ENERGY SCENARIOS FOR THE DPRK – REPORT OF THE

ENERGY SCENARIOS FOR THE DPRK – REPORT OF THE WORKING GROUPCONVENED BY THEUNITED NATIONS

Phase I

Energy Scenarios for the DPRK –Report of the Working GroupConvened by theUnited Nations

Phase I

University for Peace New York2005

4

© University for Peace Apdo. 138-6100Ciudad Colon, Costa Rica

New York OfficeUniversity for Peace122 East, 42nd St. Suite 4005New York, N.Y. 10168, USA

[email protected]

The findings, interpretations, and conclusions expressed in this publication are those of the authors and do not necessarily represent the views of any organization, the University for Peace or its Board of Executive Directors. All papers contained in this report were originally written before August 2004, except for the Up-date in the “Energy Demand Projections and Supply Options for the DPRK,” which was revised in January 2005.

This report is intended for internal group discussions only and does not represent the official views and con-clusions of the Working Group on Energy for the Democratic People’s Republic of Korea.

5

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

LIST OF CONTRIBUTING AUTHORS

Arnold Baker, President, International Association of Energy Economists

Prof. Nay Htun, Executive Director for Asia and the Pacific, University for Peace

Dr. Phillip Wonhyuk Lim, Law and Economics Division, Korea Development Institute

William Martin, Chairman, The Working Group on Energy for DPRK

Dr. Keun Wook Paik, Associate Fellow, The Royal Institute of International Affairs

Biliana Pehlivanova, Washington Policy & Analysis

Frank Pinto, Executive Coordinator, Global Environment Facility, UNDP

Isamu Seto, Washington Policy & Analysis

Maurice Strong, President, University for Peace Council

Dr. Tsutomu Toichi, Chief Executive Economist, Institute of Energy Economics of Japan

All contributing authors to this report act in a personal capacity based on their field of expertise, and do not represent the official views of any organizations with which they may be affiliated. Future members of the Working Group on Energy for the Democratic People’s Republic of Korea may include, but are not limited to the above.

7

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

TABLE OF CONTENTS

PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Maurice Strong

ECONOMIC AND ENERGY SCENARIO DESCRIPTIONS AND PROJECTIONS FOR THE DPRK . . . . . . . . . . . . . . . . . . . . . . . . . . 15William Martin, Arnold Baker, Biliana Pehlivanova

1. High Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172. Low Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193. Medium-High Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214. Medium-Low Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Appendix 1: Self Reliance Development through Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Appendix 2: Discussion Draft – DPRK Energy Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

ECONOMIC AND ENERGY OUTLOOK & KEY ISSUES FOR NORTHEAST ASIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Tsutomu Toichi

1. Regional Economics of Northeast Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332. Economic Outlook for Northeast Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353. Global/Asian Energy Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364. Energy Outlook for Northeast Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385. Key Issues for Northeast Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

8

ENERGY DEMAND PROJECTIONS AND SUPPLY OPTIONS FOR THE DPRK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Keun-Wook Paik and Wonhyuk Lim

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451. Energy Demand Projections for DPRK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461.1. DPRK’s Energy Consumption Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461.2. DPRK’s Energy Demand Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 482. DPRK’s Energy Supply Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542.1. Short-Term Energy Supply Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542.1.1 Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542.1.2 LPG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 562.2 Longer-Term Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 592.2.1 Electricity Interconnection and Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 592.2.2 LNG Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 642.2.3 Coal Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 642.2.4 Indigenous Oil Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Appendix A: Useful figures on DPRK Economy and Energy Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . 753. Pipeline Gas Introduction to the Korean Peninsula . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 773.1 A Brief Review on Korea’s Stance towards the Trans-national Pipeline Gas Introduction. . . . . . . . . . . 773.2 DPRK’s Stance towards Pipeline Gas Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 813.3 Natural Gas Supply Sources for the Korean Peninsula . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 843.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100Appendix B: The factors of Pipeline Route and Gas Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101Appendix C: Korea’s Natural Gas Industry and the Gas Market Availability . . . . . . . . . . . . . . . . . . . . . . 106Update: January 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

DRAFT BRIEF DISCUSSION NOTE: ROLE OF RURAL ENERGY IN THE DPRK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121Nay Htun

1. A Preamble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1212. Brief Overview of DPRK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1223. Economic Development – an overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1224. Rural Economy and Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1235. The Role of Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1256. The Role of Biogas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1267. Multi-Functional Energy Platforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1268. Mini and Micro Financing for Expanding Energy Access in Rural Areas . . . . . . . . . . . . . . . . . . . . . . 1269. Enabling Institutional Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127Appendix: Quotes from the Late President Kim Il Sung . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

9

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

RENEWABLE ENERGY RESOURCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129Frank Pinto

1. Estimated DPRK Energy Demand/Supply: 1990–2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1302. Estimated Trend in DPRK Energy Demand by Sector: 1990–2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 1303. Estimated Trend in DPRK Electricity Demand by Sector: 1990–2000 . . . . . . . . . . . . . . . . . . . . . . . . 1314. Energy Issues Affecting DRPK during 1990–2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1315. Renewable Energy Resources in DPRK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1316. Current Situation in the Rural Electricity Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1327. Rationale for Working in the Wind Energy Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1328. Existing Wind Energy Industry in DPRK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1329. Highlights of the UNDP/GEF Expected Project Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13310. Summary of UNDP/GEF Project Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13411. Project Status Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

UPDATED STATUS OF KEDO PROJECT AND LESSONS LEARNED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135Isamu Seto

1. KEDO Presence in Kumho . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1362. Details About the LWR Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1363. Status of the Kumho Site . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1364. Key 2002 Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1375. Latest KEDO’s Statement 03/26/2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

11

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

This presents the results of the extensive work done to examine alternative energy scenarios to meet the long-term energy needs of the DPRK. It is an important component of the broader program of preparatory work undertaken as part of the initiative which the Secretary-General of the United Nations Kofi Annan undertook in January 2003 with a view to contribute to a peaceful settlement of the “nuclear issue” and of the broader conflict which has divided the Korean peninsula and threatens peace and security in the region and the well-being and future prospects of the Korean people.

The Secretary-General’s initiative concentrated initially on reducing regional tensions and mobilizing in-creased international support to meet the immediate humanitarian and economic needs of the DPRK. Soon after its launch, the need for initiating extensive analytical work designed to help prepare the DPRK and the international community for a new era of international cooperation and support for the recovery and revitalization of the DPRK’s economy, which is expected to follow from agreement on the nuclear weapons issue, became all too clear.

The underlying premise of this work, which I had the privilege of putting together in my capacity as Personal Envoy of the Secretary-General, is that the peaceful resolution of the nuclear weapons and military aspects of this conflict must be accompanied by agreements and arrangements to ensure that the very substantial resources required by the DPRK to meet its long-term humanitarian and economic needs can be met on a basis that is viable and sustainable. This will require a major transformation in their own internal economy, reform of which they have already done, to meet the DPRK’s announced objectives of becoming a more ac-tive and open participant in the world economy and will require a great deal of time and effort both by the DPRK and its international partners. The DPRK has embarked on a promising program of economic reform

PREFACE

Maurice Strong22 August, 2005

12

and modernization and a good deal of preparatory work is being done by other interested parties. The activi-ties undertaken in support of the Secretary-General’s efforts have been designed to give strong impetus and coherence to this work while drawing upon the insights and results it is producing.

Energy is at the very heart of the DPRK’s humanitarian and economic needs affecting virtually every aspect of its economy and the lives and well-being of its people. Continuing shortages of energy, particularly since the suspension of heavy fuel oil supplies pursuant to the 1994 Framework Agreement, have resulted in severe reductions in industrial and agricultural production, transport and the provision of basic health and social services. Anyone visiting the DPRK cannot help but be impressed with the innovative capacities of both the government and the people to mitigate damage to the economy and the difficulties suffered by people as a result of these shortages. They nevertheless continue to exact a heavy cost in both economic and human terms while eroding the capacity for economic recovery and revitalization.

This report does not purport to propose specific solutions to the DPRK’s energy needs. Rather it presents a number of scenarios designed to illuminate the longer term results of alternative pathways which may result from choices made by the DPRK and the response of the international community to these choices. The development of the DPRK’s indigenous resources and internal distribution system as well as its access to external energy sources require substantial and sustainable international financing. The availability of such financing both through development assistance and investment will depend on progress towards a peaceful resolution of the nuclear weapons issue. The recent proposal by the Republic of Korea to provide electric power to the DPRK is a promising example of how the international community will indeed respond to such progress, particularly when it produces agreement on a peaceful settlement. I must add that our experts have not addressed at this stage scenarios involving a peaceful nuclear program by the DPRK.

The report is based on the results of the extensive political work undertaken by small groups of highly quali-fied and dedicated professionals headed by Mr. William Martin, former United States Deputy Secretary of Energy. This core group, members of which are working to a large extent on a pro-bono basis, enabled the work to proceed with only a limited budget. They received valuable input from consultations with many other experts and interested parties whose cooperation made a significant contribution to the work. While the DPRK did not participate directly in the working group it was kept fully informed regarding its prog-ress.

