The June 12 Trump-Kim summit in Singapore has had an overall positive effect on the oil industry, cooling down expectations about the imminence of a major conflict driven by the reckless behavior of leading political figures. Yet behind numerous geopolitical consequences, the discussion of which has taken up most of the media space, the summit also gave rise to smaller, regional ones. One of such is the resurgence of the Russia – North Korea – South Korea gas pipeline, which it seems is back on the agenda of both Moscow and Seoul. Gazprom’s admission that negotiations have been relaunched upon South Korea’s request is a harbinger of significant things to come.
The Russia-Korea gas pipeline has been on the tapis for more than 20 years. It was first raised in 1995 on the back of East Siberian gas fields being gradually brought onstream – even though the idea eventually evolved into the 38 BCm Power of Siberia project, the possibility of traditionally LNG-reliant Korea having its first onshore gas pipeline was flaunted regularly. The pipeline was supposed to pass start in the Russian city Vladivostok, then swerve towards North Korea, reaching Seoul in the end. It was never doubted that from the Russian side it would be Gazprom supplying the gas, since it has an export monopoly, from the South Korean side KOGAS and LG were mentioned amongst potential participants.
Despite what one might perceive as an extremely hostile business environment (North Korean warmongering), the project has maintained a firm government buttress from both Moscow and South Korea. The massive investment required on the territory of DPRK was thought to moderate North Korean temper, since the regime would be interested in the constant flow of transit revenues and not risk any escalation. In 2011, everything seemed ready to implement the plan – the Russia-born then-Supreme Leader Kim Jong-Il agreed for the pipeline to pass through DPRK, whilst Gazprom and KOGAS have signed a roadmap for the construction of a 10 BCm/year gas conduit. Yet Kim’s passing away in December 2011 and events unfolding afterwards have put the project off indefinitely.
Now, following several North Korean nuclear tests against the background of a very ambivalent relationship with the United States, Russia and South Korea reckon the time is ripe to revive the Vladivostok-Seoul pipeline. Do not expect legally binding obligations, though – it is evident that the any sort of agreement is highly dependent on Moon Jae-In remaining in office (and continuing his so far very successful policy of engagement with the Juche regime) and Donald Trump not making a U-turn on his commitments (he has gone from „little rocket man” to a „pretty smart cookie” within 9 months, after all). Trust-building needs time, especially when it comes to large-scale infrastructure projects.
At the core of the Vladivostok-Seoul gas pipeline is South Korea’s almost unprecedented dependence on imports to cover its energy needs – the rate stands at 98-99 percent for quite some time already. South Korea’s traditional means of generating energy largely boiled down to nuclear power and LNG, yet after the 2011 Fukushima catastrophe nuclear is about to be gradually removed from the national energy matrix. Korea’s LNG import capacities are undoubtedly spectacular, as the nation’s 4 LNG terminals can process up to 120 BCm per annum, double of South Korea’s actual natural gas needs. Yet if one is to compare LNG imports to South Korea and Gazprom’s exports to Europe, it becomes evident that Seoul has been overpaying massively.
Since LNG supplies in Asia-Pacific are exposed to seasonal volatility, the average price Korean buyers pay for liquefied gas is often double of that European consumers pay ($344 vs $172 per MCm in January 2017, $390 vs $215 per MCm in January 2018). This alone is a significant boon for South Korea (even accounting for a LNG price drop in the near future), all the more so that it would prevent Seoul from burning polluting coal in an effort to cut down expenses. Constructing an onshore pipeline eliminates all the challenges stemming from previous Russian proposals – make South Koreans buy more Sakhalin LNG (which they already do) or to construct a subsea pipeline in one of world’s most seismically active zones. Yet even beyond the geopolitical realities of today, too many ifs imbitter the Vladivostok-Seoul gas pipeline’s prospects.
Two-thirds (roughly 700km) of the Vladivostok-Seoul pipeline are supposed to pass through North Korean territory and there is no way of telling if there could be any sort of illegal tapping there. And if irregularities were to happen, how could Russia or South Korea make them stop? The last thing Russia needs is a potentially nuclear replica of Ukraine on its Far-Eastern border. If one is to see the glass half-full, the time it would take to sort out the details of the pipeline deal might be an advantage – many issues might evaporate if the promised denuclearization goes along as planned (and promised). If not, the plug on the deal can be swiftly pulled with minimal losses.
Thus, time is the biggest friend and enemy of the Russia – South Korea gas pipeline. Once (and if) the project is agreed upon, it will still take 3-4 years to actually build it, even in case of a fast-tracked procedure. Time would also help Russia understand where to source the natural gas from - whether from the E-Siberian fields of Kovykta and Chayanda or from elsewhere - and how to amend its transmission infrastructure so that the new pipeline would not interfere with Power of SIberia, slated to start on December 20, 2019. Yet two seemingly rational actors (Gazprom and KOGAS) depend on the dealmaking capacities of two seemingly irrational ones (Kim Jong-Un and Donald Trump). We will see how it all shakes out.
By Viktor Katona for Oilprice.com
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