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Feature: North Korea peace deal could reshape Russian gas export priorities

Moscow (Platts)--11 Jun 2018 1022 pm EDT/222 GMT


With US President Donald Trump and North Korean leader Kim Jong-un set to meet at a historic summit in Singapore Tuesday, global power brokers such as Russia are eyeing the prospect of an end to the nuclear stand-off on the Korean peninsula and a "new era" in relations with North Korea.

Russian gas pipeline planRussia believes a potential North Korea peace deal could help to strengthen multilateral energy cooperation in North Asia, with the possible revival of a project to build a gas pipeline through the Korean peninsula underpinning new partnerships in the region.

Russian President Vladimir Putin last week said that he continues to support peace talks and the development of new economic projects with North Korea.

Putin said the focus lies on infrastructure projects, primarily a gas pipeline, adding that other energy infrastructure are possible with regional players.

"There are many opportunities for joint, trilateral and quadrilateral cooperation, we just need to move in this direction," Putin said in an interview with China Media Group.

In a sign that Russia is preparing for greater cooperation, Putin has for the first time invited Kim Jong-Un to the Eastern Economic Forum in September. Russia's flagship economic showcase for Asian investors, it has become something of a launch pad for new cooperation between Russia and Asian investors.

Analysts see significant potential in integrating North Korea into the regional energy network for Russia, though it could lead to changes in Russia's energy project prioritizes.

For decades a pariah state, North Korea's position on the Korean peninsula has meant Russia's oil and gas export potential to the Northeast Asian market has been underutilized, said Keun-Wook Paik, a senior research fellow at the Oxford Institute for Energy Studies.

"If the outcome of the Singapore summit on June 12 is good enough it will open a new chapter for Russia's entry to Asian energy, in particular the oil and gas market," Paik said.

Related video: US, North Korea leaders in Singapore for landmark meet


GAS PIPELINE


The peace talks, if successful, could revive talks about an onshore gas pipeline, with a capacity of up to 10 Bcm/year via North Korea to the south of the peninsula, which was shelved in 2012 on major political risks. Russia's Gazprom and state-owned South Korean Gas Corp., or Kogas, first agreed to a 30-year supply of up to 10 Bcm/year of Russian gas in 2008, with startup initially marked for 2015 and then delayed to 2017.

"I am quite confident the South Korean president's office will lose no time to explore all options to accelerate the gas pipeline development [if a deal is reached]," Paik said.

Jinsok Song, a Moscow-based energy researcher agrees that the project has potential if the relationship between the two Koreas normalizes.

"It is viable but it can take some time," he said.

North Korean leaders have also expressed their interest in the project, estimating the pipeline will bring in significant transit revenue to Pyongyang's coffers. Talks, however, stalled over North Korea's controversial nuclear program.

If the pipeline project goes ahead, it could have a significant impact on the development of new gas export projects in the region, analysts said.

A proposal made in the early 2000s to ship Sakhalin 1 gas to the Korean peninsula could be revived, Paik believes, although the US may be reluctant to back the plan due to Exxon's involvement in Sakhalin 1, at a time when the US is strengthening sanctions against Russia.


CRUDE SUPPLIES


The development of an onshore gas link to South Korea also raises the prospect of onward links to Japan and China. A Korea-Japan link could be shorter than a Sakhalin to Hokkaido pipeline. While it could also reshape Russia-China talks on a new gas supply route to China's Jilin province.

In addition to gas, there have also recently been discussions on a joint power grid linking the countries in the region.

Any new crude supplies from Russia to North Korea are likely to be minimal, however, with China already covering most of Pyongyang's imports.

During the Soviet era Russia supplied around 20,000 b/d of crude to North Korea, but those volumes are unlikely to return due to limited refinery capacity in North Korea, Paik believes.

In the longer term, however, tentative plans for an oil pipeline running through North Korea to South Korea could be developed, which would be welcomed by Seoul, Song said.

"An oil pipeline from Russia to South Korea would be very beneficial for South Korea because it is heavily dependent on oil imports from the Middle East. So this pipeline would help," he said.

Russia's close proximity and lack of chokepoints are seen as major advantages to Asian consumers over Middle Eastern producers.

Nonetheless, Russian crude supplies to South Korea have remained limited, with Seoul counting on traditional crude supplies.

Most recently, however, South Korea increased significantly crude supplies from Russia as it has started reducing purchases of Iranian crude in anticipation of American sanctions. These advantages helped Russia boost exports to South Korea by 38% year on year in Q1 2018 to 183,500 b/d.

--Rosemary Griffin, rosemary.griffin@spglobal.com
--Edited by Robert Perkins robert.perkins@spglobal.com, Alisdair Bowles, alisdair.bowles@spglobal.com

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