The Role of North Korea in Northeast Asia Energy Relations David Dusseault Eurasia Energy Group...

The Role of North Korea in Northeast Asia Energy Relations

David Dusseault

Eurasia Energy Group

Aleksanteri Institute

11th December 2006

Some Basic Ideas

• N. Korea’s energy situation is dire;

• Causes include common regional constraints as well as domestic economic strategy; and

• NK is a crucial actor in regional energy relations due to location & potential knock on effects derived from regime’s survival strategy.

The Scope of the Issue

Energy Imbalance

Interdependency: Enabling and Constraining Conditions

1. Physical Constraints: uneven resource distribution, finiteness of natural resources, existence of energy sector infrastructure, geography, climate, accessibility of resources;

2. Informational Constraints: elites do not possess full information regarding their resources or how to fully maximise their benefits accrued from natural resource wealth;

3. Financial Constraints: finite financial resources for investment and resource exploitation, commodity prices, market size;

4. Actor-based Constraints: number of competing actors, how actors perceive their interests and how they determine to develop their interests; and

5. Institutional Constraints: ability of state institutions to flexibly determine the rules of the game over time without marginalising actors or seeking rent.

Regional AssessmentConstraint Northeast Asia

Physical Unique geological conditions; Lack of pipeline and other basic infrastructure; difficult climatic conditions in Eastern Siberia, Yakutia, and Sakhalin;

Financial High costs of new field development due to geological & climactic conditions; ill developed financial sector in the country, could lead to high dependence on international financial consortia; somewhat unclear investment climate for attracting FDI

Informational Compatibility of domestic know-how with demands encountered in exploiting the new fields; quality information as commodity; high variation of information concerning optimal regional energy development strategy; access to information & level of communication amongst relevant actors.

Institutional Unpredictable legal and institutional environment could lead to energy supplies being dealt with on a bi-lateral as opposed to a multi-lateral regional basis. Existing institution free environment allows for creativity in determining future institutional regimes.

Actor-based Economic logic partly intertwined with a traditional geopolitical approach in projects like the ESPO pipeline as a result of the states’ role in the energy sector development. IOCs and state backed energy companies share a partial, but not common ideological basis for energy sector development projects. Unresolved legal issues regarding the control over resources between federal & regional authorities.

Conditions: North and South Korea

Factors Enabling Constraining

Physical Strategic corridor for transit to markets in the south

Distance from significant reserves; North: Lack of necessary infrastructure to supply for demand

Informational South: Long term strategy, strategic reserves

Strategy still relies on the state as major player in sector decision-making process, direction of future development.

Financial South: Possess significant financial resources to support international energy sector projects; represents large market making super projects more attractive

Price dependency, market volatility, level of demand

Actors South: State energy sector undergoing a process of diversification

State as primary actor

Institutional South: Restructuring of institutional rules of the game

North: Institutional framework??

The Nuclear Issue in the Present Energy Context

• Nuclear stand-off on the peninsula is tied to regime survival;

• NK’s regime survival strategy has been directly linked to external aid (food and energy (KEDO));

•Energy can still form the basis for a flexible long term strategy to incorporate NK back into the international community.

Regional Priorities: Catastrophic Regional Conflict Avoidance

•FDI, financial credits, ROK Japan loans; (Bi & Multi-lateral)

•Regional Development aid (Bi & Multi-lateral)

Priorities & Strategies

US Priorities: Regime Change

•Economic Sanctions (Uni - & Multi-lateral)

•Military “Axis of Evil” (Sum zero)

NK Priorities: Regime Survival•Nuclear Threat (Sum zero)

•FDI, financial credits, WB loans; (Bi & Multi-lateral)

•KEDO energy package, UNDP development aid. (Bi-& Multi-lateral)

?

Conclusions• Re-think of US sum zero regime change strategy;

• Development of mutually beneficial, long term plan to incorporate NK into the international community;

• In the short term: resumption of HFO shipments and incremental easing of economic sanctions in return for negotiations over nuke issue;

•In the medium term: step by step programme for verifiable dissolution of nuclear programme in return for increased financial and technical assistance;

•In the long term: inclusion in regional based development initiatives with further cuts to conventional forces on the peninsula.