This work could not have been undertaken without the support of the United Nations Development Pro-gram, the Canadian International Development Agency and Washington Policy and Analysis, as well as the participants already mentioned. The University for Peace was pleased to have been able to provide admin-istrative and facilitating services to this important undertaking which is so fully in line with the mandate of the University to serve the peace and security purposes of the United Nations through education, training and research. While extensive additional work will need to be undertaken with regard to decisions arising from the Six-Party process we trust that the results of this report will make an important contribution to its decisions and provide useful guidelines for the additional work that will be required for their further develop-ment and implementation.

I am especially grateful to my United Nations and University for Peace colleagues for their critically impor-tant, indeed indispensable, support and advice throughout this exercise – particularly those who worked

13

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

most closely with me, Aleksandr Ilitchev, Senior Policy Advisor from the United Nations Department of Political Affairs and Professor Nay Htun, Senior Development Advisor. The Working Group would like to thank those responsible for publishing this volume. The editor was Isamu Seto. Audrey Chriqui and Jan Havránek provided assistance in layout and design. The book was designed and produced by Diverzity Studio, Prague, Czech Republic.

On behalf of the United Nations Secretary-General, Kofi Annan, and the University for Peace we record our deep gratitude to all those people who have contributed to this work and through it to a peaceful resolution of the conflict, so that Koreans can enjoy durable peace and prosperity in the re-unified Korea to which all aspire.

Sincerely,

15

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

The preliminary planning session held in Vevey, Switzerland in June 2004, concluded that the best way to characterize future economic and energy options for the DPRK is by creating alternative scenarios. Scenarios are not predictions of the future, but rather provide internally consistent sets of possible alternative futures. These “pictures” of alternative futures can allow systematic consideration of different risks and opportunities. The scenario framework for this study is described briefly below.

After much discussion, it appeared that two key drivers for the future of the DPRK are the degree of eco-nomic reform (modernization) it chooses to implement and the degree of external cooperation with North-east Asian countries, the United States and the rest of the world the DPRK receives. The degree of economic reform notionally can vary from limited reform to high reform, and the degree of external cooperation notionally can vary from stalemate (none) to high cooperation. These drivers are depicted in the two axes of the chart below:

ECONOMIC AND ENERGYSCENARIO DESCRIPTIONS AND PROJECTIONS FOR THE DPRK

William MartinArnold BakerBiliana Pehlivanova

16

The two quadrants on the right hand side of the Economic Reform axis represent a high degree of external cooperation that comes about in large measure because of successful Six-Party Talks that result in resolution of the nuclear and related issues. The two quadrants on the left hand side of the Economic Reform Axis come about largely because of slow progress of the Six-Party Talks.

As can be seen, the northeast quadrant of highly structured economic reform and high external cooperation leads to the highest levels of economic growth, expected to be in excess of seven percent real GDP growth per year. In this scenario, all restrictions on DPRK participation in external economic institutions are removed, and effects of the high degree of external cooperation are reinforced by the high degree of internal economic reform.

The weakest economic growth occurs in the southwest quadrant, in which there is little or no external coop-eration (stalemate) and limited internal economic reform (modernization). Annual real GDP growth may be one percent or less. External cooperation is not forthcoming because of slow progress of the Six-Party Talks.

Medium-Low Growth Scenario (GDP Growth Rate 2% – 3%)

— DPRK proceeds with structured economic reform.

— External cooperation is not available due to slow progress of the Six-Party Talks or other reasons

High Growth Scenario(GDP Growth Rate > 7%)

— DPRK proceeds with structured economic reform

— External parties respond to investment needs

— All external economic restrictions are removed

— Assumes Six-Party Talks are successful

Low Growth Scenario(GDP Growth Rate < 1%)

— DPRK pursues limited economic reforms

— External cooperation is not available due to slow progress of the Six-Party Talks or other reasons

Medium-High Growth Scenario(GDP Growth Rate 5%)

— DPRK pursues limited economic reforms

— Increased availability of economic assistance

— Assumes Six-Party Talks are successful

ECONOMIC REFORM (MODERNIZATION)

STALEMATE EXTERNAL COOPERATION

LIMITED ECONOMIC REFORM

17

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

The other two scenarios depict economic growth prospects between the high and low cases. The southeast quadrant has high external cooperation, driven by successful six party talks, but also the DPRK decision to undertake limited economic reform. Annual real economic GDP growth here might be on the order of five percent, stimulated by substantial external official aid flows.

The northwest quadrant has somewhat lower levels of economic growth, on the order of perhaps two to three percent per year. The low levels of economic cooperation, as noted, would most likely be due to slow prog-ress of the Six-Party Talks, though potentially they also could be due to a lack of interest by other countries. Economic growth is higher than in the low economic growth scenario because the DPRK has instituted structured economic reforms, but the effect of these reforms is limited by the lack of external cooperation.

Each of these four scenarios is discussed in more detail below. (See also Appendix 1 and 2)

1. High Growth

1.1 Key Drivers

The “Six-Party Talks” are successful, leading to high levels of external cooperation and long-term political stability for the Korean Peninsula. At the same time, the DPRK implements significant domestic economic reforms that encourage development of competitive markets and attract foreign technology and investment.

1.2 Economic Development

The DPRK becomes an integrated member of the world economic and financial community. Through affili-ation with international organizations (i.e. IMF, ADB, IBRD, etc.), it receives access to financial resources, expertise, and trade status. In parallel with development of stable domestic economic institutions and fair business and investment rules and practices, neighboring countries and trading partners engage in joint projects that improve the DPRK’s infrastructure and the vitality of its main economic sectors. These factors enable the DPRK to sustain high annual real economic growth rates of seven percent per year or more.

Cooperation in Northeast Asia increases significantly. South Korean, American, Chinese, Japanese and Rus-sian companies, along with commercial entities from other countries, contribute to the development of DPRK through investments in vital transportation and energy infrastructures, and the manufacturing and mining sectors. Foreign assistance helps establish training and education centers for professionals and skilled labor. Technology transfer improves healthcare through training and related diagnostic and treatment equip-ment.

To support the economic expansion, new roads, railroads and ports are built. In turn, these stimulate foreign investment and technology transfer to build and expand DPRK manufacturing production centers. DPRK and foreign investors are able to capitalize on the country’s abundant highly skilled and economically com-

18

petitive labor force. Fertilizers and improvements in agricultural equipment help the domestic agricultural industry satisfy increasing domestic food needs.

A modern banking system is developed that meets the needs of growing domestic businesses and the expand-ing financial services required by the rising incomes of the DPRK people. Domestic regulatory institutions are established to insure fair competition and provide for improved health, safety and security of the people of DPRK.

1.3 Energy Sector

Economic expansion leads to growing demand for oil in the transportation sector and expanded domestic refining capacity to help meet that demand. Foreign capital and technology stimulate domestic offshore drill-ing and exploration, expanding domestic oil and natural gas production, and reducing, but not eliminating the need for oil and natural gas imports. Oil imports are diversified through regional cooperation, as are natural gas imports and electricity trade.

Sustained economic development and growth of energy intensive industrial production and manufacturing is supported by a modernized domestic energy infrastructure. A well-run national power grid is established, with renewable energy and small power generators used in off-grid applications for rural economic develop-ment until the grid is more fully integrated.

Advanced power generation technologies for coal, natural gas and renewables (including expanded hydro electric power, wind, biomass and solar), coupled with the national power grid, provide a modern, energy ef-ficient and environmentally safe energy foundation, avoiding significant air and water pollution, supporting domestic jobs, and providing a stable, secure domestic fuel mix for electricity generation.

As the DPRK economy continues to expand, natural gas becomes an increasingly important domestic in-dustrial, commercial and residential energy source, and source for petrochemical feedstocks. To meet rising natural gas demand, several potential areas of supply are considered (i.e. Irkutsk, Sakhalin, etc.), and a re-gional natural gas pipeline system is developed, linking the DPRK to Sakhalin Island, the ROK and other regional natural gas supplies.

1.4 Summary

Over the next 20 years the DPRK integrates into the world and regional economic and financial com-munities and develops into a modern, industrialized nation, incorporating its rural and remote communi-ties. Its success is built on global and regional stability and cooperation, sound domestic economic policies and institutions that foster competition and productivity, while providing for a cleaner environment and improved health and safety. The DPRK establishes a modern energy, transportation and communications infrastructures, and utilizes its indigenous resources efficiently and environmentally consciously, enabled by FDI, technology transfer, training, education, and financial aid. The DPRK achieves significantly improved self-reliance by fully and productively employing its skilled labor force, natural resources and capital. It em-

19

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

ploys clean coal and other advanced energy technologies, introduces natural gas and increases the share of renewable energy in its fuel mix, and geographically diversifies its oil imports.

