build global scale of natural gas import and export station, especially in the east coast of country. 6. How to design nation’s energy diplomacy and security policy effectively: proper energy security program should be introduced at each level of energy governance: presidential leadership, congress, ministry, and military. Leaders in the Korean Peninsula are clearly

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lacking in the exact concept of energy security, and this often misleads national energy policy flaw. What Are the Biggest Foreseen Challenges in the Near Future? Within the realm of energy cooperation in Northeast Asia, the major concern is that politics always outplay economics. In other words, political huddles including the inherent complexities of Northeast Asian relations such as the balance of power relations among China, Russia, and the U.S.; the lack of mutual trust between nations; DPRK’s nuclear proliferation; and estranged ROK-Japan relations all hinder further energy cooperation in the region. Moreover, the general lack of understanding of the proper concept of energy security among Northeast Asian top leaders is also prevalent; the new threat of nuclear power plants’ danger as well as nontransparency of energy industry and energy market in certain countries still remains potential challenges for the region to ensure energy security in future. What Role Does the US-Japan-Korea Alliance Play for the Country’s Energy Security? In comparison with Sino-Russian energy alliance or potential SinoRussian-Korean energy alliance, the U.S-Japan-Korean energy alliance could create more reliable and predictable energy market system based upon the decades of strong political and military alliance. Specific elements of energy alliance cooperation may include natural gas (shale gas) transfer and the collaboration over the gas-related industry such as gas automobile industry. In this sense, it is essential to anticipate possible US crude oil transfer to Japan and Korea through free trade agreement settings. Off-Shore Resource Development There is also interest in development of offshore energy resources in Japan and the ROK: What impact does this have on energy policy, cooperation among the three countries (and others)?: Quite frankly, there is no active offshore energy resources development in the Korean offshore area at this stage. Indeed, there are massive gas hydrate

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reserves in Dokdo Island in the East Sea and Sector 7. Unless the current conflict between ROK and Japan resolves, however, it is quite difficult to see further energy cooperation between the two sides. Nonetheless, the U.S. is very keen on Sector 7 development since this project could give Korea more impetus to engage in both the East China Sea and South China Sea. Besides that, there was a brief idea of natural gas co-buying scheme right after Fukushima incident from the Japanese and Korean side, yet the plan was abandoned with no actual practical benefit.

Perhaps, three nations could work on framing energy security in the DPRK including oil exploration in the DPRK offshore area in future instead. Furthermore, three nations could work on energy transportrelated sea route safety regulation activities or sea lane communication issues as well as nuclear safety regulation in future. Finally, once again, it is essential to examine the current development and obstacles of Sino-Russian energy relations as well as the possible energy transfer among China, Russia, and the Korean Peninsula. This also leads the U.S., Japan, and Korea to implement the right proper energy strategy to form new energy alliance among three nations.

Energy Diplomacy There are a number of problems for South Korea’s energy diplomacy. Under Park–Geun-Hye’s administration, most of energy diplomacy activities virtually stopped to function. There are two explanations for this failure. First, energy security concept is simply missing among top leadership including at the legislative, judicial body not to mention presidential office. – Energy security educating program must be introduced at the moment. Politicians are seriously in need of learning the true concept of energy security. – Energy security should not be a part of party politics or election agenda, even though it is quite tempting and lucrative political agenda. – It is the most important element of national security. – Yet, Korean leadership seems like they are not aware of the importance of energy security.

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Secondly, Energy was highly politicized within Korean soil. From the begging of her term, President Park really wanted to distance herself from the former Lee Myung Bak administration in terms of energy policy. There were a number of energy-related scandals and corruption charges revealed after Lee Myung Bak’s administration. Accordingly, at the current, a number of energy companies are still under the government inspection and every energy business activities led by state energy companies have been the primary target for the annual government inspection. From the energy security perspective, excessive government intervention in energy diplomacy or activities is not considered to be desirable because with too much government inspection and regulation, it is highly likely that energy market or energy diplomacy is beginning to mal-function. Nonetheless, South Korea’s primary objective of energy diplomacy is diversification of energy import market: Four different channels. (1) the Middle Eastern oil and gas; (2) Southeast Asia; (3) Russia and the former Soviet Union; and (4) new North American gas market. It is quite essential to point out that the ROK government desperately needs to keep up with the 5 mega trends of global energy market these days. At the same time, the Korean government recently also set up a few specific energy policy goals for Northeast Asian energy cooperation: 1. How to frame or ensure energy security in North Korea; 2. How to establish Northeast Asian oil and natural gas hub facilities in the Korean Peninsula; and 3. How to set up multilateral framework for the safety of nuclear power generation: TRM (Top Regulators’ Meeting) and TRM plus. TRM stands for which guides nuclear power safety among China, Japan and South Korea.

Energy Power Mix Korea’s most recent energy power mix plan is too much oriented toward nuclear power generation and renewable energy. Korea, just like Japan, depends on foreign energy resources: The rate of current energy independence is only 3%: Here, 3% includes hydropower, anthracite, and a small segment of renewable energy. Other than that, as previously mentioned

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in the early part of this paper, Korea imports most of energy including oil, coal, and natural gas. Nonetheless, in a traditional sense, Korea’s current energy mix is generally perceived as stable for the global standard because energy resources for power generation were diversified, compared with early 1980s when oil used to be the primary energy for power generation. Now, coal, nuclear power, and natural gas replaced oil for power generation. In short, external factor, mostly, global energy market situation and specifically energy price have been the most dominating force or variable to determine Korea’s energy power mix plan. Most recently, however, four domestic constraints create the problems of energy power mix in Korea: 1. Korea’s overdependence on nuclear power generation. 2. Korean government did not keep up with the mega trend of global energy market: especially did not consider natural gas booming phenomenon into the national energy power mix plan. Simply underestimated the role of natural gas importance. 3. Overvalued the capacity of renewable energy: Renewable energy is neither base load energy like nuclear power or coal nor peak load energy like LNG. 4. The lack of energy reform, specifically regarding energy price and energy taxation. Korea’s energy reform is much outdated and need to be fixed. In other words, energy industry needs to be restructured desperately in need of significant reform (Ryu and Ryu 2013). Moreover, in Korea there are too many government-directed energy planning such as basic energy planning; power supply and demand basic planning; long-term natural gas supply and demand planning; renewable energy planning; energy utilization basic planning; and global energy diplomacy strategic planning. And the problem is that each of many energy planning is not inter-connected with one another. They were planned separately with no consideration of other planning. Therefore, ROK government desperately needs to bring all of these individual plannings together, and also seek to rearrange in terms of order. Most important, between the most recent Korea’s energy power mix plan

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numbers 6th and 7th, the natural gas use was not taken into consideration into the basic national energy power mix plan at all (Ryu and Ryu 2013).

Energy Scandal South Korea depends heavily on its self-generated nuclear power. Meanwhile, a nuclear scandal took place in South Korea, when the country faced a series of shutdowns, of nuclear reactors because of fake warranty documents a few years ago. This incident was exposed to the public during the September 2013’s nationwide blackout period. This whole scandal demonstrates corruption at Korea Hydro and Nuclear Power (KHNP), the state-run company that was responsible for the operation of country’s nuclear power plant. Through this nationwide scandal, the deep ties between KHNP and the related industry was revealed. And these special ties, labeled as the nuclear mafia, generated serious social and technology problems in Korea. Specifically, a number of illegal activities such as putting fake warranties into substandard parts of reactors and failed safety checks of control cables that are in charge of shut down reactors in the event of an emergency were exposed. As far as the fake documents are concerned, for example, the documents dated back to 2012. During November 2012, 2 nuclear reactors were suspended by the country after discovering that the parts were supplied with fake certificates. Also, on 10 October 2013, South Korea indicted about 100 people, which included a top former state utility official, with the charges of scandal. Officials further noted that they will bring those reactors that were suspended for inspection and replacement of parts. Moreover, on 7 February 2014, the Nuclear Safety and Security Commission declared that its investigation since mid-2013, they found eight cases out of 2,075 samples of foreign manufactured reactor components that were supplied with fake documents. However, the names of dealing countries remains undisclosed. It is equally interesting to point out that this phenomenon is quite prevalent throughout the planet, not just in Korea. After the Fukushima incident, quite a few energy experts had already anticipated the nuclear power will come back eventually because of strong ties between the state and industry which had persisted for several decades. In fact, a nuclear Watergate type of incident is just at the tip of the iceberg of

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the whole energy industry corruption throughout the world, especially compared with the oil and gas sector. Traditionally within energy sector, there is a strong bond or ties which have been established between politics and energy industry. It is really difficult to crush this invincible fortress which had been consolidated over the last century. This type of exclusive fortress substantially controls global energy market and politics, and is deeply engaged in many energy-related activities: creating energy company, deciding oil price and electricity price, controlling over national power plant, M &A of energy companies, and most importantly deeply involved in all kinds of national election process. And it is striking to point out that environmental group actually supports nuclear power generation since nuclear power plant produces low CO2 emission, which is a very interesting phenomenon throughout the world. Despite the Fukushima incident, especially in East Asia and the U.S., with the help of climate change notion, nuclear power generation became so fashionable these days with zero greenhouse gas emission.

Conclusion This paper reviewed the ROK’s most current energy security priorities and problems as well as energy mix plan. This study revealed that under the President Park’s administration, ROK has faced a number of energy security problems at the national level. Almost nation’s energy diplomacy has virtually stopped to function for mostly domestic political reasons. Furthermore, nation’s energy security has been endangered because ROK’s energy security policy, for example energy master plan, has poorly executed with no concrete set of proper goals and with no rational choice of which energy is more important to one another. Nonetheless, this study outlined ROK’s most urgent energy security task at the moment and how the country should response to these specific issues. This paper argues that the current problems of ROK’s energy security and the recent deadlock of ROK’s energy diplomacy stemmed from the general ignorance of the exact definition of energy security at the national level among energy policymakers, various political groups including top leadership, interest group, academia as well as media. In the course of harsh political turmoil and perhaps at the time of most divided national public opinion virtually over every issue ever in ROK’s history, energy security issue has also become the most sensitive and the most provocative political agenda in the ROK’s domestic politics.

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Hence, not a single national energy company dares to expand its new abroad energy business at this moment. Nor do relevant energy policymakers in the ROK’s government want to discuss energy security policy at first, while just looking at what President Park will have to say about energy policy based upon limited resources. This is even more depressing when we look at other Japanese and Chinese leaders are most aggressively pushing forward their energy diplomacy, especially given the current low global oil price. ROK top officials are at least simply concerned with CO2 emission and renewable energy, while not realizing the importance of natural gas and the true meaning of energy security. Unless there is a revolutionary change in the thinking of the new energy security concept, it is highly likely that ROK will face significant energy security disarray in the upcoming few decades. It is essential to point out that national leaders, parliament members and energy policymakers should keep up with the global energy mega trends. And most important, energy security policy and energy diplomacy should be depoliticized in ROK as soon as possible. It is even more pessimistic to see national leaders in the Blue House, the National Assembly, prosecutor’s office, and the parties look at energy security issue as a political decoy or public hatred issue. In conclusion, it is even more important to understand that energy diplomacy is the continuation of domestic energy security issue, and energy diplomatic skill is also the important component of today’s national energy security. It is equally important for political leaders to remember that the notion of energy security does not mean only diversification or access any longer. It also includes national leaders’ basic knowledge, vision, and the capacity to understand the nexus between energy and security.

References Ahn, Se Hyun, “Energy Security in Northeast Asia: Putin, Progress, and Problems.” LSE Asia, 2007. Ahn, Se Hyun, “The Fate of Kovykta” Northeast Asia Energy Focus 6(1): 12–19, 2009. Ahn, Se Hyun, “Energy Alliance among South Korea, Russia and China: Potentials and Problems.” The Journal of International Studies 15(1), 2010a, pp. 105-135.

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Ahn, Se Hyun, “Framing Energy Security between Russia and South Korea? Progress, Problems, and Prospects,” Asian Survey, 50:3, May/June 2010b, pp. 591–614. Ahn, Se Hyun, “The Anatomy of China’s ODA Policy-Energy Diplomacy Link Strategy toward Africa: Reasons of Success & Challenges.” East West Journal 24(1), 2012a, pp. 109-140. Ahn, Se Hyun, “South Korea’s ODA Policy and Energy Diplomacy Linking Strategy toward Africa: Lessons from ENI and China.” The Journal of International Studies 17(1), 2012b, pp. 89-118 Ahn, Se Hyun, “Framing Energy Security in North Korea?: Natural Gas Cooperation in Northeast Asia” The Journal of International Studies 18(1), 2013a, pp. 67-103. Ahn, Se Hyun, “Framing Multi-lateral Energy Security Framework in Northeast Asia?: Lessons from KEDO and ECT.” East West Journal 25(4), 2013b, pp.87-110. Ahn, Se Hyun, “North Korea’s Energy Conundrum: Natural Gas Remedy.” Asian Survey 53(6), 2013c, pp. 1037-1062. Ahn, Se Hyun, “Anatomy of the New Energy Great Game among the United States, Russia and China in the Middle East: The US Energy Belt Building Strategy and its Origins.” Review of International and Area Studies 23(4), 2014, pp. 65–101. Ahn, Se Hyun, and Jones, Michael T, “Northeast Asia’s Kovykta Conundrum: A Decade of Promise and Peril.” Asia Policy The National Bureau of Asian Research, NBR 5(1), 2008, pp. 105–140 Ahn, Se Hyun, and Kim, Bo Ram, “The Anatomy of International Political Economy of the Keystone XL Pipeline Project: Obstacles and the United States Energy Politics Mechanism.” East West Journal 27(1), 2015, pp. 169-203. An, Ji-Woon, “A Prospect on Energy Technology using TM Prototype: Focused on an application of New and Renewable Energy” Energy Economics Institute, 2014. Bak, Jung-Sun, “A Policy Change and Market Analysis on International New and Renewable Energy” Energy Economics Institute, 2014. Bak, Sang-Yong et.al, “Exploring the future of renewable portfolio standard in the Korean electricity sector” Journal of The Korean Society for New and Renewable Energy. Vol. Spring, 2014. Belgrave, Robert, Charles K. Ebinger and Hideaki Okino ed, Energy Security to 2000. Boulder: Westview Press, 1987 Deese, David, “Energy: Economics, Politics, and Security,” International Security. 4(3), 1979, pp. 140-153. Doh, Hyun Jae, “Perspectives and Measures for Energy Security in the 21st Century,” Korea Energy Economics Institute Report No. 03(07), 2003.

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Epstein, Lita, Jaco, C.D., and Iwersen-Neimann, Julianne C, The Politics of Oil. Indianapolis, IN: Alpha, 2003. Herberg, Mikkael, “The National Bureau of Asian Research, Seattle, Washington, USA.” personal interview, Seattle, Washington. October 1, 2015. Hippel, David von, and Hayes, Peter, “Foundation of Energy Security For the DPRK.” Korea Energy Economics Institute, 2012 Jones, Bruce. Steven, David. and O’Brien Emily, “Fueling a New Order? The New Geopolitical and Security Consequences of Energy.” Brookings, 2014. Kang, Jung Min, “The Natural Resource Defense Council, Washington, DC, USA.” Washington DC. December 4, 2015. Kandiyoti, Rafael, Pipelines: Flowing Oil and Crude Politics. New York: I.B. Tauris & CO, 2008. Kalicki, Jan H. and David L. Goldwyn, Energy and Security. Washington, DC: The Johns Hopkins University Press, 2005. Kim, Jung-In et.al, “A Comparative Study on a Policy of New Alternative Energy” Journal of Northeast Asian Economic Studies 24(1), 2012. Kim, Jung-moon, “RPS” Eco Times, August 31, 2015, On http:// www.eco tiger.co.kr/news/articleView.html?idxno=14499,2015 Accessed September 9, 2015. Klare, Michael, Resource Wars: The New Landscape of Global Conflict. New York: Metropolitan Nooks, 2001. Klare, Michael, Rising Powers, Shrinking Planet: The New Geo-Politics of Energy, 2008. Korea Energy Economics Institute, “2014 Energy Info. Korea” Korea Energy Economics Institute, 2014. Korea Energy Sector and Green Economy Review, “Lesson from the Region, Korea Energy Economics Institute.” Korea Energy Economics Institute 2014. Korea Energy Master Plan, “Outlook & Policies to 2035” Ministry of Trade, Industry & Energy (MOTIE), Energy and Resources Policy Division, Office of Energy and Resources, 2014. Lee, Chyul-Yong, “A Study on An Estimate of Willingness to Pay and Improvement Strategies of Social Acceptance.” Energy Economics Institute, 2014. Lee, Gwang-Won, “A Study on the Implementation Process of Policy for Renewable Energy to Overcome Energy Crisis: Focused on Policy Network Analysis of the Solar City Daegu Project.” Journal of Korea Association for Crisis and Emergency Management 11(3), 2015. Lee, Sung Kyu, Russian energy expert, Korea Energy Economics Institute, KEEI, Seoul, September 19, 2011. Lee, Yu-Su, “A Study on Activation Strategies of Mass Energy Business with New and Renewable Energy.” Energy Economics Institute, 2011. Lieber, Robert J, “Energy, Economics and Security in Alliance Perspective,” International Security 4(4), 1980.

