Power Struggles

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
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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 acknowl-
edges 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. Espe-
cially, 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 apprecia-
tion 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
vi 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 appre-
ciate 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 1
2 Framing Energy Security Between Russia and South
Korea? 7
Introduction 7
Progress 8
The Kovykta Gas Field at Irkutsk 8
The Sakhalin Project 11
Other Energy Projects 14
Problems 16
Bilateral Dimension 16
The Limits of the RFE: Underdevelopment and Harsh
Environment 20
The Regional Dimension 23
Prospects 25
3 Northeast Asia’s Kovykta Conundrum: A Decade
of Promise and Peril 33
The Potential Benefits of Kovykta Gas Development 34
Russia’s Untapped Potential 34
South Korea’s Looming LNG Supply Gap 35
China’s Promise as a Gas Market 39
The Fight for Kovykta 40
The Five-Country Feasibility Study (1996–2000) 41
vii
viii CONTENTS
The Three-Country Feasibility Study (2000–03) 42

Gazprom’s Strong-Arm (2004–Present) 44
Obstacles to the Development of the Kovykta Gas Pipeline 46
Transit Country Problems 46
Complexities of Gas Investments 48
Demand Security and Pricing 50
Russia’s Resource Renationalization 52
Balancing Russia’s Domestic and European Demand 56
Russia’s New Subsoil Law 57
Kovykta’s Periphery 57
Future Outlook 60
4 Is Natural Gas the Answer for North Korea? 69
Introduction 69
Energy Crisis in North Korea 70
North Korea’s Energy Dependence on China 72
Natural Gas Remedy: Why Natural Gas for North Korea? 79
Natural Gas Options for North Korea 83
Siberian Potential and Russia’s Role 83
PNG North Korean Route and LNG Power Plant
Proposal 84
The US Role 87
Future Outlook 89
5 Framing Multilateral Energy Security Framework
in Northeast Asia?: Lessons from KEDO and ECT 97
Introduction 97
The Experience of KEDO: “Why is KEDO Relevant
for Future Energy Development?” 98
The Lesson from the EU and ECT 104
Anatomy of Future Regional Multilateral Energy
Framework 109
What Is to Be Done? & Outlook 111
References 114
6 Republic of Korea’s Energy Security Conundrum:
The Problems of Energy Mix and Energy Diplomacy
Deadlock 117
Introduction 117
ROK’S Energy Consumption and Demand Trend 118
CONTENTS ix
Global Supply and Demand Conditions 118

Current Energy Consumption 118
Problems of the Current Energy Policy 121
Basic Direction of the Second Energy Master Plan 121
Oil and Gas Supply and Demand Projection 124
Alternative Energy 126
Natural Gas 128
The New Energy Security Concept 130
ROK’S Energy Security Objetives 133
What is the Most Important Current Issue and How is
the Country Trying to Solve It? 133
What Are the Biggest Foreseen Challenges in the Near
Future? 136
What Role Does the US-Japan-Korea Alliance Play
for the Country’s Energy Security? 136
Off-Shore Resource Development 136
Energy Diplomacy 137
Energy Power Mix 138
Energy Scandal 140
Conclusion 141
References 142
7 The US-ROK Energy Alliance 147
Background 147
Benefits 148
Specific Projects 150
Policy Implication and Outlooks 154
8 Energy Alliance Between Canada and South Korea:
Canadian Oil Sands Cooperation 159
Energy Potentials of Canada 159
Oil 162
Oil Sector Organization & Trends 162
Exploration and Production 164
Western Canada Sedimentary Basin 164
Offshore 164
Pipelines 165
Canadian Oil Sands 167
Important Factors for Oil Sands 171
South Korea’s Involvement in Alberta’s Oil Sands 172
x CONTENTS
Limitation of Canadian Oil Sands Developments 173

Oil Demand Crunched 174
EnCana, Imperial, Suncor 174
Environmental Problems 175
Implications 175
9 World Chokepoint 179
Definition 179
Strait of Malacca 181
Strait of Hormuz 182
Panama Canal 183
History 186
Expansion 186
China Question 187
Nicaragua Canal 188
Greater Mekong Sub-Region (GMS) 189
South Korea’s Current Engagement in GMS 190
The Political Economy of World Chokepoint 194
Chokepoint and International Law 195
Implications of World Chokepoints 195
10 Conclusion 199
Bibliography 207
Index 221
List of Figures
Fig. 2.1 South Korea’s Natural Gas Demand 2003–2017 (Source

Ministry of Commerce, Industry and Energy [Seoul Korea,
December 2009]) 10
Fig. 2.2 The Russian Oil and Natural Gas Pipeline Proposals
in Northeast Asia (Source: Economist, July 11, 2004) 14
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) 37
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) 38
xi
xii LIST OF FIGURES
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) 40
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]) 44
Fig. 3.5 Distribution of Russia’s Oil and Gas Production,
1991–2006 (Source “BP Statistical Review of World
Energy 2007”) 53
Fig. 3.6 Crude Oil Price per Barrel, 1970–2006 (Source “BP
Statistical Review of World Energy 2007”) 54
Fig. 4.1 North Korea’s energy use composition 71
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]) 71
Fig. 4.3 DPRK foreign trade trends (US $ million) (Source “DPRK
Trade Trends,” 2011 KOTRA [Korea Trade Investment
Promotion Agency] [Seoul Korea, 2011]) 76
Fig. 4.4 North Korea’s long-term energy demand prospects
(in tons) (Source KEEI Energy Statistics, 2010) 81
Fig. 4.5 North Korea’s long-term power electricity capacity
prospects (in million kwh) (Source KEEI Energy Statistics,
2010) 82
Fig. 6.1 Final energy consumption trend by source (Unit:%) (Source
Korea Energy Economics Institute 2014. “Yearbook
of energy statistics” Korea Energy Economics Institute) 119
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) 120
LIST OF FIGURES xiii
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) 122
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) 123
Fig. 8.1 The Map of Canada 160
Fig. 8.2 Total energy consumption in Canada (2021) (Source
International Energy Annual 2005) 161
Fig. 8.3 Top Western hemisphere oil producers, 2007 (Source EIA
International petroleum monthly) 163
Fig. 9.1 Panama Canal (Source Se Hyun Ahn’s Photo) 184
Fig. 9.2 Panama Canal 185
Fig. 9.3 Panama Canal 187
List of Tables
Table 4.1 DPRK foreign trade volume (Unit: US $ million) 77

Table 4.2 North Korea’s long-term energy demand prospects
(Unit: TOE) 81
Table 6.1 Fossil fuel self-sufficiency rates of the world’s ten largest
energy consumers (2011) 119
Table 6.2 Current and new policy paradigm 123
Table 6.3 Forecast by source: Total primary energy demand
(business-as-usual (BAU)) 125
Table 6.4 Forecast by source: Final energy consumption
(business-as-usual (BAU)) 125
Table 6.5 ROK government budget for alternative energy(Won:
a hundred million) 126
Table 6.6 The present state of Alternative Energy Supply (unit:
thousand toe) 127
xv
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 implica-
tions 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 secu-
rity, 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 1

Singapore Pte Ltd. 2022
S. H. Ahn, Power Struggles,
https://doi.org/10.1007/978-981-19-5474-0_1
2 S. H. AHN
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 Russian-
South 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 prob-
lems 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 drasti-
cally 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.
1 INTRODUCTION 3
• 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 compli-
cating 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 situ-
ation. 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 investi-
gates 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
4 S. H. AHN
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 secu-
rity 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 competi-
tion. This chapter seeks to explore distinct features of Malacca, Hormuz,
Panama Canal, Nicaragua Canal, and Greater Mekong Sub-region (GMS)
1 INTRODUCTION 5
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 North-
east 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 Russian-
South 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 coun-
tries 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 coun-
tries. 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

https://doi.org/10.1007/978-981-19-5474-0_2
8 S. H. AHN
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 devel-
opment 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
2 FRAMING ENERGY SECURITY … 9
bank. In 1997, BP renewed its interest in the Kovykta project by

becoming a shareholder of Sidanko. In November, Sidanko and BP estab-
lished 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 eight-
month 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
10 S. H. AHN
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 approx-
imately $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 annu-
ally 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 reluc-
tance 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 25,000
Tonnes 20,000
of Oil 15,000
Equivalent 10,000
5,000
0
2003 2004 2005 2007 2010 2015 2017
Year
Fig. 2.1 South Korea’s Natural Gas Demand 2003–2017 (Source Ministry of
Commerce, Industry and Energy [Seoul Korea, December 2009])
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 nega-
tively 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 devel-
oped 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 negoti-
ating 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 Sakhalin-
2 gas project is one of the most immediately achievable projects. In
fact, the Sakhalin oil and gas projects are based on decades of Russia-
Japan 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 diffi-
cult to count the number of Sakhalin projects because their status varies.
They range from Sakhalin-2 which is currently producing oil offshore, to
12 S. H. AHN
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 Sakhalin-
2 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 envi-
ronmental regulations. The consortium was forced to sell a majority stake
to Gazprom in 2006. After 2006, Gazprom controlled a 50% stake in the
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 Sakhalin-
2 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 Sakhalin-
2 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
14 S. H. AHN
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 agree-
ment 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
a total of primarily oil contracts worth $4 billion. The biggest was a