2. Low Growth

2.1 Key Drivers

The “Six-Party Talks” are not successful in resolving DPRK’s nuclear program, and the lack of external cooperation and instability on the Korean Peninsula continues over the next 20 years. The DPRK pursues very limited eco-nomic reforms, retains a centrally-planned structure of the economy and does not encourage foreign investment.


The DPRK remains outside world economic and financial community, and does not have access to its fi-nancial resources, expertise, and trade status. In light of its centrally-planned economy, there is little foreign interest in joint projects to improve the DPRK’s infrastructure. DPRK’s energy, transportation, and com-munications infrastructures continue to struggle, and its economic vitality remains very weak. These factors keep annual real economic growth rates below one percent per year.

Cooperation between the DPRK and Northeast Asia remains weak. There is little foreign interest in investing in mining and manufacturing, providing technology transfer or education and training. Limited cooperation between the DPRK and foreign countries is carried out mainly in the form of humanitarian assistance and aid to support the immediate needs of its people. The economy continues to be based on labor-intensive manufacturing, with limited improvement in productivity.

Transportation infrastructure continues to be an impediment for increasing the economic ties between the DPRK and its neighbors. Rehabilitation of energy infrastructure is carried out to the extent that domestic funding allows, and some additional generation capacity is added. However, the country continues to experi-ence electricity shortages, as electricity transmission and distribution remain a challenge.

Energy shortages limit economic growth, especially in the manufacturing and industrial sectors. It is difficult to upgrade the vital coal-mining sector, and damages from flooding and outdated equipment continue to pose problems. Rehabilitation of the energy sector progresses slowly at best, as the lack of capital limits much needed upgrades and equipment replacement.

The DPRK exports very little. With little access to foreign capital and assistance, its ability to import needed petroleum, food, fertilizer and medicine remains limited.

20

The agricultural sector continues to struggle due to lack of fertilizers and delayed upgrades of equipment and technology. Domestic food production remains insufficient to feed the people, and food shortages are frequent.

A modern banking system and regulatory institutions fail to develop. Domestic levels of health, safety and security remain near current levels. The minor economic reforms that the government implements encour-age some small private entrepreneurs to operate on the fringes of the economy, but do not significantly affect overall economic wellbeing or employment.

2.3 Energy Sector

With very weak economic growth and a limited energy and transportation infrastructures, demand for oil for transportation grows slowly. Additional domestic refining capacity is not built, due to limited capital avail-ability. Domestic oil exploration is weak and inconsistent, and only adds modest oil supplies. Oil imports grow slowly, and remain dependent on the good will of Peninsula neighbors.

Continued lack of a modernized domestic energy infrastructure limits economic growth potential. With limited foreign assistance, only minor improvements are made to the present weak electric grid. While ad-ditional hydroelectric power is built with domestic investment, and modest technology improvements in coal fired power generation become available, the DPRK electricity supply remains coal and hydroelectricity based, and insufficient to meet needed electricity demand. Coupled with the lack of an integrated national electricity grid, electricity shortages and blackouts are frequent, frustrating citizens and companies alike, and increasing domestic health and security risks.

Rural economic development is especially weak, as only small amounts of distributed renewable electricity (wind, tidal, solar) become available, due to limited assistance from international organizations.

With a weak economy and limited access to advanced energy and manufacturing technologies, air and water pollution problems grow, adversely affecting agriculture and health.

Natural gas does not become a feature of the DPRK economy. It is too costly to build a domestic natural gas transportation and distribution infrastructure, and to retrofit existing coal and oil boilers. Because of contin-ued political instability on the Peninsula, other countries extend natural gas infrastructure without consider-ation of DPRK needs or future market demand potential. Once the regional natural gas infrastructure is in place, it becomes very costly to alter it, and natural gas supplies to the DPRK become problematic.

2.4 Summary

Over the next 20 years the DPRK remains isolated from the world, does not become an integral part of the regional economic and financial communities, and its economy struggles to meet the needs of its people, especially those in its rural and remote communities. This situation comes about through the continued lack of stability and cooperation in the Korean Peninsula, and limited domestic economic reforms that

21

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

hinder productivity growth, fail to slow environmental pollution, and put health and safety at risk. Its energy, transportation and communications infrastructures stagnate. The DPRK remains unable to feed its people; and it utilizes its indigenous energy and labor resources inefficiently. It receives limited foreign humanitarian aid to help with short-term crises, and the crises continue. It is unable to make any signifi-cant improvements in self-reliance. The DPRK continues to depend upon coal, hydro and outdated power generating technologies for its electricity; its electricity grid remains fragmented; its people and industries are faced with electricity shortages and blackouts; and it depends on the good will of Peninsula neighbors for needed oil imports.

3. Medium-High Growth

3.1 Key Drivers

The “Six-Party Talks” are successful, leading to high levels of external cooperation and long-term political stability for the Korean Peninsula. At the same time, the DPRK implements limited domestic economic reforms, and retains a centrally planned economic structure that does not attract substantial foreign private investment and technology.


The DPRK becomes an integrated member of the world economic and financial communities. Through af-filiation with international organizations (i.e. IMF, ADB, IBRD, etc.), it receives access to financial resources and expertise. This enables neighboring countries and trading partners to undertake joint government and IFI projects to improve the DPRK’s infrastructure and support improvement in its main economic sectors, including exports. These factors enable the DPRK to sustain annual real economic growth rates in the five percent range.

Cooperation in Northeast Asia increases significantly. South Korean, American, Chinese, Japanese and Rus-sian governments, along with other country governments and the international financial institutions, con-tribute to the development of the DPRK through financial support and assistance for vital transportation and energy infrastructures, and for the manufacturing and mining sectors. Foreign assistance helps establish training and education centers for professionals and skilled labor. Official technology transfer improves healthcare through training and providing some diagnostic and treatment equipment.

To support the moderate economic expansion and export growth, additional roads, railroads and expanded port capacity are built. These help support domestic manufacturing and export industries that capitalize on the country’s abundant highly skilled and economically competitive labor force and help finance import needs. Additional fertilizer and agricultural equipment imports improve domestic food production, though significant food imports are still needed.

22

A modern banking system fails to develop, though modest banking reforms are enacted in response to the needs of moderately growing domestic businesses and the financial services required by the rising incomes of the DPRK people. Domestic levels of health, safety and security improve, but are still below levels in neighboring countries. Centralized planning becomes increasingly complex, as parts of the economy re-spond to increased foreign assistance, but are unable to attract sufficient private capital investment to meet demands for goods and services, and government controls try to allocate resources appropriately. Through modest economic reforms, the government encourages some small private entrepreneurs to operate on the fringes of the economy, but these primarily complicate the centralized planning and control system. Domestic regulatory institutions remain largely untouched by reforms, and are not capable of sustaining a market economy.

3.3 Energy Sector

Moderate economic expansion leads to growing demand for oil in the transportation sector and imported petroleum products to meet that demand. Some domestic capital and foreign assistance stimulate domestic offshore drilling and exploration, modestly expanding domestic oil production, and marginally reducing the need for oil imports. Oil imports are diversified through regional cooperation, as are any requirements for natural gas imports and electricity trade.

Economic development and growth of energy intensive industrial production and manufacturing is sup-ported by an improved domestic energy infrastructure. Through foreign assistance, a limited national power grid is established and works well in the urban centers. Foreign assistance supports renewable energy and small power generators in off-grid applications for rural economic development.

Penetration of some advanced power generation technologies for coal, natural gas and renewables (includ-ing expanded hydro electric power, wind, biomass and solar), coupled with the limited national power grid, provide a significantly improved, moderately energy efficient and more environmentally viable energy foun-dation, reducing air and water pollution, supporting domestic jobs, and providing a reasonably stable and secure domestic electricity mix.

Rural economic development proceeds slowly, as some distributed renewable electricity (wind, tidal, solar) become available through assistance from international organizations.

As the DPRK economy continues to expand, natural gas becomes a modestly important domestic industrial, commercial and residential energy source, and source for petrochemical feedstocks. To meet rising natural gas demand, limited LNG importing facilities are developed.

3.4 Summary

The DPRK becomes an integrated member of the world economic and financial communities. Through affil-iation with the WTO, IMF, ADB and IBRD communities, it receives access to their financial resources and expertise. This enables joint development of government and international financial organizations projects

23

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

to improve DPRK’s infrastructure and key economic sectors. Its success is built on global and regional stabil-ity and cooperation, with access to institutional and foreign governments’ financial and technical support. The DPRK establishes improved energy, transportation, communications and agricultural infrastructures, and utilizes its indigenous resources somewhat more efficiently and environmentally consciously, enabled by foreign direct investment, technology transfer, training and education, and financial aid. Its economic growth and development is limited by a centrally planned economic system, which fails to attract private foreign investment and private technology transfer. It achieves a somewhat greater level of self-reliance by more productively employing its skilled labor force, natural resources (including agriculture and water) and domestic capital. It employs moderate use of clean coal and other advanced energy technologies, introduces natural gas, somewhat increases the share of renewable energy in its fuel mix, and geographically diversifies its oil imports.