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Ministry of Trade, Industry & Energy, “Korea Energy Master Plan: Outlook & Policies to 2030.” Ministry of Trade, Industry & Energy, 2014. Nakano, Jane, “Center for International Strategic Studies, Washington, DC, USA.” Washington DC. December 4, 2015. Nam, Gi-Woong, “A Policy on New and Renewable Energy.” The Korean Solar Energy Society, 2013. Normal, James, The Oil Card: Global Economic Warfare in the 21st Century. Walterville, OR: Trine Day LLC, 2009 Paik, Keun Wook, “Interview.” Oxford Energy Institute. London. January 30, 2013. Philip, Andrews-Speed, “Energy Security in East Asia: A European View.” Presentation Material at the Symposium on Pacific Energy Cooperation 2003, Tokyo, February 12–13, 2003. Reisinger, William, Energy and Soviet Bloc. Ithaca: Cornell University, 1992 Ryu, Ji Chul and Ryu, Kwon Hong, “Policy Implication on Stable Mid-term and Long Term Energy Mix” October 15. The Institute for the Future of the State Policy Report, on http://www.ifs.or.kr/modules/board/bd_view.asp? no=114&ListBlock=&gotopage=1&Pagecount=1&sk=bd_title&sv=&id=res earch&ca_no=16&mncode=&left=&top=&author=&top=2 Accessed October 19, 2013 So, Jin-Young, “A Study on Improvement Strategies of regional supportive policy on New and Renewable Energy” Energy Economics Institute, 2011. Stares, Paul B, “Introduction and Overview” in Paul B. Stares, ed., Rethinking Energy Security in East Asia, Tokyo: Japan Center for International Exchange, 2000. Venn, Fiona, Oil Diplomacy in the Twentieth Century. New York: St. Martin’s Press, 1986. Willrich, Mason, Energy and World Politics. New York: The Free Press, 1975. Yergin, Daniel, “Energy Security in the 1990s,” Foreign Affairs. 67(1): 111–132, 1988. Yergin, Daniel, The Prize: The Epic Quest for Oil, Money and Power. New York: Free Press, 2008. Yergin, Daniel, “Ensuring Energy Security?” Foreign Affairs. 85(2), 2006. Yergin, Daniel, Author’s Interview. Washington, DC. July 5, 2011, 2011a. Yergin, Daniel, The Quest. New York: The Penguin Press, 2011b. Statistics Korea, “The present state of alternative energy supply” Accessed September 9, 2015, 2014. http://www.index.go.kr/potal/main/EachDtlPa geDetail.do?idx_cd=1171.

CHAPTER 7

The US-ROK Energy Alliance

Background The Korean peninsula is currently located in the middle of between energy continental power group and the energy sea power group. And recently following the US shale gas revolution, South Korea was actively courted by both sides to join each of these two energy groups. From the energy continental group, eastern Siberia has been quite a promising region considering both its massive oil and gas reserves and also its proximity to the Korean peninsula. Accordingly, in the past several years, the natural gas pipeline project linking two Koreas and Russia has attracted a lot of regional attention, as discussed in the previous chapters and still remains the potential important element of Northeast Asian energy security cooperation. Nonetheless, from the South Korean energy security perspective, how to build further strong energy alliance with the U.S. is South Korea’s foremost important energy policy priority and the new energy security agenda in recent years: ROK and the U.S. could elevate the current strong political and military alliance beyond up to the level of a special energy alliance. This is more convincing considering the fact that the two sides already agreed on free trade agreement. Specifically, the two sides could tighten up the energy alliance with the transfer of the US natural gas and crude oil as well as coal, not to mention nuclear power cooperation. Perhaps the U.S. could use also either the existing or potential Korean © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 S. H. Ahn, Power Struggles, https://doi.org/10.1007/978-981-19-5474-0_7

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natural gas terminal, both inside and outside Korean territories to expand its Asian export market in the longer term. The shale revolution in the U.S. brought about a new era of energy abundance in the U.S.. Crude oil and natural gas have increased significantly. For example, crude oil production increased from 5 million barrels per day in 2008 to over 9 million barrels per day in 2015. In 2013, the U.S. surpassed Saudi Arabia and became the largest energy-exporting nation.1 Before 2009, the U.S. was worried about sharp decrease in domestic gas production and from where to import LNG. Nonetheless, shale gale began to emerge as the domestic supply increased and skills were developed. Shale gas proved to be even cheaper than conventional natural gas. In 2000, shale gas constituted only one percent of US natural gas supply. However, by 2011 it was 25%, and within two decades it reached more than 50%.2 The shale gas dramatically changed the U.S natural gas market. Constant shortage gave way to substantial surplus. North America’s natural gas base, now estimated at 3,000 trillion cubic feet, was able to provide for current levels of consumption for over a hundred years.3 It is undeniable that the U.S. right now is very similar to what it was during the early twentieth century. Or the U.S. is the strongest nation ever, in terms of energy security, economics, military, and almost every arena. Someone might describe the U.S. as “a mighty winged tiger.” In fact, there is no denying that despite the potential of energy cooperation between the two countries, there has not been substantial talk both at the government level and at private sector level until very recently. The ROK-US alliance has been mostly based upon military and political basis, not energy alliance level. Nonetheless, US shale revolution transformed the geo-political landscape between the U.S. and its allies. And South Korea lies in the linchpin of the new economic security alliance between the U.S. and its ally states in Northeast Asia. There are wide range of issues including actual petroleum transaction, technology transfer, comanagement of world choke point, nuclear power generation and safety issues, offshore exploration, DPRK energy assistance, and environmental issues within Indo-Pacific strategy framework.

Benefits As far as the benefits of the US-Korean energy alliance is concerned,

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First, in comparison with Sino-Russian energy alliance or potential Sino-Russian-Korean energy alliance, the US-Korean energy alliance could create more reliable and predictable energy market system based upon high level of confidence between the two sides which has accumulated from the decades of strong political and military ties. In particular, as the golden age of natural gas has just started, natural gas-related cooperation including LNG (shale gas) transfer and the collaboration over the gas-related industry such as gas automobile industry between the two countries seemed to be very promising. Also, as far as the energy transportation cost is concerned, transportation cost of natural gas from Gulf Coast to Korea is lower, cheaper than the transportation cost from the Gulf Coast to California by trolley. Furthermore, Korea leads other Asian states in terms of US energy transfer to East Asia at the current. Korea is in a great position within the crude oil transfer from the U.S., because two countries already agreed on free trade agreement. ROK-US energy alliance potential is even greater than Japan-US energy collaboration, mainly due to free trade agreement issue. Already South Korea, world’s 5th largest crude oil importing country became the US number one crude oil and LNG exporting country in 2021. And the U.S. was South Korea’s second largest LNG and crude oil importing nation next to Qatar and Saudi Arabia, respectively. In fact, South Korea has imported 2.8 million ton of US LNG since 2016.4 Moon and Trump signed a twenty-year contract for U.S LNG worth more than half a billion dollars a year.5 KOGAS and BP made long-term US LNG contract in New York in September 2019. And ROK is supposed to import 9.612 billion US dollar worth LNG (1.58 Million ton) for 18 years from 2025.6 From 2025, South Korea’s US LNG volume will double thanks to this contract. In addition, in April 2022, KOGAS made another long-term gas contract with BP to import 1.58 million ton of US LNG. This volume is equivalent for 3% of ROK’s total annual LNG consumption.7 Moreover, South Korean private sector such as SK Gas Trading Company and others made a long-term contract with US shale gas. For example, SK made a 18-year long-term gas contract with its US counterpart, Energy Transfer company, to import 0.4 million ton of LNG per year.8 Already eastern part of Korean peninsula has transformed significantly in the past several years, in response to the shale gas revolution in North America. Korea began to build so called energy hub city, called Samchuk.

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Specific Projects In other words, Korea is looking at the possibility how to establish global oil and gas hub in the Korean peninsula: Korea is where the future massive amount of Russian gas and the North American gas will be imported simultaneously and posits a perfect location to build global scale of natural gas import and export station, especially in the east coast of country. Moreover, it is even more important to mention that in the course of energy crunch which started last 2021 and aggravated by Russian invasion of Ukraine, energy alliance between ROK and U.S. over liquefied natural gas (LNG) is desperate and essential. The current energy crunch might turn out to be even more serious than in 1970s because it includes natural gas, coal, and other strategic mineral resource price spike not to mention high crude oil price. This energy crisis also involves war and delivers no sign of slowing down oil demand from the Chinese side. Therefore, South Korea and the U.S. share a number of tasks to collaborate and cooperate with each other, especially over global natural gas transaction to help Europeans who are very much struggling with gas shortages disturbed by Russians. Two countries can implement a strategic natural gas reserve system in the foreseeable future too just like the strategic petroleum reserves. Secondly, aside from natural gas and coal trade, the U.S. and South Korea also share common interests to develop offshore energy resources in Northeast Asia, specifically, the Joint Development Zone area between Japan and the ROK, which is located in the region of East China Sea area. It is considered as the low-hanging fruits for deepening engagement of the possible trilateral energy security alliance. As a matter of fact, this offshore development issue was first brought up by the US embassy in Japan when I participated in the US state department’s public diplomacy program which aimed at forming the US-Japan-ROK energy alliance last year. There are massive gas reserves in the Japan-South Korea Joint Development Zone in the East China Sea, which is also linked to the China’s biggest offshore gas field, Chunshiao gas field. The U.S. has keen interest in many respects. Third, as US-China tension grows, ROK and the U.S. can collaborate over various energy projects in the third country or third region. In this respect, one of the most important region where the US-led Indo-Pacific strategy and China’s Belt and Road Initiative collides is Greater Mekong

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Subregion (GMS) . Korea could set up smart city project in collaboration with the US LNG, which Cambodia, Myanmar, and Laos already showed great interests.9 China, which considers GMS as its own territory prefers other nation including South Korea not to engage in this region. Fourth, in line with GMS, two nations could closely work on the management of world choke point. Specifically, in addition to traditionally important spot such as Malacca Strait and Hormuz, two significant choke points are GMS and Panama Canal. For Panama Canal, it is essential for ROK to set up an emergency communication channel with the U.S. since US shale gas-loathed KOGAS LNG ship cannot pass through Panama Canal and ship all the way through Cape of Good Hope while wasting a great amount of time and fuel due to logistics problems and the transit fees which happens quite often in Panama these days.10 The nexus between sea route and energy security is very tight these days. And the byproduct of this link is China’s BRI and IPS. And almost every energyrelated topic these days tends to be interpreted within the framework of these two grand strategies. And this is clearly a focal point of any nation’s national security agenda. Fifth, DPRK energy assistance program could turn out to be very important key component of the US-Korean energy discussion in future, if the tension in the Korean peninsula is eased: in other words, how to frame DPRK energy security is important task for the South Korean government and also for the five party talk member states including the U.S. within the six party talks, and is equally considered to be one of the most important regional energy security agenda in the upcoming years. This issue is also very important because it is essential for Korean government to prepare for the energy security framework for the possible reunified Korea. From the US side, energy issues had been one of the primary agenda in US-DPRK relations since 1990s, as discussed in the previous chapters. Because US energy assistance program will constitute the major reward for DPRK’s abandoning nuclear power program. In the past few decades, DPRK’s energy security has completely collapsed and desperately in need of foreign assistance at the moment. Accordingly, natural gas remedy seems to be a perfect solution to DPRK’s energy shortage problem due to its diverse supply options either from Russia or from the North American states. And it can also reduce DPRK’s energy dependence on China.

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Before shale revolution, in 2009, Russian pipeline gas has been often one of many options for Washington. Now with the U.S., LNG is situated on the top of Russian natural gas. The US direct energy assistance project to DPRK seems to be much viable after U.S. became energy export country again after 2009. Washington could provide US shale gas and crude oil to DPRK instead of Russian or Chinese petroleum. Most of all, Pyongyang knows this global energy trends better than anybody else. In short, the US energy turns out to be the best option for DPRK to rule out its black market energy transaction with Russia and China on the sea water or border area. It is much realistic to anticipate the U.S. and ROK set up energy infrastructure including national gas trunk pipeline, gas power plants in North Korea together once the US-DPRK relations improves dramatically in future. Sixth, the U.S, Japan, and Korea also can collaborate on the management of the nuclear power issue. Exchange or transfer of nuclear technology seems to be quite substantial between the U.S. and South Korea. As the global energy crisis becomes serious agenda, nuclear power reemerges as one of the best alternative energy solutions for many countries not to mention South Korea and the U.S., while satisfying low carbon policy. Especially, smart nuclear power or small module reactor (SMR) turns out to be very promising option for two countries. It is even more intriguing to point out that there are not many companies that are capable of constructing SMR in the world except for two nations, which is the U.S. and South Korea. The two countries can achieve win–win strategy through a wide range of cooperation over nuclear power generation. As European energy crisis becomes even more serious than ever, the world’s two most advanced nuclear power technology countries can cooperate and collaborate with each other in Europe, especially in the Eastern European region, as Russia cult off natural gas supply. Namely Poland and Czech Republic would be perfect area for both countries to enter and establish joint venture.11 One of the greatest potential aspect of mutual collaboration is to set up nuclear power infrastructure in the third country such as the Middle East and Southeast Asia, not to mention Eastern Europe, as mentioned above. They need each other badly. The U.S. needs private companies which is capable of constructing nuclear power plants like Korean Doo San company. South Korea also needs US permission and collaboration to be able to handle and manage nuclear waste in the end in the third country.

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Aside from that, two countries could work on the nuclear safety issues, such as information exchange framework, preventive joint drill exercise, regional cooperation project, specifically on online information exchange system, and establishment of video conference system. Seventh, Washington and Seoul can collaborate together to ensure supply chain of strategic mineral resources such as rare earth, which is essential for electric car manufacturing or renewable energy. Rare earth is often called manufactured seasoned garnishing for industry. And the demand for this kind of mineral resources such as nickel and others increased dramatically during the energy transition period like this time of period. Wind power and solar power as well as electric care require rare earth, nickel, and other particular mineral resources for their major component of semiconductor parts. Therefore, as some experts argue, the global supply chain disturbance phenomena related to strategic mineral resources could be transitory rather than prolonged according to global energy or climate change trends. It is important to keep in mind that previously mineral resources have not been strictly classified as traditional energy but these days since they have been the key elements for wind and solar power parts, the management of these strategic resources have attracted so much attention of resource security. What is worse, the US-China rivalry has become intensified, rare earth over-dependence on China in terms of both manufacturing and the proximity to supply chain, emerged as a global grave concern for many countries. In this regard, Seoul and Washington should cooperate on three principles agenda for managing strategic mineral resources: recycling, storage, and innovation, while exchanging data if necessary, on the basis of transparency and setting up to achieve win–win strategy, in order to ensure supply of these key mineral resources. Moreover, two countries can enter India and Myanmar market together to develop strategic mineral resources as an alternative for Chinese resource materials within the Indo-Pacific strategic framework. Eighth, two countries can create energy-related job together in their countries within the framework of Green New Deal project. Specifically, under the democrats-controlled politics, South Korean companies could enter the US soil in the (ESS) Energy Storage System R&D project, battery, semiconductor, electric grid, smart city project, electric car, and other environmentally clean projects. Not only at the private sector, but also at the local government level, two countries could be engaged in with wide range of activities regarding energy transition scheme.

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Finally, U.S. and ROK could cooperate on environmental security issues, namely, the China’s air pollution and its impact on the Korean peninsula. China’s micro-dust problem is no more China’s issue, but transnational and transboundary health security issues that threaten the life of Northeast Asian people. This also clearly threatens the life and health of 28,500 US soldiers who live in South Korea. Air pollution in Korea comes mostly from China, as the wind blows from west to east. In fact, coal consumption in Beijing, Tianjin, and Hebei province exceeds the total EU’s coal consumption. The figure of death in China caused by air pollution is more than 2.2 million people every year. The annual global steel production is about 1.5 billion ton. And China produces 0.5 billion ton every year. In particular, the city of Tangshan, which is located right next to Beijing in Hebei province produces the largest amount of steel in China. Tangshan has several hundreds of both licensed and unlicensed ironworks. And most micro-dust and pollution are originated from illegal cokes factories and ironworks. It is very interesting that blue sky in Korea comes after China’s National People’s Congress or China’s long national holiday season because all the factories are closed. Air pollution in China is also very problematic since there is no sign of reducing coal consumption in China in the upcoming years, considering global economic crisis and energy crunch, along with worsening economic situation in China. The U.S. and ROK need to bring these severe health security issues in either the international arena or Washington’s United States Capitol. Bilateral talks between Beijing and Seoul over air pollution issues are almost impossible.

