Energy Cooperation in Northeast Asia
Operation and Support of the SOM and Conference for Energy Cooperation
in Northeast Asia
Hyun-Jae Kim, Sang-Yul Shim Korea Energy Economics Institute
Summary 1)
Chapter 2. Korea-Russia International Seminar
Section 1. Introduction of the Seminar
○ The Korea Energy Economics Institute hosted an international seminar on "Policies and Strategies toward Korea-Russia Energy Cooperation" in collaboration with the Administration of Primorsky Krai, the Russian Federation, which was supported by the Government of the Republic of Korea and held in Vladivostok on October 7, 2003.
- The seminar was attended by about 60 professionals including the Korean Ambassador to Russia, the Governor of Primorsky Krai, chief executive officers of leading energy companies, government officials of Korea and Russia, and experts from academia and research organizations.
○ Significance of the seminar
- Fostering consensus on bilateral energy cooperation by exchanging views and opinions face to face among industry top managers, experts, and policy makers
1) It is noted that Chapter 2 and Chapter 5 are exclusively included in this summary by the author's intention.
- Enhancing the mutual understanding of cooperative energy projects, ongoing and prospective, such as the Sakhalin II project and the Kovykta gas field project
- Drawing some implications on future business opportunities for energy-related industries
Section 2. Major Contents of the Seminar
1. Session 1 : Overview of Energy Policies for Eastern Siberia and the Russian Far East
1.1 Major Subjects Presented
○ Four strategic guidelines of Russian energy policies: energy security, energy efficiency of the economy, economy efficiency of energy, and ecology security
○ The potential for energy conservation is estimated in the range of 40-45% in 2020, since energy-GDP ratio in 2020 is forecast to be 42-56% the level of 2000.
○ Major objectives of external energy policies: 1) strengthening the position of Russia, 2) non-discriminatory access to international markets and advanced technologies, and 3) stimulate foreign investment
○ Some flexibilities are needed in terms of contractual clauses including price mechanism in order to expand the natural gas market in Korea in spite of a high possibility of bilateral energy cooperation
due to complementary nature in energy policies and the structure of energy supply and demand.
○ Appropriate approaches need be developed to invite China and Japan into the Vladivostok Statement scheme, and to cultivate good working relationship with other regional and international organizations for the promotion of energy cooperation in Northeast Asia.
1.2 Major Points Discussed
○ It was indicated that cooperative energy projects had not been realized due to lack of coordination, since every government was pursuing its own cooperative measures without concerted policy directions between countries, and since the business sector was developing and doing its cooperative energy projects without clear policy directions at the governmental level.
○ Some questions were asked about what specific roles Gazprom would play as a coordinator for the development of natural gas in East Siberia and the Russian Far East. No direct answers were given.
○ It was also indicated that the import of LNG from the Sakhalin region would be an option to meet the increasing demand for natural gas in Korea from the viewpoint of time patterns of natural gas contracts.
○ It was considered to be positive that Korea was encouraging energy cooperation in Northeast Asia by promoting the establishment of the Senior Officials Meeting among concerned countries. However, fundamental questions were raised with regard to any incentives for
multilateral talks on energy cooperation in the midst of competing interests in securing energy supply between countries.
○ It was noted that a systematic and concerted top-down strategy, concurrent with the present bottom-up approach, might be taken for the initiation of multilateral energy cooperation.
2. Session 2 : Major Issues in Energy Projects in Eastern Siberia and the Russian Far East
2.1 Major Subjects Presented
○ Very important is energy cooperation between East Asia and Russia.
Energy cooperation such as interstate electricity ties and the interconnection of natural gas pipelines are expected to reduce the supply costs of energy, and to enhance the reliability of energy supply, and to mitigate the environmental impact of energy use.
○ China is geographically located in the corridor of natural gas flow from Russia and Central Asia to Northeast Asia countries, which may lead to a possibility of China's strategic behavior. Thus consensus need be pursued on the policy directions of multilateral energy cooperation between countries.
○ Time lines of the Kovykta project are to commence commercial gas production in the period of 2006~2007, and to expand production to the maximum potential in the period of 2008~2015.
○ Preparatory matters and considerations were presented for the establishment of the North-East Asia Development Bank to facilitate the financing of cooperative energy projects in the region.
○ Energy projects will be successfully financed under four stable conditions: the stable structure of energy development, well-prepared institutional arrangements, political stability, and financial viability.
○ Therefore a reasonable approach is needed to spread energy project risks. For example, investment risks in interstate energy facilities could be shared by investors and the governments of concerned countries.
○ It was shown that, for the potential project of the Angarsk-Nakhodka oil pipeline, the Japanese government had given Russia favors: 1) the provision of low-interest loan of 7.5 billion dollars, 2) the government guarantee of private investment, and 3) the Japanese development of untapped oil fields in East Siberia.
