No.

19 (January 27th, 2015)

EAF Policy Debates

PUBLISHER: East Asia Foundation DATE: January 27th, 2015

The Geopolitics of the Northeast

Asian Gas Pipeline
By Gu Ho Eom (Professor, Hanyang University)

The administration of South Korean President Park Geun-hye should note that in
order to produce successful results in its policies toward North Korea, it needs to
focus on creating an environment in Northeast Asia that encourages Pyongyang to
change, rather than determining its level of strategic cooperation in response to
North Korea's stance. It should also note that the gas pipeline project linking the two
Koreas and Russia is a valuable instrument for balanced diplomacy with Moscow,
which is gaining importance as Russia strengthens its relations with China and North
Korea in the wake of the crisis in Ukraine. The LNG market in Asia is predicted to
remain stable, and Russian prominence in the gas sector will diminish in the long
run due to the increasing production shale gas. South Korea should actively respond
to the changing situation in the LNG market through measures such as establishing
LNG trading hubs. South Korea needs to take into account both the geopolitical
value of Russian gas and the long-term changes in gas prices as it seeks to incorpo-
rate the Korean-Russian gas pipeline project into the Northeast Asian gas networks.

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 Initia-
tive aspires to create an amicable international atmosphere for the reunification of the two Koreas, as
well as to stabilize the Korean Peninsula 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

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of former administrations, and that the initiative is losing its impetus due to the deterioration of
Russias 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 reap-
praisal 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 Korean Peninsula. 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 Russias 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 Russias pride. The crisis in Ukraine has
reinforced Russias 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 Russias 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. Russias 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 Russias 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 Koreas loans from Russia, and so on. For South Korea,
Russias 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 bilat-
eral 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,

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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 govern-
ment, 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 million 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 million. China will
receive 30 bcm of gas for 30 years through the Altai route to northwestern China from the West Sibe-
rian 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 Chinas 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 nego-
tiations, Russia has lost a lot of credibility as a reliable partner. The Russian government planned to
complete development on the Cayanda 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

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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 electric-
ity 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 produc-
tion 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, care-
ful attention should be paid to the appropriateness of prices. Given that there is not much political
benefit for North Korea, the current negotiations between China and Russia should be maintained for
the time being.

Time is not on Russias side, and South Korea should remember that weakening Russias bargaining
power is an opportunity. It would be a mistake to hoard the gas pipeline projects, which have geopo-
litical 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;

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Japan will have to expand its LNG development; and the core of Chinas 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.

The views expressed here are those of the author and do not reflect any official position of the East Asia Foundation.

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Gu Ho Eom (Professor, Hanyang University)

Gu Ho Eom is a professor at the Graduate School of International Studies at Han-

yang 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 Glo-
bal 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.

East Asia Foundation Policy Debates is a venue to facilitate intellectual discourse by encour-
aging strategic debates and analyzing the core domestic and foreign policies in Korea today from a
mid- to long-term perspective. The international linkages of Korean policies will also be addressed,
describing key issues in East Asia relevant to Koreas national interests and strategy. Experts in
various fields will provide in-depth discussions and philosophical views on current policies based
on non-partisan and analytical insight. This effort endeavors to build an intellectual network which
explores and understands the inner side of Korea from a unique approach.

Sang-young Rhyu (Professor, Graduate School of International Studies, Yonsei University),

Editor of the East Asia Foundation Policy Debates | syrhyu@yonsei.ac.kr

The East Asia Foundation (Chairman Ro-myung Gong) was established as a non-profit organization officially
registered with the Ministry of Foreign Affairs of the Republic of Korea in January 2005. The foundation strives to
promote peace and prosperity in East Asia through human and knowledge networks. (www.keaf.org)