Policy Implication and Outlooks The U.S, Japan, and South Korea share a lot of strategic interests in terms of both energy security and regional security. In particular, various energy trade between the U.S. and South Korea are not purely based upon commercial interests but based upon strong blood alliance. Therefore, it is essential to alleviate the current energy cooperation up to another level. The new energy security alliance can focus not only on stable supply of energy resources, but also on stable security of sea lanes. It can also deal with the stable management of nuclear power generation. In particular, it is important to understand that as the natural gas golden age has finally arrived, natural gas cooperation between the two countries seems to be quite promising. It is important to note that price issue is not the most decisive criteria for energy transaction between two countries. This does not mean that high natural gas price should not be

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problem at all. Stability, predictability, confidence, and flexibility issues are sometimes more important than gas price in the special ROK-US alliance relations. This argument is more convincing considering that economic security has become the core element of the new ROK-US alliance in the midst of global energy crunch and economic crisis. Gas price between these two close allies is often intermingled with other economic security or other traditional security agenda such as metal customs disputes, automobile free trade agreement, Agreement for Cooperation between the Government of the Republic of Korea and the Government of the United States of America concerning Civil Use of Atomic Energy, nuclear power technology cooperation, ROK’s nuclear power exporting strategy, Strategic Petroleum Reserve (SPR) collaboration, offshore energy development project in Northeast Asia, ROK’s Japan leverage, as well as the levels of arms trade between two nations, and so on. In other words, gas transaction should be considered within the larger economic security package deal between these two states. Accordingly, from the South Korean perspective, it is also equally important to bear in mind the US energy and environment politics mechanism precisely. In this respect, looking at the development of Keystone XL pipeline would be the barometer to distinguish republican and democrat’s energy policy direction. If a republican elect president controls white house, then it is for 100% sure that Keystone XL pipeline project will be resumed anytime. And South Korean energy and construction sectors should have clearly chance to participate in this grand national energy project in future, not to mention to invest in other renewable energy sector or in battery business in the states. One South Korean state company has been also deeply involved in the US Colonial pipeline project since 2010. In 2010, Chevron sold its 23.4% stake to a joint venture between private equity firm Kohlberg, Kravis Roberts & Co. (KKR [https://money.cnn.com/quote/quote. html?symb=KKR&source=story_quote_link]), and South Korea’s staterun National Pension Service.12 Buy-out firm Kohlberg Kravis Roberts & Co (KKR) teamed up with the Korean National Pension Service (NPS) to acquire a significant minority stake in a Chevron pipeline company in a deal valued at close to $1bn. The sale of the 23.4% stake in Colonial Pipeline, which runs from the Gulf of Mexico to the eastern seaboard of the U.S., follows a hotly contested auction with bidders including sovereign wealth funds. It comes at a time when large investors including sovereign funds, private equity funds, and pension funds are embracing

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investments in infrastructure, especially in the energy sector. The National Pension Service of Korea was one of the fourth largest and fastest growing pension funds in the world. The deal with KKR is structured as an account that the private equity firm manages on behalf of the Koreans, rather than as part of a fund in which the NPS passively invests. That unusual structure is likely to become more common as big national pools of money try to reduce the fees they pay the buy-out firms and increase their influence over the deals in which the buy-out firms invest.13 This is one of the very few example of South Korea’s participation in the energy infrastructure project in the American soil. The case of ROK NPS represents one of the South Korea’s possible future energy alliance strategy with the U.S.. In short, it is important for South Korean government should design two track policies toward the U.S. while paying close attention to both republican and democrat’s two different energy policies. As discussed above, the US-China rivalry becomes intense, the USRussian relations soars, and the U.S. and its ally relations become more and more tight these days to overcome current global energy crisis. In particular, the US-ROK turn out to be perfect energy partner to cope with European energy crisis and to mitigate global supply chain problems as well. Perhaps this also leads the U.S. and Korea to implement the right proper energy strategy to form new energy alliance among three nations. It is equally important to address that true energy alliance requires really high level of confidence between states. Considering it is really promising than any other type of US alliance, it is even more intriguing to point out that the impact of US-ROK energy alliance could be amplified by ROK’s proactive involvement in AUKUS. Global energy market has been formed by strictly Anglo-Saxon-based family politics and International Oil Companies for the past 150 years. The membership entry requirement for this energy super class is very exclusive and limited. South Korean leaders and businessmen do not realize that U.S. has been number one energy super power for the past 150 years and the UK was also the old energy power. Moreover, Australia and Canada are emerging global energy powers. Most of all, global energy finance is controlled by these AUKUS member states. And, in this sense, ROK-US energy alliance should not be aimed at simply energy transaction between two countries. It should be formed on the basis of some sort of exclusive true energy partnership just as the type of “Achnacarry Agreement”

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or “Redline Agreement’ or ‘As Is Agreement” in the past. This is something Japan even failed to achieve in the past several decades despite its tenacious lobbying effort.

Notes 1. U.S. Crude Oil Export Policy, Hearing before the Committee on Energy and Natural Resources United States Senate, One hundred fourteenth Congress, First Session, March 19th, 2015 (Washington: U.S. Government Publishing Office, 2015), pp. 3–4. 2. Daniel Yergin, The Quest (New York: The Peniguin Press, 2011), pp. 320– 330. 3. Ibid. 4. Maeil Business News Korea, https://www.mk.co.kr/opinion/contribut ors/view/2019/10/787697/, accessed May 8th, 2022. 5. Daniel Yergin, The New Map (New York: Penguin Press, 2020), p. 39. 6. Republic of Korea Ministry of Trade, Industry Energy and September 24th, 2019. 7. Chosun Biz, April 22th, 2022. 8. NewSIS, May 4th, 2022, https://newsis.com/view/?id=NISX20220504_ 0001859150&cID=13001&pID=13000, accessed May 9th, 2022. 9. Interview with Ambassador Pou Sothirak, the former Cambodian Minister, Parliament Member, Ambassador to Japan, June 11th, 2019. 10. Interview with one anonymous KOGAS high ranking official, October 3rd, 2018, St. Petersburgh, Russia. 11. Interview with Lee Sung Kyu, Korea Energy Economics Institute (KEEI), May 5th, 2022. 12. Chris Isidore, CNN, “Who Own the Colonial Pipeline? It’s Complicated,” May 12th, 2021, on https://edition.cnn.com/2021/05/12/investing/ colonial-pipeline-ownership/index.html, accessed May 28th, 2022. 13. “Korean Fund Buys Stakes in Colonial Pipeline,” October 12th, 2010, https://www.ft.com/content/88d92166-d596-11df-8e86-00144f eabdc0, accessed May 28th, 2022.

CHAPTER 8

Energy Alliance Between Canada and South Korea: Canadian Oil Sands Cooperation

Energy Potentials of Canada Canada possesses a great amount of natural resources and is considered one of the world’s largest oil and natural gas producing and exporting nations. Canada was ranked the fifth-largest energy producer in the world in 2000, behind the U.S., Russia, China, and Saudi Arabia. Over the past two decades, Canada has become a significant net energy exporter. Canada is a net exporter of oil, natural gas, coal, uranium, and hydropower. In 2005, Canada produced 19.1 quadrillion British Thermal Units (Btu) of total energy, the fifth-largest amount in the world. Since 1980, Canada’s total energy production has increased by 86%, while its total energy consumption has increased by only 48% during that period. It is also one of the most important sources of US energy imports. Almost all of Canada’s energy exports go to the U.S., making it the largest foreign source of US energy imports: Canada is consistently among the top sources for US oil imports, and it is the largest source of US natural gas and electricity imports. Recognizing the importance of the energy trade between the two countries, both participate in the North American Energy Working Group, which seeks to improve energy integration and cooperation between Canada, the U.S., and Mexico.1 In 2000, for example, about 30% of Canadian energy production was exported, with the U.S. by far its main customer. From January through August 2002, © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 S. H. Ahn, Power Struggles, https://doi.org/10.1007/978-981-19-5474-0_8

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the U.S. imported more oil (including crude oil and petroleum products) from Canada than from any other country. The U.S. also imported about 2.2 tcf of Canadian natural gas in the first seven months of 2002, with 93% of total US gas imports coming from Canada2 (Fig. 8.1). In 2005, as Fig. 8.2 indicates, the largest source of energy consumption in Canada was oil (31%), followed by hydroelectricity (25%) and natural gas (24%). Both coal (12%) and nuclear (7%) constitute a smaller share of the country’s overall energy mix. From 1985–2005, Canada’s overall energy mix has remained relatively stable, though hydroelectricity has decreased from 31 to 25%. In 2000, about 36% of Canada’s primary energy production was natural gas, followed by oil (23%), hydropower (20%), coal (11%), and

Fig. 8.1 The Map of Canada

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Fig. 8.2 Total energy consumption in Canada (2021) (Source International Energy Annual 2005)

nuclear power (4%). Over two-thirds of Canada’s energy is produced in the province of Alberta. Besides being a major producer, Canada is also a significant energy consumer and a member of the International Energy Agency (IEA). Canada was the world’s fifth-largest energy consumer in 2000, roughly on par with India in terms of total energy consumption. Canada has the highest energy intensity of any OECD country. Canada’s total oil production (including all liquids) was 3.36 million bbl/d in 2007. The country’s oil production has steadily increased as new oil sands and offshore projects have come onstream to replace aging fields in the western province. Overall, EIA predicts that oil sands production will increase even further in coming years and more than offset the decline in Canada’s conventional crude oil production: according to the

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May 2008 Short Term Energy Outlook, EIA expects Canadian oil production to increase to 3.42 million bbl/d in 2008 and 3.59 million bbl/d in 2009. Canada consumed an estimated 2.34 million bbl/d of oil in 2007. The country sends over 99% of its oil exports to the U.S., and it is consistently one of the top three sources of US oil imports.3 Oil Canada has proven conventional oil reserves of 4.9 bn barrels, as of January 2002, a 152-mm-barrel increase over January 2001 reserves. Oil production averaged 2.9 mm bpd during 2002, with estimated consumption of 2.0 mm bpd. The province of Alberta, located in Western Canada, is by far the country’s leading oil producing region. While Alberta’s light oil reserves are declining (the province now contains an estimated 45% of the country’s total light oil reserves), the province also contains huge oil sands deposits. Meanwhile, projects and potential projects in other provinces are shifting the oil industry’s focus to include the eastern and northern parts of the country. Canada is a major source of US oil imports. From January through August 2002, the U.S. imported 1.89 mm bpd of oil from Canada (1.39 mm bpd of which was crude oil). This makes Canada the top petroleum supplier to the U.S. and the third-largest supplier of crude oil imports (behind Saudi Arabia and Mexico, and ahead of Venezuela). Canada has been the top supplier to the U.S. of refined petroleum products, including gasoline, jet fuel, distillate, etc., over the past few years. Oil Sector Organization & Trends Canada has a privatized oil sector that has witnessed consolidation in recent years. The largest integrated operator in the country is Imperial Oil, majority owned by ExxonMobil. Canada’s oil sector has seen also significant mergers and acquisitions in recent years, with US firms purchasing over $ 35 bn in Canadian oil and gas assets during 2001. In July 2001, Houston-based Conoco purchased Gulf Canada for $ 8.9 bn, marking the largest oil and gas deal in Canadian history. In October 2001, Devon Energy (US) acquired Canada’s Anderson Exploration for $ 7.1 bn. In December, 2001, Burlington Resources (US) purchased Canada’s Canadian Hunter Resources for $ 3.4 bn. In addition, Canadian firms

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also have been busy reorganizing the country’s oil patch. In April 2002, two of Canada’s largest companies, Alberta Energy and PanCanadian, also merged to create EnCana, the world’s largest independent oil and natural gas producer (by market value). Other significant oil producers in Canada include Exxon’s Imperial Oil, Shell’s Shell Canada, Petro-Canada, Talisman Energy, Suncor, EOG Resources, Husky Energy, and Apache Canada.4 Canada’s oil sands producers have also attracted increasing attention from Asian oil companies, seeking to satisfy growing demand in their countries and secure equity oil stakes. In July 2006, state-run Korea National Oil Corporation (KNOC) purchased the BlackGold bitumen deposit from Newmont for $250 million; BlackGold contains an estimated 250 million barrels of crude oil, and KNOC plans to bring 35,000 bbl/d of production onstream at the site by 2010. China’s Sinopec earlier purchased a 40% stake in the Syneco’s Northern Lights oil sands project, which Syneco plans to bring online in 2010 at a production rate of 100,000 bbl/d. In addition, the China National Offshore Oil Corporation (CNOOC) holds a stake in MEG Energy, a subsidiary of EnCana that operates the Christina Lake project. In 2007, the Chinese National Petroleum company (CNPC) won exploration rights for a 260-acre tract in Alberta5 (Fig. 8.3).

Fig. 8.3 Top Western hemisphere oil producers, 2007 (Source EIA International petroleum monthly)

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Exploration and Production Western Canada, and more specifically Alberta, remains the premier energy producing region in Canada. The Western Canadian Sedimentary Basin, underlying Alberta, Saskatchewan, and part of the Northwest Territories, has been the main source of Canadian oil production for the past 50 years. An estimated 60% of conventional oil production in 2000 came from Alberta. However, conventional oil production has been declining in the West as it has been rising in the East in the last few years. Exploration and production activity on Canada’s east coast is focused on the Jeanne d’Arc Basin, offshore Newfoundland. The climate demands technologically advanced offshore oil platforms, able to withstand extremely cold temperatures and high winds, which add to production costs. Canadian oil production comes mainly from three sources: the Western Canada Sedimentary Basin (WCSB); the oil sands deposits of Northern Alberta; and offshore fields in the Atlantic Ocean. Alberta contains the largest share of Canada’s oil production, as it holds the majority of oil sands deposits and the bulk of the WCSB. According to Statistics Canada, Alberta represented 68% of Canada’s national oil production in 2007.6 Western Canada Sedimentary Basin The WCSB, underlying most of Alberta and parts of British Columbia, Saskatchewan, Manitoba and the Northwest Territories, has been the main source of Canadian oil production for the past 50 years. The age of many of the fields, though, has led to a steady decline in conventional oil production in the WCSB. Analysts predict that oil sands will supplant conventional sources as the focus of future oil production in Western Canada. Conventional crude oil production in the WCSB represents around 38% of Canada’s total crude oil production, down from 65% in 1999. Offshore Canada has three oil projects off its Atlantic coastline, all located in the Jeanne d’Arc Basin: Hibernia (135,000 bbl/d, PetroCanada), Terra Nova (116,000 bbl/d, PetroCanada), and White Rose (117,000 bbl/d, Husky). The basin has seen an increase in investment plans in recent years,

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with both White Rose and Hibernia announcing plans to expand production by incorporating satellite fields. Outside of the Jeanne d’Arc Basin, StatoilHydro announced in 2008 that it would begin a drilling program at the Mizzen field in the Flemish Pass basin. Chevron signed a MOU with the provincial government in 2007 to develop the Hebron-Ben Nevis field, which could hold recoverable reserves of 700 million barrels. Operators at the Atlantic oil fields must contend with harsh natural conditions, including rough seas, seasonal icebergs, and extreme temperatures. These factors increase the difficulty and costs of oil production in the region. Off the Pacific coast, industry experts believe that there could be sizable oil and natural gas reserves. However, there has been no production to date there, because of a federal ban on offshore oil activities in the Pacific Ocean.7 Pipelines Although most Canadian oil is produced in Western Canada (mainly Alberta), oil is consumed primarily in Central and Eastern Canada. As a result, Canada exports mostly crude oil from Alberta and imports crude oil and petroleum products on the east coast, explaining why Canada exports approximately 1.89 mm bpd (gross) to the U.S., but net exports are slightly lower (1.78 mm bpd). Domestic System An extensive pipeline system transports Western Canadian oil to domestic and US markets. There are two major oil pipeline operators in Canada: Enbridge Pipelines and Kinder Morgan Canada (formerly Terasen). Enbridge operates a 9,000-mile network of pipelines and terminals, delivering oil from Edmonton, Alberta, to Eastern Canada and the US Great Lakes region. Kinder Morgan operates the Trans Mountain Pipe Line (TMPL), which delivers oil mainly from Alberta west to refineries and terminals in the Vancouver, British Columbia area. The expansion of Alberta’s oil sands industry has necessitated the construction of several new pipelines to transport diluted bitumen and synthetic crude to downstream facilities in the Edmonton area.

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Export Pipelines Canada has extensive oil pipeline connections with the U.S. . Enbridge maintains connections between major Canadian cities and Chicago, integrating the Canadian and US components of its network. Enbridge also operates Spearhead, a 650-mile pipeline with a capacity of 125,000-bbl/d that links Chicago with Cushing, Oklahoma; originally carrying oil from Cushing to Chicago, Enbridge received regulatory approval in late 2004 to reverse the flow of the pipeline, allowing it to export oil from Canada deeper into the US market. Kinder Morgan exports oil to the U.S. through an extension of the TMPL that reaches Northern Washington. It also operates Express, a 790-mile, 170,000-bbl/d pipeline that links Hardisty, Alberta and Casper, Wyoming; from Casper, the company’s 930-mile, 120,000-bbl/d Platte pipeline runs to Wood River, Illinois. Any increase in oil sands production will require additional pipeline capacity to take that production to world markets. Along with expanding existing trunk lines, Enbridge has proposed a new pipeline linking the Chicago area with the US Gulf Coast, which would allow oil sands producers greater access to the large concentration of refineries there. Enbridge has floated plans for the construction of the 720-mile, 400,000bbl/d Gateway pipeline from Edmonton to Kitimat, a deepwater port in British Columbia capable of supporting very large crude carriers (VLCC). The Gateway pipeline would facilitate the export of oil sands to Asia and California. Kinder Morgan has discussed plans to build a similar pipeline or upgrade the capacity of the TMPL. Import Pipelines Enbridge has proposed construction of the Southern Lights pipeline, which would transport 180,000 bbl/d of light hydrocarbons from Chicago to Edmonton. Oil sands operators in Alberta rely on these hydrocarbons to dilute bitumen so that it can flow through pipelines. Currently, the largest source of diluents comes from natural gas liquids, however the prospects of declining Canadian natural gas production mean that Alberta could face a diluents crunch without additional supplies. Oil Exports and Imports In 2007, Canada exported 2.4 million bbl/d of crude oil and refined products to the U.S., the single-largest source of US oil imports. The largest share of US-bound Canadian oil exports go to the Midwest (PAD

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District II), followed by the Rocky Mountains (PAD District IV). The bulk of Canadian exports to the U.S. have traditionally gone to PAD Districts II, because this area is well connected to Alberta by oil pipelines and not well served by coastal import terminals in the U.S.8

Canadian Oil Sands Second only to the Saudi Arabia reserves, Alberta’s oil sands deposits are described as “Canada’s greatest buried energy treasure,” and could satisfy the world’s demand for petroleum for the next century. They are contained in three major areas beneath 140,200* square kilometers of Northeastern Alberta—an area larger than the state of Florida, an area twice the size of New Brunswick, more than four and half times the size of Vancouver Island, and 26 times larger than Prince Edward Island. However, only about two percent of the initial established resource has been produced to date. Oil sands contain deposits of bitumen, a heavy, viscous oil. There are two methods currently used to extract bitumen from the ground: open-pit mining and in situ (“in place”). Open-pit mining resembles conventional mining techniques and is effective in extracting oil sands deposits near the surface. However, the bulk of Canada’s estimated oil sands deposits (80%) are too deep below the surface to use open-pit mining. The second method, in situ, can reach these deeper deposits. In situ extraction involves the use of steam to separate bitumen from the surrounding sands and lift it to collection pools near the surface. To date, Canadian oil sands producers have employed each method almost equally, but future production will likely shift to emphasize in situ extraction. Once extracted, oil sands producers must add lighter hydrocarbons to the bitumen to allow it to flow through pipelines. Upgraders then process most of the bitumen into “synthetic crude,” which can then be sold to a traditional oil refinery, though some bitumen is also sold in raw form for the production of heavy products like tar and asphalt. Some oil sands projects have integrated upgrading capacity, while others must send their raw bitumen production to another facility. In 2007, oil sands production represented approximately half of Canada’s total crude oil production. The Athabasca oil sands deposit in Northern Alberta is one of largest oil sands deposits in the world. There are also sizable oil sands deposits on Melville Island in the Canadian