4. Medium-Low Growth

4.1 Key Drivers

The “Six-Party Talks” are not successful in resolving DPRK’s nuclear program, and the lack of external co-operation and instability on the Korean Peninsula continues over the next 20 years. Nonetheless, the DPRK undertakes significant domestic economic reforms to encourage development of competitive markets and attract foreign technology and investment.


The DPRK remains outside the world economic and financial communities and is unable to access its financial resources, expertise, and trade status. Its domestic economic reforms move it from a centrally planned economy toward a market-based, competitive one, with supporting fair business and investment rules and practices. But without regional and world support, only modest amounts of private foreign capital become available to develop its key infrastructures and industries. DPRK’s energy, transportation and communications infrastructures, though improved modestly, continue to struggle, and its economic vitality remains weak. These factors keep annual real economic growth rates in the two-three percent per year range.

Cooperation between the DPRK and Northeast Asia remains weak. There is only modest foreign interest in investing in mining and manufacturing, providing technology transfer, and education and training. Lim-ited cooperation between the DPRK and foreign countries is carried out mainly in the form of humanitar-ian assistance and aid to support the immediate needs of its people. The economy continues to be based on labor-intensive manufacturing, though some new foreign investment supports higher technology products that utilize its well- trained labor force, and helps modestly improve domestic labor productivity.

Transportation infrastructure continues to be an impediment to increasing the economic ties between the

24

DPRK and its neighbors, as private investment in this area is particularly limited. Rehabilitation of energy infrastructure is carried out to the extent that domestic funding and modest foreign investment allows, and modest additional electric generation capacity is added. However, the country continues to experience elec-tricity shortages, as electricity transmission and distribution remain a challenge.

Energy shortages limit economic growth, especially in the manufacturing and industrial sectors. Only mod-est upgrading of the vital coal-mining sector is possible, and damages from flooding and outdated equipment continue to pose problems. Rehabilitation of the energy sector progresses slowly, as the lack of capital limits needed upgrades and equipment replacement.

The DPRK exports modestly, using revenues to help finance needed imports. With limited access to foreign capital, because of the lack of external cooperation and instability on the Peninsula, its ability to import needed petroleum, food, fertilizer and medicine remains limited.

The agricultural sector continues to struggle from a lack of fertilizer and needed upgrades of equipment and tech-nology. Domestic food production remains insufficient to feed the people, and food shortages are frequent.

A modern banking system is developed that meets the needs of domestic businesses and entrepreneurs, and the financial services required by the modestly rising incomes of the DPRK people, both to stimulate domes-tic economic development and in the hopes of attracting additional private foreign capital. Some domestic regulatory institutions are established to insure fair competition and provide for improved domestic health, safety and security, but these institutions are note well funded.

4.3 Energy Sector

With modest economic growth and a limited energy and transportation infrastructures, demand for oil for transportation grows moderately. Only limited domestic refining capacity is added. Domestic oil exploration continues somewhat with weak foreign capital and technology support, and adds moderate oil supplies. Oil imports grow moderately, and remain dependent on the good will of Peninsula neighbors.

Continued lack of a modernized domestic energy infrastructure hinders economic growth potential. Still, the limited foreign assistance and modest private foreign capital investment are able to make some improvements to the present weak electric grid. A moderate amount of new hydroelectric power is added through domestic and foreign investment, as is a modest amount of advanced coal fired power generation. The DPRK elec-tricity system remains coal and hydroelectricity based and insufficient to meet growing electricity demand. Coupled with a still poorly operating electricity grid, electricity shortages and power blackouts still occur, frustrating citizens and companies alike, and increasing domestic health and security risks.

Rural economic development continues to be weak, as only modest amounts of distributed renewable elec-tricity (wind, tidal, solar) become available, due to limited assistance from international organizations and modest private capital.

With modest economic growth and limited access to advanced energy and manufacturing technologies, air

25

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

and water pollution problems continue, adversely affecting agriculture and health.

Natural gas only becomes a marginal feature of the DPRK economy. It is costly to build a domestic natural gas transportation and distribution infrastructure, and to retrofit existing coal and oil boilers, so natural gas is only employed in high valued uses (e.g., petrochemical feedstocks). Because of continued DPRK-Peninsula instabilities, other countries extend their own natural gas pipeline and LNG infrastructures without consider-ation of DPRK needs or future market demand potential. Once the new Peninsula natural gas infrastructure is in place, it becomes very costly to alter it, and natural gas supplies for the DPRK become problematic.

4.4 SUMMARY

Over the next 20 years the DPRK remains isolated from the world and regional economic and financial com-munities, and its economy struggles to meet the needs of its people, especially those in rural and remote com-munities. This situation comes about through the continued lack of stability and cooperation on the Korean Peninsula, despite domestic economic reforms that attract modest foreign capital and improve productivity growth. Environmental pollution continues, putting the health and safety of the people of the DPRK at risk. Its energy, transportation and communications infrastructures improve modestly; it remains largely unable to feed its people; and while the DPRK improves utilization of its indigenous energy and labor resources, those uses remain largely inefficient. The DPRK receives limited foreign humanitarian aid to help with short-term crises. It is only able to make modest improvements in self-reliance. It continues to largely depend upon coal, hydro and older power generating technologies for its electricity; its electricity grid though improved, remains fragmented; its people and industries are faced with electricity shortages and blackouts; and it largely depends on the good will of Peninsula neighbors for needed oil imports.

26

Appendix 1: Self Reliance Development through Energy

27

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Appendix 2: Discussion Draft – DPRK Energy Scenarios (August 23rd, 2004)

High Growth Scenario

HIGH GROWTH

— Integrated Electricity Grid— Electricity Trade with Neighboring

Countries— Natural Gas Distribution System— Nuclear Plant by 2025— Expanded Domestic Refining Capacity— Domestic Oil Exploration &

Production— Some Market Based Renewables in

Rural Areas

28

Low Growth Scenario

LOW GROWTH SCENARIO

— Balkanized Electricity Grid— Minimal Electricity Imports— No Natural Gas or Nuclear— Over Reliance on Biomass— Limited Domestic Refining Capacity— No Domestic Oil Production— Very Modest Renewables from UNDP

29

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

MEDIUM-HIGH GROWTH

— Limited National Power Grid— Some Electricity Imports— Natural Gas Distribution for Industrial

& Modest Electric Generation— Nuclear Plant by 2025— Expanded Domestic Refining Capacity— Domestic Oil Exploration &

Production— Some Market Based Renewables in

Rural Areas

Medium-High Growth Scenario

30

MEDIUM-LOW GROWTH

— Marginal Improvements in Electricity Grid

— Limited Electricity Imports from ROK— Increase in Small Hydro— Limited Natural Gas— No Nuclear— Modest Increase in Refining Capacity— No Domestic Exploration or

Production— Very Modest Renewables from UNDP

Medium-Low Growth Scenario

31

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

DPRK 2025 Electricity Input Scenario Comparsion

DPRK 2025 Energy Demand Scenario Comparsion

32

DPRK Crude and Product Supply 2025 – Scenario Comparsion

33

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

ECONOMIC AND ENERGY OUTLOOK & KEY ISSUES FOR NORTHEAST ASIA

Tsutomu Toichi

1. Regional Economics of Northeast Asia

The end of the Cold War has resulted in further economic globalization promoted by trends such as the tran-sition to market economies and the spread of information technology (IT). Many developing countries in Asia have achieved an overall high rate of economic growth thanks to the fast-paced expansion of trade and foreign direct investment (FDI), close mutual economic ties and industrialization. In the process, they have made the region into the growth center for the entire world economy. Due to its economic advances, energy demand in Asia continues to expand much faster than in other parts of the world, having increased energy imports in recent years from outside the region, particularly from the Middle East.

While economic globalization has advanced, we have seen the expansion and formation of both new and existing regional economic blocks such as European Union (EU), North American Free Trade Agreement

34

(NAFTA), Association of Southeast Asian Nations plus Japan, the Republic of Korea (ROK) and China (ASEAN + three) and the Asia Pacific Economic Council (APEC). In Northeast Asia, however, no such institutional framework has begun to take hold. Northeast Asia is normally defined as a natural economic region which includes Japan, Northeast China, ROK, the Democratic People’s Republic of Korea (DPRK), Eastern Russia and Mongolia. Although the political events in the 20th century still overshadow the present in Northeast Asia, political and economic ties between the six different countries are moving in a positive direction, albeit rather belated.

If we look at Northeast Asia as an economic region, the most remarkable feature is its great diversity in terms of economic development stages, indigenous energy resources and energy requirements. For example, as shown in Table 1, GDP per capita is $32,610 for Japan, $8,930 for ROK, $2.140 for Rus-sia, $910for China, and $440 for Mongolia in 2001. While Japan and ROK are very rich in capital and advanced technologies, China and DPRK have an abundant, high quality, low-cost labor force. In the energy sector, Japan and ROK have scarce domestic energy resources, and most of their energy needs are supplied via imports.

