Yuzhno-Sakhalinsk, Russia (Platts)--29Sep2011/531 am EDT/931 GMT

A gas pipeline from Russia via North Korea to South Korea, estimated to cost $2.5 billion, is the most "economically efficient" option for supplies of Russian gas but represents "unavoidable" political risks, an official with South Korea's Kogas subsidiary in Russia, Kogas Vostok, said Wednesday.

"The project will cost $2.5 billion," Kogas Vostok general director Chang Seon Lee said, citing publicly listed information.

The gas pipeline project is the most economically efficient route out of three options that Russia and South Korea considered previously for gas supplies, which also included LNG and CNG, he said at the Sakhalin Oil and Gas conference.

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"The capex and [operational expenditure] of the gas pipeline project [totaling $3 billion] will be almost half of that for an LNG or CNG project, according to a study conducted by Gazprom and Kogas," according to Chang's presentation.

Gazprom and South Korea's state-owned Korea Gas Corporation signed a road map for implementation of the project to deliver Russian pipeline gas to South Korea via North Korea earlier this month.

In 2008, the two agreed on supplies of at least 10 billion cubic meters/year starting from as early as 2015, but they have yet to firm up a delivery route, with the most obvious route via North Korea facing political difficulties

In August, however, the project got some momentum, with Gazprom agreeing to establish a working group for the pipeline project with North Korea's Ministry of Oil Industry and inking an agreement with Kogas to move the project forward.

South Korea and Gazprom have raised the discussed volumes of future supplies to 12 Bcm/year, Gazprom's deputy CEO Alexander Medvedev said Tuesday, adding that the work will be carried out "intensively."

RUSSIA MAY GET 29% OF SOUTH KOREAN MARKET

Chang said Wednesday that Russia may get up to 29% of the South Korean market, which is heavily dependent on energy imports, from 6% now, and become a central player on the north Asian market if the project is realized.

"Russia could be the largest gas supplier to South Korea, if the gas supplies start in around 2017," Chang said.

The project may also become a "catalyst of regional integration and peace" as it may ease the tension between the two Koreas, he said.

This may also improve North Korea's attitude towards international issues as the country would see significant income from the project, he said.

North Korea is estimated to receive "significant cash revenue of around $100 million/year in transit fees," he said, citing unnamed media reports.

At the same time, Chang admitted that the project has "the ever-present North Korea risk," with nearly 700 km out of 1,100 km pipeline to run through that country.

Chang expressed hope that concern in South Korea over the project would ease once the nation saw the pluses of stable supplies of energy resources.

--Nadia Rodova, nadia_rodova@platts.com

--Luciano Battistini, luciano_battistini@platts.com

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