$3 billion project between LG, South Korea’s second largest conglom-
erate, 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 equip-
ment 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 agree-
ment 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 Inter-
national, 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
16 S. H. AHN
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 trilat-
eral 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. Bilat-
eral 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
gas would meet the South Korea’s current demand and enable competi-
tion 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 impor-
tant 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 bilat-
eral diplomatic relations. It is also clear that active government policies
in favor of gas are essential for the market penetration of gas. The trans-
border 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 third-
party 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 long-
term projects and has led to reluctance in Korean business circles to
invest in Russia. In other words, Korean business sectors have been rela-
tively 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.
18 S. H. AHN
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, espe-
cially those capable of resolving complex government-related issues and
administrative litigation. South Korea’s 2005 Sakhalin oil scandal illus-
trates 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 situa-
tion 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, certifica-
tion, and better licensing of energy market participants. On the other
hand, changing legislation and an unstable tax regime acts as disincen-
tives to developing effective businesses.42 Russia has failed to provide the
legal and institutional infrastructure for external economic transactions.
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 corpo-
rate 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 nation-
alism 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 endeav-
ored 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.
20 S. H. AHN
Beijing and Seoul officials were confused about whether business negoti-
ations 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 TNK-
BP’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 ineffec-
tive 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 trans-
portation 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
Far East are extremely tough. From October to June, these condi-
tions 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 condi-
tions 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 over-
runs.”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 previ-
ously 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; xeno-
phobic paranoia about international conspiracies; dictatorship by local
demagogues; and an economically inspired population exodus—an inviting
vacuum for nearby overpopulated China.54
22 S. H. AHN
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 North-
east 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 North-
east 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 aban-
doned 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 author-
ities are equally concerned that East Asians would reshape their own
communities as sojourners or as long-term residents within Russian terri-

tories. 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 coop-
eration 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 tech-
nology 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 institu-
tional 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. More-
over, there are currently no legal and institutional frameworks for energy
cooperation in Northeast Asia. Only Russia and Japan have signed the
24 S. H. AHN
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 connec-
tion 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 Sakhalin-
1 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
focusing on one side turns out to be unsustainable in the end. Multilat-

eral 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 frame-
work 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 Amer-
ican 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 infrastruc-
ture 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 develop-
ment and national security. Russia’s abundant oil and gas resources have
the potential to contribute to enhancing its bilateral energy security rela-
tionship with neighboring states—and to regional security more broadly.
This potential is based on a long-term vision of energy security inter-
ests 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
26 S. H. AHN
enormous opportunities to solve their energy shortage and thus diversify

their existing energy markets. Russian energy is very attractive, particu-
larly 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 polit-
ical 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
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 negotia-
tions 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 expen-
sive 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 coopera-
tion 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 arrange-
ments in Northeast Asia. Most of all, the competitiveness of Russia’s oil
28 S. H. AHN
and gas prices in the Northeast Asian energy market is also often ques-
tioned. 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 Rela-
tions 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.
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.
15. Michael Bradshaw, “Prospects for Russian Oil and Gas Exports to North-
east 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 Penin-
sula,” 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 Corpora-
tion), email interview, September 9, 2005.
30 S. H. AHN
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 inter-
view, 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 Imple-
mentation 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,” Demokratizat-
siya [The Journal of Post-Soviet Democratization], 16:1 (Winter 2008),
p. 46.
48. Se Hyun Ahn and Michael T. Jones, “Northeast Asia’s Kovykta Conun-
drum: A Decade of Promise and Peril,” Asia Policy 5 (January 2008),
pp. 131–132.
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.];
One anonymous Russian diplomat and one anonymous Russian intelli-

gence member in Seoul, personal discussions, Seoul, between 2006 and
2009.
51. Eugene M. Khartukov, “Russia,” in Rethinking Energy Security in East
Asia, ed. Paul B Stares (Tokyo: Japan Center for International Exchange,
2000), p. 145.
52. 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.
53. Ibid.
54. 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.
55. Tom Wuchte, “Northeast Asia’s Forgotten Worry: Russia’s Far East,”
Pacific Focus, 16:2 (Fall 2001), p. 47.
56. Keun-Wook Paik, three personal interviews [London, November 6, 2005;
Seoul, January 16 and September 15, 2009]; and phone interview,
December 20, 2009.
57. Rozman, p. 9.
58. Khartukov, p. 176.
59. 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.
60. 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.
61. 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 confronta-

tion 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 reli-
able 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

https://doi.org/10.1007/978-981-19-5474-0_3
34 S. H. AHN
the midst of taking over controlling stakes in Russia’s remaining foreign-

owned 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.
3 NORTHEAST ASIA’S KOVYKTA CONUNDRUM … 35
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. Develop-
ment at this level could facilitate diversification of Russia’s Europe-centric
export market, increase government revenues, spur economic develop-
ment 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 govern-
ments.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 fastest-
growing and most dynamic economies. Vast amounts of natural resources
36 S. H. AHN
will be needed to maintain this economic growth. Due to the expan-

sion 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 There-
fore, 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 begin-
ning 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 vulner-
able 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
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
70
60
Percentage
50
40
30
20
10
0
1990 1995 2000 2005 2010 2015 2020
Year
Southeast Asia Middle East Other
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)
38 S. H. AHN
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
45
Supply gap
40 Supply contracts
Million tons of oil equivalent
35
30
25
20
15
10
0
1990 1995 2000 2005 2010 2015 2020
Year
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)
China’s Promise as a Gas Market

Natural gas currently comprises only 3% of China’s total energy consump-
tion 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 trans-
portation 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 manu-
facturers 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 emis-
sions 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 invest-
ments 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 intro-
duction 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
40 S. H. AHN
300
Billion cubic meters

250 NDRC (250)
200
150 APERC (153)

EIA (134)
IEA (107)
100
50
0
2006 2020
Year
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,” Inter-
national 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 north-
eastern 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
hoped that this project could both enhance South Korea’s energy secu-
rity 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. Esti-
mates 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
42 S. H. AHN
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, compa-
nies 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 coop-
eration 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 feasi-
bility 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
by giving Northeast Asia a truly integrated pipeline system, the North

Korean routing option would both minimize the unstable political situ-
ation 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 wran-
gling between stakeholders, local and federal governments, and Russian
gas giant Gazprom ensued, due in large part to Moscow’s 2002 appoint-
ment 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 final-
ized 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
44 S. H. AHN
Chayandinskoye
Gas-Oil Field
Kovykta Gas Field

Skovorodino
Irkutsk
Manzhouli
Ulaanbaatar Khabarovsk
Daqing
Harbin
Changchun Nakhodka
Beijing
Dalian
Pyongtaek
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 agree-
ment, 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
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 poten-
tial 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 agree-
ment 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
46 S. H. AHN
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 Penin-
sula. Both China and South Korea are clearly aligned in desiring a stable
and benign North Korea—and resolving North Korea’s energy insecuri-
ties 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
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 North-
east 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 addi-
tional 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 bene-
ficial. 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
48 S. H. AHN
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 govern-
ments. 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 standard-
ized benchmark price. Furthermore, striking natural gas deals between
two parties (let alone three or more parties) involves a highly sophis-
ticated set of plans and calculations. The huge amounts of front-end
investments and the difficulties and expense of storage and transporta-
tion 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 bench-
mark 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
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 construc-
tion, 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. Further-
more, 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 invest-
ment; 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 commit-
ments 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.
50 S. H. AHN
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.
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 opti-
mistic 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, nego-
tiations 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
52 S. H. AHN
per million Btu (including freight) plus $0.40 per million Btu for regasi-
fication.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 demon-
strating 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 mid-
1990s. 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
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 Oil
700 10
9
600
Million barrels per day
Billion cubic meters
8
500 7
400 6
5
300 4
200 3
2
100
1
0 0
91 93 95 97 99 01 03 05 91 993 995 997 999 001 003 005
19 19 19 19 19 20 20 20 19 1 1 1 1 2 2 2
Year Year
Consumption Exports
Fig. 3.5 Distribution of Russia’s Oil and Gas Production, 1991–2006 (Source
“BP Statistical Review of World Energy 2007”)
54 S. H. AHN
last two years, crude oil prices have hovered around $70 per barrel and
even topped $100 per barrel. By some estimates, federal earnings from
oil and gas under Putin are ten times greater than under Yeltsin.53
As oil and gas have become central to Russia’s economy, Putin has
taken great strides toward gaining control of the energy industry. In 2001,
Putin appointed three high-level executives at Gazprom, all of whom were
either friends of Putin or former Putin administration officials.54 As aptly
characterized in a Swedish defense analysis, “Putin is creating a culture
of a politically correct market economy.”55 With the oligarchs that run
Russia’s energy companies voluntarily and naturally placing state interests
on par with commercial ones, direct state intervention no longer seems
necessary.
In the mid-1990s when Asian companies entered into the Kovykta
pipeline negotiations, energy prices were low and the Kremlin was weak.
The autonomous rights of regional authorities (such as those in Sakha
and Irkutsk) were also at a peak, enabling these locales to have greater
influence and independent decision-making regarding resource planning
and management. Irkutsk’s remoteness from Moscow contributed to this
100
90
80
70
60
Price ($)
50
40
30
20
10
0
70
73
76
79
82
85
00
88
91
94
97
03
06
19
19
19
19
19
19
19
19
19
19
20
20
20
Year
Fig. 3.6 Crude Oil Price per Barrel, 1970–2006 (Source “BP Statistical Review
of World Energy 2007”)
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 govern-
ment 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 representa-
tives 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.
56 S. H. AHN
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, Turk-
menistan, 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 one-
twentieth 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 indi-
cation of Russia’s fear of overstretching Gazprom’s other export commit-
ments.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?
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 coun-
try’s major fields for export to Asia and beyond. In an energy strategy
document, the Russian Ministry of Energy outlines the country’s far-
reaching 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 interna-
tional 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
58 S. H. AHN
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 approxi-
mately 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 repre-
sented a timely and strategic potential investment. Chayanda was in fact
one of the only major fields in Russia’s eastern frontier that was not oper-
ated by international oil companies. Gazprom could thus use the threat
of Chayanda exports to bypass TNK-BP’s export plan.64 There have even
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 oppor-
tunity 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
60 S. H. AHN
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 criti-
cized 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, North-
east 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 impor-
tant 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 considera-
tions 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
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 Recon-
struction 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. Polit-
ical expediency has thus far dictated Gazprom’s export policy. Although
some foreign investors remain in Russia, the IOCs will likely reassess polit-
ical and commercial risk at some point, which may have consequences for
any future investment.
With Gazprom’s attention on Sakhalin and further European expan-
sion, for the foreseeable future, Kovykta will likely either sit idly or be used
62 S. H. AHN
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 percep-
tions 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 gas-
producing 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 secu-
rity, 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 manage-
ment, contract sanctity, and adequate and secure financing. Most of these
necessities are, however, far from being in place in Russia’s Far East.
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 govern-
ment 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 avail-
able 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.
64 S. H. AHN
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.
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 Kaza-
khstan, Turkmenistan, Myanmar, as well as Kovykta and Sakhalin in
Russia. See “Price, Russia Weaken Case for China LNG,” Petroleum
66 S. H. AHN
Intelligence Weekly 44, no. 44 (October 31, 2005); and Miyamoto and
Ishiguro, “Pricing and Demand for LNG in China.”
48. “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.
49. “China’s Foreign Plans Have a Long Way to Go,” International Gas
Report, no. 568, February 26, 2007.
50. Vladimir Milov, Leonard L. Colburn, and Igor Danchenko, “Russia’s
Energy Policy: 1992–2005,” Eurasian Geography and Economics 47, no.
3 (2006): 286.
51. Clifford Gaddy and Fiona Hill, “The Russian Federation,” Brookings
Institution, Energy Security Series, October 2006, 10.
52. Based on authors’ own calculations using “Crude Oil Price Summary,”
Energy Information Administration, 2007 www.eia.doe.gov.
53. Gaddy and Hill, “The Russian Federation,” 7.
54. These appointees are Dmitry Medvedev (chairman), Aleksei Miller (presi-
dent), 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.
55. 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.
56. Jennifer Josefson, “Policy Challenges: A Russian Perspective,” in Energy
Futures, ed. Ralf Boscheck (New York: Palgrave Macmillin, 2007), 98–
107.
57. “China Energy Report Weekly,” Interfax Information Services, March 4–
10, 2006, 27–28.
58. “Country Analysis Brief: Russia,” U.S. Department of Energy, Energy
Information Administration, April 2007 http://www.eia.doe.gov/emeu/
cabs/Russia/Background.html.
59. 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.
60. Josefson, “Policy Challenges,” 104–105.
61. “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.
62. “Kovykta–Why Not Call It Expropriation,” Energy Economist, no. 309
(July 2007): 3.
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 Protec-
tion 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 Essen-
tial,” 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 poten-
tial 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 US-
North 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