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Arctic, and two smaller deposits in Northern Alberta near Cold Lake and Peace River. The largest oil sands projects in the Athabasca area utilize open pit mining. The Syncrude Project, operated by Canadian Oil Sands Limited, produced 258,000 bbl/d of synthetic crude in 2006. Suncor operates another large open pit mining project in Alberta, which produced 236,000 bbl/d of crude oil in 2007. Finally, the Athabasca Oil Sands Project (AOSP), operated by Shell Canada, began production in 2002 and currently has a capacity of 155,000 bbl/d. AOSP utilizes a facility adjacent to Shell’s Scotford refinery to upgrade raw bitumen produced by the project. The in situ oil sands projects in the Athabasca area are smaller than their mining counterparts. In 2004, Suncor began operations at its Firebag project, which utilizes a relatively new in situ technology called steam-assisted gravity drainage (SAGD). Other SAGD projects include Petro-Canada’s MacKay River and Dover; EnCana’s Foster Creek and Christina Lake; and Nexen’s Athabasca and Long Lake. Petro-Canada’s Dover facility also contains a demonstration project of a new in situ technology called vapor extraction (VAPEX). VAPEX utilizes solvents, such as butane, to extract raw bitumen, rather than steam; VAPEX could allow significant cost savings for in situ operators, since the operators can re-use most of the solvents. Outside of the Athabasca deposit, the largest oil sands project is Imperial Oil’s Cold Lake in situ facility, with a capacity of 150,000 bbl/d. Also in the Cold Lake area, CNRL operates Primrose, while Husky operates the Tucker project. In the Peace River deposit, Shell Canada operates Cadotte Lake (11,000 bbl/d). Despite the excitement surrounding the development of Canada’s oil sands reserves, there are still several difficulties that could impede the future development of the industry. Analysts predict that the production of synthetic crude from oil sands is only economically viable with relatively high crude oil prices. While further advances in oil sands technology could reduce production costs, it is likely that synthetic oil production will continue to be dependent upon high crude oil prices. Second, the oil sands industry is heavily reliant upon water and natural gas, which is necessary in both the extraction of bitumen from oil sands and the upgrading of bitumen to synthetic oil. Even though there have been some efforts to reduce this dependence on natural gas, any increase in natural gas prices or sharp reduction in natural gas supply would have

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critical repercussions for the oil sands industry. Newer technologies could reduce the need for natural gas, such as the aforementioned VAPEX in situ process. Another technique in development is called toe-to-heel air injection (THAI), where bitumen is ignited in the ground to warm the reserves, then pumped with horizontal wells. Finally, there has been some discussion of the potential of using nuclear power plants to provide energy for steam generation, though no one has developed any concrete plans to implement this approach. In any event, water or natural gas constraints in the area put downward pressure on any forecast of future oil sands production (see below). Finally, there are reports that the oil sands boom is creating a labor shortage in Alberta’s oil industry, especially in Fort McMurray. This has led to an escalation in labor costs and construction delays due to a lack of available workers. Several companies planning or developing oil sands projects have significantly increased their cost estimates due to rising prices for labor, materials, and support services. In 2005, Shell Canada announced that the planned costs for its proposed 100,000-bbl/d expansion of the AOSP project had increased from C$4 billion to C$7 billion; in 2006, Western Oil Sands, a stakeholder in the AOSP project, warned that these costs could rise even further to C$11 billion. Along with labor issues, oil sands projects must also face the challenges of the generally tight global market for industrial goods and engineering services. Even considering these concerns, most forecasts of world oil markets estimate that Canadian oil sands will become an increasingly important component of world oil supply. EIA’s International Energy Outlook 2006 (IEO) estimates that Canadian oil sands operators will produce 3.6 million bbl/d by 2030. In fact, much of the exploration in Alberta in coming years likely will be for heavy crude and oil sands, as conventional oil reserves are being depleted. Unlike conventional oil, oil sands contain a mixture of bitumen, sand, water, and clay. Bitumen, which is a thick and tar-like hydrocarbon, surrounds the sand and water. To develop oil sands, bitumen is separated from the sand, water and clay. Once separated, bitumen can be upgraded into a high-quality oil called “synthetic crude.” One of the largest synthetic crude producers, Syncrude (a joint venture of Alberta Energy, Canadian Oil Sands Investments, Conoco, Imperial, Mocal Energy, Murphy Oil, Nexen, and PetroCanada), reported an average production cost of about $ 11.50 per barrel in 2001.

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Canada holds between 1.7 and 2.5 tons barrels of oil sands. The Athabasca Oil Sands deposit, in Northern Alberta, is one of the two largest oil sands deposits in the world (the other is in the Orinoco Belt, Venezuela). There are also oil sands deposits on Melville Island, in the Canadian Arctic, and there are three smaller deposits in Northern Alberta. Current output of synthetic crude and bitumen is estimated at 600,000 bpd. A new oil sands project, the Muskeg River Mine, located on the Athabasca oil sands and operated by Shell Canada, Western Oil Sands, and Chevron Canada, is scheduled to begin production in early 2003. The Muskeg River mine will produce an additional 155,000 bpd. Construction also is nearing completion at Petro-Canada’s MacKay River oil sands project. Petro-Canada expects production of 30,000 bpd in 2003. According to the Canadian government, synthetic oil and bitumen production is expected to reach 1.2 mm bpd by 2010. There have been four epochs of development of Canada’s oil sands. Exploration Phase: 1700 to 1919. Scientific Phase: 1920 to 1929. Testing Phase: 1930 to 1959. Commercialization Phase: 1960 to 1997.9 Alberta Energy appears to be quite attractive because of the responsible development of these extensive deposits through planning and liaison with government, industry, and communities to ensure a competitive royalty regime that is attractive to investors, appropriate regulations and environmental protection and the management of Crown rights to oil sands while taking into account some of the barriers—higher technological risk and higher capital costs—faced by oil sands developers. Alberta’s oil sands industry was possible due to multi-billion-dollar investments in infrastructure and technology required to develop the non-conventional resource. According to the Canadian Association of Petroleum Producers (CAPP), in 2006 industry investment in Alberta’s oil sands reached approximately $14 billion. In 2006, Alberta’s oil sands were the source of about 62% of the province’s total crude oil and equivalent production and about 47% of all crude oil and equivalent produced in Canada. Over the last four fiscal years, from 2003/2004 to 2006/2007, oil sands development returned

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$4.276 billion to Albertans in the form of royalties paid to the provincial government.10 Annual oil sands production is growing steadily as the industry matures. Output of marketable oil sands production increased to 1.126 million barrels per day (bbl/d) in 2006. With anticipated growth, this level of production could reach 3 million barrels per day by 2020 and possibly even 5 million barrels per day by 2030. This degree of activity would support the development of other key industries and see Alberta become a Global Energy Leader.11 Development of Alberta’s oil sands resources represents a triumph of technological innovation. Over the years, government and industry have worked together to find innovative and economic ways to extract and process the oil sands and energy research is more important today than ever before. Working through the Alberta Energy Research Institute, the Alberta government is committed to a collaborative approach to spur new technology and innovation programs that will reduce the impact of greenhouse gases and other emissions and reduce the consumption of water and gas. Important Factors for Oil Sands Crude Oil Prices By far, the most important factor in the profitability equation is the price of the conventional crude oil. Low prices have historically indicated excess supply, low demand or both and made it extremely difficult for oil sands producers to breakeven. However, the high price environment up to the middle of 2008 is excellent for the development of Canada’s oil sands and their profitability. The uptrend is a result of growing global demand, depletion of existing reserves and a lack of growth in new oil supplies.12 Natural Gas Prices Natural gas use is a major cost for oil sands producers. Natural gas is used to heat up the water that is used to separate the bitumen from the oil sands in mining projects. It is also used in the upgrading process to convert the bitumen to synthetic crude oil. For in situ projects, natural gas is used to create steam that is directly injected in the reservoir to lower the viscosity of the bitumen. In short the cost of natural gas is one of the largest variable costs. Companies that can use natural gas more efficiently or can eliminate the use of natural gas in the production of Canada’s oil

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sands will have a significant cost advantage in the future. Natural gas is the largest operating expense for in situ oil sands projects, representing 60% of all operating costs. Mining operations use far less natural gas but it still represents 15% of total operating costs.13

South Korea’s Involvement in Alberta’s Oil Sands South Korea has been hunting for investment opportunities in Alberta’s oil sands to improve its security of supply since 2000. The Alberta government had assisted KNOC since 2000 to explore investment options in the oil sands, where recoverable reserves are estimated at 300 bn barrels. From the beginning, KNOC had no interest in owning shares in an oil sands producer. KNOC pursued direct working interest position, with a partner than has the technological capabilities. Meanwhile other Asian countries had also shown interest in the oil sands, following the lead of Japan Canada Oil Sands Limited which is developing a C$ 150 mm project in Northern Alberta to produce 10,000 bpd by 2005. The Hangingstone venture is owned 66.9% by state-owned Japan National Oil Corp., 6.2% by Japan Petroleum Exploration Co. and 26.9% by 70 Japanese companies.14 In July 2006, South Korea signed a deal to purchase a 100% stake in an oil sands mine in Canada that can produce 250 mm barrels of oil. It said the estimated size of the Blackgold Mine in the Cold Lake region of Alberta will allow South Korea to extract 30,000–35,000 barrels of oil per day for the next 25 years. Hwang Doo-yul, CEO of state-run Korea National Oil Corp. (KNOC), and Geoff Waterman, vice president of Newmont Mining of Canada, signed the deal in Seoul. The Canadian company is an affiliate of US-based Newmont Mining Corp., the world’s largest gold producer. The South Korean firm was expected to begin production in 2008, with full-scale operations to commence two years later. KNOC paid $ 270 mm for the mining rights and expects annual sales to reach $ 500 mm once full-scale production commences. Oil sands, also referred to as tar or bituminous sands, are deposits of bitumen trapped in a mixture of clay, sand, and water. They are in essence sand or sandstone containing at least 10% petroleum. There are estimated to be 175 bn barrels of petroleum that can be extracted from oil sands mines around the world, with Canada having the world’s second-largest reserve of oil sands after Venezuela. Canada, which has

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most of its oil sands mines in the Peace River, Cold Lake, and Athabasca regions of Alberta, can churn out 4.7 bn barrels of oil on an annual basis. The ministry said once production begins, the country’s oil output self-sufficiency level could be raised by around 1.2%. South Korea currently produces 115,000 barrels of oil daily from local and overseas oil fields. Seoul wants to raise the self-sufficiency level from around 4% at present to 18% in 2013.15 In March 2008, Korea National Oil Corp. (KNOC) had let a contract to IMV Projects, part of John Wood Group, for front-end engineering and design of a 10,000-bpd heavy oil development in Northern Alberta. The steam-assisted gravity drainage project is on the BlackGold oil sands lease, which KNOC acquired from Newmont Mining Corp. in August 2006. The 39-sq-km lease is 140 km southeast of Fort McMurray. Through year end 2007, KNOC had drilled 18 holes for core analysis, acquired 23 sq km of 3D seismic data, and drilled two water-supply wells. KNOC plans eventually to produce 30,000 bpd from the lease. It estimates BlackGold holds more than 200 mm bbl of recoverable bitumen.

Limitation of Canadian Oil Sands Developments Recently, energy companies are cutting back development of Canadian oil sands, as crude prices plunge and processing costs become prohibitive. Royal Dutch Shell, the world’s second-largest oil company, and Calgarybased Suncor Energy and EnCana stated that they would reduce plans to extract bitumen, the tar-like raw material for the crude, after prices fell 65% to $ 37.07 a barrel since July 4, 2008. The Canadian Association of Petroleum Producers also reduced its forecast for spending next year by 20% to C$ 16 bn ($ 13.6 bn). Moreover, in June 2008, the trade group announced that companies would spend C$ 126 bn over the next five years on pipelines, mines, and upgrading plants as record oil prices made the Canadian reserves in Alberta increasingly lucrative. The figure has now been chopped to about C$ 80 bn, Greg Stringham, a vice president at the association, said on November 7, 2008. “Because of the economic uncertainty and turmoil that’s out there right now, both the availability of capital and the lower pricing, people are waiting to see how long and how deep that is going to be,’” Stringham said.16

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Companies can get oil from processing bitumen dug from mines or coaxed from the ground using steam. It takes two tons of oil sands to make one barrel of oil. Oil sands projects will be profitable if crude is priced at $ 95 to $ 100 per barrel in coming decades. Bitumen can be tapped at existing projects for roughly $ 40 a barrel. The oil sands oil typically tends to be the most expensive barrel to produce.17 Oil Demand Crunched The Cold Lake blend must go through an upgrading process, adding C$ 20 to C$ 25 to the cost of the product that goes to refineries. Oil prices fell as the global credit crunch that forced financial companies to report $ 688 bn in losses and write-downs since the start of 2007 caused the world economy to slow. The cooling economy will cut global oil demand for the first time in a quarter of a century next year, Wood Mackenzie Consultants stated on November 6, 2008 Oil demand in the U.S., the oil sands only export customer, will slump 830,000 bpd, or 4.3% this year from 2007 to 19.8 mm bpd, the Energy Department predicted October 7. EnCana cited financial market uncertainty on October 15 when it delayed a plan to spin off Cenovus Energy, which was formed to manage oil sands projects in Alberta and US refineries. Closely held Value Creation, based in Calgary, stopped work on a C$ 4 bn upgrader, which separates bitumen from sands and converts it to heavy oil, because of financing, Gerry Gabinet, director of economic development in Strathcona County Alberta where the upgrader was planned, said on September 25, 2008. EnCana, Imperial, Suncor Oslo-based StatoilHydro, Norway’s largest oil company, said August 11, 2008 that it may postpone the start of its oil sands upgrader. Bruce March, chief executive officer for Imperial, which is 70%-owned by ExxonMobil, said August 6 the company is deciding whether to proceed with the Kearl oil sands project, citing rising costs of development. Suncor announced on October 23, 2008 it would cut back on construction at its Voyageur oil sands project in Northern Alberta because of tumbling crude prices and will focus on another site. The same day,

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Petro-Canada and UTS Energy, based in Calgary said they may postpone an oil sands processing facility near Edmonton. A week later, Shell said it would delay an investment decision on expanding its Athabasca oil sands project because of construction costs. The company, based in The Hague, said it will press ahead with the first phase of the project.18 Environmental Problems The US policies that discourage fuel purchases from heavy-polluting sources are further reducing incentives to exploit oil sands. The crude creates three times more greenhouse gases than conventional wells, and a US law enacted in December bans federal agencies from buying fuels that cause more emissions than alternatives. Oil sands mines along the Athabasca River near Fort McMurray, Alberta, can be 80 m (262 feet) deep and claimed almost 500 sq km (311 sq miles) of forest. They have created bitumen and clay-laden ponds with an oily sheen of gray and green hues that have killed scores of birds. Oil sands hold the equivalent of 173 bn barrels, enough to supply the U.S. for 24 years. Only Saudi Arabia has more crude. Producers are trying to get pipelines built that would take the oil to millions more consumers by allowing shipments to Asia and to the US Gulf Coast, home to 47% of the nation’s refining capacity, according to US Energy Department data. A line sponsored by Enbridge to the British Columbia coast may not be built before 2014, Pat Daniel, the company’s chief executive officer, said in a conference call to analysts July 31. Two conduits to Texas cosponsored by Enbridge, one with ExxonMobil and another with BP, won’t be ready until 2012 at the earliest, Enbridge said in separate August statements.19

Implications The oil sands still represent the largest investment opportunity in the global energy sector to date. Of the total proven reserves of 174 billion barrels, only 3% has been produced to date. In comparison, most oil producing regions are past their prime production periods and are facing declines in their conventional oil production. Moreover, Canada and the province of Alberta have implemented investor friendly tax and royalty regimes to encourage the rapid development and exploitation of the oil sands resource. Despite massive

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investment and the four decades long development, only 20% of all oil sands leases have been acquired so far. This means that future investment chances for South Korean companies or government sectors are still immense. South Korea must bear in mind that Canada is one of the most geopolitically stable countries in the world and has existing trading relationships and closest proximity to the largest importer of oil. The majority of the world’s excess oil production and reserves are in politically and economically unstable regions such as Caspian Sea, Middle East, or Africa. Perhaps, besides oil sand issue, other possible energy cooperation between Canada and South Korea also include establishment of joint R&D type project on the environmentally sustainable renewable energy. In fact, renewable energy sources, such as wind, solar energy, and bio mass are beginning to gain more attention as Canada works toward meeting international obligations to reduce greenhouse gas emissions. President Lee Myong Bak’s Green Energy Revolution project and the Canadian experience for the strong existing infrastructure for renewable energy technology would be substantially a good mutual stepping stone to enhance further energy cooperation between the two countries.

Notes 1. Energy Information Administration (EIAI), on http://www.eia.doe.gov/ emeu/cabs/Canada/Background.html, accessed on 8 March, 2009. 2. Energy Information Administration (EIA), Country Energy Analysis: Canada, 19 December, 2002. 3. EIA, on http://www.eia.doe.gov/cabs/Canada/Oil.html, accessed on 6 March, 2009. 4. Energy Information Administration (EIA), Country Energy Analysis: Canada, 19 December, 2002. 5. EIA, on http://www.eia.doe.gov/cabs/Canada/Oil.html, accessed on 6 March, 2009. 6. Ibid. 7. Ibid. 8. EIA, on http://www.eia.doe.gov/cabs/Canada/Oil.html, accessed on 6 March, 2009. 9. Gates, Derek S. The Canadian Oil Sands Investors’ Guide, (Victoria:Trafford Publishing, 2006), p. 11. 10. Alberta Energy: Oil Sands, on http://www.energy.gov.ab.ca/oilsands/oil sands.asp, accessed on March 1, 2009. 11. Ibid. 12. Gates, pp. 28–29.

