FROM: Asia Times

[Asia Times - August. 12, 2018]

Could a pipeline of peace help unite Northeast Asia?

A trans-Korean gas pipeline from Russia, extending out to China and Japan, could lay the foundation of an East Asian economic community, says World Energy Council head

A gas pipeline would run through North Korea into South Korea and beyond. Photo: iStock

Northeast Asia is home to the heavyweight economies of China, Japan and South Korea, as well as being one of the world’s three largest zones of economic activity.

But unlike the other two – Europe, with the EU, and North America, with NAFTA – it lacks the unifying force of a free-trade area. Moreover, at its heart lies one of the world’s most dangerous security flashpoints: North Korea.

Political solutions have been sought for decades to try to calm intra-regional tensions, but all have failed to deliver. However, a regional, trans-Korean energy initiative could lay the foundation for a Northeast Asian economic community, which would have beneficial knock-on effects on regional geopolitics, according to David Kim, chairman of the World Energy Council, or WEC.

“The Cold War has gone, ideology has gone, all that is left is national interest,” Kim said in an interview with Asia Times. “This project is a symbol: One project can serve everyone.”

The project Kim refers to is a natural gas pipeline pumping power from the island of Sakhalin in the Russian Far East, through North Korea, into South Korea and beyond.

The project, feeding gas into the grids of China, Japan and South Korea, with add-ins from the United States, could create the physical skeleton of an East Asian common market, while offering dollar incentives for North Korea to come out of the cold, Kim asserted.

World Energy Council chairman and Daesung Group CEO and chairman David Kim talking to Asia Times in Seoul on Thursday. Photo: Daesung Group

More than a pipe dream

As Kim envisages it, the pipeline would carry Sakhalin PNG (piped natural gas) through North Korea, across the Demilitarized Zone, or DMZ, and into South Korea. The latter has one of the most efficient power distribution nets on earth, thanks to top-down governance, a national power monopoly and small land size.

There are no significant technical challenges. A pipeline already runs from Sakhalin to Vladivostok, and from Vladivostok to the DMZ is just 750 kilometers, meaning the pipeline could be constructed in two to five years, Kim estimates. (For comparison, Gazprom’s 4,000-kilometer “Power of Siberia” pipeline has a four-year construction period.)

Piped gas is intrinsically more economical than LNG, or liquid natural gas, as it does not require infrastructure to liquefy and re-gasify it at ports. Nor does it require expensive LNG tankers to transport. A pipeline would enable an increase in South Korea’s imports of Sakhalin gas from 1.5 million metric tons per year to 7 million, Kim said.

The project is not a new idea. The concept of a trans-Korea gas pipeline, supplied by Russia, first rose to prominence during the Kim Dae-jung administration (1998-2003) under the “Sunshine Policy” which sought to improve inter-Korean relations and open up the isolated North.

It was put to Russia in 1999, when the South Korean president, seeking a summit with then-Russian President Boris Yeltsin, asked local business leaders to come up with ideas, as Yeltsin had been reluctant to agree to any meeting – given that Russian had outstanding debts to South Korea.

“I proposed it be put on the agenda, but it was dismissed – [the project] was too huge,” Kim, who in addition to his elected position at the WEC, is CEO and chairman of South Korea’s energy-focused Daesung Group, recalled. “But then they found out that this was the only project that Russia was interested in.”

Kim accompanied the state visit and a bilateral MOU was signed. “The project saved the summit,” he said.

Then, nothing happened. With the “Sunshine Policy” still in its early days, a suspicious Pyongyang refused to allow teams into the country to carry out a feasibility study.

Further talks took place in 2011, between Russia’s Gazprom and South Korean power monopoly KOGAS. But then, inter-Korean relations were at a nadir: a year earlier, North Korea had torpedoed a South Korean warship and shelled a border island. The project was not politically feasible.

With the liberal Moon Jae-in having taken power in 2016, overturning a decade of right-wing rule in Seoul, possibilities are looking brighter. “Now, we have better relations,” Kim said, referring to the chummy summit in April between North Korean leader Kim Jong Un and South Korea’s Moon.

Russia ‘eager to diversify markets’

The project is certainly on the mind of Russian President Vladimir Putin, an aggressive promoter of energy exports with a “look east” policy. “Russia is eager to diversify its markets,” Kim said.

Europe is currently the only major market for Russian gas, though Gazprom’s pipeline to China is expected to come online in 2019. Under Moscow’s 2030 Energy Strategy, Russia seeks to sell 25% of its natural gas to Asia. So it was no surprise that during their summit during this year’s World Cup, Putin and Moon agreed to start joint feasibility studies on the project.

Kim is thinking far beyond simply Russia selling gas to South Korea via North Korea. He sees the pipeline getting ‘buy-in’ from across the region and beyond.

The first and obvious partner is Japan – like South Korea, a net energy importer. Earlier this year, Kim discussed the project with Japan’s Ministry of Trade and Industry, or MITI.

“They showed a strong interest,” he said. The idea would be to extend the pipeline from the southeastern South Korean port city of Busan, underwater, to the southern Japanese island of Kyushu, and then, possibly, to Honshu.

The less obvious partner would be China, which already has a gas pipeline from Turkmenistan in the west, and is building another line from Siberia in the north. “If we extend [the trans-Korean pipeline] to China, via [an] undersea pipe, it would be very tempting for China,” Kim said.