https://doi.org/10.1007/978-981-19-5474-0_4
70 S. H. AHN
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 China-
dependent 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 coal-
focused, and 84% of total energy production was from coal.5 From a total
4 IS NATURAL GAS THE ANSWER FOR NORTH KOREA? 71
Nuclear, Thermal,
37% 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])
72 S. H. AHN
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, elec-
tric 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 Yong-
byon 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 land-
scape. Russian energy aid was suddenly abandoned, and North Korea was
forced to rely only on domestic coal and limited hydro resources. The
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 exagger-
ation 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 vulnera-
bility, 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 More-
over, 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 gener-
ating 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
74 S. H. AHN
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 millen-
nium 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 Terri-
tories.”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 mili-
tarily 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 favor-
able (or unfavorable) terms for energy joint production and export to
North Korea. China could strengthen its competitive edge at the Six-
Party 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 conspicu-
ously 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 collabo-
ration for joint projects.18 Furthermore, the Suhan Bay oil exploration
project in North Korea’s northwest is also bound by a joint oil explo-
ration 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
76 S. H. AHN
the total volume of exports over the previous 11 years.22 It is impor-

tant 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
Total Sum
6,000
5,000
4,000
DPRK-China
3,000
2,000
DPRK-S. Korea
1,000
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])
4
Table 4.1 DPRK foreign trade volume (Unit: US $ million)
1991 1993 1995 1997 1999 2001 2003 2005 2006 2007 2008 2009 2010
Total sum of trade 2695 2833 2339 2485 1813 2673 3115 4057 1346 4731 5635 5093 6086
Trade between DPRK & China 610 899 549 656 370 737 1022 1580 1699 1974 2787 2680 3472
Trade between DPRK & S.Korea 112 186 287 308 334 403 724 1055 1350 1798 1820 1679 1912
Source 2011 Korea Trade Investment Promotion Agency (KOTRA) DPRK Trade Trends
IS NATURAL GAS THE ANSWER FOR NORTH KOREA?
77
78 S. H. AHN
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 secu-
rity 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 agree-
ment 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
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 denu-
clearize, 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, rela-
tively 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 obsta-
cles. As we saw from the March 2011 Japanese tsunami, nuclear energy
is not immune to unexpected natural disasters. There are several indi-
cations 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
80 S. H. AHN
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 partic-
ularly 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 North-
east 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 adop-
tion 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
60,000
50,000
Others
40,000
Nuclear
30,000 Hydro
N. Gas
20,000
Oil
10,000 Coal
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)
2004 2007 2012 2017 2022 ’04–2022
Coal 11,400 11,986 15,285 15,589 30,376 5.6

(68.9) (69.1) (67.9) (50.0) (54.1)
Oil 1230 (7.4) 1409 (81) 2384 4243 10,974 12.9
(10.6) (13.6) (19.5)
N. Gas 1654 (5.3) 4371 (7.8)
Hydro 3125 3125 3800 4930 5100 (9.1) 2.8
(18.9) (18.0) (16.9) (15.8)
Nuclear 3285 3285 (5.8)
(10.5)
Others 780 (4.7) 834 (4.8) 1043 (4.6) 1484 (4.8) 2071 (3.7) 5.6
Total 16,535 17,354 22,513 31,184 56,176 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
82 S. H. AHN
being diverted to military use in North Korea. Even though many vehi-
cles 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)
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 inten-
sive, 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 plat-
forms, and building pipeline grids, must be factored into planning. This
means that gas infrastructure requires long-term financing, strategic plan-
ning, 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 facil-
ities. 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 opportu-
nity 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 frame-
work 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
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 Penin-
sula 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 prolif-
eration 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
86 S. H. AHN
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 under-
standing 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 stand-
point, 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 circum-
stances.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
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 coun-
try’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 humani-
tarian 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 intro-
duction 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 final-
ized several gas contracts with South Korea and Japan, and is on course
88 S. H. AHN
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 capaci-
ties 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, Wash-
ington 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 transporta-
tion 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 Depart-
ment 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
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
90 S. H. AHN
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 oppor-
tunities 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 situa-
tion 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.
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 anony-
mous 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-NK-
electricity-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
92 S. H. AHN
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.
15. 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.
16. Henry Kissinger, “The Future of U.S-Chinese Relations,” Foreign Affairs
91:2 (March/April, 2012), pp. 44–52.
17. 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.
18. 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.
19. Aminex PLC, http://www.aminex-plc.com/projects/, accessed
September 20, 2012.
20. “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.
21. 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.
23. 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
in collaboration with the KEEI, September 13, 2012; and Aden, “North
Korean Trade with China.”
25. Woojin Chung, director and senior research associate at Resources Devel-
opment Research Division, International Energy Cooperation Group,
KEEI, “North Korea’s Mineral Resources and Challenges in Inter-
Korean Cooperation,” presentation report, Global Forum on North Korea
Economy 2011, Millennium Seoul Hilton, Seoul, Korea, April 7, 2011.
27. Since 2008, trade volume between the North and China comprised more
than 50% of the total trade volume between the North and foreign coun-
tries. 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.
28. “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.
29. Author interview with Chung (KEEI), Seoul, September 17, 2012.
30. Choongang Ilbo [Choongang Newspaper] (Seoul), September 17, 2012.
31. Chung, “North Korea’s Mineral Resources and Challenges in Inter-
Korean Cooperation”.
32. 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.
33. Benjamin Habib, “Rogue Proliferator? North Korea’s Nuclear Fuel Cycle
and Its Relationship to Regime Perpetuation,” Energy Policy 38:6 (January
2010), p. 2833.
34. 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-hippel-
hayes3.pdf, accessed June 20, 2013; and Jung-min Kang, “An Initial
Exploration of the Potential for Deep Borehole Disposal of Nuclear
94 S. H. AHN
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.
35. David von Hippel and Peter Hayes, “DPRK Energy Sector Development
Priorities: Options and Preferences,” Energy Policy 39:11 (November
2011), pp. 6781–6789.
36. Helen Cabalu, “Indicators of Security of Natural Gas Supply in Asia,”
Energy Policy 38:1 (January 2010), p. 221.
37. Se Hyun Ahn and Michael T. Jones, “Northeast Asia’s Kovykta Conun-
drum: A Decade of Promise and Peril,” Asia Policy 5 (January 2008),
p. 108.
38. Se Hyun Ahn, “Can Korea, Russia, and China Form a Strategic Energy
Alliance?” Journal of International Politics 15:1 (Spring 2010), pp. 105–
135.
39. Ahn and Jones, “Northeast Asia’s Kovykta Conundrum,” pp. 105–140.
40. 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.
41. “Russia, China, Two Koreas: Gas Games,” Financial Times, August 26,
2011.
42. Author interview with Lee Sung Kyu, Russian energy expert, KEEI, Seoul,
September 19, 2011.
43. Se Hyun Ahn, “Global Insider: North Korea the True Target for China-
South Korea Pipeline Proposal,” World Politics Review, April 23, 2012,
http://www.worldpoliticsreview.com/trend-lines/11874/global-insider-
north-korea-the-true-target-for-china-south-korea-pipeline-proposal.
44. 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.
45. 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.
46. See remarks by both Keun-Wook Paik and author, in “Russia:
Korean Pipe’s Surprising Progress,” Energy Compass, Energy Intelligence,
November 4, 2011.
47. 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.
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 funda-
mental 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 obsta-
cles 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 Develop-
ment 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 func-
tional multilateralism or practical multilateral structure with concrete

