The plan to construct a pipeline linking Russia and South Korea is not exactly new. A similar project – building a pipeline from Russia's Yakutia to South Korea across the northern part of the Korean Peninsula – was eyed back in the late 1990ies, and at the time North Korea's ambassador to Moscow even told the Russian parliament that his government already had land lots earmarked to host the infrastructure. Later, Russia switched to the Sakhalin and adjacent marine shelf gas fields, where output grew steadily, as the resource base to sustain its export strategy in East Asia.
On May 12, 2003 Russian energy giant Gazprom and Korea's Kogas signed a five-year cooperation agreement, which was extended for another five-year term in 2008. The fairly broad deal includes a probe into the feasibility of supplying natural gas from Russia to Korea and is being implemented by a permanent bilateral work group. On June 23, 2009 Gazprom Chairman of the Company’s Management Committee Alexey Miller and Choo Kang-soo, President – CEO of Kogas signed in Seoul an additional agreement meant to intensify the study gas supply opportunities. A report on the potential for gas volumes delivery to Korea using the Sakhalin-Khabarovsk-Vladivostok network was released in 2010 as a result.
Russia adopted in September, 2007 an Eastern Gas Program built around an ambitious plan to form in East Siberia and the Far East an integrated natural gas production, transit, and supply system, which should in part be oriented towards the markets of China and other Asia Pacific countries. The Russian government charged Gazprom with coordinating the Program.
The development of the energy plan to be implemented jointly by Russia and the Koreas reached a milestone during President Medvedev's talks with the DPRK leader Kim Jong-il in Ulan-Ude on August 24, 2011 and with the ROK President Lee Myung-bak in St. Petersburg on November 2, 2011, enabling the Korean leaders to announce the launch of a large-scale gas supply project. The talks Gasprom Chairman of the Company’s Management Committee A. Miller held on an individual basis with North Korea's Oil Industry Minister Kim Hui Yong and Kogas CEO Choo Kang-soo in Moscow on September 15, 2011 also helped advance the Russia-Koreas energy agenda. The discussions with Choo Kang-soo led to the signing of a roadmap setting a timetable for gas supplies from Russia to South Korea, which are due to start in 2017 and should amount to around 10- 12 bcm annually. A memorandum of understanding was inked by Gazprom and North Korea's Oil Industry Minister based on the talks with Kim Hui Yong. Up to date, Russia and North Korea have reached no agreement on the cooperation in the gas sphere and Moscow is suggesting an inter-government deal to establish a legal framework for the project. Gazprom intends to have all issues related to the construction of the North Korean section of the planned pipeline addressed exclusively within dialog with Pyongyang. The Russian company will shoulder the construction costs and project risks while North Korean workforce will possibly be attracted to construct and operate the pipeline. The entire volumes of gas pumped via the pipeline are supposed to land in South Korea.
It is clear that the part of the pipeline construction to take place in the demilitarized zone will involve trilateral and, quite likely, bilateral inter-Korean consultations. Since concerns were voiced over North Korea's “bad intentions” behind the involvement in the project, Moscow chose to state that its decision to have the pipeline built was taken upon a careful analysis of all pertinent circumstances stemming from the current state of the relations between Russia and the Koreas and from the military and political conditions on and around the Korean Peninsula. The obvious interest of both Seoul and Pyongyang in eventually bringing the pipeline online should be the best guarantee that the project is going to be a success.
It is an open secret that the economic aspects of the project and the geopolitical, strategic, and security context of the Korean Peninsula are tightly interwoven. The project should help build trust and normal relations between the Koreas, settle the Korean Peninsula nuclear problem, and generally serve the cause of security and stability in North East Asia. These are the political benefits Moscow counts on, and recently Russia's foreign ministry appointed an envoy to the ad hoc created post of an ambassador in charge of the currently existing key trilateral projects in the spheres of railroad transit, gas pipeline construction, and electric power supply to South Korea across North Korea.
No doubt, there are groups in South Korea, the US, and Japan which mount opposition to Russia's taking a bigger economic role in the region and to the initiatives meant to draw the DPRK into multilateral economic cooperation. Instead, they are pushing for greater isolation of Pyongyang aimed finally at the regime change and therefore seek to debar North Korea from projects like the above pipeline one, which might to some extent revitalize the economy of the country. Combined with the deep mistrust between the two Koreas, the atmosphere created by the policy prompts concerns over the security of the uninterrupted potential gas supplies to South Korea across the territory of its northern neighbor.