Then there is the US. “I am considering inviting the United States to transport Alaskan gas,” he said. That would be shipped in from the United States, and fed into the network from a port on Korea’s east coast. “They could plug their gas into the East Asian market,” Kim said. “Gas is gas!”

The extension of the pipeline to Japan would primarily be of economic significance.  The energy-thirsty, heavy manufacturing economies of Japan and South Korea rely heavily on shipped-in LNG; piped natural gas would shift the landscape. “We pay an ‘Asian premium’ for LNG,” said Kim, which is estimated at 30%. “If we had PNG, we would have a chance to bargain.”

Looping in China and the US would be economically beneficial, but would also have critical political ramifications that would help move the project forward and secure it against geopolitical risk, Kim believes.

Energy security

China, which seeks energy security, would benefit from diversifying sources of import, Kim said. “China is now buying gas from the west, from Turkmenistan, and [will be] from the north, from Siberia,” Kim said. “For stability, we suggest a loop grid, via [an] undersea pipe.” That would offer China’s massive economy gas from three directions: West, North and East.

In regard to US President Donald Trump’s recent, critical comments in Europe about the EU’s heavy reliance upon Russian energy supply, Kim is hoping that the business-minded president might change his tune if America has the chance to sell gas from Alaska to the venture.

“I think Trump was quite concerned with the Russian connection [in Europe] and might worry about this in East Asia,” he said. “But if we have America in, it’s another story – they would be willing to participate.”

Currently, there seems little reason to fear that North Korean would tap the pipeline for domestic use as its power-generation is primarily coal-based. “North Korea is shackled by its ‘juche’ [self-reliance] philosophy: It does not want to rely on foreign services, it prefers coal resources,” Kim said. “They don’t have natural gas infrastructure at all, they mostly rely on coal. We cannot assume they will use the PNG for their own consumption.”

Moreover, an unprecedented energy net linking the economic interests of all key regional players – China, Japan, South Korea, Russia and the US – would hedge against the obvious risk, which is: What would stop North Korea, in times of tension, turning off South Korea’s power supply?

The answer is simple. “If North Korea tried to turn off the gas, it would have to answer to too many counterparts,” Kim said.

The proposal is for the pipeline to run down the heavily fortified east coast of North Korea, so there would need to be close coordination with the North Korean military, Kim admitted.

But there is a key incentive for Pyongyang to both join the project and to play nice: Money. The cash-strapped regime could bank transit fees of US$150 million per year, Kim said.

First connection

Kim, whose first connection with the project was during the liberal Kim government, admits he is in touch with the liberal Moon administration in Seoul, but – citing discretion – declined to expand upon his role. However, as the chairman of the multinational WEC, he is already in touch with key players.

David Kim believes a Russia-North Korea-South Korea natural gas pipeline could pave the way toward a Northeast Asian economic community. Photo: Daesung Group

“I think the WEC is a good platform to bring the decision makers together,” he said.  The London-based body is the world’s largest network of energy-sector professionals, boasting 92 national members, and will host the next World Energy Congress in Abu Dhabi in 2019.

Putin personally attended the WEC Congress in Istanbul in 2016 and is scheduled to host it in 2022 in St Petersburg, “so he has a reason to come,” Kim said, adding, “I feel a very strong sense of urgency from the Russian side to sell power to the Far East.”

North Korea has shown recent interest in the WEC. The country was ejected for not paying its dues, but in 2016 the North Korean embassy in London contacted the WEC by email with a view to rejoining.

(Omissions)

A meeting between interested heads of state could happen earlier. Putin has invited Kim Jong-un to attend the Russian Far Eastern Economic Forum in Vladivostok, Russia, in September, along with South Korea’s Moon and Japanese Prime Minister Shinzo Abe.

If the project gets the green light, Kim expects it to be in the form of a Russian-South Korean Special Purpose Vehicle, or SPV, which would both own and operate the pipeline. He anticipates little difficulty in raising capital investment from China and Japan, and expects North Korea’s workforce would play a role.

The project dovetails neatly with regional economies. “Russia is almost 100% about resources; South Korea and Japan are 100% knowledge and technology; China is mixed,” Kim said. “So it is a natural fit for all players around the region.”

Those players include Kim and his firm. He took on the chairmanship of the WEC in 2016 and will relinquish it in 2019. Then his own – and Daesung’s – interests will be purely commercial. “We would probably be a buyer,” if Russian PNG flows into South Korea, he said.

For now, politics – notably the big question hanging over the region, on whether Kim Jong-un really is prepared to denuclearize – is the big barrier.

In Kim’s opinion, an economic incentive for North Korea could sweeten any deal. “It is a chicken-and-egg situation,” he mused. “If denuclearization goes ahead, this will help; if this goes ahead, it will help denuclearization.”

Kim’s political benchmark is the European Coal and Steel Community, the predecessor to the European Economic Community, and today’s EU. That original body, the ECSC, was designed to intertwine the big economies of mainland Europe, and thus helping to prevent wars on the continent.

“This project could reshape the region if we can achieve a common market based on energy infrastructure,” Kim said. “If we have an Asian union, there would be totally different geopolitics.”

POST WRITTEN BY Andrew Salmon

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