https://doi.org/10.1007/978-981-19-5474-0_5
98 S. H. AHN
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 coopera-
tion. 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 prac-
tical 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 imple-
ment the 1994 U.S-North Korea Agreed Framework and designed to
stop North Korea’s nuclear weapons program. KEDO was perhaps the
5 FRAMING MULTILATERAL ENERGY SECURITY … 99
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 rele-
vant 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 agree-
ment 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 agree-
ment 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
100 S. H. AHN
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 flex-
ibility 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 consoli-
dating 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 special-
ists 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 prede-
cessor 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
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 begin-
ning, the relationship between North Korea and KEDO began as antag-
onistic 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 hesi-
tant 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 US-
North 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 gener-
ating 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 explo-
ration 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 rele-
vant organization to benchmark future energy multilateral framework, it
is important to point out that the creation of KEDO indirectly facilitated
102 S. H. AHN
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 foun-
dation 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 orga-
nization’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 harmo-
nizing national policies, not only providing South Korea, Japan, and, later,
the European Union a seat at the table in resolving an important secu-
rity 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.
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 some-
times 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 polit-
ical 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 impor-
tant 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 imple-
mented 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 insti-
tutionalized framework is required, as we already have seen in the case of
KEDO.
104 S. H. AHN
The Lesson from the EU and ECT

Accordingly, we must understand that the question of building a multilat-
eral 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 polit-
ical 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 coun-
tries 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 develop-
ment 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 over-
rule economics. As for energy efficiency matter, in particular, government
intervention is even necessary in Europe too. Energy efficiency enhance-
ment 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, govern-
ments in East Asia are more often involved in energy policymaking or
diplomacy process in general compared with European ones. Several Asian
countries tend to privilege a strategic approach over economic calcula-

tions. 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 multilat-
eral 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 asso-
ciated with energy-related investment and trade (Francoise 2004). The
aim of the ECT was to establish a legal framework to promote long-
term energy cooperation focusing on the protection of investment,
trade in energy materials and products, and transit and dispute settle-
ment. The character of the ECT resembled KEDO somehow because it
established a framework for international cooperation between European
106 S. H. AHN
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 Euro-
pean 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. (Euro-
pean 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 reso-
lution process. In particular, among the ECT set of rules, in the North-
east Asian context, dispute settlement and transit protocol are the key
elements to keep in mind. First, dispute settlement rule aims at the resolu-
tion 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 investor-
state 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 interna-
tional 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
Contracting Party is obliged to make provision for the effective enforce-

ment 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 inter-
national 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 recommenda-
tions 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, compet-
itive 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 trans-
portation 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 effec-
tive for coping with complex cross-border infrastructure projects, like
108 S. H. AHN
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 govern-
ments. 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 initia-
tives are far less developed in the region due to regional rivalry, lack
of trust, unsolved history dispute, and more diversity in terms of poli-
tics, 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 excep-
tion 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 associ-
ations 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 assump-
tion, 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 polit-
ical intervention will occur. When energy access is disrupted, tempers and
suspicions rise and manipulations quickly follow. In such circumstances,
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 poli-
cymaking, 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 institu-
tionalized 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 imple-

ment 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 frame-
work 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:
110 S. H. AHN
• 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 partic-
ularly 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 infras-
tructure and the entire supply chain recognizing the vulnerabilities that
come from terrorism, war, piracy, accident, and natural disaster.
Most of all, in order to keep its value as a source of energy, the devel-
opment of local distribution networks is particularly crucial for natural gas
markets to form and for projects to proceed. However, efficient distribu-
tion 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 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 rela-
tively 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 individ-
ually 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 institu-
tional 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 rela-
tions throughout the histories, any type of regional security cooperation
between the nation states looks quite even more pessimistic.
112 S. H. AHN
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 appro-
priate 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 distri-
bution 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 elec-
tric 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 adop-
tion 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.
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 North-
east 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 conti-
nent, 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. Further-
more, on condition that energy cooperation between the states in this
region goes smooth, we could take further step, which is rather ambi-
tious 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 multi-
lateral 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 non-
governmental 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
114 S. H. AHN
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-to-
government negotiations are crucial to implementation of multilateral
energy framework. In this aspect, specifically Russian-Chinese gas cooper-
ation 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: Poten-
tials and Problems.” The Journal of International Studies 15(1), 2010,
pp. 105–135.
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 Fran-
coise Nicolas, Francois Godement, and Taizo Yakushiji, Asia and Europe:
Snyder, Scott, “The Korean Peninsula Energy Development Organization: Impli-
cations for Northeast Asian Regional Security Cooperation?” North Pacific
Policy Papers 3. University of British Columbia, 1997.
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Brief, November 2006.
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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).
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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,
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DC, 2009).
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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 prior-
ities 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 endan-
gered 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 policy-
makers, 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

https://doi.org/10.1007/978-981-19-5474-0_6
118 S. H. AHN
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 consump-
tion 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
6 REPUBLIC OF KOREA’S ENERGY SECURITY CONUNDRUM … 119
Table 6.1 Fossil fuel self-sufficiency rates of the world’s ten largest energy
consumers (2011)
Ranking Country Oil Gas Coal
1 China 0.46 0.78 0.98

2 U.S. 0.46 0.93 1.12
3 India 0.26 0.76 0.77
4 Russia 3.25 1.41 1.55
5 Japan 0.00 0.03 0.00
6 Germany 0.03 0.16 0.60
7 France 0.01 0.01 0.01
8 Canada 2.12 1.58 0.72
9 Brazil 1.03 0.62 0.14
10 Korea 0.01 0.01 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%, transporta-
tion 36.3%, and household/commerce 6.9%. Furthermore, excluding
feedstock is as follows: Industry 14.5%, transportation 70.2%, and house-
hold/commerce 13.1% (Ministry of Trade, Industry & Energy 2014).
120 S. H. AHN
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. More-
over, 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)
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 overcon-
sumption patterns and accelerated the social trend toward dispropor-
tionate 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 bitu-
minous 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 elec-
tricity. 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).
122 S. H. AHN
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 success-
fully 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 develop-
ment
4. Strengthening industrial infrastructure by training high-quality
workers and conducting practical R&D (Ministry of Trade,
Industry & Energy 2014) (Table 6.2).
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 Improve the government’s

seas resources (enlargement of capability to develop resources
public enterprises) (Strengthening industrial
competitiveness and creating jobs)
Key Player Public enterprises Public and private enterprises
Funding Financed mainly by public Financed mainly by the private
enterprises sector
Method M&A, buying shares in Securing operating licenses in
production fields exploration fields
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 illus-
trated 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:
124 S. H. AHN
responding aggressively to changes in the global market, such as the emer-

gence 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 trans-
portation 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 revolu-
tion 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 gener-
ation sector will depend on greenhouse gas emission reduction aims, base
Table 6.3 Forecast by source: Total primary energy demand (business-as-usual

(BAU))
Source 2011 2025 2030 2035 Average

annual
growth rate
1%)
Coal 83.6 (30.3) 100.2 107.7 112.4 1.24

Ishare %) (28.3) (29.1) (29.7)
Oil 105.1 111.0 107.1 101.5 −0.15
(38.1) (31.3) (29.0) (26.9)
Natural Gas 46.3 (16.8) 64.8 69.8 73.3 (19.4) 1.93
(18.31) (118.9)
Hydro 1.7 1.7 (0.5) 1.9 2.0 (0.5) 0.70
(0.6) (0.5)
Nuclear 32.3 (11.7) 59.6 65.3 (17.7) 70.0 3.28
(16.81) (18.51)
Renewable 6.6 16.8 18.0 18.8 4.44
& Others (2.4) (4.7) (4.9) (5.0)
Total 275.7 354.1 369.9 377.9 1.32
(100.0) (100.0) (100.0) (100.0)
Table 6.4 Forecast by source: Final energy consumption (business-as-usual

(BAU))
Source 2011 2025 2030 2035 Average

annual
growth rate
l%l
Coal 33.5 (16.3) 37.4 (15.0) 38.8 (15.3) 38.6 (15.2) 0.58
(share %)
Oil 102.0 109.1 105.1 99.3 (39.1) −0.11
(49.5) (43.9) (41.3)
City Gas 23.7 (11.5) 32.5 (13.1) 34.4 (13.5) 35.3 (13.9) 1.68
Electricity 39.1 (19.0) 59.7 (24.0) 65.6 (25.8) 70.2 (27.6) 2.47
Heat energy 1.7 (0.8) 2.9 (1.2) 3.1 (1.2) 3.3 (1.3) 2.82
Renewable 5.8 (2.8) 7.1 (2.9) 7.4 (2.9) 7.4 (2.9) 1.01
[non-electricity]
Total 205.9 248.7 254.3 254.1 0.88
(100.0) (100.0) (100.0) (100.0)
126 S. H. AHN
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 4,350 5,326 6,877 7,958 9,283 8,309

