By Selig S. Harrison
Ko Gas made an important but relatively little-noticed decision in August that could have a profound impact on South Korea's energy security, on the rate of improvement in North-South relations and, most immediately, on the resolution of the nuclear crisis with Pyongyang.
Faced with a burgeoning demand for natural gas, Ko Gas invited bids for 20-year liquefied natural gas (LNG) contracts. The decision to rely so heavily on LNG in the years immediately ahead marked a major reversal in South Korea's energy policy. Until August, Seoul had kept the door open for the early introduction of natural gas pipelines from Kovykta in Siberia or from Sakhalin. But the Kovykta project, which Ko Gas had supported with a feasibility study, is stalled by a seemingly intractable pricing stalemate between China and Russia and by internal factional conflicts within Russia.
In the case of the Sakhalin project, the proposed pipeline route would start at Exxon-Mobil's Sakhalin I seabed concession off the northeast corner of the island and cross through North Korea to South Korea. The Bush Administration opposes a pipeline that would benefit Pyongyang and Exxon-Mobil has been unwilling to proceed in the face of U.S. government opposition.
Given the uncertain prospects for both the Kovykta and Sakhalin pipelines, Ko Gas has been under pressure to test the LNG market. However, even if it is assumed that the LNG contracts will actually be concluded, South Korea is still likely to get a significant portion of its gas in the medium and long-term through pipelines from Russia, in all probability from Sakhalin.
There are three reasons why this is so.
First, the demand for gas will steadily increase, so that by 2012 or 2014 there will be a need for pipeline gas to supplement LNG, even if the long-term contracts are concluded. This means that feasibility studies could usefully be undertaken now so that a pipeline will be in place in time.
Second, diversification. South Korea's energy security requires diversified sources of gas, not exclusive reliance on what could be risky LNG imports, especially from faraway sources of supply in politically unstable countries.
Third, there are powerful geopolitical factors that could galvanize support for a Sakhalin pipeline in South Korea. A Sakhalin pipeline could be the key to resolving the nuclear crisis with North Korea. Another geopolitical imponderable is the drive for closer North-South relations. The Sakhalin pipeline would make a major contribution to North-South economic interdependence and thus toward reunification.
Still another geopolitical question mark is Russia's desire for closer commercial and political ties with the two Koreas. Russia is increasingly unhappy about Exxon-Mobil's reluctance to build a pipeline from Sakhalin I to South Korea. After all, such a pipeline would be economically profitable for all concerned and would help to provide much-needed gas for Khabarovsk and Vladivostok. Russia might very well decide to promote an alternative pipeline route from another seabed concession south of Sakhalin I, so far not developed, known as Sakhalin III, by renegotiating its current Sakhalin III concession agreement with Exxon-Mobil to place the Russian company Rosnyeft as the lead partner in place of Exxon-Mobil.
The recent absorption of Rosnyeft by the powerful government gas monopoly, Gazprom, would give it powerful bargaining leverage if it does decide to confront Exxon-Mobil.
Given the poor results of its oil prospecting efforts to date and the refusal of the Bush administration to build the light water nuclear reactors promised under the Agreed Framework, North Korea is increasingly pinning its hopes for economic salvation on a gas pipeline from Sakhalin. Pyongyang would not only receive royalties for letting the pipelines pass through its territory but could also tap into them to supply fertilizer plants and power stations.
South Korea would be the main market for the pipeline's gas, with a hypothetical commitment to buy 10 billion cubic meters annually. Russia would buy some for the Khabarovsk-Vladivostok region, adjacent to the pipeline route, and North Korea would seek a steadily growing share as its economy grows.
The Sakhalin I pipeline would be roughly 1,900 miles long, running along the east coast of Korea to its terminus near Seoul, where it would intersect with the existing South Korean gas network. It could be built within three to four years at a cost between $3 billion and $3.5 billion.
The North strongly prefers a pipeline from Sakhalin to one running through China from Kovykta and has repeatedly conveyed this preference to Russia and South Korea.
Some observers in Seoul and Washington fear that a pipeline crossing North Korean territory would be politically risky, giving the North powerful bargaining leverage. But the North would have a big stake of its own in keeping the pipeline operational and avoiding disruptions in the gas flow to the South. Pyongyang would suffer greatly from any disruptions, since the uninterrupted operation of power stations and fertilizer plants dependent on gas from the pipeline would be critical to the North's economic stability.
Control and management of the pipeline would rest with a consortium including Exxon-Mobil and its concession partners, including Rosnyeft, Ko Gas and other South Korean entities involved, and North Korea. Whether it likes it or not, Pyongyang would have to accept this type of joint control, modeled after international practice in other pipeline ventures, or forfeit economic benefits that it desperately needs.
The strongest argument against both the Kovykta and Sakhalin pipelines is that LNG might be cheaper for South Korea. But this cannot be determined until a feasibility study is completed. More important, unless there is an overwhelming economic advantage in favor of LNG, the central long-term South Korean goal of promoting a stable process of North-South economic cooperation leading to a confederation and eventual unification would be a factor in favor of Sakhalin gas.
In North Korean eyes, the Sakhalin pipeline issue is a significant test of U.S. intentions in the nuclear crisis. A White House green light to Exxon-Mobil to explore it would signal a serious U.S. interest in resolving the nuclear issue and would, therefore, soften the North's posture in the nuclear negotiations.
The Sakhalin option is the most potent incentive that the U.S. could offer in the nuclear negotiations but would have to be accompanied by moves toward the normalization of relations, a peace treaty and large-scale multilateral and bilateral aid from neighboring powers, as well as, from the United States, for the rehabilitation of North Korea's crumbling economic infrastructure.