The ambitious project to pipe Russian natural gas to South Korea across the North has been dormant for more than a year amid inter-Korean tension.

A glimmer of hope is rising for one of the largest gas deal in Asia as President-elect Park Geun-hye pledged to move ahead as part of her efforts to promote peace and stabilize domestic energy supplies.

But experts question the project’s outlook due to lingering tension, economic uncertainty, political risks of depending on the unpredictable North for the route. Possible backlash from the U.S. and China concerned with it hurting their energy interests also remains a hurdle.

The program is one of the signature pledges made by Park Geun-hye, along with an integrated Eurasia power grid and a logistics network also covering China, Central Asia and Eastern Europe.

Hopes are growing that discussions may pick up in the near future amid North Korean leader Kim Jong-un’s drive to refurbish its fossilized economy and ease chronic fuel shortages.

Key issues on the agenda include feasibility and technical studies, prices of contracted gas, transit fees for North Korea, financing, designing and contractors. Construction of the 700-kilometer-long pipelines alone is estimated to cost up to $5 billion.

“Given Russia’s abundant supply of gas, North Korea’s need for tariff revenue, and South Korea and Japan’s growing concerns about their dependence on nuclear energy, the project makes economic sense. This issue is whether political risk can be surmounted,” said Marcus Noland, deputy director and a senior fellow at the Peterson Institute for International Economics in Washington.

“The first and most important issue is that a very large share of the costs is ‘up-front’ or ‘sunk.’ Constructing the pipeline and associated facilities requires large investment before any revenues are realized.

“The great fear, of course, is that after the pipeline is built, North Korea as an intermediate transit country might disrupt the operations of the project. So private lenders are reluctant to fund a project subject to a high level of political risk,” Noland said in an email.

Hong Hyun-ik, head of security strategy research at the Sejong Institute, also said sound cross-border relations will be a prerequisite for the project’s takeoff.

With inter-Korean relations remaining strained, Park’s attitude toward Pyongyang may be another hurdle, he says. Despite her willingness for engagement, the president-elect’s overall North Korea policy largely chimes with incumbent Lee Myung-bak’s stringently reciprocal, conditions-laden approach that has been blamed for the long-running chill in the relationship.

“The pipelines require a good mood between the two Koreas but I don’t think their relationship will be much improved under the Park government,” Hong told The Korea Herald.

“Even if the program gets backing, the South will need the strong political will to execute it in the face of the North’s potential disruptions, and cheaper shale gas available in the future.” 

Ambitious initiative

Initiated by late President Roh Tae-woo in the early 1990s, the project is design to deliver natural gas from Russia’s Siberia region to South Korea by transiting through the North.

Negotiations kicked off in earnest after a 2006 gas supply pact under late President Roh Moo-hyun.

Seoul has believed that the pipelines will help beef up energy security and hedge price volatility, while defusing cross-border tension by engaging Pyongyang for an economic cause.

To the North, the program may mean a chance to earn hard currency from rights of passage, shore up its shoddy energy infrastructure and curb economic dependence on China, its ally and top patron. 

Russia, as the gas provider, will secure new markets and distribution channels. The pipelines could simultaneously enable Moscow to rebuild old ties with Pyongyang and keep the U.S. and China in check.

“(The pipeline project) will help establish peace and trust on the Korean Peninsula. It’s a win-win-win for all three countries. Once (pipelines) are set up, it is not easy to cut them off,” Park told reporters in September last year when she was chair of the ruling Saenuri Party.

While acknowledging potential economic gain, analysts emphasized the need to take into account regional economic factors and global market perspectives when assessing the program.

“For this reason a proper energy sector development plan should be prepared to ensure any investments in North Korea linked to the pipeline are economically rational,” said Brad Babson, a former World Bank consultant and currently chair of the DPRK Economic Forum at the U.S.-Korea Institute at Johns Hopkins University.

“For South Korea, a stable long-term supply of gas through the pipeline is attractive from an energy security perspective, but the pricing will determine its overall economic benefit compared with alternative sources.”

South Korea is the world’s No. 5 crude buyer and the No. 2 natural gas importer. It imports almost all of its fossil fuel needs.

It has also been grappling with electricity shortages on the back of brisk industrial development and shutdowns at some nuclear reactors using parts with forged quality certificates.

The pipelines are forecast to allow the country to cut costs by up to 30 percent compared with using sea transport.

But with a U.S.-led shale gas boom, Seoul now has less incentive to hasten construction and fix rates for Russian gas under a long-term contract, Hong of Sejong noted.

Thanks to the new drilling technologies, the U.S. will surpass Saudi Arabia to become the world’s top oil producer by 2020, according to the Energy Information Administration. Its technically recoverable gas reserves are estimated at some 2,200 trillion cubic feet, sufficient to cater to domestic needs for more than 90 years.

“Mid- and long-term imports of shale gas supposedly starting 2020 could lower prices in the international market, which is a good sign for resources-deficient countries like South Korea,” Hong added.

Political challenges

In 2008, the pipeline initiative came to a standstill in the aftermath of the death of a South Korean tourist by a North Korean soldier at Mount Geumgang resort.