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13. Gates, pp. 29–30. 14. “South Korea is looking to invest in Alberta’s oil sands,” Energy 24, March 20, 2001. 15. The Korea times, July 27, 2006. 16. http://www.bloomberg.com, November 11, 2008. 17. Ibid. 18. Ibid. 19. Ibid.

CHAPTER 9

World Chokepoint

Definition World renown oil and gas reserves are not the only important element of today’s energy security. Energy transportation hot spots which can quickly cut off energy supplies are considered to be equally or even more important energy security caveats these days. For energy chokepoints are naturally vulnerable to all kinds of attacks and accidents. In particular, global energy security and market are genetically related to maritime security. For water has been the major huddle for the energy transfer throughout the world. One of the key component of today’s energy security is the safety of energy route and the maintenance of cheap transportation cost. In this regard, the story of energy chokepoints revisits the important nexus between the maritime security and energy security. Global energy markets depend on the safety of reliable energy transport routes. Blocking a chokepoint can increase total energy costs and world energy prices. World energy chokepoints also leave oil and gas tankers vulnerable to pirates and terrorist attacks, shipping accidents that can cause environmental disasters, and political unrest in the form of wars or hostilities. Also energy chokepoints are also embroiled with all kinds of economic sanctions and political lobbying activities within energy politics. Therefore, this chapter seeks to explore distinct features of 6 different world energy chokepoints and also explains the political economic implications of energy chokepoints. © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 S. H. Ahn, Power Struggles, https://doi.org/10.1007/978-981-19-5474-0_9

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Energy Security needs to be considered not just in terms of energy transaction itself but also in terms of the security of the supply chain including transit infrastructure and sea transportation routes. The infrastructure and sea routes were built over many decades and already became the key element of international security. And being the agenda of energy security itself, the vulnerabilities of these supply chain take many forms, from outright hostile assaults, wars, sanctions, resource nationalism to the kind of small events that can affect a global energy price.1 In particular, most energy trade happens in the international water and the security of the supply chain is vitally important and urgent. Thus international chokepoints along the sea routes create particular vulnerabilities for the transport of oil and LNG, in the form of accidents, terrorist or pirate attacks, war, or other political reasons. There are several known world chokepoints that can quickly cut off oil and gas supplies. Also these chokepoints need to be updated and added according to the current landscape of international political economy and international security. The concept of chokepoint is strictly military term. Chokepoint can defined as a geographical feature on land such as a valley, defile or a bridge, or at sea such as a strait which an armed force is forced to pass, sometimes on a substantially narrower front. From the strategic point of view, the importance of chokepoint are twofold: (1) decreases its combat power; (2) a chokepoint can allow a numerically inferior defending force to successfully defeat a larger opponent. Chokepoint appeared to be very attractive for terrorists, pirates, and other offending groups.2 International energy markets depend on reliable transport routes. Approximately, 63% of world’s oil production move on maritime routes every year. Blocking a chokepoint can increase energy costs both directly and indirectly. This means that perceptions and the interaction of “wet barrel” and “paper barrel” markets play a major role in determining price level and volatility as a result of disruption of a chokepoint. As discussed previously, the following threats include terrorist and pirates attack, political crisis, war, armed conflict, and shipping accident. And, in traditional sense, the two world energy chokepoints, Strait of Hormuz and the Strait of Malacca account for a combined 57% of all oil sea routes before the US shale revolution took place. From the East Asian perspective, we need to pay close attention to the following four well-known international chokepoints: Strait of Malacca, Panama Canal, Strait of Hormuz, and Greater Mekong Sub-region.

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Strait of Malacca This waterway connects the Indian Ocean with the South China Sea and the Pacific Ocean. Oil and LNG pass through Malacca to South Korea, Japan, China, and other Asian countries. The five- hundred mile long, narrow, and constricted passage between Malaysia and the Indonesian island of Sumatra that funnels in from the Indian Ocean, curves up around Singapore, and then widens out into the South China Sea. At its most narrow, it is only 40 miles in width. It is reported that two-thirds of internationally traded LNG—and half of all of world trade, passed through Malacca in the 2010s: Crude oil (90%) + Petroleum products (10%)80% of Japan’s and South Korea’s oil + 40% of China’s total supply used to pass this chokepoint. But again, with the US shale revolution, the US LNG and crude oil, and Australian LNG that was destined for South Korea and Japan do not travel through this chokepoint, whereas Malacca is still crucially important to China. Piracy is a problem in the strait, between Peninsular Malaysia and Indonesia’s Sumatra island, through which most of China’s crude oil imports pass from the Middle East and Africa. Speaking of piracy, it is interesting to point out that there are some fundamental differences between Somalia pirates and Malacca pirates. Somalia pirates tend to be more brazen, bold, and audacious: they normally attack in daylight with well-armed automatic weapons. They intimidate the target vessels such as LNG ships or oil tankers and its crew for ransom. In contrast, Malacca pirates operate mostly secretly under cover of darkness with the robbers. Most attacks are on vessels at anchor or in port where security may be loose. Also, Somalia pirates are very well organized and has ability to operate far offshore. They sometimes operate more than 200 nautical miles to sea, using mother ships strategy. In contrast, Malacca pirates are less organized, being generally small-time robbers and petty criminals. Their range of operations is quite limited. Firearms are not often used and the weapons of choice are generally knives and machetes. The October 2002 bombing of a nightclub on the Indonesian Island of Bali raised international concerns.3 • Alternatives: if blocked, approximately half of the world’s fleet reroute

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• Rerouting options: Indonesian archipelago: (1)the Lombok Strait between the Indonesian islands of Bali and Lombok (2) the Sunda Strait between Java and Sumatra • Bypass options: Myanmar-China natural gas pipeline in 2013: stretches from Myanmar’s ports in the Bay of Bengal to the Yunnan province of China. (424 bcf per year)

Strait of Hormuz This chokepoint connects the Persian Gulf with the Gulf of Oman and Arabian Sea. It has been considered the world’s most important chokepoint. A great amount of oil and gas travel through this waterway for Northeast Asian countries, the U.S. and Western Europe. 17 million barrels of oil passed this strait every day and 30% of all seaborne traded oil and 85% of the passed crude oil went to Asian markets in the 2010s. Nonetheless, after US shale revolution, the strategic importance of this chokepoint diminished significantly, compared with pre-2010 period. However, not the U.S., China would be still very keen on the development of this area because the U.S. is no more relying on the Middle Eastern energy. Moreover, South Korea and Japan also import significant amount of crude oil and LNG from the U.S., not through Hormuz. Meanwhile, of Hormuz is disturbed, there are several alternatives. The first one is 746-mile Petroline, that is also called, the East–West Pipeline which runs across Saudi Arabia from its Abqaiq complex to the Red Sea. There are two pipelines: the 45 inch pipeline has a nameplate capacity of 3 million barrels per day; and the other one is 48 inch natural gas pipeline. This pipeline is also called the Abqaiq-Yanbu natural gas pipeline. There are other alternatives: The UAE: the Abu Dhabi Crude Oil Pipeline (1.5 million bbl/d) that runs from Habshan to the port of Fujariah on the Gulf of Oman [transport more than half of UAE’s total net oil exports & plan to increase the capacity to 1.8 million bbl/d.] The 1.65 million bb/d, 48-inch Iraqi Pipeline in Saudi Arabia (IPSA): 1989, transport 1.65 million bbl/d of crude oil from Iraq to the Red Sea. [closed following Iraq invasion of Kuwait in 1990; in June 2001, Saudi Arabia seized the ownership and converted it to natural gas pipeline.] Trans-Arabian Pipeline (TAPLINE): Saudi Arabia to Lebanon and strategic oil pipeline between Iraq and Turkey have been out of service for years due to war damage, disuse, or political crisis.

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It is intriguing to observe complicated tri-lateral relations among Iran, the U.S., and China over Hormuz Strait. There is a possibility of strategic move toward China, from the US perspective, specifically utilizing Hormuz Strait, while involving Iran. The US strategic move seems more convincing given the fact that US shale revolution relieved the US dependence on the usage of this particular chokepoint. The US stance toward Hormuz is as follows: • The U.S. might use its oil weapon instead to strike at the core of China’s weakness—it’s huge dependence on oil import. • With the newly acquired oil might, the U.S. can trick Iran to block the Strait of Hormuz without any economic damage onto the U.S. itself, in order to strike a severe blow to China’s fragile economy. – The US congress will reject the Iran nuclear deal. – The U.S. will give the nod to Isreal’s air strike against Tehran’s nuclear facilities. – Iran will retaliate by blocking the Strait of Hormuz. The Strait is the only sea passage from the Persian Gulf to the open ocean. Once it’s blocked, China will scramble to meet its oil demands. In China, the inflation will jump up; the China yuan will plummet, and an economic meltdown will come to bear. In short, China appears to be the biggest victim of Hormuz shutdown, not the U.S. anymore.

Panama Canal Panama Canal is at the center of US-China trade war disputes and received major global attention in recent years, than any other world chokepoint. It connects the Pacific Ocean with the Caribbean Sea and the Atlantic Ocean. Most of the petroleum transiting the Panama Canal travels southbound from the Atlantic Ocean to the Pacific Ocean. Panama Canal is 50miles long and only 110 feet wide at its narrowest point. Cargo which passed through this canal is as follows (Fig. 9.1): • 0.6 million barrels per day passes through and more than 13,000 vessels transited in 2014.More than 13,000 vessels transited the Panama Canal in fiscal year 2016. • Representing roughly 204 million tons of cargo.

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Fig. 9.1 Panama Canal (Source Se Hyun Ahn’s Photo)

• 921,000 b/d of petroleum and petroleum products were transported through the canal in fiscal year 2016. • About 84% of total petroleum (775,000 b/d) went southbound from the Atlantic to the Pacific in 2016. The U.S. is the primary country of origin and destination for all commodities going through the Panama Canal. However, it has not been a significant energy route for the US petroleum until recently: petroleum products consisted of 18% of the principal commodities and only 1.4% of total global maritime petroleum in 2013. There were two reasons for that. First, the canal was too narrow. Second, the failure of Alaskan oil production also decreased oil volumes going through the Panama Canal. Nonetheless, following the shale gale, the canal expansion project was completed in 2016 to accommodate large LNG ship such as Aframx tanker at 120,000 deadweight tons). Currently, the Panama Canal plays a significant role in the US economy since it handles a substantial share

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of the US shipping. Alternatives to the Panama Canal include the Straits of Magellan, Cape Horn, and Drake Passage at the southern tip of South America as well as the Nicaraguan Canal. However, these routes would significantly increase transit times and costs, adding about 8,000 miles of travel. The unique operation (Fig. 9.2): • Geographically, the oceans that Panama Canal connects with are not at the same level; the Pacific Ocean lies a little higher than the Atlantic Ocean. • This difference in the sea level requires ships to get up over the terrain of Panama—up to 26 m above the sea level—in order to reach the other end of the canal. • With the help of Lock Gates, the vessels entering the canal are lifted to the higher level and later dropped down to the sea level at the other end of the canal.

Fig. 9.2 Panama Canal

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• The Panama Water Lock System is considered to be one of the greatest engineering services undertaken at that time, purporting to the needs of the ships to save transit-time History France began work on the canal in 1881, but stopped due to engineering problems and a high worker mortality rate. The dense jungle was alive with venomous snakes, insects, and spiders, but the worst challenges were yellow fever, malaria, and other tropical diseases, which killed thousands of workers; by 1884, the death rate was over 200 per month. The U.S. took over the project in 1904 and opened the canal on August 15, 1914.The U.S. completed construction in August 1914, the 77 kmlong Panama Canal helps ships sailing between the east and west coasts of the U.S. to shorten their journey by 15,000 km. The U.S. continued to control the canal and surrounding Panama Canal Zone until the 1977 Torrijos–Carter Treaties provided for handover to Panama. After a period of joint American–Panamanian control, in 1999, the canal was taken over by the Panamanian government. It is now managed and operated by the government-owned Panama Canal Authority (Fig. 9.3). Expansion • On June 26, the Panama Canal Authority, the body that opened a third set of locks that facilitated transit of larger ship, the first expansion since the canal was completed in 1914. • The wider and deeper navigation channels and larger locks allow for the transit of larger vessels through the canal. • The maximum vessel dimensions in the old lock system, as Panamax vessels, limited tankers to those of approximately 300,000 to 500,000 barrels of capacity of petroleum products like gasoline and diesel fuel. • The newer lock systems allow for the transit of larger Neopanamax vessels, with estimated petroleum product capacities of 400,000 to 600,000 barrels. In terms of revenues, Panama Canal revenues totaled 2.48 billion dollars in 2018, 8.5% more than the 2.24 billion of the previous year.

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Fig. 9.3 Panama Canal

The transit of ships through the Canal, where about 6% of world trade passes, came in 2018 at 13,692, 0.2% more than the 13,666 the previous year. China Question China is the 2nd largest user of Panama Canal and bought Panama’s Largest Port in 2017 (2016.6.22). Chinese company called ‘Landbridge,’ which is allegedly linked with PRC Peoples Liberation Army (PLA) has been engaged in Mega port construction project. Chinese firm started to work on $1bn Panamanian megaport since 2017. Varela became first Panamanian president to make state visit to China in November 2019. And the Chinese president Visited new Panama Canal locks in 2018. China was also involved in railroad construction project in Panama. China decided to build “Panama Canal on Railway Tracks.” across America in May 2019. China being the second largest user of the Panama Canal,

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after the U.S., became the largest supplier of goods in the Panamanian free zone, which is the largest in Latin America and the second in the world. Panama is currently negotiating a Free Trade Agreement (FTA)with China. In the Atlantic, the Chinese company CCCC (China Communications Construction Company) has built 30% of the new Panama Colón Container Port, a terminal that will facilitate suitable for the new dimensions of the Expanded Canal and multipurpose ships, and a station for the reception of liquefied gas. CCCC is one of the largest port construction and design companies in Asia. The company Hutchinson Whampoa, of Hong Kong, has been also managing a port terminal for two years at the southern entrance of the Panama Canal. With an investment of $ 165 million, in Amador, the Chinese company CHEC is part of a Cruceros del Pacifico consortium to build a new cruise port. US concerns over Chinese expansion in Panama Canal region dramatically increased in recent years. Panama Canal has become the center of the US-China Trade war. The government of Panama is not a producer of crude oil, natural gas, or coal. However, the country serves as an energy transit point through its controls of the Panama Canal and Trans-Panama Pipeline.4 Nicaragua Canal China also launched the construction of Nikaragua Canal. In September 2012, Beijing-based Chinese private enterprise set up Hong Kong Nicaragua Canal Develoment Group (HKND) to finance the project. It has sole right to plan, design, construct, operate and manage the Nicaragua Grand Canal and other related infrastructure. Total canal length is 278 km, and project costs are estimated at 50 billion US dollars and the project was supposed to complete by 2020 but stalled at this stage. Russia also showed its willingness to participate in the project for strategic interests. As for the benefits of this project, first, from the Nicaraguan perspective, they consider this project as the opportunity to pull their country out of poverty and create at least 250,000 jobs. Second, as China intended, this canal project will put immense pressure toward the U.S. and Panama Canal. If we compare the capacity of canal with Panama, Panama Canal’s average capacity for the container of the vessel is 4,500 for 20 feet size and

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the maximum, 12 thousand, whereas Nicaraguan Canal can allow 2,500 container for the same feet size. This is almost doubled size capacity. As for the risks of this project, economic viability of the canal is questioned. First, Panama Canal still has capacity, while undergoing a major renovation. Second, Nicaraguan Canal has to compete with a coast to coast railway renovation. For example, China is also building a railway in Honduras. And this project can have a negative effect on the canal. Third, North American land bridges in Mexico and the U.S. will also compete against this Canal. Meanwhile, as of September 2015, this canal project has somehow delayed and no significant construction has taken place because of financing shortage problems from the Chinese side. Furthermore, the Nicaraguan government failed to present reliable information about whether or not the project can be financed. And this generated nothing but doubt over whether the project would be completed. The HKND Group maintained that financing would come from debt and equity sales and a potential initial public offering. By May 2017, however, no concrete action had been taken constructing the canal with more doubts being left. In February 2018, the project was officially as defunct, although the head of the project insisted work was still alive. Despite HKND’s official withdrawal in April 2018, the Nicaraguan government stated that it would continue with the 908 km2 (351 sq mi) dry land expropriations within Nicaragua, under land expropriation Canal Law 840.5 In short, since 2016 the project stalled, and limited information has been released since then concerning its status. Technically, it has been abandoned. “The Nicaragua Canal project remains a technically feasible option that may not be suitable in the current commercial context but could eventually take shape. However, this is usually a stepwise process requiring the presence of port infrastructures on both facades as well as a highway and rail corridor.”6 There is no denying that Nicaragua’s 50 billion canal plan sank.