Population GDP GDP Per Capita Annual Growth (millions) ($ billions) ($) 1990-2001 (%)

China 1271.8 1159.0 910 10.0

DPRK 22.4 n.a. n.a. n.a.

Japan 127.0 4141.4 32610 1.3

Mongolia 2.4 1.1 440 1.2

ROK 47.3 422.2 8930 5.7

Russia 144.8 310.0 2140 -3.7

Table 1. Key Economic Indicators of Northeast Asia (2001)Source: The World Bank, “03 World Bank Atlas” 2003

China is also increasing oil imports in recent years as its oil consumption continues to out-pace domestic pro-duction. The DPRK is facing serious energy shortages due to economic and political difficulties. Japan and ROK are promoting energy policies to reduce dependency on Middle East oil by diversifying energy sources. In contrast, Eastern Russia including Sakhalin is very rich in undeveloped oil, natural gas and hydroelectric power energy resources.

On the whole, Northeast Asia has not only tremendous amounts of investment capital and advanced technologies, but also abundant energy resources and low-cost labor forces. Exploiting these advantages by

35

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

deepening intra-regional economic relationships will help us to build a prosperous and peaceful Northeast Asia in the 21st century.

2. Economic Outlook for Northeast Asia

Economic Partnership Agreements (FTA) and other strong ties of interdependence among the economies in Asia are expected to develop further and keep the rates of economic growth at high levels in next several decades. According to projections from “Asia/World Energy Outlook, 2004” created by the Institute of Energy Economics, Japan (IEEJ), the world economy is expected to show moderate growth at an average rate of 2.7% from 2000-2020 driven by the Asian economy (Table 2). If we look at major energy import-ing countries in Northeast Asia, China, ROK and Japan are expected to show very different economic development as follows.

1980–2000 2000–2020

Population GDP Population GDP

World 1.6 2.7 1.1 2.7

N.E. Asia

China 1.3 9.7 0.6 7.2

Japan 0.4 2.8 -0.1 1.3

Korea 1.1 7.4 0.4 4.3

Table 2. Projection of Annual Average Growth Rates of Population and GDP (%)Source: The Institute of Energy Economics, Japan (IEEJ), “Asia/World Energy Outlook, 2004” March, 2004

The Chinese economy sustained high rates of growth throughout the 1990s with the support of its domes-tic demand, and stayed in the 7–9% range in recent years. It managed to record growth of 7.3% in 2001 in spite of the decelerating U.S. economy and slumping performance among Asia‘s newly industrializing economies (NIEs) and ASEAN countries. Furthermore, following its admission into the World Trade Organization (WTO) in 2002, China posted high rates of economic growth, at 8.0% in 2002 and 9.1% in 2003. Although it is saddled with an array of problems such as internal economic disparities, the need for state enterprise reform, unemployment, and bad debt, China should be able to achieve high growth at rates averaging 7.2% over the long term, provided that it continues to practice proper macroeconomic management.

The Japanese economy has stagnated for more than a decade mainly due to enormous bad loans in the banking sector after the burst of the “economic bubble” in the early 1990s. But the recent progress of eco-nomic reform in the corporate sectors has started to stimulate economic activity coupled with significant

36

increases in exports to China and the US. The forecast for Japan is comparatively low growth at a rate of 1.3% owing to factors such as economic maturation and the decline in the labor population accompany-ing population decreases and aging.

The ROK economy continued to expand with growth rates of more than 7% by the late 1990s when the “Asian currency crisis” occurred in 1997 which seriously damaged its economy. Major economic reforms after the crisis have succeeded in bringing about a remarkable economic recovery aided by sharp increases in exports to China in recent years. The ROK economy is expected to expand with a moderate growth rate of 4.3% during next two decades due to rising labor costs and more fierce international competition from other Asian countries.

3. Global/Asian Energy Outlook

According to IEEJ projections, the world’s primary energy consumption is expected to increase at an aver-age annual rate of 2.1% during the years 2000–2020. The volume in 2020 is expected to reach 13.6 billion oil-equivalent tons (toe), a 1.5-fold increase from the 9.1 billion toe in 2000. Roughly 70% of the increases in energy consumption will be derived from non-OECD countries (primarily developing countries). Non-OECD Asian countries will probably account for about two-thirds of the total, and China for about 30%.

Fossil fuels (coal, oil, and natural gas) are expected to contribute about 90% of the increases in primary energy consumption during the years 2000–2020, thus should continue to play a major role as an energy source. Oil consumption is expected to show the largest increases of all fossil fuels and account for 35% of the increase in primary energy consumption, followed by natural gas at 30% and coal at 26%.

Total Coal Oil N. Gas Nuclear Hydro Power etc.

2000

World 9057 2325 3494 2107 676 455

Asia 2423 1049 938 237 132 67

2020

World 13593 3489 5072 3490 781 761

Asia 4570 1811 1720 598 247 195

Table 3. World Primary Energy Consumption by Source (Million toe)Note: Asia refers to China, Japan, Hong Kong, Taiwan, South Korea, Singapore, Brunei, Indonesia, Malaysia, Philippines, Thailand, Vietnam, India and other parts of Asia.Source: IEEJ, “Asia/World Energy Outlook, 2004” March, 2004

37

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

World oil consumption is expected to rise from 70 million B/D (3.5 billion toe) in 2000 to 102 million B/D (5.1 billion toe) in 2020. Asia should account for about 50% of this increase. It is estimated that about 60% of oil demand will come from the transportation sector. The share of oil in primary energy consumption is expected to decline slightly, from 39% in 2000 to 37% in 2020, but oil would nevertheless remain the single largest energy source (Table 4).

Consumption of natural gas, which reached 2,341 billion m3 (2.1 billion toe) in 2000, is expected to hit 3,877 billion m3 (3.5 billion toe) in 2020, the highest increase among fossil fuels. The installation of combined-cycle power generation systems fueled with natural gas is steadily spreading due to advances in utilization technology and environmental compatibility considerations. About 60% of the increase in natural gas consumption should come from fuel put into the power sector. Expanded utilization led by this sector is expected to drive an increase in the natural gas share of primary consumption, from 23% in 2000 to 26% in 2020.

In oil-equivalent terms, world coal consumption is expected to rise from 2.3 billion toe in 2000 to 3.5 bil-lion toe in 2020. Asia should account for about 70% of this increase, and China, about 40%. Roughly 90% of coal consumption demand will probably come from the power sector as the trend toward fuel for power generation deepens. The coal share of primary energy consumption should remain more or less unchanged at around 26% over the years 2000–2020.

Coal Oil N. Gas Nuclear Hydro Power etc.

2000 26 39 23 8 5

2020 26 37 26 6 6

Table 4. World Primary Energy Consumption by Source(%)Source: IEEJ, “Asia/World Energy Outlook, 2004” March, 2004

In oil-equivalent terms, the consumption of power generated by nuclear power plants is expected to rise from 676 million toe in 2000 to 781 million toe in 2020. The nuclear share of primary energy consumption is expected to decline from 8% in 2000 to 6% in 2020 due to the fast-paced expansion of natural gas utilization in the power sectors of developed countries in North America and Europe and their virtual lack of prospects for construction of additional nuclear power plants. The increase in generated output of nuclear power plants should be confined almost exclusively to a few countries in Asia. In East Asia, nuclear power will continue to play a vital role in Japan, South Korea, and Taiwan, which have few domestic energy resource reserves, and China, with its rapidly growing demand for electricity.

There are high hopes for the spread of renewable energy sources with little environmental impact such as hydroelectric power, geothermal energy, and new energy. Their share of primary energy consumption is ex-pected to increase from 5% in 2000 to 6% in 2020. However, they will not rank on par with fossil resources as pillars of the base energy supply due to their high supply cost and unstable supply caused by natural influ-ences such as the intermittent nature of photovoltaics and wind power.

38

4. Energy Outlook for Northeast Asia

4.1 China, Japan and ROK

Primary energy consumption in China Japan and ROK is expected to grow from 1648 million toe in 2000 to 2927million toe in 2020 (Table 5). China’s primary energy consumption is projected to double from 932 million toe in 2000 to 2063 million toe in 2020, although ROK and Japan are expected to expand energy demand 1.6 and 1.1 times respectively. As a result, about 88% of consumption increases in Northeast Asia over forecast period is derived from expanded consumption in China, followed by Korea at about 9% and by Japan at about 3% only.

In Northeast Asia as is occurring globally, fossil fuels (coal, oil, and natural gas) are expected to continue to play a vital role as sources of energy, and account for about 90% of the increases in primary energy consump-tion over the forecast period. Coal is expected to have the largest share of the increase at 42%, followed by oil at 31% and natural gas at 14%. Annual average growth rates of fossil fuels are 2.6% for coal, 2.6% for oil and 5.0% for natural gas.

Consumption of oil, which was about 12 million B/D (591 million toe) in 2000, is expected to increase by an average annual rate of 3.1% and reach 20 million B/D (982 million toe) in 2020. China is expected to ac-count for about 95% of the increase, ROK about 8%, but Japan is expected to decline about 3%. The greatest increases will come from transportation followed by the residential/commercial and industrial sectors. The oil share of primary energy consumption is expected to dip from 36% in 2000 to 34% in 2020.