Relations between the two Koreas quickly froze. It further soured after the North’s sinking of a South Korean naval corvette and shelling of Yeonpyeong Island in 2010, killing at least 50 South Koreans in total.

Seeking a breakthrough, President Lee Myung-bak and his then Russian counterpart Dmitry Medvedev forged an agreement in November 2011 to tentatively begin pipeline construction in 2013 and gas supplies in 2017.

Vladimir Putin reaffirmed his resolve to nail down the project and help reduce cross-border tension after taking over the Kremlin in February, while Korea Gas Corp. and Russia’s state-run Gazprom geared up to discuss commercial terms.

With inter-Korean ties still on ice, however, their efforts have made little progress.

“The decision is going to be North Korea’s,” said Stephen Blank, a Russia expert with the U.S. Army War College’s Strategic Studies Institute.

“Russia wants to get back into the game as an Asian power that really has something to contribute in this case to the resolution of North Korea problems.

“But are they willing to have that much extension of Russian influence in North Korea and also South Korean influence? Those are political influences,” he told The Korea Herald.

Rudiger Frank, a North Korea specialist and head of the East Asian studies department at the University of Vienna, said the Mount Geumgang incident and its aftermath epitomize North Korea-related risks involved in the pipeline deal.

“A pipeline is useless without a reliable guarantee that it will not be subject to political ups and downs. No investor would spend money unless something similar can be excluded for the pipeline,” he said in an email.

“Building a pipeline through very sensitive areas of North Korea is a major security challenge to Pyongyang. Not all military strategists will regard the economic gain of the pipeline as being bigger than its cost in terms of security.”

Given Washington and Beijing’s stakes in the region, the three partners will likely have to consult with them before construction gets under way, the analysts said.

“For any pipeline deal to succeed it will need strong political support among all the six-party countries,” Babson at Johns Hopkins University said via email.

“And it would be most likely to obtain this support as part of a multilateral agreement that also addresses meaningful progress in reducing North Korea’s nuclear and missile threats to regional security.”

Pledges

Seeking to recreate momentum for the pipelines, Park Geun-hye has pledged to hold trilateral consultations involving the two Koreas and Russia, which is also a member of the six-party denuclearization forum.

Her “Silk Road Express” entails a trans-Korean railway to be connected with the Trans-China Railway and Trans-Siberian Railroad to Europe. The president-elect is also aiming to add to the package a Eurasia power grid and a regional crude trade hub in the peninsula’s east coast.

“If that line were then tied to other regional lines, the effort could help develop China’s three northeastern provinces and Russia’s Far East ― and, in turn, perhaps transform the Korean Peninsula into a conduit for regional trade,” Park wrote in the journal Foreign Affairs in September 2011.

“Although tensions have delayed further discussions about the railway project in recent years, these could be restarted as a means of building trust on vital security matters.”

In a meeting on Dec. 20 with Russian Ambassador Konstantin Vnukov, she expressed hopes for “close cooperation” between the two countries for the project.

Park has also said that she raised pipeline and railway construction at a 2002 meeting in Pyongyang with late North Korean leader Kim Jong-il.

“A railroad network linking Russia, North Korea and South Korea, or projects such as for gas pipelines and a power grid, is a good thing for peace and co-development in Northeast Asia,” she was quoted by her spokespeople as telling Vnukov.

Her remarks instantly pushed up shares in local companies deemed potential beneficiaries. Pipe manufacturers such as Dong Yang Steel Pipe Co., Hi Steel Co. and Korea Cast Iron Pipe inc. respectively soared 7.7, 7.4 and 4.7 percent over the next two trading days.

The tech-laden junior KOSDAQ bourse saw a similar drift. Daea TI, a railway signal control system developer, shot up 6.8 percent during the same period, while Leenos Corp., a communication equipment solutions provider, climbed 4.4 percent. Other winners include electrical fittings producers Semyung Electric Machinery Co. with a 3 percent rise and Ehwa Technologies Information Co. with 2.1 percent.

Such politically themed stocks normally draw heavy attention during any given transition period but do not necessarily end up snatching a major deal. Still, their recent upswings highlight growing hopes for the project, said Kim Gyeong-joong, an analyst with Eugene Securities in Seoul.

Russia, for its part, dispatched a group of lawmakers to Pyongyang last month in a bid to renew discussion on the project and expand personnel exchanges.

During their five-day stay, the Russian politicians and North Korean officials agreed on the need to realize joint projects including pipelines, power transmission and railroad networks, Rostislav Goldstein, deputy chairman of the Duma’s Arctic and Far East Committee, said upon their return to Vladivostok on Nov. 8.

The group also toured the North’s hands-on oil agency and said Russia is “ready to revitalize negotiations” to begin the project, Russia’s official Itar-Tass news agency reported.

Though some say that the plan will face hurdles because of conservative opposition, Park as president is in a better position to persuade them, said Kim Duk-joo, a professor at the Korea National Diplomatic Academy in Seoul. 

“It’s not a simple, one-off project but one that may trigger economic innovation in the North by renovating railroads, laying power cables and telephone lines, and setting up pipelines,” he said.

“Negotiations may take a long time but it should bring about a major, comprehensive deal, drawing a forward-looking attitude from Kim Jong-un.”

By Shin Hyon-hee (heeshin@heraldcorp.com)