Andrei Konoplyanik is president of the
Energy and Investment Policy and Project Financing Development
Foundation (ENIPPF), a Doctor of Economics, Professor of the
department of management in the international fuel and energy
business at the State University of Management
Kravets is a probationer-researcher at
Andrei Fyodorov is chairman of the
Political Research and Consulting Centre foundation and
director for political research at Russia’s Council for
Foreign and Defence Policy
Developing the Kovykta gas condensate field —
potential reserves 1.6 trillion cubic metres, stable
production for more than 25 years — will provide Russia with
valuable markets in China and South Korea and could possibly
be a vital factor in bringing North Korea in from the
After 50 years of bitter confrontation between the
two Koreas, signs are emerging that a reunification could be
on the horizon — and the present plans for selling 20bn cubic
metres of Kovykta gas by a pipeline to China with an expensive
offshore branch then taking a further 10bn cubic metres to
South Korea may have to be redrawn in favour of a cheaper
extension through North Korea to Seoul.
In our opinion, some progress has been made
towards making this option feasible — the two Koreas have been
co-operating closer and intend to reunite.
This would be
beneficial for both exporters and consumers of Kovykta gas —
it would reduce capital investment in the pipeline, cut
transport costs and, therefore, lower end-user
Korean dialogue aimed at South and North Koreas’
unification is an important political process and will have a
serious impact, primarily in south-east Asia. It has been
given new impetus as a result of the South Korean president’s
visit to Pyongyang last year and the signing of bilateral
accords. Korean unification processes have been expedited,
making it possible to resolve many problems which had seemed
The Korean dialogue is multifaceted —
political, economic and humanitarian. Progress in each of
those spheres will certainly not be uniform but things are
moving and cannot be stopped.
It is now possible to
suggest confidently that Korean unification will be mostly
completed in 2005 or 2006.
What gives such confidence about
the time frames?
First, the Korean dialogue has been steady
and the North Korean leader, Kim Jong Il’s planned visit to
South Korea may further advance bilateral relations and
contribute to the ‘opening up’ of the North Korean
Second, the economic situation in North Korea
requires urgent supplies of food, energy resources and power,
which can only be provided by South Korea or with its
Only South Korea can swiftly move North Korea
out of its permanent economic crisis.
Third, the strong
external factor — China, Russia, the United States, Japan and
other nations are objectively (politically first and foremost)
interested in Korean unification.
Developed nations regard
North Korea as a threat (by the very fact that it has a
nuclear potential and delivery means) to the international
community. Therefore, its unification with South Korea would
substantially reduce military political risks.
ideological changes have been underway in North Korea. They
have been transforming the public conscience, no longer
presenting south Koreans as enemies. The reunion of many
families has been a strong factor promoting early
Fifth, their common history is yet another
strong factor. People are willing to pool their efforts,
primarily in the framework of international organisations and
movements — at the Sydney Olympics a united Korean team was
fighting for medals.
Working up a political model for a
united Korea will certainly be the most complex problem. Such
issues will have to be addressed as the functioning of the
legislative and executive power system and the relatively
smooth transformation and convergence of power mechanisms
existing in the North and South.
Both sides recognise the
problems and there will most likely be several transition
stages in reunification, which will eventually lead to a
uniform political system.
The economic factors of Korean unification
have their own specifics. A comprehensive plan will have to be
worked up for economic transformation and integration which,
by its scale, can in some respects surpass that for a united
South Korea has already started work on such
The development of economic co-operation between
the North and South objectively calls, first and foremost, for
restoring uninterrupted transport communications between the
two parts of the Korean peninsula.
The creation of a Eurasian
(Asia-Russia-Europe) transport corridor based on Russia’s
Trans-Siberian railway (Trans-Sib) with a branch bound for
Korea could help this process. The commissioning of the
trans-Korean mainline and linking it to the Trans-Sib could
resolve many economic development problems and form the main
‘growth areas’ along the mainline route.
standards in North Korea closer to those in South Korea will
be the key economic issue. Even though North Korean statistics
are inaccessible, available data indicates that living
standards in the North are about 30 times lower than the
South’s. Per capita incomes in North Korea do not exceed
$65-$90 a year — although housing and the social sphere are
well developed and free, the crime rate is close to zero and
there is no such thing as personal motor transport there.
The most preliminary estimates show that
investment in North Korea’s development, to bring it to the
level of the South, would require $20bn-$30bn a year during
the first seven to ten years — is possible in principle if the
parties slash their military spending radically.
question is how open will a new Korea be to foreign
If the modernisation programme is successfully
implemented in the North and a common economic infrastructure
is created, a united Korea can, in ten to 15 years become one
of the Asia-Pacific region’s leading nations.
Harmonising living standards in various parts
of one country means that relative energy consumption levels
should also be similar. According to the International Energy
Agency’s data, in 1999 per capita energy consumption in South
Korea was 3.75 times higher than in North Korea. Any steps to
modernise the North Korean economy will require large spending
on energy resources — and supplies can only come from outside
Only imported gas can ensure that substantial
growth in demand for energy, in line with general trends in
energy consumption in the Asia-Pacific region.