2000

N.E. Asia 1648 789 591 110 116 43

China 932 656 222 28 4 23

Japan 525 94 265 65 84 17

ROK 191 39 104 17 28 3

2020

N.E. Asia 2927 1325 982 290 217 114

China 2063 1158 592 162 61 90

Japan 561 101 253 84 104 19

ROK 303 66 137 44 52 5

Table 5. Primary Energy Consumption by Source (Million toe)Source: IEEJ, “Asia/World Energy Outlook, 2004” March, 2004

39

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Coal Oil N. Gas Nuclear Hydro Power etc

2000 48 36 7 7 3

2020 45 34 10 7 4

Table 6. Northeast Asia’s Primary Energy Consumption by Source (%)Source: IEEJ, “Asia/World Energy Outlook, 2004” March, 2004

Consumption of natural gas is expected to undergo a 2.6-fold increase from 122 billion m3 (110 million toe) in 2000 to 322 billion m3 (290 million toe) in 2020, for growth at the highest rate of all fossil fuels. It is estimated that about 50% of the consumption increase will come from fuel use in the power sector. The natural gas share of Northeast Asian primary energy consumption is expected to grow from 7% in 2000 to 10% in 2020, yet shifts in natural gas should be slower than those in North America and Europe.

Consumption of coal is expected to rise from 789 million toe in 2000 to 1325 million toe in 2020. China will probably account for about 94% of the increase, while the ROK and Japan will probably account for about 5% and 1% respectively. About 90% of the increase will come from power generation, while the re-maining 10% will come from industry. While the share of primary energy consumption for coal is expected to slip from 48% in 2000 to 45% in 2020, it should retain the single largest share of the primary energy supply in Northeast Asia.

Consumption of power generated by nuclear power plants is expected to increase from 116 million toe in 2000 to 217 million toe in 2020. Almost all of the corresponding global increases should come from Northeast Asia. There are strong prospects for growth in China and in countries with few domestic energy resource reserves of such as Japan and Korea. China is expected to account for about 56% of the nuclear power increases in North-east Asia. The nuclear share of primary energy consumption should stay at about 7% over the period to 2020.

The share of renewable energies (e.g., hydroelectric power, geothermal energy, new energy) is expected to in-crease from 3% in 2000 to 4% in 2020. It should be noted, that energy consumption is expected to expand rapidly in the region, thus requiring a rapid response to ensure a stable supply of energy. These circumstances will act to limit the utilization of renewable energies, whose supply tends to be unstable due to natural con-ditions (except hydroelectric power and geothermal energy). Nevertheless, the installation of new energy systems with low environmental loads will continue to play a key role.

The rate of oil dependence on the Middle East will deepen steadily in Japan, China, and ROK. It is expected to reach about 90% in Japan and 80% in ROK in 2020. It is also expected to jump from 15% in 2000 to about 50% in China in 2020 due to sharp increases in oil demand and the leveling off of domestic produc-tion. The corresponding rate of dependence on the Middle East in Northeast Asia as a whole is expected to rise from 58% in 2000 to approximately 70% in 2020 with the quantitative expansion of consumption in China. If the three countries begin to import crude oil produced in Siberia (in quantities totaling about 100 million tons per year), the corresponding rate may be lowered by about 11%.

40

4.2 DPRK and Mongolia

According to projections from the Korea Energy Economics Institute (KEEI), DPRK’s primary energy con-sumption is expected to increase from 15.69 million toe to 65.32 million toe, at an average annual rate of 7.4% over the years 2000 –2020 (Table 6). The current energy consumption per capita of the DPRK is 0.17 toe/capita almost the same as that of China. Once foreign direct investments are introduced into the DPRK to revitalize its stagnant economy, demand for energy is expected to grow rapidly. In order to reach a stable supply of energy, the DPRK must make every effort not only to expand domestic coal energy production, hydroelectric power and other sources, but also increase oil and natural gas imports. The projections in Table 7 assume that the KEDO (Korean Peninsula Energy Development Organization) project will be completed by 2015, and also assumes that the Siberian gas pipeline would pass through DPRK territory from 2020. If not, alternative scenarios for energy supply sources will have to be examined. According to projections from the Korea Energy Economics Institute (KEEI), DPRK’s primary energy consumption is expected to increase from 15.7 million toe to 65.3 million toe, at an average annual rate of 7.4% over the years 2000–2020.


2000 15.69 11.25 1.12 – – 3.32

(100) (72) (7) – – (21)

2020 65.32 29.27 23.82 3.32 3.29 5.64

(100) (45) (36) (5) (5) (9)

00–20 7.4 4.9 16.5 – – 2.7

Table 7. DPRK‘s Primary Energy Consumption by Source(Million toe, %)Note: * The projection assumes that the KEDO project will be completed by 2015.** The projection also assumes that the Siberian gas pipeline will pass through DPRK territory from 2020.Source: Korea Energy Economics Institute (KEEI), 2002

KEEI also projects that the primary energy consumption of Mongolia will increase from 2.6 million toe in 2000 to 3.7 million toe in 2020 at an annual growth rate of 0.1%. As its total amount of energy consumption will remain very small, the impact on Mongolia’s energy balance will be minimal from a regional viewpoint of Northeast Asia for the foreseeable future.

4.3 Russia

The primary energy consumption of Russia is expected to increase from 612 million toe in 2000 to 841 million toe in 2020 at an annual growth rate of 1.6%. Russia is the largest natural gas producer and ex-

41

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

porter in the world as well as the second largest oil exporter after Saudi Arabia. Most exports of oil and gas have up to now been directed to European countries mainly through pipeline networks and oil tankers. As the Eastern regions of Russia depend almost entirely on extra-regional shipments of oil and the need for Northeast Asian countries to pursue a policy of diversification of their supply sources of oil and gas, it is quite rational for Russia to develop abundant energy resources in East Siberia and the Russian Far East, including Sakhalin. In terms of its resource base, it is estimated that the Eastern regions of Russia account for 45% of coal, 30% of natural gas and 18% of oil resources, over 80% of hydroelectric power for Russia as a whole.

Proven Reserves Global Share (%) R/P Ratio

Oil (Billion toe) 9.5 6.0 % 22.2

Natural Gas (Trillion m3) 47.0 26.7 % 81.2

Coal (Billion toe) 157.0 15.9 % -

Table 8. Proven Russian Reserves of Oil, Natural Gas and Coal (at end of 2003)Source: BP Statistical Review of World Energy, June 2004

Various oil and gas projects and their feasibility being considered depend on access to long distance, large capacity pipelines. The construction of mega-pipelines requires enormous capital funds and a long-term return-on-investment period. As the economic feasibility of the mega pipeline system cannot be supported by limited domestic demand, most projects are expected to export oil or gas to neighboring markets. Ac-cording to “Energy Strategy 2020” adopted in 2003, the Russian government promised state support for export pipelines, if these pipelines are built within Russian territory, as mega energy projects are expected to stimulate economic activities in the Eastern regions of Russia where economic development lags behind the rest of the country. Thus Russia and energy-importing countries in Northeast Asian have a common interest to cooperate to develop energy resources in the Eastern regions of Russia.

5. Key Issues for Northeast Asia

As Northeast Asia is expected to become further dependent on the Middle East for a long -term supply of oil, the region must have an ample supply capacity for natural gas and coal. The simultaneous realization of energy security, market rationalization, and environmental improvements in Northeast Asia demands the construction of the „best mix“ of energy sources in each country that factor in the situation vis-à-vis the amount of energy reserves, geographical conditions, and stage of economic development. Furthermore, the formation of an analogous „best mix“ in the region as a whole will require extensive utilization of coal and nuclear power alongside natural gas while assuring oil supply stability.

42

5.1 Ensuring Energy Security

Strong economic growth and progressive motorization are going to expand the demand for energy in North-east Asia. As noted above, the dependency on the Middle East for supplies of oil should deepen, as regional oil supplies would not be able to keep pace with rapid demand expansion. While it is naturally important for individual countries to make efforts to secure their own energy supplies, there is also a possibility that an excessive pursuit of national interests by any single country could damage the energy security of the region as a whole. Thus it is becoming increasingly important for the issue to be treated as one in which all countries in the region have a common stake. To this end, Northeast Asian countries must cooperate to develop abundant undeveloped energy resources, including oil, natural gas, coal and hydroelectric power in the Eastern regions of Russia.

5.2 Pursuit of Energy Diversification and “Best Mix“

Pursuit of the best energy mix is another agenda item to be confronted by each country according to its cir-cumstances vis-à-vis energy demand, the amount of resource reserves, technology level, and economic merit. However, it is also vital to retain the perspective of optimizing the mix in the region as a whole, based on cooperation between net consumers and net suppliers.