Alternative energy technology 1,326 2,079 2,445 2,520 3,125 2,306
development
Supply business for alternative 1,541 1,431 1,637 1,202 1,290 1,340
energy
Support for development 270 513 1,492 3,318 3,950 3,950
differences
Supply loan 1,213 1,303 1,303 740 918 713
6
Table 6.6 The present state of Alternative Energy Supply (unit: thousand toe)
2005 2006 2007 2008 2009 2010 2011 2012 2013
Supply 4,879.20 5,225.20 5,608.80 5,858.50 6,086.20 6,856.30 7,582.80 8,850.70 9,879.20
Supply percent 2.1 2.2 2.4 2.4 2.5 2.6 2.8 3.2 3.5
Solar heat 34.7 33 29.4 28 30.7 29.3 27.4 26.3 27.8
PV 3.6 7.8 15.3 61.1 121.7 166.2 197.2 237.5 344.5
Bio 181.3 274.5 370.2 426.8 580.4 754.6 963.4 1,334.70 1,558.50
Waste 3,705.50 3,975.30 4,319.30 4,568.60 4,558.10 4,862.30 5,121.50 5,998.50 6,502.40
Water power 918.5 867.1 780.9 660.1 606.6 792.3 965.4 814.9 892.2
Wind power 32.5 59.7 80.8 93.7 147.4 175.6 185.5 192.7 242.4
Geothermal 2.6 6.2 11.1 15.7 22.1 33.4 47.8 65.3 87
Hydrogen Fuel cell 0.5 1.7 1.8 4.4 19.2 42.3 63.3 82.5 122.4
Marine resources – – – – – 0.2 11.2 98.3 102.1
Source http://www.index.go.kr/potal/main/EachDtlPageDetail.do?idx_cd=1171
REPUBLIC OF KOREA’S ENERGY SECURITY CONUNDRUM …
127
128 S. H. AHN
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 tech-
nology 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 govern-
ment’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 improve-
ment, 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 estab-
lished 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
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 Indone-
sia’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 choke-
points 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
130 S. H. AHN
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 impor-
tance 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 increas-
ingly 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 mili-
tary 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 defi-
nition 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 plau-
sible approach (Willrich 1975). More specifically, “in a state which enjoys
energy security, consumers and their governments are able to believe that
there are adequate reserves from sources at home or abroad, and produc-
tion 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 phys-
ical 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 secu-
rity 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
132 S. H. AHN
to foreign markets (Willrich 1975). Moreover, an exporter may view secu-

rity 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 secu-
rity 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 benefi-
cial 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 earn-
ings. 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 diplo-
matic 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 impor-
tant, 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.
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 renew-
able 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 solu-
tion 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 conti-
nental 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
134 S. H. AHN
Koreas and Russia has been actively brought to the diplomatic table,
and still remains the focal point of Northeast Asian energy secu-
rity 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 impor-
tant but both sides are not moving fast as it should be. Gas from
Russia’s Eastern Siberian field has the potential to not only drasti-
cally 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. Nonethe-
less, 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 facili-
tate 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 North-
east Asia. In fact, Putin prefers Rosneft with Igor Sechin to
Gazprom with Alexei Miller.
• Global economic crisis was the major hurdle for energy cooper-
ation 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
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 Turk-
menistan, 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 tradi-
tionally 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 effec-
tively: 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
136 S. H. AHN
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 non-
transparency 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 Sino-
Russian-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
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 transport-
related 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 activ-
ities virtually stopped to function.
There are two explanations for this failure. First, energy security
concept is simply missing among top leadership including at the legisla-
tive, 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 impor-
tance of energy security.
138 S. H. AHN
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 govern-
ment 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 interven-
tion 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 indepen-
dence is only 3%: Here, 3% includes hydropower, anthracite, and a small
segment of renewable energy. Other than that, as previously mentioned
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 gener-
ally 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 specif-
ically 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; renew-
able 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 plan-
nings together, and also seek to rearrange in terms of order. Most
important, between the most recent Korea’s energy power mix plan
140 S. H. AHN
numbers 6th and 7th, the natural gas use was not taken into consider-
ation 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. Mean-
while, 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 docu-
ments 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 offi-
cial, 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 compo-
nents 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
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 priori-
ties 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 polit-
ical 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.
142 S. H. AHN
Hence, not a single national energy company dares to expand its new
abroad energy business at this moment. Nor do relevant energy policy-
makers 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 diplo-
macy 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.
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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 prox-
imity 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

https://doi.org/10.1007/978-981-19-5474-0_7
148 S. H. AHN
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 signifi-
cantly. 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 cooper-
ation 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, co-
management 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,
7 THE US-ROK ENERGY ALLIANCE 149
First, in comparison with Sino-Russian energy alliance or poten-

tial 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 accumu-
lated from the decades of strong political and military ties. In particular,
as the golden age of natural gas has just started, natural gas-related coop-
eration 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, transporta-
tion 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 agree-
ment 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, respec-
tively. 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.
150 S. H. AHN
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 Devel-
opment 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
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 tradition-
ally important spot such as Malacca Strait and Hormuz, two significant
choke points are GMS and Panama Canal. For Panama Canal, it is essen-
tial 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 energy-
related 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.
152 S. H. AHN
Before shale revolution, in 2009, Russian pipeline gas has been often
one of many options for Washington. Now with the U.S., LNG is situ-
ated 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 manage-
ment 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 coun-
tries 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 gener-
ation. 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.
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 tradi-
tional 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.
154 S. H. AHN
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 unli-
censed 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 pollu-
tion 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 situ-
ation 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. There-
fore, 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 genera-
tion. 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
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 secu-
rity 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 devel-
opment 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 presi-
dent 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 state-
run 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
156 S. H. AHN
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 struc-
ture 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 US-
Russian 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 prob-
lems 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 member-
ship 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 exclu-
sive true energy partnership just as the type of “Achnacarry Agreement”
or “Redline Agreement’ or ‘As Is Agreement” in the past. This is some-

thing 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. Govern-
ment 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 consid-
ered 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 Amer-
ican 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,

https://doi.org/10.1007/978-981-19-5474-0_8
160 S. H. AHN
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 consump-
tion 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

8 ENERGY ALLIANCE BETWEEN CANADA AND … 161
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 produc-
tion will increase even further in coming years and more than offset the
decline in Canada’s conventional crude oil production: according to the
162 S. H. AHN
May 2008 Short Term Energy Outlook, EIA expects Canadian oil produc-
tion 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 consump-
tion 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 Impe-
rial 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
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 esti-
mated 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 Interna-
tional petroleum monthly)
164 S. H. AHN
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 Terri-
tories, 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 technologi-
cally 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 conven-
tional 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 repre-
sents 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,
with both White Rose and Hibernia announcing plans to expand produc-
tion 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. Oper-
ators 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 produc-
tion 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 expan-
sion 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.
166 S. H. AHN
Export Pipelines
Canada has extensive oil pipeline connections with the U.S. . Enbridge
maintains connections between major Canadian cities and Chicago, inte-
grating 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, 400,000-
bbl/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
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 extrac-
tion. 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
168 S. H. AHN
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 oper-
ates 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 tech-
nology 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 Impe-
rial 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 oper-
ates 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 rela-
tively 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
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 expan-
sion 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 impor-
tant 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 Invest-
ments, Conoco, Imperial, Mocal Energy, Murphy Oil, Nexen, and Petro-
Canada), reported an average production cost of about $ 11.50 per barrel
in 2001.
170 S. H. AHN
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 respon-

sible development of these extensive deposits through planning and
liaison with government, industry, and communities to ensure a compet-
itive 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
$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 green-
house 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
172 S. H. AHN
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 govern-
ment 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 Hang-
ingstone 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
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 Calgary-
based 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
174 S. H. AHN
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 develop-
ment 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,
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 cospon-
sored 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 devel-
opment and exploitation of the oil sands resource. Despite massive
176 S. H. AHN
investment and the four decades long development, only 20% of all oil
sands leases have been acquired so far. This means that future invest-
ment 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 rela-
tionships 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.
March, 2009.
6. Ibid.
7. Ibid.
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.
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 trans-
port 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 impli-
cations of energy chokepoints.

https://doi.org/10.1007/978-981-19-5474-0_9
180 S. H. AHN
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 infras-
tructure 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 infe-
rior 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, polit-
ical 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.
9 WORLD CHOKEPOINT 181
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 Indone-
sian 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
182 S. H. AHN
• 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 choke-
point. 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 devel-
opment 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 [trans-
port 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.
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.
184 S. H. AHN
Fig. 9.1 Panama Canal (Source Se Hyun Ahn’s Photo)
• 921,000 b/d of petroleum and petroleum products were trans-

ported 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
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

186 S. H. AHN
• 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 engi-
neering problems and a high worker mortality rate. The dense jungle
was alive with venomous snakes, insects, and spiders, but the worst chal-
lenges 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 km-
long 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.
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,
188 S. H. AHN
after the U.S., became the largest supplier of goods in the Panama-
nian 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 Communica-
tions Construction Company) has built 30% of the new Panama Colón
Container Port, a terminal that will facilitate suitable for the new dimen-
sions 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 perspec-
tive, 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
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 ques-
tioned. 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. Further-
more, 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
190 S. H. AHN
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 consti-
tutes 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 govern-
ment 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 dramati-
cally 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.
So far ROK has only participated in small scale project such as railroad
construction and water resource management for GMS project. Nonethe-
less, 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 compa-
nies 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, rail-
road 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 devel-
opment 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 envi-
ronment, 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 invest-
ment. 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 specifi-
cally, ROK companies are very keen on Vietnamese oil industry, Myanmar
natural gas, Thai rubber industry, Laos timber, Cambodian fishery busi-
ness. 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
192 S. H. AHN
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 treat-
ment and social infra) plus East Asia climate partnership 11.7 million US $
(Vietnam and Cambodia water resource and electricity infra). It is impor-
tant 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 ROK-
Mekong 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 environ-
mental security in the Mekong River; (2) to implement the construction
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 environ-
mental 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 govern-
ment 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 engage-
ment in GMS does not only imply ROK’s Niche public diplomacy or
Niche ODA policy. This may turn out ROK’s first major diplomatic chal-
lenge 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, offi-
cial 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 el-
Mandeb strait, the Gulf of Aden and the western waters of the Indian
Ocean. A number of pirates and terrorists have attacked oil and LNG
194 S. H. AHN
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 liter-
ally 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 rela-
tions 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 interac-
tions 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 percep-
tions 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
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 choke-
points 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 tradi-
tionally 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, histor-
ically, 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.
196 S. H. AHN
• 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/how-
much-does-it-cost-to-go-through-the-panama-canal/ (2019.6.8);
https://www.statista.com/statistics/710174/toll-revenue-panama-
canal/ (2019.6.8);
https://www.panamatoday.com/economy/panama-canal-revenues-
grow-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-chinese-
expansion-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-starts-
w7rk-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
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 Tailor-
Made 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 Tailor-
Made 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

https://doi.org/10.1007/978-981-19-5474-0_10
200 S. H. AHN
new global energy trend. North Korea could join the leading natural gas-
consuming 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 infras-
tructure 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 relation-
ship. 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.
10 CONCLUSION 201
As the Russian chapter described previously, in the Korean Penin-

sula, 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 discrimi-
nating 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 previ-
ously argued, Russians do make political calculations in evaluating energy
projects. In the Soviet and Russian contexts, economic, political, and mili-
tary 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 North-
east 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;
202 S. H. AHN
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 Indo-
Pacific strategy. As the world choke point chapter illustrated, these two
concepts are genetically related to one of the key elements of energy secu-
rity, 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 impor-
tant 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 US-
led 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
10 CONCLUSION 203
questions are somehow genetically related to energy security problems.

