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The Geopolitics of the Northeast Asian Gas Pipeline

16 February 2015
Gu Ho Eom

Gu Ho Eom, Professor at the Graduate School of International Studies at Hanyang University

 

The Eurasia Initiative and the Korean-Russian Gas Pipeline Project

More than a year has passed since the administration of President Park Geun-hye announced the Eurasia Initiative. Both concerns and hopes have been expressed on the subject. The Eurasia Initiative aspires to create an amicable international atmosphere for the reunification of the two Koreas, as well as to stabilize the KoreanPeninsula through economic cooperation with countries to the north. It also aims to build new momentum for the South Korean economy by incorporating it with the economies of the Eurasian continent. Critics claim that it is no different from the northern policies of former administrations, and that the initiative is losing its impetus due to the deterioration of Russia’s relations with the West after the crisis in Ukraine, which dampened interest in the pipeline project linking South Korea and Russia through North Korea. However, the project deserves a reappraisal for the following two reasons. First, it can be a valuable instrument for balancing relations between South Korea and Russia in the turmoil of geopolitics on the KoreanPeninsula. Second, the recent gas trade deal between China and Russia presents the possibility of removing the “Asia premium,” therefore necessitating a reassessment of the economic viability of the gas pipeline project.

Geopolitical Changes and South Korean-Russian Cooperation after the Ukraine Crisis

The Ukraine crisis demanded that Russia “pivot to Asia,” as the US did before it. Scholars had predicted that President Vladimir Putin would adhere to Russia’s position of combining “strong state diplomacy” and “pragmatism” as he began his third term. Russia was meant to cooperate with the US on some global issues such as combating terrorism and climate change, but confront the US on Russian domestic issues and global issues that concern Russia’s pride. The crisis in Ukraine has reinforced Russia’s isolation from the West. Putin has emphasized the strength of the Russian state, despite the fact that doing so invited economic sanctions from the West. He demonstrated that Russian national identity precedes diplomatic incentives, especially concerning Russia’s dominance over former Soviet regions. This isolation from the West made China the most likely strategic partner to enable Russia to overcome its economic hardship and hone its strength in order to stand up against the US. Russia’s economic outlook appears gloomy. The World Bank predicts the Russian economy will contract 2.9 percent in 2015. Economic cooperation with China, particularly concerning energy, is the only hope for Russia’s economy. Moreover, it is notable that Russia is conducting its relations with North Korea as a “node of tension” as it confronts the US in Northeast Asia. North Korea-Russia relations have recently shown great improvement through high-level interactions, the settlement of trade in Russian ruble, the writing off of North Korea’s loans from Russia, and so on. For South Korea, Russia’s strengthening relations with China and North Korea call for balanced diplomacy with Moscow, especially considering the issues related to THAAD and AIIB, as well as persisting North Korean nuclear issues.

Russia is a great partner for balanced diplomacy, notably because it has a lower tendency toward bilateral alliances among the four powers surrounding the Koreas. This relatively weak presence in the region can possibly lead to relatively small risks for diplomatic failure. South Korea might benefit from a semi-balancing alliance with Russia concentrating on resources, on top of its strong security alliance with the US and its economic alliance with China through the free trade agreement. Korea can have more leverage in shaping the region as a middle power seeking structural transformation in Northeast Asia. Gas is the one resource that can provide geopolitical influence, as well as economic influence, among the resources available for cooperation. Gas requires more consideration in the context of the geopolitical environment than even petroleum. It can serve as political leverage over North Korea, taking into account that a deficiency of energy is an imposing problem for the country. The Park administration should note that in order to produce successful results, unlike the previous government, regarding its northern policies, it needs to focus on creating an environment in Northeast Asia that encourages North Korea to change, rather than determining the level of its strategic cooperation in response to North Korea’s stance.

Chinese-Russian Gas Cooperation and the Asia Premium

Chinese-Russian cooperation has been most prominent in the area of gas trading since the crisis in Ukraine, showing great progress in 2014. In May, Russia and China agreed to a $400 billion deal: Russia will provide 38 bcm of gas from east Siberia to heavily populated eastern China for 30 years from 2018. In November, another deal was reached, this time with a value of $284 billion. China will receive 30 bcm of gas for 30 years through the Altai route to northwestern China from the West Siberian gas field, which was formerly sold mostly to Europe. Many predict the latter deal to be a political flaunt in the midst of US-Russian tensions, because the concrete conditions for the deal have not yet been decided. Nonetheless, if both deals go through as agreed, they will account for almost 17 percent of China’s natural gas demand in 2020.