Greater Mekong Sub-Region (GMS) Greater Mekong Sub-region is trans-national region of the Mekong River basin in Southeast Asia with 300 million people. It covers Cambodia, China (specifically Yunnan Province and the Guangxi Zhuang Autonomous Region), Laos, Myanmar (Burma), Thailand, and Vietnam. The GMS holds irreplaceable natural and cultural riches and is considered one of the world’s most significant biodiversity hotspots. The region is an

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important food provider and the site of many large-scale construction projects with social and economic implications.7 Nonetheless, this area is perhaps the most important strategic place on earth these days, where China’s Belt and Road Initiative and the US-led Indo-Pacific Strategy collides first. For GMS is a crucial region for China’s energy security, where China could only transport its energy coming from Africa and the Middle East to his home, in case of Strait of Malacca completely close down. And it is undeniable that GMS is China’s a front yard because China is also the part of GMS geographically. Compared with other chokepoints discussed above, GMS is too vast for traditional chokepoint in terms of space, and yet this area is perhaps the most sensitive spot for Chinese maritime energy transaction. If Myanmar or Thailand becomes another Singapore who is more friendly toward the US military operation than China, China will be in much trouble. GMS is also the area where South Korea is very keen on implementing its new Southern Policy. And energy cooperation with local states constitutes one of the key aspects of Southern Policy. Apparently, the U.S. has shown great deal of interest in cooperation and collaboration with South Korea in the GMS over establishment of energy infrastructure or ICT smart technology and energy combined projects. South Korea’s Current Engagement in GMS ROK’ recent participation in Mekong Project was further consolidated by President Moon’s New Southern Policy. This policy was directly designed by Blue House office in the latter part of 2018. Up to this moment, despite several official meetings organized by relevant ROK’s government departments, it is undeniable that overall country’s interests toward Mekong region and Southeast Asia was still minimal. Nonetheless, during Moon’s administration period, ROK’s commitment and national interests toward this region was highly upgraded and promoted at the presidential office level. And national perception toward this area has also dramatically transformed from not only tourist attractions to new political and economic strategic partners. Previously, On September 6, 2010 for the first time ever, ROK has hosted GMS forum in Korea with 150 participants including over 100 domestic companies (ROK Ministry of Strategy and Finance, 2010). ROK emphasized that Mekong River region will turn into the 2nd Han River miracle, with Asia’s new frontier spirit while leading twenty-first century.

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So far ROK has only participated in small scale project such as railroad construction and water resource management for GMS project. Nonetheless, ROK will increase activities such as transportation infrastructure, trade, environment, energy, and ICT. Specifically, ROK is planning to provide GMS with the following programs: construction of transportation infrastructure, promoting active investment through the simplification of regulation, joint cooperation for climate change, development of clean and renewable energy, the establishment of IT infrastructure and electronic government (Cambodia Constructor Association). Furthermore, since 2011, Korean companies including Hanhwa, Daerim, Hyosung, Inchon Airport Corporation, Korea Consultants International, SK have been very active on this. And ROK has also started the following project from 2011: development of tourist resources, the development of bio energy, small hydro power, railroad infrastructure in the rural area of Vietnam and Laos (Cambodia Constructor Association; Korea News Plus, 2019). In 2010, ROK made some substantial achievement throughout GMS forum. First, ROK Ministry of Economy and Finance and ADB agreed on pursuing joint consulting for GMS and introduce Korean model of development strategy, and participating in ROK’s Knowledge Sharing Program (KSP) module project for ODA, as well as renewing the MOU of 3.5 billion US dollar ADB joint loan program. Second, in the realm of environment, ADB and other Korean government agencies such as Korea Environment Institute, Korea Adaptation Climate Change Center, Korea Forest Service agreed to sign MOU for the development of GMS. Third, ADB agreed on arranging a bilateral business meeting between Korean companies and ADB on developing a new market in Mekong River area in infrastructure, communication, environment, trade, and investment. In particular, ROK considers that Mekong River states’ biggest strength is abundant natural resources, massive labor forces and the will of people for economic prosperity and economic openness. More specifically, ROK companies are very keen on Vietnamese oil industry, Myanmar natural gas, Thai rubber industry, Laos timber, Cambodian fishery business. Fourth, at the minister level, Thailand and ROK discussed the possibility of building nuclear power plant. Laos Ministry and ROK discussed signing on EDCF, KSP, Green Growth and Global Green Growth Institute cooperation. ROK has provided 0. 932 billion US dollar for transportation infrastructure and water resource development project through EDCF (Cambodia Constructor Association). And the 1st

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Mekong-ROK summit took place on 27th of November 2019 (Chosun Ilbo, 2019; Peace and Prosperity-the New Southern Economic Policy and New Northern Policy). As far as the total amount of ROK’s ODA support for GMS states was concerned, total aid including credit aid and grant aid along with East Asia climate partnership was US $ 2.2 billion. Among them are EDCF portion 1.78 billion US $ (transportation, electricity and other economic infra), grant ODA 410 million US $ (education, medical treatment and social infra) plus East Asia climate partnership 11.7 million US $ (Vietnam and Cambodia water resource and electricity infra). It is important to point out that 932 million US $ out of 1.78 billion $ was solely spent on GMS program itself. And as for the KSP support, Vietnam and Cambodia were the major two receiving nation and yet Laos was added on the list since 2010. For Vietnam case, between 2004 and 2009, 27 different project was implemented and Vietnam Development Bank was founded in May 2006 in due course. For Cambodia, between 2006 and 2009, 9 different project was carried out. And the ROK private sectors’ total investment on GMS states was 9.1 billion US $ with 180 thousand cases back in 2008 (ROK Ministry of Strategy and Finance, Press Release Report, 2010).8 More importantly, the development of Mekong River contains a number of political, energy, military, environmental, and human security implication. Most of all, GMS is the first battleground where China’s Belt and Road Initiative (BRI) collide with the US-led Indo-Pacific strategy (IPS). There have been a great deal of lobbying and public diplomacy from each side. And large of scale of grand energy projects or major infrastructure development projects which had a special nexus with ODA program have been either discussed or in the process in the GMS since this year. In this sense, ROK has been put very awkward position amid the US-China balance of power relations. Nonetheless, President Moon’s public announcement in late-June 2019 to harmonize with Indo-Pacific Strategy turned out milestone in ROK’s new diplomacy toward the Mekong River states (Donga Il bo, 2019). Moreover, the first ROKMekong Summit just took place on 27th of November, 2019 in Busan, Korea. In particular, in collaboration with the Indo- Pacific Strategy, ROK needs to prepare for special mechanism to deal with the following objectives besides with implementing specific grand scale type of energy and environment related projects: (1) to deal with energy and environmental security in the Mekong River; (2) to implement the construction

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of hydropower along the Mekong River both in upstream states as well as within Cambodia; (3) to balance the tradeoffs between the relations to the need for lower electricity prices and the importance of environmental and social protection; (4) to resolve existing threats to the river’s eco system and biodiversity; (5) to ensure nutritional safety net for those who live in the bottom along the river; and (6) other health security such as nutrition, hygiene problem (Cambodian Institute for Cooperation and Peace, 2019). Finally, as mentioned above, ROK’s engagement in GMS is not solely confined to ROK’s bilateral relations with each GMS member states, but also possesses many security and diplomatic implications for balance of power strategy between the U.S. and China. First of all, GMS region itself will have to face many challenges amid harsh fierce economic battle or beyond that between the two major big powers in the upcoming years (Robinson, 2019; Chongkittavorn,2019; www.asiatoday.co.kr/view.php? key=20180617010007976; Sisa Journal, 2012). Second, ROK government must also keep in mind the important fact that great game in GMS is highly likely to take place within strictly zero sum game trajectory in the near future. This means that ROK’s Niche strategy between the two major powers may not be allowed in this type of game. In other words, ROK’s ambiguous stance or theory oriented balanced strategic move between BRI and IPS in the region of GMS might cause huge diplomatic deadlock in the future. In conclusion, it is crucially important for ROK top leadership to keep in mind that ROK’s strategic engagement in GMS does not only imply ROK’s Niche public diplomacy or Niche ODA policy. This may turn out ROK’s first major diplomatic challenge amid the two major great powers’ rivalry in the region. There is no doubt that ROK’s Niche public diplomacy toward GMS, ODA policy in particular, should be continued and innovated in order to match more individual local needs. Nonetheless, ROK’s Niche strategy, that is, official diplomacy to choose between BRI and IPS may turn out neither a good nor a smart choice. Therefore, it is vital for Korean top leadership to analyze the anatomy of strategic Niche engagement in GMS and its repercussion.9 Moreover, it is important to understand that a new risk emerged for world chokepoint in more open sea waters area such as Malacca, Beb elMandeb strait, the Gulf of Aden and the western waters of the Indian Ocean. A number of pirates and terrorists have attacked oil and LNG

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tankers. Accordingly, a number of multi-national naval vessels are already operating in these regions to prevent piracy and terrorists act.10

The Political Economy of World Chokepoint rWorld chokepoint has more implication for international political economy beyond choking global energy sea lanes. It is undeniable that the global canal competition or war just started. The company or the country that owns the asset of man-made chokepoint such as canal has special privilege of managing the chokepoint. So far, the U.S. has literally dominated the global canals. Nonetheless, China has been very active pursuing to purchase some assets of either existing or future canals such as Panama one or Nicaragua one, and the 2nd Suez Canal. China has been also quite successful in filling the gap between the U.S. and Egypt since the new Egyptian leader, Abdel Fattah el-Sisi took over in 2014. The U.S. has significantly reduced ODA to Egypt. And Abdel Fattah el-Sisi actually asked for Chinese help. And China invested 4 billion US dollars on the 2nd SuezCanal project. It is equally important to examine the special relations between the companies such as Shell and Rothschild in Suez Canal. Shell was able to become a powerful international oil with Russian oil, while enjoying the exclusive privilege of passing through the Suez Canal, which the Rothschild family built. Most important, as for the relationship between maritime chokepoints and barrel mechanism, problems with energy chokepoints, whether they are real or expected, have an impact on both “wet barrel” markets and “paper barrel” markets. Here, “wet barrel” refers to real barrels of oil which are bought and sold on a spot or term contract basis. “Paper barrel” means promises to deliver or take delivery of paper barrels of oil are exchanged. The key determinants of oil price are the interactions of perceptions within these two markets. In other words, there is no doubt that a loss of physical supply would affect the wet barrel market by creating shortages. Specifically, the effect in terms of price and price volatility would depend on how much and what type of crude oil has been lost from supply, and how much spare capacity and what stocks exist elsewhere to replace the loss.11 Nonetheless, at the same time, a crisis situation around a chokepoint tends to influence perceptions and expectations in paper barrel markets. This could in itself change oil prices dramatically. In other words, the uncertainty and the impact of perceptions of paper barrels as a result of disruption of chokepoints make it extremely difficult to predict the precise price of crude oil.12 And most importantly, speculation group can take full advantage of this. In other

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words, political instability and the disruption of energy chokepoint could become a great excuse or instrument for speculations to manipulate global oil price.

Chokepoint and International Law As far as the nexus between chokepoints and international law is concerned, the commercial and strategic importance of energy chokepoints has been a driving force in the evolution of the international law of the sea-both customary law and treaty-based law. Both of these two laws emphasize the presumption that shipping should not be disturbed, and that geographic chokepoints should no longer become chokepoints in the international trading system. Therefore, freedom of navigation prevailed as a matter of customary international law. And this principle has traditionally upheld by trading nations and naval powers like the Netherlands, the UK, and the U.S. successively. And the UN Convention on the Law of the Sea (UNCLOS), which was signed in 1982 has been the basic legal regime that applied to the major energy chokepoints throughout the decades. Nonetheless, the applicability of UNCLOS used for international navigation in time of war is debated. And different states also view the rights and duties concerning chokepoints and UNCLOS’s applicability differently. Implications of World Chokepoints • More recent years have revealed a new risk for open ocean waters because ocean waters have become more dangerous. • Pirate attacks became more serious almost daily routes throughout the Gulf and Malacca area. What is worse, cooperation between pirates and terrorist groups has increased significantly. • The US domestic crude oil increase transformed world chokepoints trends. For Panama Canal became increasingly important chokepoint than any other one in the past several years. Moreover, historically, US refiners have been major consumers of African crude oil, primarily light sweet crude from Nigeria, Algeria, and Angola. However, with increased US production of light, sweet crude, the U.S. has imported less crude oil from Africa, and more African crude has been sent to Asia through the Strait of Malacca.

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• Therefore, it is essential to secure the alternative routes in terms of security, upgrading existing infrastructure and capacity, in order to lower the risks of disruption. • Equally important to implement cooperative mechanism among the regional member states. The model of the strait of Malacca is good example. • Korean government, for example, should set up some concrete set of strategic goals and policy toward energy chokepoints and prepare for possible various scenario related to chokepoints disruptions.

Notes 1. Danie Yergin, the Quest (NewYork: the Penguin Press, 2011), pp. 281– 282. 2. Chokepoint, Wikipedia, on https://en.wikipedia.org/wiki/Choke_point, accessed on January 31, 2017. 3. Lita Epstein, C.C.Jaco, and Julianne C. Iwersen-Neimann, the Politics of Oil (New York: Alpha Books, A member of Penguin Group 2003), pp. 265–267. 4. https://www.marineinsight.com/guidelines/how-the-water-locks-of-pan ama-canal-work/(2019.6.8); https://www.cheapestdestinationsblog.com/2013/07/19/howmuch-does-it-cost-to-go-through-the-panama-canal/ (2019.6.8); https://www.statista.com/statistics/710174/toll-revenue-panamacanal/ (2019.6.8); https://www.panamatoday.com/economy/panama-canal-revenuesgrow-85-2018-9176(2019.6.8); http://www.xinhuanet.com/english/2018-12/04/c_137650362.htm (2019.6.8); https://www.newsroompanama.com/news/us-concerns-over-chineseexpansion-in-panama-canal-region (2019.6.8) https://www.youtube.com/watch?v=1S57QJKE394 (2019.6.8); https://www.youtube.com/watch?v=_Flg8CQ8jsA (2019.6.8); https://foreignpolicy.com/2019/05/07/the-panama-canal-could-bec ome-the-center-of-the-u-s-china-trade-war/(2019.6.8); http://www.globalconstructionreview.com/news/chinese-firm-startsw7rk-1bn-panama7nian-meg7aport/(2019.6.8); and https://www.ft.com/content/524ae9f8-7db3-11e9-81d2-f78509 2ab560 (2019.6.8) 5. Wikipedia, on https://en.wikipedia.org/wiki/Nicaragua_Canal

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6. Jean-Paul Rodrigue and Theo Notteboom, “the Nicaragua Canal Project,” Port Economics, Management and Policy, 2022, https://por teconomicsmanagement.org/pemp/contents/part9/nicaragua-canal-pro ject/ 7. Wiki, on https://en.wikipedia.org/wiki/Greater_Mekong_Subregion 8. Se Hyun Ahn, “Anatomy of the Republic of Korea’s Niche Strategic Engagement in the Greater Mekong Sub-region (GMS): ROK’s TailorMade Strategy and its Security Policy Implication,” Korea Journal of Policy Studies, Vol. 34, No. 3 (2019), pp. 97–121. 9. Se Hyun Ahn, “Anatomy of the Republic of Korea’s Niche Strategic Engagement in the Greater Mekong Sub-region (GMS): ROK’s TailorMade Strategy and its Security Policy Implication,” Korea Journal of Policy Studies, Vol. 34, No. 3 (2019), pp. 97–121. 10. Danie Yergin, the Quest (NewYork: the Penguin Press, 2011), pp. 282– 283. 11. Charles Emmerson and Paul Stevens, “Maritime Choke Points and the Global Energy System: Charting a Way Forward,” briefing paper, Chatham House, January 2012, pp. 6–7. 12. Ibid.

CHAPTER 10

Conclusion

It is quite certain that East Asia’s appetite for energy in the years ahead will continue to grow enormously despite the global energy transition fever that spurred a few years ago. And current energy crunch and global economic crisis will be a turning point to redefine energy security in East Asia. As almost every chapter in this book addressed, natural gas is the centerpiece of the East Asian energy security agenda. In particular, 2022 natural gas supply in East Asia will be very tight due to the shortage of European gas supply stemming from both green inflation and war. A long-term gas contract will also gain more momentum over spot contracts for the time being, as the gas price has been skyrocketing. The role of the U.S, Qatar, and Australia would be crucially important to maintain gas security in Asia. In this regard, the concept of energy security alliance will be a very important subject for today’s ensuring energy security in East Asia more than at any other time. More specifically, an energy alliance between democratic nations of East Asia and the U.S., or Australia, and an energy alliance among the former and current communist states in Asia will constitute a highly likely future energy alliance posture in the region. Furthermore, LNG cooperation and coordination between the U.S. and South Korea will be the linchpin of the US energy alliance with its allies. At the same time, as the North Korean chapter illustrated, the natural gas option is even attractive for North Korea, considering the

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new global energy trend. North Korea could join the leading natural gasconsuming country group and enjoy some privileges of solving energy shortage problems while meeting environmental standards as well. It is undeniable that the golden age of natural gas is imminent. Natural gas became a global strategic commodity because of significant reductions in gas liquefaction and transportation costs and shale gas revolutions before the Russian invasion of Ukraine. Indeed, coal, oil, gas, nuclear energy, and various renewable forms of energy all have important roles to play in the Asia Pacific’s energy, economic, and political future. However, among the options available today, natural gas is best positioned in the region. This is because it can fuel economic growth, and meet the increasing demand for power, also be environmentally sustainable. There is no denying that every nation in East Asia is moving very slowly toward natural gas use. In particular, China’s use of gas is still slow in scope, even though its demand is likely to increase up to 450 bcm by 2030. Natural gas infrastructure has not been fully established yet in China, especially in the northeastern region of China. In this sense, North Korea can significantly reduce its energy dependence on China. If North Korea turns to natural gas use, more and more inter-Korean cooperation and collaboration can be anticipated because South Korea possesses world’s top class LNG and gas infrastructure know-hows and technologies. After the Russian invasion of Ukraine, it is highly unlikely that East Asian states except China are much willing to work with Russia in terms of energy transactions, especially regarding pipeline natural gas. Quite frankly, China is also not so convinced by gas transactions with Russia in the future. China has had some unpleasant memory with Russia in terms of gas price negotiation in the past few decades. China knows what Russia is up to whenever the Sino-Russian relations rupture. Building a pipeline creates a special relationship between countries. And potentially there is leverage both ways by the supplier and by the buyer. And so security has been a standing issue in the natural gas trade. Therefore, as the current Russian-Ukraine war illustrates, Russian pipeline gas turns out the last option for East Asian states to implement. None of the East Asian states want to be a prisoner of the Russian PNG locked down relationship. Every state in the world witnessed how risky and dangerous it is to deal with Russians, especially regarding PNG transactions. Furthermore, considering the Russian image that has been depicted in Asia throughout the centuries is not that friendly or trustworthy, East Asians do not have sanguine views toward Russian energy transfer to their territories.