The use of natural gas in Northeast Asia is expected to grow in the future, driven by demand for diverse en-ergy sources and environmental improvements. In order to promote this, natural gas must be economically competitive with other energy sources. The Asia-Pacific region has a fully sufficient long-term supply poten-tial for LNG, while LNG importing countries must collaborate in efforts to raise their economic benefits by exercising stronger bargaining power against LNG suppliers. Thus it will be beneficial for Northeast Asian countries to cooperate to develop natural gas resources in the Eastern regions of Russia and have new supply sources of natural gas via cross -border pipelines.

Coal has superb economic benefits but also entails a high environmental load, thus its utilization in de-veloped countries could stop growing as a result. In Northeast Asia, there are abundant reserves of coal in countries such as China and Russia, while the region‘s utilization of coal is expected to grow, particularly in the power sector. This would further raise the importance of environment-friendly utilization harnessing high-efficiency technology. It is vital for Northeast Asia to make better use of its abundant coal deposits based on energy security and economic benefits.

In the developed countries of Europe and North America, construction of additional nuclear power plants has essentially been halted, while installed capacity is expected to decline. As a result, Northeast Asia should be the location of almost all additional nuclear power plants. Many Northeast Asian countries have a rela-tively low level of domestic natural resources, while nuclear power has a major role to play to ensure supply stability and overcome environmental concerns. There is also a need for intraregional cooperation covering operations and management in this area. Thus it is important to have various options for energy supply sources. This would be linked not only to higher levels of energy security but also a stronger position in price negotiations for competing fuels.

43

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

5.3 Improvement of Investment Environment

A stable supply of energy is vital for sustainable economic development in Northeast Asia. In addition to securing crude oil, natural gas, coal, and other resources, enormous capital is needed to build infrastructure such as pipelines and transmission lines. Major financing of these mega-projects must rely heavily on both loans and direct investment from foreign private corporations as well as foreign governments, international organs, and other forms of public funding. Thus rules governing taxes, investments, and other systems must be defined in order to encourage development of energy resources and related infrastructure using foreign capital. Moreover, strong support by governments in the form of financial assistance and investment insurance will play a vital role in promoting the participation of private enterprise in energy infrastructure projects.

5.4 Cooperation for Environmental Improvement

As the dominant energy sources will continue to be coal and oil in Northeast Asia in the foreseeable future, various environmental problems including current air pollution and CO2 emission will worsen due to rapid increases in coal and oil consumption. In order to deal with these problems, regional cooperation through technology transfer is extremely valuable and effective, particularly in the areas of energy conservation, clean coal technology and renewable energy development. China and other Northeast Asian countries have im-mense potential for energy conservation, and offer enormous opportunities for technical assistance through the Clean Development Mechanism (CDM) and other schemes. As Japan ranks at the top worldwide in terms of energy conservation and environmental technologies, regional cooperation can contribute to a win-win situation in Northeast Asia.

45

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

ENERGY DEMAND PROJECTIONS AND SUPPLY OPTIONS FOR DPRK

Keun-Wook PaikWonhyuk Lim

Introduction

In this report, we present energy demand projections for DPRK (Democratic People’s Republic of Korea or North Korea) by fuel and major economic sector, and also look at its supply options for the short term (2005) and medium-long term (2020). Essential to DPRK’s economic rehabilitation, energy assistance is likely to be an integral component of a comprehensive agreement designed to resolve the nuclear problem on the Korean peninsula, and we examine energy supply options for DPRK by combining geopolitical and economic perspectives.

This report consists of three parts. In Part one, using various assumptions on DPRK’s economic growth and energy supply options, we present energy demand projections for the period up to 2020. We consider four economic growth scenarios for DPRK as outlined in the previous section, and present energy demand projections for DPRK by fuel and major economic sector. Building on a previous study by the Korea Energy Economics Institute (KEEI 2003), we adopt various assumptions on DPRK’s economic growth and energy supply options and derive corresponding demand projections.

46

In Part Two, we look at energy supply options for DPRK. For the short term, we discuss the possibility of transferring energy resources such as heavy fuel oil and LPG (liquefied propane gas). In particular, we look at the option of providing LPG from ROK (Republic of Korea or South Korea) to DPRK. For the medium-long term, we look at energy infrastructure projects such as electricity interconnection and power generation, coal production, and oil exploration. For electricity, we review the option of building interconnection with Russia as well as constructing power plants within DPRK. For oil, we look at the tantalizing prospects for offshore exploration.

In Part Three, we examine in detail the possibility of introducing pipeline natural gas from Russia to the Korean Peninsula. We review the ROK and DPRK positions on trans-national gas pipelines and explore vari-ous options by supply source—namely, Irkutsk, Sakha, and Sakhalin projects. We emphasize that only with close international cooperation at the governmental level can we expect to make substantive progress on the introduction of pipeline natural gas to the Korean Peninsula.

1. Energy Demand Projections for DPRK

In Part One, using various assumptions on DPRK’s economic growth and energy supply options, we present energy demand projections for DPRK for the period up to 2020. Before making demand projections, we give a brief overview of DPRK’s energy consumption trends since 1980 in comparison with ROK’s. On per capita terms, DPRK’s energy consumption was on a par with ROK’s in 1985, but their consumption trends began to diverge sharply in the late 1980s as the collapse of the Socialist Bloc had a devastating effect on the DPRK economy. Yet the fact that the two sides had similar per capita energy consumption levels as late as the mid-1980s suggests that ROK’s energy consumption trend since then might be regarded as a possible benchmark for DPRK’s economic recovery scenarios.

We then present energy demand projections for DPRK by fuel and major economic sector. We change assumptions on DPRK’s economic growth and energy supply options and derive corresponding demand projections.

1.1. DPRK’s Energy Consumption Trends

As shown in Table 1, on per capita terms, DPRK’s primary energy consumption was almost identical to ROK’s in 1985. Since the collapse of the Socialist Bloc in the late 1980s, however, DPRK’s energy consump-tion has sharply declined due to production bottlenecks and hard-currency problems. In 2002, DPRK’s per capita energy consumption was approximately 54 percent of its level in 1985; whereas, ROK’s corresponding figure increased more than three-fold over the same period.

47

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Total Consumption (mtoe) Per Capita Consumption (toe)

ROK DPRK ROK DPRK

1980 43.911 21.013 1.15 1.19

1985 56.296 24.940 1.38 1.31

1990 93.192 23.963 2.17 1.19

1995 150.437 17.280 3.34 0.80

2000 192.887 14.587 4.10 0.71

2002 208.636 15.640 4.38 0.70

Table 1. Primary Energy Consumption, 1980–2002Source: Korea National Statistical Office

DPRK’s crude oil imports suffered an even larger decline due to the termination of energy trade on “friendly” terms with Russia and China (Table 2). The precipitate fall in crude oil imports had serious repercussions for DPRK’s industrial production. DPRK’s refining capacity has also declined since the late 1980s due to lack of investment.

Crude Oil Imports Refining Capacity Imports (MBbl) Imports per Capita (Bbl) (BPSD/100 Persons)

ROK DPRK ROK DPRK ROK DPRK

1980 182.861 15.393 4.796 0.784 1.679 0.397

1985 198.313 14.369 4.860 0.752 1.936 0.367

1990 308.368 18.472 7.193 0.914 1.959 0.346

1995 624.945 8.063 13.859 0.374 4.032 0.325

2000 893.943 2.851 19.019 0.129 5.186 0.316

2002 790.992 4.376 16.604 0.196 5.118 0.313

Table 2. Crude Oil Imports and Refining Capacity, 1980–2002Source: Korea National Statistical Office

By contrast, DPRK’s electrical power generation capacity has continued to increase over the past two decades, especially in the hydro power sector. As shown in Table 3, however, gross production has declined over the same period due to reduced capacity utilization.

48

Gross Capacity and Composition by Energy Source

Year Gross Capacity (kW) Hydro (%) Thermal (%) Nuclear (%) Gross Production (TWh)

ROK DPRK ROK DPRK ROK DPRK ROK DPRK ROK DPRK

1980 9,391 5,010 12.3 58.1 81.4 41.9 6.3 – 37.2 21.2

1985 16,136 5,915 13.8 56.0 65.5 44.0 17.8 – 58.0 25.1

1990 21,021 7,142 11.1 60.1 52.6 39.9 36.2 – 107.7 27.7

1995 32,184 7,237 9.6 59.9 63.6 40.1 26.8 – 184.7 23.0

2000 48,451 7,552 6.5 60.8 65.2 39.2 28.3 – 266.4 19.4

2002 53,801 7,772 7.2 61.9 63.6 38.1 29.2 – 306.5 19.0

Table 3. Electrical Power Generation Capacity and Production, 1980–2002Source: Korea National Statistical Office

1.2 DPRK’s Energy Demand Projections

In 2003, the Korea Energy Economics Institute (KEEI) made a projection on DPRK’s energy demand until 2020 (the initial study was done in 2002). As the four scenarios developed for the KEEI’s projection are similar to those in our study, the KEEI’s study is applicable to our work.