2.2 Major Points Discussed
○ The feasibility of energy cooperation should be comprehensively evaluated, taking into consideration three relevant aspects:
government strategies, i.e., policies and measures, institutional arrangements, and the economic viability of the energy project.
○ The economic feasibility of the Kovykta project may be challenged by various factors, for example, the economic and technical impact of helium content of Kovykta gas, large investment in interstate gas pipelines, difficult issues in relation to energy transit between countries, etc. These challenges can be resolved through consultation between concerned countries.
○ Foreign investment companies stressed that cooperative governments evaluate the economics of the Russian natural gas project from the
viewpoint of a long time horizon of 30 to 40 years to come, not from the standpoint of short-term conditions.
○ Presented were available tools for the financing of energy projects, which include the foundation of North-East Asia Development Bank as a long-term strategy, and a mechanism of project financing. These ideas are not new, but they await in-depth analyses.
○ Foreign investors insisted that countries like Korea, potential importers of natural gas, promise to buy Russian gas, which helps investors get easy access to the financial market for reliable investment.
3. Session 3 : Strategies for the Promotion of Regional and International Business in Energy and Related Industries
3.1 Major Subjects Presented
○ Presented were major trends of the international natural gas market such as increased competition between gas projects, the greater roles of the market, and a decrease in the border price of natural gas, which all are challenging issues to the development of Russian resources.
○ What is important to the realization of energy cooperation in Northeast Asia is not words but action in place, although we face various bottlenecks to regional energy cooperation which include political and economic instability, diplomatic and military confrontation, differences in the economic and political systems, and difficult financing issues.
○ Korean industry participation in the Sakhalin II project was introduced. Samsung Heavy Industries was awarded a contract for the fabrication and installation of two platform topsides while Poong Lim engaged in infrastructure work including building construction as a major sub-contractor.
○ The Sakhalin Energy Investment Company has reached sales agreements with Tokyo Gas, Tokyo Electric Power Company, and Kyushu Electric Company, and it negotiates with other potential buyers including Korea, China, and US.
○ The speaker representing Samsung Heavy Industries introduced new technologies to transport natural gas which are Pressurized Natural Gas, Compressed Natural Gas, and Pressurized Liquefied Natural Gas.
3.2 Major Points Discussed
○ As shown by Korea's participation in the development of Russian resources, business opportunities are so diverse to include not only energy development and trade but also energy-related business activities such as infrastructure construction and the building of natural gas carriers.
Section 3. Future Directions of Korea-Russia Energy Cooperation
○ It is recommended that the human resources network established in the course of this seminar be developed further and utilized effectively to strengthen Korea-Russia energy cooperation.
○ It is hoped that government officials will closely cooperate so that energy cooperation will be discussed and agreed on during future summit talks between Korea and Russia.
- In addition, it is also hoped that Korea and Russia will play a leading role in instituting a consultative mechanism to promote energy cooperation in Northeast Asia.
○ In conclusion, existing isolated and separate discussion on energy cooperation need be continued in a more systematic and comprehensive way.
Chapter 5. KEEI-IEA Joint Seminar
Section 1. Major Contents of the Seminar
1. Session 1 : Energy Security in Northeast Asia
○ Session One effectively covered the key issues relating to Northeast Asian energy security from a range of perspectives.
○ Energy security was defined by one speaker as a stable, cost-effective and sustainable supply of energy based on an efficient and environmentally friendly energy supply system, emergency preparedness and international cooperation.
○ Challenges to Northeast Asia's energy security include the rapid growth of energy demand; limited energy reserves; increasing imports from outside the region; geopolitical vulnerability and a high dependence on oil from the Middle East; and environmental problems
stemming from dependence on coal and oil as well as energy inefficiency in certain areas.
○ The discussion emphasized the key importance of a regional approach to Northeast Asian energy security.
○ Regional energy cooperation (in particular Russian natural gas exports to the rest of Northeast Asia) is expected to rectify the region's imbalance of supply and demand, strengthen energy security through geographical and fuel diversification, improve stability, decrease vulnerability to external shocks, and provide cleaner and more cost-effective energy.
○ While the potential benefits are clear, speakers also recognized significant obstacles.
○ Cross-border energy trade depends on very large investments, stable political relationships and multilateral institutions. The speakers suggested various concrete strategies and cooperative frameworks to address these issues through concerted efforts, in order to ensure that the search for energy security becomes a catalyst rather than a constraint for regional cooperation.
2. Session 2 : Framework Building for Regional Energy Cooperation in Northeast Asia
○ Session Two began with the presentation of a vision for regional integration of energy systems, addressing both physical and non-physical integration. In this context, confidence building processes and legal frameworks and institutional arrangements were highlighted.
