Gas and geopolitics in Northeast Asia: pipelines, regional stability, and the Korean nuclear crisis.

Author:Harrison, Selig S.

The enormous potential of East Asia's energy market has been an American preoccupation almost from the time Secretary of State John Hay proclaimed the Open Door policy in 1900. It even became the theme for an improbably successful novel, Oil for the Lamps of Chind, by Alice Tisdale Hobart, a bestseller in the United States during the early 1930s. Drawing on her own experiences as the wife of a Standard Oil executive in China, Hobart turned the clash of corporate and Confucian cultures into a drama so compelling that it inspired two Hollywood movies and won her a loyal audience for a dozen other novels, travel books, and a memoir, most of them set in the Far East.

Seventy years later, a real-life Asian drama is unfolding about gas and geopolitics that is likely to be unfamiliar even to devotees of financial journalism. This time, Russia, not the United States, is cast in the lead role. With the emergence of Russia as a major oil and gas exporter, China, Japan, and the two Koreas have turned to nearby Russian sources of petroleum in Siberia and Sakhalin Island.

Apart from their need to keep pace with rapidly growing energy needs, all of these countries are anxious to offset their dependence on faraway Arab producers. They not only want a hedge against possible supply disruptions resulting from war and revolutions; equally important, they want to reduce what they find to be an increasingly uncomfortable reliance on the United States for the protection of tanker traffic through potentially hazardous sealanes. For environmental reasons, the addition of Russian natural gas to their energy mix is particularly attractive as a way to cut down on an appalling level of pollution resulting from the use of coal and oil.

Russia's gas reserves are the world's largest, comprising 31 percent of known global reserves, in contrast with its oil potential, which ranks seventh on the global scale. Already the largest supplier of natural gas to Europe, where its exports have reached the saturation point, Russia will become the major source of gas for all or most of Northeast Asia within a decade if promising negotiations for gas pipelines from eastern Siberia and Sakhalin Island reach fruition.

There is a catch. Though these pipelines could greatly enhance regional stability and provide a cheap alternative to oil imported from the Middle East, the United States seems uneasily wary of pipeline networks in Northeast Asia. In the case of Korea, the Bush administration for ideological reasons actively opposes pipelines crossing from North to South Korea. This rules out participation of Exxon-Mobil, a U.S. firm, in a projected pipeline from its gas fields off the coast of Sakhalin. Yet U.S. support for such a pipeline could be the key to easing the confrontation between the Bush administration and North Korea over nuclear weapons.

More broadly, the very idea of a tightly knit Northeast Asia has alarmed some U.S. analysts. "Pipelines that promote greater regional integration in Northeast Asia," warned a National Bureau of Asian Research study, "might exclude U.S. involvement except in a marginal way...and could evolve into regional blocs." (1) Conceivably, if overall U.S. relations with Russia, China, and Japan should seriously deteriorate, this could prove a prescient warning. However, in the absence of such a sharp downturn, the United States would benefit from a cooling off of regional tensions that could enable Washington to scale down a costly U.S. military presence. Access to cheaper energy would weaken incentives for expanding civilian nuclear power programs that could be converted to producing weapons. Moreover to the extent that Northeast Asia can satisfy its petroleum needs from indigenous sources and from Russia, competition with the United States for access to existing sources, pushing prices up, would be reduced.

A High-Stakes Struggle

Startling projections of future growth in energy demand underline why Northeast Asia's reliance on nearby petroleum sources would be beneficial to the United States. China, in particular, with its rapid economic expansion propelling the rising number of gas-guzzling cars and trucks on its highways, is steadily escalating oil imports. Most expert projections suggest that the level of imports, now 1.6 million barrels a day, will reach 4 million barrels a day by 2010 and 7 million by 2015, close to the current U.S. level and equal to three-fourths of Saudi Arabia's current output. Natural gas accounts for only 2.5 percent of China's energy mix, with coal providing 68 percent. But Beijing is seeking to raise the share of natural gas to 10 percent by 2020 through increases both in domestic production and in imports. The increase in imports will involve not only gas delivered by pipelines but also liquefied natural gas (LNG) transported by tanker and then reconverted to natural gas. The shift to gas is driven both by the pollution resulting from a coal-based economy and by the geographical accident that China's coal deposits are in the north and west, while energy demand is centered in the south and east. Expanding the use of coal would require a costly expansion of China's aging railroad network.