It is undeniable that the global maritime route is dominated by enor-
mous 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 unfavor-
able 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
204 S. H. AHN
Soviet leaders underestimated the importance of ecological and environ-

mental 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 mid-
term 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
10 CONCLUSION 205
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 hard-
ware. 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 auto-
mobile 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 secu-
rity 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.
206 S. H. AHN
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 Asso-
ciates, Washington, DC. July 5, 2011. See also Daniel Yergin, “Energy
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Index
A Apache Canada, 163

Abqaiq-Yanbu natural gas pipeline, Arabian Sea, 182
182 Arbitration Institute of the Stockholm
Abu Dhabi Crude Oil Pipeline, 182 Chamber of Commerce, 106
Achnacarry Agreement, 156 Argentina, 99
Aframx, 184 ASEAN Council on Petroleum
Africa, 176, 181, 190, 195 (ASCOPE), 23, 25, 111
Alaska, 89 ASEAN Regional Forum (ARF), 113,
Alberta, 161–175 114
Alberta Energy, 163, 169–171, 176
Asian Development Bank (ADB), 191
Alfa Eco, 18
Asian markets, 11, 35, 43, 58, 62,
Algeria, 195
182
Altai, 58
Asia-Pacific, 3, 26, 80, 88–90, 112,
Altai pipeline, 58
113, 200
Alternative energy, 79, 88, 126–128,
152 As Is Agreement, 157
Aminex, 75, 92 Association of Southeast Asian
Anderson Exploration, 162 Nations (ASEAN), 23, 111, 114
Angarsk, 35 Athabasca oil sands, 167, 170
Angarsk Petrochemical Company Athabasca Oil Sands Project (AOSP),
(APC), 8 168, 169
Angarsk Refinery, 8 AUKUS, 156
Angola, 195 Australia, 17, 47, 52, 60, 99, 135,
Aniva Bay, 14 156, 199
© The Editor(s) (if applicable) and The Author(s), under exclusive 221
license to Springer Nature Singapore Pte Ltd. 2022
https://doi.org/10.1007/978-981-19-5474-0
222 INDEX
B Canadian Hunter, 162

Baikal, 43, 84 Cape Horn, 185
Balance of power relations, 5, 136, Cape of Good Hope, 151
192 Caribbean’s San Jose Pact, 25
Bali, 181, 182 CBM, 112
Battery, 153, 155 Changchun, 43
Beb el-Mandeb strait, 193 Chayanda, 11, 16, 58, 59
Beijing, 9, 20, 22, 39, 40, 42, 43, 51, CHEC, 188
73–76, 78, 94, 154, 188 Cheniere, 88, 113
Belt and Road Initiative (BRI), 150, Chernobyl, 80
151, 190, 192, 193, 202, 203 Chicago, 166
Bengal, 182 Chile, 99
Bilateral, 2, 4, 5, 7, 8, 16, 17, 20, 22, China, 1, 3, 5, 7, 9–12, 20–22, 24,
23, 25–28, 73, 89, 100, 111, 26, 33, 35, 39, 40, 42, 43, 45,
130, 154, 191, 193, 202 47, 48, 50–52, 55, 56, 58–62,
Billion cubic meters (bcm), 8, 9, 11, 70, 73–76, 78, 79, 82–86,
12, 34–36, 41–43, 45, 50, 51, 88–90, 92, 93, 97, 98, 102, 103,
60, 83, 84, 129, 200 105, 110, 112, 119, 134–138,
Bitumen, 163, 165–175 150–154, 159, 163, 181–183,
BlackGold, 163, 172, 173 187–190, 193, 194, 200–204
Blackouts, 78, 140 China Communications Construction
Blue House, 142, 190 Company (CCCC), 188
Bradshaw, Michael J., 11, 29, 67 China National Offshore Oil
British Columbia, 88, 113 Corporation (CNOOC), 163
British Petroleum (BP), 8–10, 26, 42, China’s coal industry, 39
43, 85, 149 China’s National People’s Congress,
Brunei, 17 154
Brussels, 106 China’s State Administration of Coal
Bureya Hydro Power Plant, 15 Mine Safety, 39
Burlington Resources, 162
Chinese National Petroleum
Bush administration, 87
Corporation (CNPC), 9, 11, 26,
Bypass, 58, 60, 182
42, 60, 163
Chokepoint, 36, 129, 180–196
C Chongjin, 78
California, 88, 149, 166 Christina Lake project, 163
Cambodia, 151, 189, 191–193, 206 Chung Ju-Yung, 40
Cameron, 88, 113 Chunshiao gas field, 150
Canada, 1, 4, 35, 84, 86–88, 99, 113, City gas, 87, 120, 124
119, 156, 159–168, 170–172, Climate change, 141, 153, 191
175, 176 Clinton administration, 87
Canadian Association of Petroleum Coal, 3, 39, 50–52, 70, 72, 73, 75,
Producers (CAPP), 170, 173 76, 78, 80, 92, 112, 118–121,
INDEX 223
133, 139, 147, 150, 154, 159, E

160, 200, 204 East Asia Gas Co (EAGC), 8, 9, 41,
Cold Lake, 168, 172–174 42
Cold War, 26, 33, 201, 202 East China Sea, 113, 137, 150, 202
Committee on Security Cooperation Eastern Siberia, 8, 26, 41, 59–61,
in the Asia Pacific (CSCAP), 101 83–85, 133, 147
Condensate, 8, 11, 12, 35, 84 Eastern Siberia Pacific Ocean Oil
Conoco, 162, 169 Pipeline (ESPO), 2, 15, 22, 49,
Consortium, 9, 12, 15, 34, 35, 41, 90
60, 112–114, 188 East Sea, 78, 113, 137
Conundrum, 1 East-West Pipeline, 182
Council for Mutual Economic Economic security, 4, 28, 131, 148,
Assistance, 25 155
Cushing, 166 EDCF, 191, 192
Czech Republic, 99, 152 Edmonton area, 165
Electric car, 153
Electricity, 15, 39, 72–74, 76, 78, 82,
83, 99, 105, 110, 112, 120–122,
D 128, 141, 159, 192, 193
Daerim, 191 el-Sisi, Abdel Fattah, 194
Daewoo International Kumho Petro Enbridge, 165, 166, 175
Chemical, 15 Enbridge Pipelines, 165
Dalian, 43, 48, 78 EnCana, 163, 168, 173, 174
Danchun, 78 Energy alliance, 5, 20, 90, 135–137,
147, 150, 156, 199, 201, 202,
Dandong City, 73
204
Deep Borehole Disposal (DBD), 80
Energy Charter Treaty (ECT), 3, 24,
Democrat, 153, 155, 156
105–108, 111
Democratic People’s Republic of
Energy crunch, 1, 5, 150, 154, 155,
Korea (DPRK), 71, 73, 75–77,
199, 201, 204, 205
83, 85–87, 92, 133, 136, 137,
Energy diplomacy, 4, 7, 27, 28, 103,
148, 151, 152
105, 117, 118, 130, 132, 135,
Department of Energy, 66, 88 137, 138, 141, 142, 201
Devon Energy, 162 Energy great game, 1, 5, 90, 110,
Diamond Gas Sakhalin, 12 205
Diversification, 35, 80, 100, 107, Energy power mix, 138–140
132, 138, 142 Energy scandal, 140
Dokdo Island, 137 Energy security, 1, 3–5, 7, 8, 16, 19,
Doo San company, 152 24–26, 33, 34, 62, 69, 70, 73,
Draft Law, 57 78, 83, 85, 87, 89, 90, 97, 98,
Drake passage, 185 101, 103, 104, 108–113, 117,
Dublin European Council, 106 122, 129–133, 136, 137, 141,
224 INDEX
142, 147, 148, 151, 154, 179, Guangdong, 51