These gas deals between Russia and China have implications for the gas pipeline project connecting South Korea, North Korea and Russia. First of all, for the past 20 years, Northeast Asian countries have shown great interest in cooperating with Russia in the area of gas supplies. However, due to delays in the development of gas fields and related infrastructure, and rigid attitudes in energy negotiations, Russia has lost a lot of credibility as a reliable partner. The Russian government planned to complete development on the Bayanda and Kovykta gas pipelines by 2016, and to begin exporting through them in 2017. Yet, in the case of the Kovykta gas pipelines, production will likely began after 2019 at the earliest, and delay is expected in the development of the Krasnoyarsk gas pipeline. A couple of years ago, the Russian government directed Gazprom to conduct an overall reexamination of the Eastern Gas Program. The fundamental reason for this delay is a lack of financial capacity. In addition, the appearance of shale gas has increased doubts about the price competitiveness of Russian gas. However, with the gas deal between China and Russia, the biggest problem in energy development in East Siberia and in the Far East – the lack of financing to construct transportation networks and develop oil deposits – has been solved. With this, the possibility of gas cooperation between Russia and the countries of Northeast Asia has increased.

Secondly, the huge Russia-China gas deals have created the possibility of overcoming the “Asia premium.” LNG trade in South Korea, China, Japan and Taiwan accounts for 63 percent of the world total, yet these countries pay five times more than the US for gas. The main reason for this Asian premium is the lack of a market where price is determined by demand and supply in the region, as well as a lack of an “LNG trading hub,” a transparent price signal that could be used to promote investment in natural gas infrastructure. However, the more fundamental reason is that there have been no stable and long-term contracts regarding PNG. The recent Russia-China gas price negotiations might play the role of a standard setter for gas prices in Asia. In particular, attention should be paid to the Altai project, the specifics of which have yet to be negotiated. With the global drop in oil prices, there is a big possibility that China might propose a lower price than in the negotiations this past May. If Russia and China agree to a lower price than they did in May, this may become the standard price in Asia, allowing other Asian countries to also negotiate lower prices with Russia.

Responding to Changes in LNG and the Possibility of Introducing PNG

In 2030, gas will become the most important fuel in the energy mix of OECD countries in the electricity sector. New US regulations limiting carbon dioxide emissions will play a big role in this change. However, concerns about the security of gas supplies are not warranted. Gas will be better supplied due to an increase in the number of international gas suppliers, the near tripling of the number of liquefied gas plant complexes in the world, and increased LNG trade, with the necessity of connection between markets. In addition to this, the LNG market in Asia is stabilizing, and with Chinese demand for gas being met through huge imports from Russia, other Asian countries such as South Korea, Japan and India can increase their imports via the existing sea lane routes. With these elements, even the possibility of excess gas supply in the Asian market exists. If there is excess supply, Australia, the US, Canada, and Mozambique would rather increase their gas supply levels in order to disturb Russia, a supplier with higher costs, as in the case of the iron ore industry. In particular, the introduction of shale gas suggests a bleak future for the Russian gas sector. In 10 to 15 years, when shale gas production will have drastically increased, Russian gas exports will decrease by 20 percent. Regardless of the geopolitical benefits of the gas pipeline business between South Korea, North Korea and Russia, careful attention should be paid to the appropriateness of prices.

Time is not on Russia’s side, and South Korea should remember that weakening Russia’s bargaining power is an opportunity. It would be a mistake to hoard the gas pipeline projects, which have geopolitical benefits, in anticipation of the influence of shale gas on the market. It is difficult for Europe to escape from gas dependency on Russia until 2035, and there is still uncertainty regarding shale gas due to environmental regulations. The importance of Russian gas in Northeast Asia should not be disregarded.

South Korea should build an LNG trading hub that can actively respond to the changing LNG market. On the other hand, South Korea should lead South Korea-China-Japan gas cooperation, and explore the possibility of incorporating the South Korea-North Korea-Russia gas pipeline into the Northeast Asian gas network. In 10 years, many countries will have to shut down their nuclear plants; Japan will have to expand its LNG development; and the core of China’s clean energy will be gas. The actual gas price might be higher than what is currently predicted, making it crucial to keep in mind that gas prices are not and will not be stable.

About the Author

Gu Ho Eom is a professor at the Graduate School of International Studies at Hanyang University and coeditor-in-chief of the Journal of Eurasian Studies, published by Elsvier Press, a biannual magazine in English. He has served as the director of the Asia-Pacific Research Center at Hanyang University. He has published over 10 books and 100 articles in edited volumes and such scholarly journals such as Global Economic Review. Dr. Eom was conferred a Russian Government Decoration – the Pushkin Medal – in 2011. He has conducted many research projects on Russia and Eurasian countries and is now a member of the Presidential Committee for Unification Preparation.

The original version of this article was published by the East Asia Foundation.
The article is republished with the permission of the East Asia Foundation.