Japan and South Korea, respectively the world's second and fourth largest oil importers, are also global leaders in the use of liquefied natural gas. Japan is now the world's largest importer, accounting for 61 percent of global demand, and the consumption of LNG in both Japan and South Korea is rapidly increasing. However, the extent of this increased demand depends on whether, and when, projected gas pipelines are built, and whether the price of pipeline gas is competitive.

With untold billions of dollars in profits at stake during the decades ahead, an intense struggle is now developing between rival contenders for dominance in this burgeoning energy market. On one side are leading LNG exporters like Shell, El Paso, and Conoco, anxious to maintain and increase the existing level of their exports from established gas fields and processing terminals in Indonesia, Australia, Brunei, Alaska, and the Persian Gulf. On the other are Russian and foreign gas companies with substantial investments in exploration and development in eastern Siberia and Sakhalin, notably Yukos, Transneft, Tyumen (TNK), British Petroleum, and Exxon-Mobil. These ventures will pay off only if their production is conveyed by pipelines to Northeast Asian consumers. This struggle overlaps with internal conflicts in all of the countries concerned that will determine whether the pipelines can be built at a tolerable cost, and thus whether the gas can be sold at a price competitive with liquefied natural gas.

In Russia, the state-controlled gas giant Gazprom is seeking to assert planning and coordinating authority over both internal and external pipeline development, with the power to decide which gas fields, and which pipelines, should get priority in governmental transportation and infrastructure investment within Russia. This has provoked resistance from the companies that would be adversely affected by Gazprom's anticipated priorities. The Ministry of Energy is at loggerheads with the two provinces that would supply pipeline gas to Northeast Asia. They have yet to agree on who should control the price of gas exports and how high the price should be, a key issue in negotiations with China on a pending pipeline agreement. These two Siberian border provinces, Irkutsk and Sakha, together with the companies that control their gas reserves, are competing for the biggest share of pipeline exports.

Regional leaders in China's northern provinces near Russia, and in its interior provinces where it is hard to deliver LNG, are more eager to see pipelines built than those in coastal provinces. In Japan, powerful utility companies led by Tokyo Electric, with monopoly control over regional electricity markets, want to continue their exclusive reliance on liquefied gas imports. Consumer groups, by contrast, are campaigning to break the grip of the monopolies and to bring prices down by promoting competition between LNG and pipeline gas from Sakhalin.

In South Korea, middlemen allied with companies that are developing LNG terminals to receive gas from Sakhalin, notably Shell, are waging a propaganda offensive designed to prove that liquefied gas will be cheaper than pipeline gas from either Siberia or Sakhalin. The government gas monopoly, Kogas, supports development of a pipeline that would run from Kovykta in Irkutsk province through China to North and then South Korea. Kogas is taking part in a $120 million tripartite Kovykta feasibility study, jointly financed by China, Russia, and South Korea, that is scheduled for completion next July. South Korean president Kim Dae Jung, soon to retire, who favors closer ties with Russia and likes the idea of a pipeline crossing through North Korea to the South, has been pushing the Kovykta project. But South Korea has yet to resolve interlocking controversies over whether it would be cheaper to get pipeline gas from Kovykta or from Sakhalin, which is not as far away, and the relative share that pipeline gas and LN G should have in its energy mix in relation to oil and nuclear power.

The Battle Over Routes

The Kovykta complex of six gas fields, one of the world's largest, is located in a remote, undeveloped part of Siberia to the west of Lake Baikal, 225 miles north of Irkutsk. "At the moment, you have mostly tigers, bears, and earthquakes there," exclaimed Mikhail Lipilin, vice president of Russia's biggest pipeline construction combine, Rozneftegaztroy, in a Moscow interview. "There's no infrastructure, no helicopter pads, nothing." Undaunted, British Petroleum paid $571 million in 1997 to acquire the Russian company that controlled the Kovykta reserves and has since invested $100 million on exploration in a joint venture with two Russian companies.

Originally, British Petroleum envisaged a...

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