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As the Russian chapter described previously, in the Korean Peninsula, Russians hoped to forge a special alliance with both South and North Korea through gas pipeline cards, while checking in the U.S. and China. In Northeast Asia, Russians want to pursue its discriminating energy policy toward China, Japan, and Korea. This is very similar to the old Soviet thinking approach: the “divide and conquer policy”. Russia’s worst nightmare is that China, Japan, and South Korea form a sort of gas-importing alliance and deal with Russia unilaterally. In the past few decades, the Kremlin leaders have been wondering what kind of energy diplomacy mechanism or strategy they should apply to Northeast Asian regions. They spent too much time calculating their energy matrix, somehow with great fear. Energy politics, especially pipeline politics was an important component of Soviet efforts to influence regional events throughout the Cold War period. Also, their strategy was to support infrastructure ventures that are unattractive to western corporations. This formula substantially might apply to the Korean Peninsula too. As previously argued, Russians do make political calculations in evaluating energy projects. In the Soviet and Russian contexts, economic, political, and military issues have been closely interwoven in the pattern of Russian energy alliance management. In the PNG issues, it is almost 100% sure that Russians will bring other strings into the energy bargaining. For example, during the Brezhnev era in the 1980s, in Eastern Europe front, the energy and defense nexus developed. It is very important to keep in mind that by selectively discriminating among the East European states, and also manipulating energy exports in times of crisis, the Soviet Union linked its energy assistance to an East European state’s cooperation on alliance matters, especially military burden-sharing. It is highly likely that Russians tend to view East Asia and the Korean Peninsula as former East Europe rather than West Europe. In 2022, Russians already manipulated Western Europe with pipeline natural gas weapons. Now, in Northeast Asia, in the course of hesitation and procrastination, Russia has virtually lost a golden opportunity, and the U.S. has already taken over Russia thanks to the shale gas revolution. The US LNG option was more attractive to Northeast Asia because it was more predictable, reliable, and flexible, compared with Russia’s gas contract being rather unpredictable and risky. As the US-ROK energy alliance chapter described, a wide range of energy security cooperation and collaboration between the U.S. and ROK can take place. These include traditional oil and natural gas cooperation especially in the midst of the 2022 global energy crunch;

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nuclear power technology cooperation including ROK’s nuclear power exporting strategy; Strategic Petroleum Reserve (SPR) collaboration; offshore energy development project in Northeast Asia, as well as the mineral resource production securing global supply chain, and so on. Considering the possibility of the emergence of the new Cold War and U.S-China rivalry, the strategic importance of the current U.S-ROK energy alliance is at its highest ever since the 1950s. Perhaps one of the highlights of bilateral energy cooperation would be the implementation of an oil and gas strategic reserve system as well as a joint operation in the third region, possibly in the Greater Mekong Subregion and Europe as well as several open seawater. In this regard, the joint development of the Sector 7, or Joint Development Zone in the East China Sea area turns out perfect fit for US-ROK energy offshore collaboration. Regarding the US-China energy game is concerned, it is highly likely that China’s Belt and Road Initiative will collide with the U.S-led IndoPacific strategy. As the world choke point chapter illustrated, these two concepts are genetically related to one of the key elements of energy security, more specifically, the safety of energy maritime transportation routes. The great powers are expected to crash each other at the possible three major world choke points such as Malacca, Hormuz, Panama, and the GMS. And the U.S. has a comparative advantage over China in these three areas except the GMS for many reasons. Moreover, what is more important is that China has significant disadvantages over oil pricing to the U.S.. China does not even possess an oil supply, which was a major strength for the Soviet Union during the Cold War. This means that throughout the Ukraine war, high oil price appears to be a significant burden on the Chinese national budget, especially given that China relies on most of its energy imports from oversea resources. Furthermore, China’s refineries are generally not configured to run heavy, sour crude, which means that the Chinese have to purchase more expensive light, sweet crude oil. In addition, since oil is priced in dollars, China has to overcome the USled petrodollar barrier, which is genetically related to current financial superpower groups.1 Perhaps, in order for China to become a true global superpower, it is necessary to compare its current status with the one of the Soviet Union during the Cold War period. China’s biggest disadvantage lies in two factors. One is the difficulties of China’s physical access to energy natural resources, in particular, oil and gas; the other is the insecurity of sea route of transporting these energy goods to the homeland. These two

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questions are somehow genetically related to energy security problems. It is undeniable that the global maritime route is dominated by enormous US naval powers. In this regard, China feels immense pressure to pass through global energy choke points such as the Strait of Hormuz and Malacca Strait, not to mention Panama Canal.2 This is why China is so dedicated to the Northern sea route or the North Pole in recent years. These three or four particular areas plus the Mekong River area will turn out the strategic battleground between BRI and Indo-Pacific strategy.3 In the same line with the energy sea route, China is also facing another bigger challenge, perhaps the most disadvantageous, that is, the current global financial system which has been formed as quite unfavorable and unfriendly to China. China is not only dealing with the U.S., one nation. China has to deal with other superclass financial powers, who are both visible and invisible. These financial superpowers who are mostly descendants of the Rockefeller Rothschild, Nobel families, and others have accumulated their fortunes for the past 250 years, while deeply penetrating into politics both domestic and international in each country. These formidable groups which consisted of old seven sisters and mainly American and European wealthy families are substantially controlling the global financial market and energy market up to now.4 Their powers were more amplified by the fact that energy became a financial commodity by simply surpassing economic commodities during the millennium period. These super classes are traditionally not so friendly toward Russians and Chinese. In order for China to compete against the U.S., China has to get over these global financial tycoons. Accumulating hard currency or securing a sea route is not simply enough to cope with these groups’ immense powers. These two preconditions are completely subordinate to global financial market trends or policy. In a similar approach that Japan did for the past several decades, China has no choice but to either be integrated into this very exclusive club or admit it, in order to get over this circumstance. The only skeptic is that Japan has not even been fully accepted despite its tenacious efforts to contribute to this group either. Without solving this fundamental problem, China is highly likely to be put in a very unstable and disadvantaged position for the brand new great game against the U.S., not to mention trade disputes or prevailing BRI strategy all over the world. Lastly, other than dealing with the global financial superclass, China also has to deal with environmental problems such as air pollution etc. both domestically and internationally. It is important to understand that

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Soviet leaders underestimated the importance of ecological and environmental disasters during the Soviet period. Both the Aral Sea ecological disaster and Chornobyl nuclear incident caused by man-made mistakes generated significant social chaos and disarray in the late 1980s. Equally moreover, China does not have powerful allies in the region like the US ones, especially among its neighboring states.5 It is undeniable that still, several PRC’s neighboring states in the region tend to perceive China as a big military security threat. In this regard, China needs to transform its regional image drastically. It would be ideal for PRC to see that the US troops will be evacuated from the Korean Peninsula and Northeast Asia. However, it is virtually impossible to see this will happen even in the midterm or longer term since US foreign policy has put too much gravity on this region lately, even above the traditionally important Middle East. Meanwhile, the current energy crunch which happened in the latter part of 2021 seems to be more serious than during the 1970s energy crisis. First, not only crude oil prices but also gas, coal, rare earth, food, and other mineral resource prices surged. Second, green inflation already started even before Russia invaded Ukraine, which means that revenge for the old economy already began to start in the latter part of 2021. Third, war has aggravated the global energy crunch situation all over the world. Fourth, there was no such sign that global oil demand was going to shrink due to China’s continued incredible appetite for oil demand in the upcoming years. There is no indication that China’s energy demand is going to decrease, even though its economy is facing great difficulty for the first time ever since the 1950s. This means that global oil demand will continue to grow especially after the world is gradually recovering from COVID-19. If then, energy security will be a primary agenda for global energy geopolitics and the global economy again. Energy security posture will be more complex than before in the region, while facilitating energy alliance grouping based on the economic bloc. The energy alliance issue will be a very important key component of East Asia’s future security discussion. Moreover, the result of COP-26 illustrates that energy transition assignment is quite difficult to achieve in a realistic sense, especially in the region of East Asia. None of the Northeast Asian countries decided to give up coal power generation totally except South Korea. The concept of energy security has never been either ignored or underestimated in East Asia, especially compared with other parts of the world despite the energy transition booming which happened elsewhere in the past few

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years. However, energy security will remain the most important task for any state in East Asia in particular for the time being since the global energy crunch is highly likely to last at least until the end of 2024, coupled with the green inflation phenomenon. Furthermore, a wide range of energy security issues including energy maritime route, infrastructure, black market activities, nuclear safety, oil price, LNG competition, free trade, maritime dispute, and so on will continue to persist in the region, while emerging as a traditional security concern as well. Lastly, as Yergin pointed out, it is important to keep in mind that energy is not software that can be changed anytime, but rather hardware. It is important for leaders of East Asia to remember that the old economy is too powerful to be ignored, even though the new thinkers in every arena desperately hope to change the world, in terms of energy and environmental policy. We have witnessed how powerful and resistant the old economy has built into who they are now for the past 150 years. The old economy is still run by the oil and gas sector, along with the automobile industry and power sectors as well as global huge international finance power. Equally, it is important to point out that energy security and energy transition are not necessarily the opposite concept. Energy security also includes environmental sustainability always. However, Northeast Asia still takes energy security as their primary national security agenda rather than energy transition. The result of COP 26 and each of the Northeast Asian countries’ energy policies illustrates that the people of East Asia still look at energy issues as zero-sum rather than idealistic. And what is more important, energy issues will evolve as more of a traditional security concern rather than non-traditional in the region. This means that the energy security alliance will be very keen to watch for the next several decades amid the balance of energy great game among Russia, China, and the U.S..

Notes 1. James Norman, The Oil Card (Chicago: Trine Day LLC, 2008), p. 39. 2. Michael Klare, Resource Wars: The New Landscape of Global Conflict (New York: Metropolitan Nooks, 2001), pp. 109–137. See also Michael Klare, Rising Powers, Shrinking Planet (New York: A Holt Paperback, 2009), pp. 194–201.

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3. Discussion during Workshop, Regional Workshop on the Future Prospects of the Mekong River organized by the Cambodian Institute for Cooperation and Peace (CICP) and the US Embassy in Phnom Penh, June 13–14, 2019, Phnom Penh, Cambodia. 4. Author’s Interview with Daniel Yergin. Cambridge Energy Research Associates, Washington, DC. July 5, 2011. See also Daniel Yergin, “Energy Security in the 1990s,” Foreign Affairs,67:1 (1988), pp.111–132. Daniel Yergin, the Prize: The Epic Quest for Oil, Money and Power (New York: Free Press, 2008), pp. 523–542; and Daniel Yergin, The Quest (New York: The Penguin Press, 2011), p. 83. 5. Aaron L. Friedberg, “The Geopolitics of Strategic Asia, 2000–2020,” in Ashley J. Tellis, Andrew Marble, and Travis Tanner (eds.), Asia’s Rising Power an America’s Continued Purpose (Washington, DC: The National Bureau of Asian Research, 2010), pp. 26–33.

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Index

A Abqaiq-Yanbu natural gas pipeline, 182 Abu Dhabi Crude Oil Pipeline, 182 Achnacarry Agreement, 156 Aframx, 184 Africa, 176, 181, 190, 195 Alaska, 89 Alberta, 161–175 Alberta Energy, 163, 169–171, 176 Alfa Eco, 18 Algeria, 195 Altai, 58 Altai pipeline, 58 Alternative energy, 79, 88, 126–128, 152 Aminex, 75, 92 Anderson Exploration, 162 Angarsk, 35 Angarsk Petrochemical Company (APC), 8 Angarsk Refinery, 8 Angola, 195 Aniva Bay, 14

Apache Canada, 163 Arabian Sea, 182 Arbitration Institute of the Stockholm Chamber of Commerce, 106 Argentina, 99 ASEAN Council on Petroleum (ASCOPE), 23, 25, 111 ASEAN Regional Forum (ARF), 113, 114 Asian Development Bank (ADB), 191 Asian markets, 11, 35, 43, 58, 62, 182 Asia-Pacific, 3, 26, 80, 88–90, 112, 113, 200 As Is Agreement, 157 Association of Southeast Asian Nations (ASEAN), 23, 111, 114 Athabasca oil sands, 167, 170 Athabasca Oil Sands Project (AOSP), 168, 169 AUKUS, 156 Australia, 17, 47, 52, 60, 99, 135, 156, 199

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 S. H. Ahn, Power Struggles, https://doi.org/10.1007/978-981-19-5474-0

221

222

INDEX

B Baikal, 43, 84 Balance of power relations, 5, 136, 192 Bali, 181, 182 Battery, 153, 155 Beb el-Mandeb strait, 193 Beijing, 9, 20, 22, 39, 40, 42, 43, 51, 73–76, 78, 94, 154, 188 Belt and Road Initiative (BRI), 150, 151, 190, 192, 193, 202, 203 Bengal, 182 Bilateral, 2, 4, 5, 7, 8, 16, 17, 20, 22, 23, 25–28, 73, 89, 100, 111, 130, 154, 191, 193, 202 Billion cubic meters (bcm), 8, 9, 11, 12, 34–36, 41–43, 45, 50, 51, 60, 83, 84, 129, 200 Bitumen, 163, 165–175 BlackGold, 163, 172, 173 Blackouts, 78, 140 Blue House, 142, 190 Bradshaw, Michael J., 11, 29, 67 British Columbia, 88, 113 British Petroleum (BP), 8–10, 26, 42, 43, 85, 149 Brunei, 17 Brussels, 106 Bureya Hydro Power Plant, 15 Burlington Resources, 162 Bush administration, 87 Bypass, 58, 60, 182 C California, 88, 149, 166 Cambodia, 151, 189, 191–193, 206 Cameron, 88, 113 Canada, 1, 4, 35, 84, 86–88, 99, 113, 119, 156, 159–168, 170–172, 175, 176 Canadian Association of Petroleum Producers (CAPP), 170, 173

Canadian Hunter, 162 Cape Horn, 185 Cape of Good Hope, 151 Caribbean’s San Jose Pact, 25 CBM, 112 Changchun, 43 Chayanda, 11, 16, 58, 59 CHEC, 188 Cheniere, 88, 113 Chernobyl, 80 Chicago, 166 Chile, 99 China, 1, 3, 5, 7, 9–12, 20–22, 24, 26, 33, 35, 39, 40, 42, 43, 45, 47, 48, 50–52, 55, 56, 58–62, 70, 73–76, 78, 79, 82–86, 88–90, 92, 93, 97, 98, 102, 103, 105, 110, 112, 119, 134–138, 150–154, 159, 163, 181–183, 187–190, 193, 194, 200–204 China Communications Construction Company (CCCC), 188 China National Offshore Oil Corporation (CNOOC), 163 China’s coal industry, 39 China’s National People’s Congress, 154 China’s State Administration of Coal Mine Safety, 39 Chinese National Petroleum Corporation (CNPC), 9, 11, 26, 42, 60, 163 Chokepoint, 36, 129, 180–196 Chongjin, 78 Christina Lake project, 163 Chung Ju-Yung, 40 Chunshiao gas field, 150 City gas, 87, 120, 124 Climate change, 141, 153, 191 Clinton administration, 87 Coal, 3, 39, 50–52, 70, 72, 73, 75, 76, 78, 80, 92, 112, 118–121,

INDEX

133, 139, 147, 150, 154, 159, 160, 200, 204 Cold Lake, 168, 172–174 Cold War, 26, 33, 201, 202 Committee on Security Cooperation in the Asia Pacific (CSCAP), 101 Condensate, 8, 11, 12, 35, 84 Conoco, 162, 169 Consortium, 9, 12, 15, 34, 35, 41, 60, 112–114, 188 Conundrum, 1 Council for Mutual Economic Assistance, 25 Cushing, 166 Czech Republic, 99, 152

D Daerim, 191 Daewoo International Kumho Petro Chemical, 15 Dalian, 43, 48, 78 Danchun, 78 Dandong City, 73 Deep Borehole Disposal (DBD), 80 Democrat, 153, 155, 156 Democratic People’s Republic of Korea (DPRK), 71, 73, 75–77, 83, 85–87, 92, 133, 136, 137, 148, 151, 152 Department of Energy, 66, 88 Devon Energy, 162 Diamond Gas Sakhalin, 12 Diversification, 35, 80, 100, 107, 132, 138, 142 Dokdo Island, 137 Doo San company, 152 Draft Law, 57 Drake passage, 185 Dublin European Council, 106

223

E East Asia Gas Co (EAGC), 8, 9, 41, 42 East China Sea, 113, 137, 150, 202 Eastern Siberia, 8, 26, 41, 59–61, 83–85, 133, 147 Eastern Siberia Pacific Ocean Oil Pipeline (ESPO), 2, 15, 22, 49, 90 East Sea, 78, 113, 137 East-West Pipeline, 182 Economic security, 4, 28, 131, 148, 155 EDCF, 191, 192 Edmonton area, 165 Electric car, 153 Electricity, 15, 39, 72–74, 76, 78, 82, 83, 99, 105, 110, 112, 120–122, 128, 141, 159, 192, 193 el-Sisi, Abdel Fattah, 194 Enbridge, 165, 166, 175 Enbridge Pipelines, 165 EnCana, 163, 168, 173, 174 Energy alliance, 5, 20, 90, 135–137, 147, 150, 156, 199, 201, 202, 204 Energy Charter Treaty (ECT), 3, 24, 105–108, 111 Energy crunch, 1, 5, 150, 154, 155, 199, 201, 204, 205 Energy diplomacy, 4, 7, 27, 28, 103, 105, 117, 118, 130, 132, 135, 137, 138, 141, 142, 201 Energy great game, 1, 5, 90, 110, 205 Energy power mix, 138–140 Energy scandal, 140 Energy security, 1, 3–5, 7, 8, 16, 19, 24–26, 33, 34, 62, 69, 70, 73, 78, 83, 85, 87, 89, 90, 97, 98, 101, 103, 104, 108–113, 117, 122, 129–133, 136, 137, 141,