○ Because Northeast Asia has no substantial experience in energy cooperation, it was suggested that a consultative mechanism at government level could provide significant momentum to energy development in the region.
○ We learned about the evolution of energy cooperation in Europe and the role of such cooperation in enabling large infrastructure investments. The close coordination between governments and private companies in establishing a multinational gas network was highlighted, as was the role of regional institutions in the ongoing process of promoting a single European energy market. We also heard about the Energy Charter processes that have been implemented.
○ In both cases it was felt that Northeast Asia can draw certain lessons from Europe's experiences although Europe may not provide a model.
In particular, there is seen to be a need for a framework for cross-border energy trade to stimulate investor confidence in such projects.
○ It was concluded that long-term negotiations between the various stakeholders and the establishment of a regional framework for energy cooperation will be difficult but worthwhile, in time enabling the region to move from confidence-building measures to real projects.
3. Session 3 : Financing Cooperative Projects in Northeast Asia
○ It was commented in the first session that neither academicians nor bureaucrats build pipelines, and that the private sector must be engaged. However, infrastructure investment requirements in Northeast Asia are well beyond the range of the private sector alone. Government support and commitment at the highest level is required, as is the support of international financing institutions.
○ Financing of cross-border gas pipelines was highlighted as particularly complex, with problems related to risk, relations between central and local governments, regulatory issues, legal frameworks and various other concerns to be overcome.
○ Considering the scale of the financial resource requirements for infrastructure development in Northeast Asia, the idea of a Northeast Asian Development Bank was deliberately raised. There is currently no multilateral financing institution that involves all six Northeast Asian countries, and a Northeast Asian Development Bank would have the advantage of a relatively neutral image.
○ Establishment of an Asian energy agency which can propose bankable regional projects was also suggested.
4. Session 4 : Natural Gas Cooperation in Northeast Asia
○ On the second day, the discussion moved to specific areas of energy cooperation.
○ Session Four provided a clear outline of LNG projects and possible PNG projects in the region, looking at both individual projects and the bigger picture.
○ Speakers commented on the complementarity between LNG and pipeline gas in the region, and compared the specific features of each.
○ It was noted that Northeast Asian use of natural gas is relatively low, but seeing strong growth because of its anticipated environmental and economic benefits, and advantages in terms of supply diversification.
○ PNG is expected to play an increasingly important role in the region in the mid-term to long-term. However, so far there is an absence of both 'hard' and 'soft' infrastructure for cross-border trade in pipeline gas.
○ The Irkutsk PNG project was highlighted as technically and commercially viable. However, echoing the previous day's discussions, it was emphasized that government commitment and an enabling policy will be critical to implementation. Regional cooperation and the need for official inter- governmental discussions were also mentioned.
○ There was discussion of the idea of more flexible terms and conditions for pipeline gas consumers, but one speaker noted the importance of downstream commitment for such large scale, long-term, demand-driven investments.
○ We were reminded of the problem of balancing competition with investment protection and environmental concerns, and the need for a balance between market and regulator.
5. Session 5 : Electricity Cooperation in Northeast Asia
○ This session discussed integration of electricity supply systems in Northeast Asia, starting with an overview of the region's power demand and installed capacity.
○ We learned about the research project on Northeast Asian Regional Electric System Ties and about the European experience in overcoming challenges to electricity cooperation.
○ The experience and current situation of the energy sector in Mongolia were also outlined, as well as energy trade between Mongolia and Russia.
○ The benefits of a regional power network based on electricity exports from the Russian Far East were discussed, while the obstacles to development of such a network were fully recognized. A concrete proposal was presented, with an analysis of the financing required.
○ By highlighting transmission from Russia to the Korean peninsula as a potential first step in creating the envisaged regional power
network, the discussion again touched on the role of geopolitics as a force in cross-border energy transactions.
○ Participants were cautioned not to forget about the potential for increased use of renewable energy.
6. Session 6 : Cooperation in Oil and Energy Security in Northeast Asia
○ This session revisited the key issue of energy security for Northeast Asia, specifically oil supply security.
○ The expected massive increase in Chinese oil consumption was highlighted, as was the projected growth of the transport sector across the region. The need for diversification in case of volatility was emphasized, and the establishment of strategic oil stocks in China and India noted as a positive development.
○ Cooperation between Northeast Asia and the IEA, and concrete suggestions for joint work in the future were outlined. Specific suggestions include cooperation on emergency response measures, oil data system and market monitoring, and capacity building.
○ The importance of moving from national to international energy policy was mentioned, and one speaker suggested that regional cooperation in oil security could play a leading role in economic cooperation in this region.
○ Our final session also highlighted the 'Asian premium' and the role of international cooperation in resolving this issue.