In this regard it should be taken into account that Pyongyang has long been keenly interested in the energy project, primarily as a stable source of some $100-200m annually in transit revenues and construction fees. North Korea would have to worry about losing transit revenues if its relations with the trilateral project partners sink dangerously low, while it is also clear that, contrary to the concerns aired in Seoul, the project's planned 15% share in South Korea's energy consumption in any case does not warrant using the energy supply avenue as a political weapon. Experts are critical of the alternative design which implies routing the pipeline around North Korea, which would take laying it underneath the Yellow Sea, considering that the sea is fairly deep and the pumping costs would be prohibitive for the relatively modest amount of gas to be supplied. Russia's Blue Stream stretching across the similarly deep Black Sea, for example, has a throughput five times greater than the target set for the Russia-Korea pipeline.
All parties to the project are sure to benefit from its implementation. For Russia, it opens up opportunities to pursue its long-term priority of integrating into the vibrant economy of East Asia, the Korean Peninsula being a territory via which Russia with its resources can gain access to the region. Moscow is open about the fact that a viable contract with Korea would reinforce its negotiating positions vis-a-vis China and Japan. From South Korea's perspective, the project should lessen the country's dependence on the remote and politically shaky Middle Eastern suppliers (the distance between South Korea and Vladivostok happens to be much shorter than between the country and, let us say, Qatar). Growing risks to marine communications, the potential for rivalries between China and the US, and the unrest across the Middle East and North Africa have to be taken seriously.
Hydrocarbon fuel demand in China as a result of continuing dynamic gross and Japan – especially in the wake of the Fukushima disaster based “nuclear allergy” – are projected to keep rising sharply. China is in fact expected to overshadow Europe as a natural gas importer in the foreseeable future. Even if China's shale gas aspirations prove to be a clever strategy, Russia's gas export to China will certainly be welcome. At the moment Gazprom is busy organizing two routes of supply to China with a total capacity intended to reach 68 bcm a year and hopes to claim a 13% market share in North East Asia (compared to its scheduled 30% in Europe) by 2030. Naturally such events development would inevitably increase pressure over Russian gas market.
Given the above the competition over Russia's gas resources is projected to tighten. South Korea – currently the world's number two gas buyer and an economy relying on import to supply nearly 70% of its energy consumption – will need increasing volumes of natural gas to sustain its economic development.
Today's Russian pipeline policy in the East is more than ever practical. The present crucially important distinguish is Russia at last moved from rhetoric to deals. The construction of the 1,800 km Sakhalin-Khabarovsk-Vladivostok pipeline with the 30 bcm target capacity is underway, with the first phase already complete. The 4,188 km-long Eastern Siberia–Pacific Ocean oil pipeline supposed to pump 80 million tons of crude annually will have its second phase operational by 2014. The construction costs associated with the first phase were $12b for the pipeline proper plus $2b for the Kuz'mino marine terminal. Furthermore, Russia has built its first natural liquefaction facility in Sakhalin.
It was largely due to Russian premier Putin's personal emphasis on the energy theme and its geography priorities change that financial and technical resources became available for the implementation of the massive energy projects in Russia's Far East. In 2009, Putin perceived the Gazprom board to shift impressive investments and construction capacities from the huge Western-oriented Bovanenkovsky field project in Yamal peninsula to the Far East. Untypical for Russia, at the moment the cultivation of its pipeline network linked to Pacific terminals is actually running ahead but not behind of schedule.
On the whole, the major trilateral energy project has passed a crucial phase, with all pertinent political resolutions currently in place. The talks with an economic agenda are to commence in a matter of days and to lead to the signing of a commercial contract by mid-2012. Hopefully, Gazprom, Kogaz, and their North Korean partners will meet with success reaching the necessary compromise on such sensitive subjects as the pricing formula, the pipeline route, the allocation of the demilitarized zone segments, the handling of risks, etc. At present, cautious optimism over the project for gas transmission from Russia to Korean peninsula appears completely appropriate.