180, 190, 199, 202, 204, 205 Gulf Canada, 162
Energy Storage System (ESS), 153 Gulf Coast, 149, 166, 175
Energy transition, 1, 5, 153, 199, Gulf of Mexico, 89, 155
204, 205
EOG Resources, 163
Europe, 5, 12, 22, 35, 45, 46, 56, H
58, 66, 104, 135, 152, 182, 201, Hague, 106, 175
202 Hamgyong, 74
European Energy Charter (EEC), 23, Hanbo Group, 8, 41, 42, 50
24, 106, 111 Hangingstone venture, 172
European energy crisis, 152, 156 Hanhwa, 191
Export-Import Bank Korea (EXIM), Han River, 190
15 Harbin, 43
Exxon Mobil, 24 Hebei, 154
Exxon’s Imperial Oil, 163 Hebron-Ben Nevis field, 165
Henry Hub, 112
Hong Kong, 188
F
Hong Kong Nicaragua Canal
Fort McMurray, 169, 173, 175
Development Group (HKND),
Four Party Proposal, 100
188, 189
Fourth Middle Eastern War, 89
Hunchun, 78
Freeport, 88, 113
Husky Energy, 163
Free Trade Agreement (FTA), 88,
Hutchinson Whampoa, 188
135, 136, 147, 149, 155, 188
Hydropower, 70, 72, 75, 138, 159,
Fukushima, 79, 85, 89, 100, 114,
160, 193
133, 137, 140, 141
Hyosung, 191
Hyundai Corporation, 15
G
Gazprom, 3, 9–13, 15, 19, 20, 22,
33–35, 43–45, 49, 52, 54–62, I
66, 84, 86, 94, 134 Ian Craig, 21
Geopolitics, 1, 4, 5, 26, 204 Igor Farkhutdinov, 13
Germany, 56, 79, 91, 119 Inchon Airport Corporation, 191
Geun-Hye, Park, 137 India, 88, 119, 134, 153, 161
Global supply chain, 153, 156, 202 Indian Ocean, 181
Greater Mekong Subregion (GMS), 4, Indonesia, 13, 17, 63, 64, 98, 99,
151, 189–193, 202 105, 129, 181
Great Wall, 74, 92 Indo-Pacific Strategy (IPS), 148, 151,
Green inflation, 5, 199, 204, 205 192, 193, 202, 203
Green New Deal, 153 Intercontinental Exchange (ICE), 113
GS Caltex, 15 Interfax, 15
INDEX 225
International Energy Agency (IEA), Knowledge Sharing Program (KSP),

24, 30, 39, 111, 161 191, 192
International law, 195 Kohlberg, 155
International Oil Companies (IOC), Korea alliance, 136
57, 58, 61, 156 Korea Consultants International, 191
Investors, 2, 3, 16, 18–20, 41, 48, 50, Korea Energy Agency, 126
51, 61, 106, 135, 155, 170, 175 Korea Gas Corporation (KOGAS), 9,
Iran, 56, 60, 62, 183 11, 13–15, 18, 28, 36, 37,
Iraqi Pipeline in Saudi Arabia (IPSA), 42–44, 50, 92–94, 129, 149,
182 151, 157
Irish, 75 Korea Hydro and Nuclear Power
Irkutsk, 8, 9, 30, 34, 35, 41–43, 45, (KHNP), 140
49, 54, 55, 84 Korea National Oil Corporation
Irkutskenergo, 8 (KNOC), 15, 163, 172, 173
Israel, 183 Korean Energy Development
Italy, 56 Organization (KEDO), 3,
97–103, 105, 109, 112, 114
Korean reunification, 86
J Korea Railroad, 18
Japan, 1, 7, 9, 12, 14, 20, 23–26, 34, Kovykta, 1–3, 7–11, 16, 17, 19, 20,
39, 42, 50, 61, 62, 64, 69, 79, 22, 26, 27, 30, 34, 35, 38,
80, 83, 85–88, 97, 99, 100, 40–52, 54–62, 65, 84, 85, 113,
102–104, 110, 111, 119, 129, 134
134, 136–138, 150, 152, 154, Kovyktinskii, 8
155, 157, 172, 181, 201, 203 Kozmino, 15
Japp Guyt, 21 Kravis Roberts & Co. (KKR), 155,
Java, 182 156
Jeanne d’Arc Basin, 164, 165 Kremlin, 11, 12, 15, 19, 22, 24,
Joint Development Zone, 150, 202 54–57, 59, 86, 134, 201
Kuwait, 182
K L
Keystone XL pipeline, 155 Lake Charles, 88
Khabarovsk, 15, 59, 60 Landbridge, 187
Kim Jong Il, 75, 85 Landscape, 1, 5, 52, 72, 87, 113,
Kim Jong Un, 90 148, 180
Kim Yong-sam, 41 Laos, 151, 189, 191, 192
Kinder Morgan, 165, 166 Law, 55, 189
Kinder Morgan Canada (formerly Lee Myung Bak, 84, 85, 138
Terasen), 165 Legislation, 18
Kissinger, Henry, 74, 92 Light, 14, 162, 163, 166, 195, 202
Kitimat, 88, 113, 166 Light Water Reactor (LWR), 101
226 INDEX
Liquefied natural gas (LNG), 2, 7, 8, Mitsui, 12, 13

10, 12–14, 16–18, 29, 36–38, Mongolia, 2, 7, 9, 20, 25, 34, 42, 46,
43–45, 47–52, 59, 60, 63, 79, 47, 134
80, 83, 84, 87–90, 104, 113, Moon Jae In, 149, 190, 192
121, 122, 129, 130, 139, Moscow, 3, 11, 14, 16, 17, 20, 22,
148–152, 180–182, 193, 200, 24, 28, 41, 43, 54, 58, 86
205 Multilateral, 2, 3, 16, 23–25, 27, 84,
Liquefied petroleum gas (LPG), 79, 97–103, 105, 109–114, 138
87
LNG terminals, 17, 49, 51, 87, 88
Localism, 21 N
Lombok, 182 Nakhodka, 43, 45, 49
Long Beach, 88 National Assembly, 142
Louisiana Gulf Coast, 88 National Pension Service (NPS), 155,
Lumberjacks, 23 156
Lunskoye, 12, 13 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,
M 97, 100, 105, 108, 110–113,
Mafia, 26, 140 124, 128, 133–136, 138, 139,
Magellan, 185 142, 147–152, 154, 159, 160,
Malaysia, 79, 181 163, 165, 166, 168, 169, 171,
Manchuria, 43, 92 172, 182, 188, 191, 199, 200
Medvedev, Dmitry, 19, 66 Netherlands, 106, 195
Megaport, 187 Newmont, 163, 172, 173
MEG Energy, 163 New York Mercantile Exchange
Mekong River, 189–193, 203 (NYMEX), 113
Memorandum of understanding, 42, New Zealand, 99
86 NGO, 57
Mexico, 159, 162, 189 Nicaragua Canal, 4, 189
Micro-dust, 133, 154 Nickel, 153
Middle East, 2, 16, 26, 36, 38, 47, Nizhnekamsk, 15
52, 129, 130, 152, 176, 181, Northeast Asia, 1–3, 5, 7, 14, 16, 17,
190, 204 22, 23, 25–27, 33–35, 43, 46,
Mighty Winged Tiger, 148 47, 57, 60–63, 74, 80, 82, 84,
Miller, Alexey, 9, 11, 43, 44, 66, 84, 86, 89, 90, 95, 97–99, 102–104,
134 107, 108, 111–114, 123, 134,
Minerals, 19, 23, 74–76, 78, 103, 136, 148, 155, 201, 202, 204,
122, 150, 153, 202, 204 205
Mineral transfer, 76 Northeast Borderland History
Ministry of Strategy and Finance, 92, Research Project, 74
190, 192 North Korea, 2, 7, 10, 16, 24, 31,
Mitsubishi, 12, 13 34, 43, 46, 47, 69, 70, 72–76,
INDEX 227
78–80, 82–87, 89, 90, 97–101, Paper barrel, 180, 194

134, 152, 199–201 Peace River, 168, 173
North Pyongan, 74 Petro-Canada, 163, 168–170, 175
North West Shelf Australia LNG, 51 Petroline, 182
Northwest Territories, 164 Photovoltaic (PV), 127, 128
Nuclear energy, 70, 72, 79, 80, 102, Piltun-Astokskoye, 12
112, 200 Pipeline natural gas (PNG), 2, 7, 79,
Nuclear proliferation, 2, 10, 16, 85, 83–87, 130, 200, 201
98–100, 102, 136 Piracy, 110, 181, 194
Nuclear Safety and Security Pirates, 179–181, 193, 195
Commission, 140 Poland, 99, 152
Political economy, 180, 194
Politicization, 56
O Poong Lim, 13
Obstacles, 1, 2, 8, 10, 16, 22, 23, 27, Power grid, 14, 16, 24, 90, 110, 112
34, 46, 62, 79, 80, 85, 97, 108, Power grid interconnection, 8, 15
111, 114, 121, 137 President Roh Moo Hyung, 84
ODA, 191–194 Pressurized Water Reactor (PWR),
Offshore, 11, 49, 75, 114, 136, 137, 100
148, 150, 161, 164, 165, 181, Primorskii Krai, 15, 23
202 Prince Edward Island, 167
Offshore Newfoundland, 164 Private sector, 2, 13, 55, 122, 134,
Oil, 2, 3, 8, 11, 12, 14, 15, 18, 24, 148, 149, 153, 192
26, 27, 29, 33, 36, 41, 48–50, Privatized, 52, 162
52–54, 57, 59, 62, 63, 65, 70, Production Sharing Agreement (PSA),
72–76, 78, 80, 82, 87, 89, 92, 12, 19, 57–60, 67
93, 97, 102, 108, 110, 112, 114, Protectionist, 2, 27
118, 119, 123, 124, 130, 134, Putin, Vladimir, 14, 17, 19, 22, 26,
135, 137–139, 141, 142, 33, 53–55, 134
147–150, 152, 159–170, Pyongtaek, 9, 43, 48
173–176, 179–184, 188, 191, Pyongyang, 3, 24, 41, 47, 69, 70, 72,
194, 195, 201, 202, 204, 205 74–76, 79, 80, 85–87, 89, 90,
Oil sands, 161–176 99, 101, 152
Oman, 36, 129, 182
OPEC, 23, 63, 111, 129
Open-pit mining, 167 Q
Orinoco Belt, 170 Qatar, 17, 36, 88, 129, 149, 199
Qiqiha’er, 43
P
Panama Canal, 4, 88, 151, 180, R
183–188, 195, 203 Rajin, 78
PanCanadian, 163 Rare earth, 153, 204
228 INDEX
Redline Agreement, 157 Samsung, 13, 15

