October 28, 2012
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№ 10 (October 2012)

Russian Gas May Enter China Via South Korea

To shield the Russian gas industry from the Western economic downturn, Gazprom should focus efforts on meeting rising demand for gas in the Asia Pacific region, President Vladimir Putin recommended gas industry leaders on this week in Moscow. China, South Korea, and Japan are seeking ways to reduce their domestic energy deficits, offering Gazprom the opportunity to expand further into Asian markets. But pricing disputes with the region’s largest potential customer, China, has hindered Russian expansion into the region over the past 10 years.

By Ben Priddy

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How can Russia open the Asian vector of it’s gas business? Russian and Korean experts meeting the day after Putin’s remarks say the answer is: first the Korean Peninsula, then the rest.
The Fund for National Energy Security’s October 23 Moscow forum on Russia’s Asian Strategy addressed the opportunities and challenges of developing energy ties in the Far East. “Russia is a natural leader in Eurasia and has many [economic and security] interests in East Asia,” Gleb Ivashentsov, former Russian ambassador to South Korea, stated. “[But] military and political interests of [regional] governments are growing…and dependence on energy imports might lead to increased competition over access to resources. There is a need for an East Asian partnership that enables cooperation between energy suppliers, transit states, and consumers,” Ivashentsov said.

Business, government, and think-tank representatives at the meeting agreed that Moscow should focus initial efforts on linking Far Eastern natural gas fields to consumers on the Korean Peninsula. “The Republic of Korea is looking [to attract] new suppliers that would increase the diversification of the country’s natural gas imports,” according to Sergei Pravosudov, director of the Institute of National Energy. South Korea is the world’s second-largest importer of liquefied natural gas (LNG) after Japan, and is completely dependent on gas imports to satisfy the country’s domestic demand, Pravosudov explained. “Russia is [also] more actively developing the Asian vector of it’s gas business, hoping to expand it’s supplies to Southeast Asia. This is particularly important given the [current state of] relations with our traditional gas consumers – the European Union.”

For the Russian gas industry, there are several key advantages of establishing ties with South Korea before other East Asian countries. First, the South Koreans are willing to pay European prices for Russian gas, something that Beijing has refused to do because it can get cheaper gas from Central Asian suppliers like Turkmenistan and Kazakhstan. Signing a long-term supply contract at these price levels would bolster Moscow’s position at the negotiating table with the Chinese. Second, South Korea is interested in plans to construct a Trans-Korean pipeline from Vladivostok through the entire Korean Peninsula.

There are a number of challenges in the Russo-Korean gas partnership. First, Moscow must decide on a supply route. Developing LNG terminals at Sakhalin would allow Gazprom flexibility in the future to supply gas to any number of Asian or global customers, not just South Korea. On the other hand, the cheaper option would be to construct a Trans-Korean pipeline, making it also possible to sign long-term supply contracts with both North and South Korea, according to Sergei Pravosudov. “This would be beneficial to the end-user, Korea, who is trying to ease dependence on LNG and diversify the direction and means of gas imports. It [would also] benefit the supplier, who is looking for a more profitable means for delivering gas to a long-term consumer,” Pravosudov said.

Building a trans-Korean pipeline raises serious questions, however. Considering Moscow’s recent problems with troublesome transit states Ukraine and Belarus, it is wise to place trust in North Korea? What would prevent Pyongyang from shutting off gas supplies to Seoul during a political dispute? Russian and Korean proponents of the project stressed the positive aspects of the proposed project.

Several forum attendees hinted at the potential for a Trans-Korean pipeline to become a ‘peace pipeline’ leaing to increased regional security by integrating the two Koreas. “The construction of a gas pipeline…could become the locomotive for [Korean] integration,” according to Sergei Pravosudov. Li Yu-Jin, former director for KPMG in Russia, explained that construction of the Trans-Korean pipeline could have four positive long-term effects. “It could lead to constructive cooperation with North Korea to increase stability on the Korean peninsula; bring North Korea into the international community; increase potential for investment in the wider Asia-Pacific region; and give Russia a stronger position at the negotiating table with China over future gas supply contracts,” Yu-Jin said.

A strategic energy partnership with South Korea could leverage Russia’s negotiating position by pressuring the Chinese to give in to a higher price for gas supplies. But success of this project depends in large part on the reliability of North Korea as a transit state. “Russian natural gas reserves are enough to supply the region, but what are the risks involved [in this project] and who will be willing to pay for them? There is not enough confidence in [the reliability of] North Korean business partners,” Alexander Fedorovskiy of the Russian Academy of Sciences said.

Still, according to Oleg Nikiforov of Nezavisimaya Gazeta, you can’t forget the bigger picture. “The big game that Russia is playing in the region is directly connected to the long-term energy relationship with China,” Nikiforov said. “The Chinese market holds much larger potential for Siberian and Far Eastern energy than Korea. But Korea plays a crucial role in Russia’s pursuit of energy ties with the Asia Pacific region.”

Copyright 2012, OGE . All rights reserved.

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