224

INDEX

142, 147, 148, 151, 154, 179, 180, 190, 199, 202, 204, 205 Energy Storage System (ESS), 153 Energy transition, 1, 5, 153, 199, 204, 205 EOG Resources, 163 Europe, 5, 12, 22, 35, 45, 46, 56, 58, 66, 104, 135, 152, 182, 201, 202 European Energy Charter (EEC), 23, 24, 106, 111 European energy crisis, 152, 156 Export-Import Bank Korea (EXIM), 15 Exxon Mobil, 24 Exxon’s Imperial Oil, 163 F Fort McMurray, 169, 173, 175 Four Party Proposal, 100 Fourth Middle Eastern War, 89 Freeport, 88, 113 Free Trade Agreement (FTA), 88, 135, 136, 147, 149, 155, 188 Fukushima, 79, 85, 89, 100, 114, 133, 137, 140, 141 G Gazprom, 3, 9–13, 15, 19, 20, 22, 33–35, 43–45, 49, 52, 54–62, 66, 84, 86, 94, 134 Geopolitics, 1, 4, 5, 26, 204 Germany, 56, 79, 91, 119 Geun-Hye, Park, 137 Global supply chain, 153, 156, 202 Greater Mekong Subregion (GMS), 4, 151, 189–193, 202 Great Wall, 74, 92 Green inflation, 5, 199, 204, 205 Green New Deal, 153 GS Caltex, 15

Guangdong, 51 Gulf Canada, 162 Gulf Coast, 149, 166, 175 Gulf of Mexico, 89, 155

H Hague, 106, 175 Hamgyong, 74 Hanbo Group, 8, 41, 42, 50 Hangingstone venture, 172 Hanhwa, 191 Han River, 190 Harbin, 43 Hebei, 154 Hebron-Ben Nevis field, 165 Henry Hub, 112 Hong Kong, 188 Hong Kong Nicaragua Canal Development Group (HKND), 188, 189 Hunchun, 78 Husky Energy, 163 Hutchinson Whampoa, 188 Hydropower, 70, 72, 75, 138, 159, 160, 193 Hyosung, 191 Hyundai Corporation, 15

I Ian Craig, 21 Igor Farkhutdinov, 13 Inchon Airport Corporation, 191 India, 88, 119, 134, 153, 161 Indian Ocean, 181 Indonesia, 13, 17, 63, 64, 98, 99, 105, 129, 181 Indo-Pacific Strategy (IPS), 148, 151, 192, 193, 202, 203 Intercontinental Exchange (ICE), 113 Interfax, 15

INDEX

International Energy Agency (IEA), 24, 30, 39, 111, 161 International law, 195 International Oil Companies (IOC), 57, 58, 61, 156 Investors, 2, 3, 16, 18–20, 41, 48, 50, 51, 61, 106, 135, 155, 170, 175 Iran, 56, 60, 62, 183 Iraqi Pipeline in Saudi Arabia (IPSA), 182 Irish, 75 Irkutsk, 8, 9, 30, 34, 35, 41–43, 45, 49, 54, 55, 84 Irkutskenergo, 8 Israel, 183 Italy, 56

J Japan, 1, 7, 9, 12, 14, 20, 23–26, 34, 39, 42, 50, 61, 62, 64, 69, 79, 80, 83, 85–88, 97, 99, 100, 102–104, 110, 111, 119, 129, 134, 136–138, 150, 152, 154, 155, 157, 172, 181, 201, 203 Japp Guyt, 21 Java, 182 Jeanne d’Arc Basin, 164, 165 Joint Development Zone, 150, 202

K Keystone XL pipeline, 155 Khabarovsk, 15, 59, 60 Kim Jong Il, 75, 85 Kim Jong Un, 90 Kim Yong-sam, 41 Kinder Morgan, 165, 166 Kinder Morgan Canada (formerly Terasen), 165 Kissinger, Henry, 74, 92 Kitimat, 88, 113, 166

225

Knowledge Sharing Program (KSP), 191, 192 Kohlberg, 155 Korea alliance, 136 Korea Consultants International, 191 Korea Energy Agency, 126 Korea Gas Corporation (KOGAS), 9, 11, 13–15, 18, 28, 36, 37, 42–44, 50, 92–94, 129, 149, 151, 157 Korea Hydro and Nuclear Power (KHNP), 140 Korea National Oil Corporation (KNOC), 15, 163, 172, 173 Korean Energy Development Organization (KEDO), 3, 97–103, 105, 109, 112, 114 Korean reunification, 86 Korea Railroad, 18 Kovykta, 1–3, 7–11, 16, 17, 19, 20, 22, 26, 27, 30, 34, 35, 38, 40–52, 54–62, 65, 84, 85, 113, 134 Kovyktinskii, 8 Kozmino, 15 Kravis Roberts & Co. (KKR), 155, 156 Kremlin, 11, 12, 15, 19, 22, 24, 54–57, 59, 86, 134, 201 Kuwait, 182 L Lake Charles, 88 Landbridge, 187 Landscape, 1, 5, 52, 72, 87, 113, 148, 180 Laos, 151, 189, 191, 192 Law, 55, 189 Lee Myung Bak, 84, 85, 138 Legislation, 18 Light, 14, 162, 163, 166, 195, 202 Light Water Reactor (LWR), 101

226

INDEX

Liquefied natural gas (LNG), 2, 7, 8, 10, 12–14, 16–18, 29, 36–38, 43–45, 47–52, 59, 60, 63, 79, 80, 83, 84, 87–90, 104, 113, 121, 122, 129, 130, 139, 148–152, 180–182, 193, 200, 205 Liquefied petroleum gas (LPG), 79, 87 LNG terminals, 17, 49, 51, 87, 88 Localism, 21 Lombok, 182 Long Beach, 88 Louisiana Gulf Coast, 88 Lumberjacks, 23 Lunskoye, 12, 13 M Mafia, 26, 140 Magellan, 185 Malaysia, 79, 181 Manchuria, 43, 92 Medvedev, Dmitry, 19, 66 Megaport, 187 MEG Energy, 163 Mekong River, 189–193, 203 Memorandum of understanding, 42, 86 Mexico, 159, 162, 189 Micro-dust, 133, 154 Middle East, 2, 16, 26, 36, 38, 47, 52, 129, 130, 152, 176, 181, 190, 204 Mighty Winged Tiger, 148 Miller, Alexey, 9, 11, 43, 44, 66, 84, 134 Minerals, 19, 23, 74–76, 78, 103, 122, 150, 153, 202, 204 Mineral transfer, 76 Ministry of Strategy and Finance, 92, 190, 192 Mitsubishi, 12, 13

Mitsui, 12, 13 Mongolia, 2, 7, 9, 20, 25, 34, 42, 46, 47, 134 Moon Jae In, 149, 190, 192 Moscow, 3, 11, 14, 16, 17, 20, 22, 24, 28, 41, 43, 54, 58, 86 Multilateral, 2, 3, 16, 23–25, 27, 84, 97–103, 105, 109–114, 138 N Nakhodka, 43, 45, 49 National Assembly, 142 National Pension Service (NPS), 155, 156 Natural gas, 1–3, 5, 8–11, 17, 19, 20, 22–25, 28, 34–36, 41, 48, 50, 51, 53, 62, 66, 70, 72, 79–90, 97, 100, 105, 108, 110–113, 124, 128, 133–136, 138, 139, 142, 147–152, 154, 159, 160, 163, 165, 166, 168, 169, 171, 172, 182, 188, 191, 199, 200 Netherlands, 106, 195 Newmont, 163, 172, 173 New York Mercantile Exchange (NYMEX), 113 New Zealand, 99 NGO, 57 Nicaragua Canal, 4, 189 Nickel, 153 Nizhnekamsk, 15 Northeast Asia, 1–3, 5, 7, 14, 16, 17, 22, 23, 25–27, 33–35, 43, 46, 47, 57, 60–63, 74, 80, 82, 84, 86, 89, 90, 95, 97–99, 102–104, 107, 108, 111–114, 123, 134, 136, 148, 155, 201, 202, 204, 205 Northeast Borderland History Research Project, 74 North Korea, 2, 7, 10, 16, 24, 31, 34, 43, 46, 47, 69, 70, 72–76,

INDEX

78–80, 82–87, 89, 90, 97–101, 134, 152, 199–201 North Pyongan, 74 North West Shelf Australia LNG, 51 Northwest Territories, 164 Nuclear energy, 70, 72, 79, 80, 102, 112, 200 Nuclear proliferation, 2, 10, 16, 85, 98–100, 102, 136 Nuclear Safety and Security Commission, 140 O Obstacles, 1, 2, 8, 10, 16, 22, 23, 27, 34, 46, 62, 79, 80, 85, 97, 108, 111, 114, 121, 137 ODA, 191–194 Offshore, 11, 49, 75, 114, 136, 137, 148, 150, 161, 164, 165, 181, 202 Offshore Newfoundland, 164 Oil, 2, 3, 8, 11, 12, 14, 15, 18, 24, 26, 27, 29, 33, 36, 41, 48–50, 52–54, 57, 59, 62, 63, 65, 70, 72–76, 78, 80, 82, 87, 89, 92, 93, 97, 102, 108, 110, 112, 114, 118, 119, 123, 124, 130, 134, 135, 137–139, 141, 142, 147–150, 152, 159–170, 173–176, 179–184, 188, 191, 194, 195, 201, 202, 204, 205 Oil sands, 161–176 Oman, 36, 129, 182 OPEC, 23, 63, 111, 129 Open-pit mining, 167 Orinoco Belt, 170 P Panama Canal, 4, 88, 151, 180, 183–188, 195, 203 PanCanadian, 163

227

Paper barrel, 180, 194 Peace River, 168, 173 Petro-Canada, 163, 168–170, 175 Petroline, 182 Photovoltaic (PV), 127, 128 Piltun-Astokskoye, 12 Pipeline natural gas (PNG), 2, 7, 79, 83–87, 130, 200, 201 Piracy, 110, 181, 194 Pirates, 179–181, 193, 195 Poland, 99, 152 Political economy, 180, 194 Politicization, 56 Poong Lim, 13 Power grid, 14, 16, 24, 90, 110, 112 Power grid interconnection, 8, 15 President Roh Moo Hyung, 84 Pressurized Water Reactor (PWR), 100 Primorskii Krai, 15, 23 Prince Edward Island, 167 Private sector, 2, 13, 55, 122, 134, 148, 149, 153, 192 Privatized, 52, 162 Production Sharing Agreement (PSA), 12, 19, 57–60, 67 Protectionist, 2, 27 Putin, Vladimir, 14, 17, 19, 22, 26, 33, 53–55, 134 Pyongtaek, 9, 43, 48 Pyongyang, 3, 24, 41, 47, 69, 70, 72, 74–76, 79, 80, 85–87, 89, 90, 99, 101, 152 Q Qatar, 17, 36, 88, 129, 149, 199 Qiqiha’er, 43 R Rajin, 78 Rare earth, 153, 204

228

INDEX

Redline Agreement, 157 Regulations, 12, 18, 137, 138, 170, 191 Renewable, 80, 82, 105, 112, 121, 126, 128, 138, 139, 142, 153, 155, 176, 200 Renewable Portfolio Standards (RPS), 128 Republican, 155, 156 Resource renationalization, 52 Rosneft, 15, 134 Rothschild, 194, 203 Royal Dutch Shell, 12, 173 Rozman, Gilbert, 21, 22, 31 Russia, 1–3, 5, 7–13, 15, 17–20, 22–27, 30, 31, 33–35, 40–42, 45, 47, 52, 55–62, 65, 66, 72, 78, 83–86, 89, 90, 92, 98, 110, 112, 129, 134–137, 147, 152, 188, 200, 201, 204, 205 Russian Duma, 22 Russian Far East (RFE), 2, 8, 16–18, 20, 22, 24, 26, 27, 34, 35, 57, 60–62, 83, 84 Russia Petroleum (RP), 8–11, 20, 41–43, 85 Russia’s Alliance Group, 15 S Sakha, 41, 54, 58, 59, 85 Sakhalin-1, 12, 59, 60 Sakhalin-2, 11–13, 16, 21, 30, 59, 61 Sakhalin-3, 11, 16 Sakhalin Energy, 12–14, 18, 21, 29, 67 Sakhalin Energy Investment Corp (SEIC), 13, 14, 29 Sakhalin projects, 11, 12, 20, 26, 27, 59, 67 Sakhalin Vityaz Crude Oil, 14 Samchuk, 149 Samll Module Reactor (SMR), 152

Samsung, 13, 15 Saskatchewan, 164 Saudi Arabia, 148, 149, 159, 162, 167, 175, 182 Sayansk, 35 Sberbank, 15 Sea water, 103, 113, 152, 193 Sector 7, 137, 202 Semiconductor, 153 Separatism, 21 Shale gas, 2, 4, 80, 86–90, 108, 110, 112, 113, 124, 129, 130, 133, 136, 147–149, 152, 200, 201 Shanghai, 58 Shanhaiguan, 74 Shell, 11, 13, 30, 60, 168, 175, 194 Shell Canada, 168–170 Shell’s Shell Canada, 163 Shenyang, 43 Siberia, 9, 20, 23, 33, 35, 43, 45, 47, 57, 60, 83, 84 Sidanko, 8, 9, 42 Sinopec, 163 Sino-Russian, 55, 134, 136, 137, 149, 200 Sinuiju, 73 SK, 15, 149, 191 SK Gas Trading Company, 149 Small Module Reactor (SMR), 152 Smart city project, 151, 153 Solar power, 153 Somalia pirates, 181 South China Sea, 114, 137, 181 Southeast Asia, 16, 36, 129, 138, 152, 189, 190 South Korea, 2, 7, 9–16, 20, 24, 26–28, 33–38, 40–43, 45–48, 50, 55, 61, 62, 76, 80, 83–85, 88, 95, 98, 99, 102, 108, 118, 129, 134, 140, 147, 149–152, 154, 172, 173, 176, 181, 190, 199, 201

INDEX

South Sakhalin Island, 14 Stalin, 21 Strait of Hormuz, 180, 183, 203 Strait of Malacca, 180, 190, 195, 196 Strategic Petroleum Reserve (SPR), 150, 155, 202 Suez Canal, 194 Suhan Bay, 75 Sulphur, 14 Sumatra, 181, 182 Suncor, 163, 168, 173, 174 Sunda Strait, 182 Sweet, 14, 195, 202 Syneco, 163

T Taiwan, 7, 12, 88 Talisman Energy, 163 Tangshan, 154 Tariffs, 18, 20 Tarim Basin, 51 Tatarstan, 15 Tatneft, 15 Tavan Tolgoi, 113 Taxes, 18, 23, 35, 36, 67, 121, 128, 175 Terrorist, 114, 131, 179, 180, 193–195 Thailand, 12, 189–191 The European Atomic Energy Community (EURATOM), 99, 101 The Gulf of Aden and the western waters of the Indian Ocean, 193 The International Centre for the Settlement of Investment Disputes (ICSID), 106 The Korean Peninsula, 1, 10, 25–27, 41, 43, 46, 74, 82, 85, 86, 90, 102, 123, 135, 137, 138, 147, 151, 154, 201, 204

229

The Soviet Union, 26, 33, 52, 72, 201, 202 Tianjin, 154 Top Regulators’ Meeting (TRM), 138 Trans-Arabian Pipeline (TAPLINE), 182 Transit, 9, 41, 42, 47, 85, 86, 90, 105–107, 135, 151, 180, 185, 186, 188 Trans-Panama Pipeline, 188 Trump, Donald, 149 Turkey, 56, 182 Turkmenistan, 56, 60, 65, 135 Tyumen Oil Company (TNK), 10, 11, 43, 44, 85 U Ukraine, 2, 5, 47, 56, 66, 150, 200, 202, 204 Ulaanbaatar, 9, 42 UN Convention on the Law of the Sea (UNCLOS), 195 UNEXIM Bank, 8, 9 Unified Gas Supply System (UGSS), 11, 56 United Nations Commission on International Trade Law (UNCITRAL), 106 Uranium, 57, 159 US-China rivalry, 153, 156, 202 US Congress, 73 US-Japan, 150 Usolye-Sibirsk, 35 US-South Korea (ROK) energy alliance, 1, 4 Uzbekistan, 99 V Vancouver, 28, 165, 167 Vekselberg, Viktor, 11, 44 Venezuela, 162, 170, 172

230

INDEX

Vladivostok, 8, 15, 27, 59, 85 Vneshtorgbank, 15

W Wang Young-yong, 18 Western Canadian Sedimentary Basin (WCSB), 164 Western Siberia, 13, 58 West Kamchatka, 8, 15 West Sea, 113 Wet barrel, 180, 194 Wind power, 127, 128, 153 World Bank, 106 World Trade Organization (WTO), 76, 92, 106, 107

X Xinjiang, 58

Y Yakutia, 41, 58 Yalu River, 73, 75 Yamal Project, 2 Yellow Peril, 22 Yeltsin, Boris, 26, 53, 54 Yemen, 17, 36, 129 Yergin, Daniel, 62, 67, 108, 109, 131, 157, 196, 197, 205, 206 Yevgeniy Primakov, 42 Yongbyon, 72 Yunnan province, 182, 189 Yuzhno-Sakhalinsk, 21 Z Zapolyarnoye oil field, 13 Zhao Tiechui, 39 Zhigalovo, 45 Zhu Rongji, 42