Regulations, 12, 18, 137, 138, 170, Saskatchewan, 164
191 Saudi Arabia, 148, 149, 159, 162,
Renewable, 80, 82, 105, 112, 121, 167, 175, 182
126, 128, 138, 139, 142, 153, Sayansk, 35
155, 176, 200 Sberbank, 15
Renewable Portfolio Standards (RPS), Sea water, 103, 113, 152, 193
128 Sector 7, 137, 202
Republican, 155, 156 Semiconductor, 153
Resource renationalization, 52 Separatism, 21
Rosneft, 15, 134 Shale gas, 2, 4, 80, 86–90, 108, 110,
Rothschild, 194, 203 112, 113, 124, 129, 130, 133,
Royal Dutch Shell, 12, 173 136, 147–149, 152, 200, 201
Rozman, Gilbert, 21, 22, 31 Shanghai, 58
Russia, 1–3, 5, 7–13, 15, 17–20, Shanhaiguan, 74
22–27, 30, 31, 33–35, 40–42, Shell, 11, 13, 30, 60, 168, 175, 194
45, 47, 52, 55–62, 65, 66, 72, Shell Canada, 168–170
78, 83–86, 89, 90, 92, 98, 110, Shell’s Shell Canada, 163
112, 129, 134–137, 147, 152, Shenyang, 43
188, 200, 201, 204, 205 Siberia, 9, 20, 23, 33, 35, 43, 45, 47,
Russian Duma, 22 57, 60, 83, 84
Russian Far East (RFE), 2, 8, 16–18, Sidanko, 8, 9, 42
20, 22, 24, 26, 27, 34, 35, 57, Sinopec, 163
60–62, 83, 84
Sino-Russian, 55, 134, 136, 137, 149,
Russia Petroleum (RP), 8–11, 20,
200
41–43, 85
Sinuiju, 73
Russia’s Alliance Group, 15
SK, 15, 149, 191
SK Gas Trading Company, 149
S Small Module Reactor (SMR), 152
Sakha, 41, 54, 58, 59, 85 Smart city project, 151, 153
Sakhalin-1, 12, 59, 60 Solar power, 153
Sakhalin-2, 11–13, 16, 21, 30, 59, 61 Somalia pirates, 181
Sakhalin-3, 11, 16 South China Sea, 114, 137, 181
Sakhalin Energy, 12–14, 18, 21, 29, Southeast Asia, 16, 36, 129, 138,
67 152, 189, 190
Sakhalin Energy Investment Corp South Korea, 2, 7, 9–16, 20, 24,
(SEIC), 13, 14, 29 26–28, 33–38, 40–43, 45–48,
Sakhalin projects, 11, 12, 20, 26, 27, 50, 55, 61, 62, 76, 80, 83–85,
59, 67 88, 95, 98, 99, 102, 108, 118,
Sakhalin Vityaz Crude Oil, 14 129, 134, 140, 147, 149–152,
Samchuk, 149 154, 172, 173, 176, 181, 190,
Samll Module Reactor (SMR), 152 199, 201
INDEX 229
South Sakhalin Island, 14 The Soviet Union, 26, 33, 52, 72,
Stalin, 21 201, 202
Strait of Hormuz, 180, 183, 203 Tianjin, 154
Strait of Malacca, 180, 190, 195, 196 Top Regulators’ Meeting (TRM), 138
Strategic Petroleum Reserve (SPR), Trans-Arabian Pipeline (TAPLINE),
150, 155, 202 182
Suez Canal, 194 Transit, 9, 41, 42, 47, 85, 86, 90,
Suhan Bay, 75 105–107, 135, 151, 180, 185,
Sulphur, 14 186, 188
Sumatra, 181, 182 Trans-Panama Pipeline, 188
Suncor, 163, 168, 173, 174 Trump, Donald, 149
Sunda Strait, 182 Turkey, 56, 182
Sweet, 14, 195, 202 Turkmenistan, 56, 60, 65, 135
Syneco, 163 Tyumen Oil Company (TNK), 10,
11, 43, 44, 85
T
U
Taiwan, 7, 12, 88
Ukraine, 2, 5, 47, 56, 66, 150, 200,
Talisman Energy, 163
202, 204
Tangshan, 154 Ulaanbaatar, 9, 42
Tariffs, 18, 20 UN Convention on the Law of the
Tarim Basin, 51 Sea (UNCLOS), 195
Tatarstan, 15 UNEXIM Bank, 8, 9
Tatneft, 15 Unified Gas Supply System (UGSS),
Tavan Tolgoi, 113 11, 56
Taxes, 18, 23, 35, 36, 67, 121, 128, United Nations Commission on
175 International Trade Law
Terrorist, 114, 131, 179, 180, (UNCITRAL), 106
193–195 Uranium, 57, 159
Thailand, 12, 189–191 US-China rivalry, 153, 156, 202
The European Atomic Energy US Congress, 73
Community (EURATOM), 99, US-Japan, 150
101 Usolye-Sibirsk, 35
The Gulf of Aden and the western US-South Korea (ROK) energy
waters of the Indian Ocean, 193 alliance, 1, 4
The International Centre for the Uzbekistan, 99
Settlement of Investment
Disputes (ICSID), 106
The Korean Peninsula, 1, 10, 25–27, V
41, 43, 46, 74, 82, 85, 86, 90, Vancouver, 28, 165, 167
102, 123, 135, 137, 138, 147, Vekselberg, Viktor, 11, 44
151, 154, 201, 204 Venezuela, 162, 170, 172
230 INDEX
Vladivostok, 8, 15, 27, 59, 85 Y

Vneshtorgbank, 15 Yakutia, 41, 58
Yalu River, 73, 75
Yamal Project, 2
W Yellow Peril, 22
Wang Young-yong, 18 Yeltsin, Boris, 26, 53, 54
Western Canadian Sedimentary Basin Yemen, 17, 36, 129
(WCSB), 164 Yergin, Daniel, 62, 67, 108, 109,
Western Siberia, 13, 58 131, 157, 196, 197, 205, 206
West Kamchatka, 8, 15 Yevgeniy Primakov, 42
West Sea, 113 Yongbyon, 72
Wet barrel, 180, 194 Yunnan province, 182, 189
Wind power, 127, 128, 153 Yuzhno-Sakhalinsk, 21
World Bank, 106
World Trade Organization (WTO),
76, 92, 106, 107 Z
Zapolyarnoye oil field, 13
Zhao Tiechui, 39
X Zhigalovo, 45
Xinjiang, 58 Zhu Rongji, 42

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Energy Security and Energy

“Professor Se Hyun Ahn has provided timely, thoughtful, and comprehensive

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The Three-Country Feasibility Study (2000–03) 42

Global Supply and Demand Conditions 118

Limitation of Canadian Oil Sands Developments 173

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Table 4.1 DPRK foreign trade volume (Unit: US $ million) 77

© The Author(s), under exclusive license to Springer Nature 1

of Ukraine will be a turning point to redefine energy security in East Asia.

• The politics of route determination ~ Though routing the pipeline

• Demand security ~ China’s market is important to Kovykta’s success.

diplomacy has virtually stopped functioning for mostly domestic political

and also explains the political and economic implications of energy

Framing Energy Security Between Russia

© The Author(s), under exclusive license to Springer Nature 7

this stage. And other obstacles continue to hamper the establishment of

The Kovykta Gas Field at Irkutsk

bank. In 1997, BP renewed its interest in the Kovykta project by

Korea.7 Energy experts and South Korean politicians emphasized North

South Korea's Natural Gas Demand 2003-2017

less incentive to develop this field, whereas it strongly advocates foreign

The Sakhalin Project

speculative acquisition of offshore acreage from companies without the

Other Energy Projects

a total of primarily oil contracts worth $4 billion. The biggest was a

Korean nuclear proliferation remains the problem in terms of the pace of

The concentration on exports has meant that the possibility of effective

It needs a more efficient cost accounting system, price reforms, a freely

The Limits of the RFE: Underdevelopment and Harsh Environment

Localism flirting with separatism, including threats to revive the short-lived

The economically depressed RFE is represented by only 4% of Russian

communities as sojourners or as long-term residents within Russian terri-

The Regional Dimension

focusing on one side turns out to be unsustainable in the end. Multilat-

enormous opportunities to solve their energy shortage and thus diversify

One anonymous Russian diplomat and one anonymous Russian intelli-

Northeast Asia’s Kovykta Conundrum:

Energy security is gradually replacing the previous ideological confronta-

© The Author(s), under exclusive license to Springer Nature 33

the midst of taking over controlling stakes in Russia’s remaining foreign-

The Potential Benefits

One of Russia’s largest gas fields is the Kovyktinskoye (Kovykta) gas

South Korea’s Looming LNG Supply Gap

will be needed to maintain this economic growth. Due to the expan-

exporters—are already committed.11 For South Korea, these phenomena

Southeast Asia Middle East Other

become increasingly commonplace in the Asia–Pacific, spot market LNG

China’s Promise as a Gas Market

Billion cubic meters

150 APERC (153)

The Fight for Kovykta

The Five-Country Feasibility Study (1996–2000)

Petroleum Corporation (CNPC) signed an agreement to bring Kovykta

The Three-Country Feasibility Study (2000–03)

by giving Northeast Asia a truly integrated pipeline system, the North

Kovykta Gas Field

Fig. 3.4 Kovykta’s Proposed Piplines (Source K. Kanekio, “Northeast Asia