The share of gas in primary energy
consumption in Asia-Pacific countries grew substantially in
the 1990s. In South Korea the share increased from one per
cent in 1990 to ten per cent in 2000 and will reach 33 per
cent of total primary energy consumption by 2015, according to
In North Korea, the demand for primary energy is
now mostly met by coal (83 per cent) and water power (12 per
cent). Imported liquid fuel is about four per cent and is used
exclusively for transport needs.
Natural gas is not present in North Korea’s
energy balance. If it remains on its own, it is very likely
that gas will be limited to that it gets as payment for
transit of Kovykta gas to South Korea — if a pipeline is laid
through North Korea.
But with unification there will
emerge additional economic incentives — that will eliminate
the relevant political risks — for an onshore pipeline through
the Korean peninsula. It would then be more likely that North
Korea’s power stations will convert to natural gas as a more
up-to-date and environmentally friendly fuel.
Our assumption is that Korea will reunite in
2005, and we have considered scenarios under which the North
will reach per capita energy consumption levels of 60, 70, 80
and 90 per cent of that in South Korea ten, 15 and 20 years
The chart shows natural gas consumption in a
united Korea, based on those scenarios with account of an
increase due to the unification effect and growing per capita
power energy and gas consumption in the North.
that the share of natural gas in North Korea’s primary energy
resources balance will range from 12 to 24 per cent, depending
on which scenario is realised, due to the economic effects of
unification. In absolute figures, an increase in demand for
gas will average between 18m and 20m tonnes of oil equivalent
depending on the scenario.
Korean unification will substantially
increase demand in the Asia-Pacific natural gas
Where can the extra gas come from? That additional
market demand has not been taken into account so far when the
economic efficiency of various gas production and transport
projects have been considered.
And is that effective demand
— can the potential consumers pay for it?
To answer that it
is necessary to estimate potential cuts in military spending
as a result of unification.
According to The World
Factbook, in 1998 North Korea’s military spending amounted to
$4.9bn, or 33 per cent of its GDP. Unification will certainly
release a substantial share of that defence spending.
If North Korea halved its military spending,
about $2.5bn could then be used to improve living standards,
meet demand for energy and import fuel. If power-generation
was converted to natural gas, it would be logical to invest
part of that money developing a gas infrastructure in the
North and buying supplies. Potential investment by the South
into the economy of the North during the first years after
unification should also be taken into account.
So far South
Korea has mainly imported liquefied natural gas (LNG), the
bulk of which has come from neighbours such as Indonesia (65
per cent) and Malaysia (25 per cent).
It would be
logical to suggest that additional demand for gas due to
Korean unification will also be met with LNG (including
During talks when the Russian president
visited Seoul this year, the South Koreans expressed interest
in importing Russian gas to diversify supply sources. South
Korea can cope with that by having a pipeline network
supplying gas from sea terminals to consumers.
As the new
Kovykta pipeline system is planned to run from Eastern Siberia
to China and on to South Korea, a united Korea’s growing
demand for natural gas could be met from Russia.
North Korea has been considered as a country across which a
gas pipeline cannot run, or at best be a transit country, but
with reunification it would become a consumer. The planned
pipeline’s capacity could be increased from 30m tonnes of oil
equivalent a year to, say, 45m tonnes with all the resulting
This will increase the estimated capital cost
of an onshore export gas pipeline by $1bn to $8bn compared to
the $9bn for one with an offshore section.
But the increase
in the pipeline’s capacity will, according to our estimates,
reduce transport tariffs by about 20 per cent (for the description of the calculation
see ‘The pipeline that is one too many’, Oil & Capital, No
10, 2000). That would reduce the end price
paid by consumers for Russian gas and improve the competitive
edge of North and South Korea and the Asia-Pacific natural gas
market as a whole.
China’s wait-and-see stance to the Kovykta
project should also be taken into account. Because of recent
discoveries in China, Beijing may decide to cut down gas
imports and replace them with its owns. That would be
unprofitable for Russian exporters but a price cut due to a
20-per cent mark-down of the transport tariff could let
Kovykta gas be in demand in China.
As for Korea, potential
competition with LNG should be considered.
According to the
World Energy Outlook forecasts, in 2010 LNG will fetch $140 a
tonne of oil equivalent in the East-Asian region.
For Kovykta’s gas, the price in South Korea,
according to L. Bodarenko’s estimates (The economy of
trans-national gas industry projects in Eastern Siberia,
Materials of the Moscow International Energy Club’s
conference, Moscow, 1998), will also be around $140 a tonne of
oil equivalent ($120 per 1,000 cubic metres).
estimates were made independently and the prices remain
comparable, Kovykta’s gas will be able to compete in the
Asia-Pacific market. But considering trends in LNG production,
where intense research and development is leading to the
reduction of production and transport costs, the situation is
likely to change. Cuts in gas prices due to lower transport
tariffs will improve the Kovykta position in Korea and other
So, when making feasibility estimates for an
export gas pipeline from the Kovykta field to China and on to
South Korea, the potential ‘Korean unification effect’ should
be included. Russian exporters could benefit from an increase
in more competitive supplies in their new Asian market.