The basic assumptions of KEEI’s projection are as follows. The study projects the population of DPRK in 2020 to be roughly 26.2 million.

2000 2001 2005 2010 2015 2020

Annual growth rate (%) 0.35 0.42 0.60 1.00 1.30

Population (million) 22.175 22.253 22.646 23.333 24.524 26.160

Table 4. DPRK’s Population Projection Source: KEEI (2003)

The KEEI study introduces four different economic scenarios for DPRK: Quick Transition, Painful Adjust-ment, Sheltered Transition, and Bulgarian Model, depending on the extent of extent of liberalization under-taken on the one hand and the amount of resource transfers from the outside. Qualitatively, these scenarios are similar to ours, ranging from Low Growth to High Growth1.

49

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

2001 2005 2010 2015 2020

High Growth (HG) EGR (%) 5.2 7.7 8.6 8.6

GNI (bn won) 17112 20958 30369 45876 69300

GNI per head * 76 93 130 187 265

Medium High Growth (MHG) EGR (%) 3.5 4.4 5.5 6.0

GNI (bn won) 17112 19636 24355 31829 42594

GNI per head 76 87 104 130 163

Medium Low Growth (MLG) EGR (%) 2.8 3.6 3.9 3.9

GNI (bn won) 17112 19110 22807 27615 33437

GNI per head 76 84 98 113 128

Low Growth (LG) EGR (%) 0.6 0.8 1.1 1.1

GNI (bn won) 17112 17526 18239 19264 20347

GNI per head 77 77 78 79 78

Table 5. DPRK Economic Growth projection: based on growth strategy Note: EGR means Economic Growth Rate, GNI means Gross National Income.*GNI’s base year is 1995, and the unit of GNI per head is 10,000 Korean won. Source: KEEI (2003)

There is, however, one major difference: The KEEI study assumes that DPRK’s economic growth under Pain-ful Adjustment (combining a high level of liberalization with a low level of resource transfers) will be higher than economic growth under Sheltered Transition (combining a low level of liberalization with a high level of resource transfers); whereas, we assume exactly the opposite because we believe that without a high level of external cooperation, DPRK’s economic growth, even with a high level of reform, will be limited due to the lack of domestic resources. Even if DPRK takes substantive economic opening measures as part of its liberalization program, capital inflows will be limited as long as DPRK is regarded as “a rogue state.” As a result, as far as growth rates are concerned, Painful Adjustment corresponds to Medium Low Growth in our study; whereas, Sheltered Transition corresponds to Medium High Growth. In both qualitative and quantita-tive dimensions, there is basically no difference between Quick Transition and High Growth; and between Bul garian Model and Low Growth.

Table 5 shows the assumptions of economic growth rate, Gross National Income (GNI), and the GNI per head in each scenario.

Another important assumption in the KEEI study is that the KEDO light-water reactor project and a gas pipeline passing through DPRK will be completed before 2010, allowing DPRK to have access to nuclear power and natural gas for the first time. In other words, we assume that there will be a diplomatic break-through over the nuclear issue in the next few years. (The assumed operation rate of KEDO plant is 75%).

50

2001 2005 2010 2015 2020

Energy/GNI (toe/million won) HG 0.95 1.03 1.11 1.24 1.33

MHG 0.95 1.04 1.15 1.32 1.44

MLG 0.95 1.05 1.17 1.36 1.51

LG 0.95 1.05 1.18 1.21 1.54

Energy per head (toe/person) HG 0.73 0.95 1.45 2.32 3.53

MHG 0.73 0.90 1.21 1.71 2.34

MLG 0.73 0.88 1.14 1.53 1.94

LG 0.73 0.81 0.92 0.95 1.20

Energy Self-Reliance rate (%) HG 92.3 91.0 88.7 76.2 57.3

MHG 92.3 90.9 88.8 77.9 58.7

MLG 92.3 90.9 88.8 78.7 59.5

LG 92.3 90.7 88.4 79.2 69.2

Coal Dependency (%) HG 71.2 73.1 69.0 61.1 47.7

MHG 71.2 72.8 66.4 57.5 44.1

MLG 71.2 72.0 65.5 55.8 41.9

LG 71.2 70.6 60.8 44.7 41.1

Oil Dependency (%) HG 7.7 9.0 11.1 23.1 39.1

MHG 7.7 9.1 11.0 21.4 37.3

MLG 7.7 9.1 11.0 20.6 36.2

LG 7.7 9.3 11.5 20.1 28.8

Table 6. Major Energy Index Projection: based on the Growth StrategySource: KEEI (2003)

51

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

2001 2005 2010 2015 2020 01–20

Coal HG 11550 15770 23270 34779 43975 7.3

MHG 11550 14775 18660 24129 27029 4.6

MLG 11550 14379 17475 20935 21218 3.3

LG 11550 12964 13073 10431 12911 0.6

Oil HG 1250 1944 3740 13175 36114 19.4

MHG 1250 1856 3107 8995 22855 16.5

MLG 1250 1821 2944 7742 18308 15.2

LG 1250 1715 2463 4702 9057 11.0

Natural Gas HG – – 65 383 3270 –

MHG – – 52 265 2471 –

MLG – – 49 230 2197 –

LG – – 39 161 609 –

Hydro HG 2650 2765 3181 3817 4135 2.4

MHG 2650 2765 3181 3817 4135 2.4

MLG 2650 2765 3181 3817 4135 2.4

LG 2650 2765 3181 3271 4035 2.2

Nuclear HG – – 1643 3285 3285 –

MHG – – 1643 3285 3285 –

MLG – – 1643 3285 3285 –

LG – – 1643 3285 3285 –

Others HG 780 1107 1838 1500 1500 3.5

MHG 780 1037 1474 1500 1500 3.5

MLG 780 1009 1380 1500 1500 3.5

LG 780 925 1104 1500 1500 3.5

Total HG 16230 21586 33737 56938 92279 9.6

MHG 16230 20433 28117 41992 61275 7.2

MLG 16230 19974 26672 37509 50643 6.2

LG 16230 18369 21503 28350 31397 3.5

Table 7. DPRK Primary Energy Demand Projection: based on the Growth StrategySource: KEEI (2003) (Unit: 1,000 TOE & %)

52

2001 2005 2010 2015 2020 01–20

Coal HG 6699 9147 13496 19128 2486 7.0

MHG 6699 8570 10823 13271 14866 4.3

MLG 6699 8340 10136 11514 11670 3.0

LG 6699 7649 8103 8032 7101 0.3

Oil HG 703 1360 3104 11507 30979 22.1

MHG 703 1274 2489 7524 18463 18.8

MLG 703 1240 231 6330 14171 17.1

LG 703 1137 1864 3962 8036 13.7

Natural Gas HG – – 65 383 2073 –

MHG – – 52 265 1274 –

MLG – – 49 230 1000 –

LG – – 39 161 609 –

Electricity HG 1216 1720 3263 5738 10366 11.9

MHG 1216 1611 2618 3981 6371 9.1

MLG 1216 1568 2452 3454 5001 7.7

LG 1216 1438 1961 2410 3043 4.9

Others HG 780 1107 1838 1500 1500 3.5

MHG 780 1037 1474 1500 1500 3.5

MLG 780 1009 1380 1500 1500 3.5

LG 780 925 1104 1500 1500 3.5

Total HG 9398 13333 21769 38256 69104 11.1

MHG 9398 12492 17456 26542 42474 8.3

MLG 9398 12158 16348 23028 33342 6.9

LG 9398 11150 13073 16064 20289 4.1

Table 8. DPRK Final Energy Demand Projection: based on the Growth Strategy(Unit: 1,000 TOE & %)Source: KEEI (2003)

53

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

2001 2005 2010 2015 2020 01–20

Commercial Sector HG 6646 9233 14794 25739 45553 10.7

MHG 6646 8650 11863 17697 27666 7.8

MLG 6646 8419 11110 15284 21533 6.4

LG 6646 7721 8884 10504 12766 3.5

Transportation Sector HG 280 534 1150 2937 6540 18.0

MHG 280 500 922 1946 3914 14.9

MLG 280 487 864 1649 3014 13.3

LG 280 446 691 1059 1727 10.1

Residential Sector HG 1447 2011 3241 4657 8491 9.8

MHG 1447 1884 2599 3512 5568 7.3

MLG 1447 1834 2434 3169 4565 6.2

LG 1447 1682 1946 2489 3132 4.1

Other Sector HG 1025 1556 2539 4924 8520 11.8

MHG 1025 1457 2067 3387 5326 9.1

MLG 1025 1418 1946 2926 4230 7.7

LG 1025 1301 1587 2012 2665 5.2

Total HG 9398 13333 21769 38256 69104 11.1

MHG 9398 12492 17456 26542 42474 8.3

MLG 9398 12158 16348 23028 33342 6.9

LG 9398 11150 13073 16064 20289 4.1

Table 9. DPRK Final Energy Demand Projection: by sector based on the Growth Strategy(Unit: 1,000 TOE & %)Source: KEEI (2003)

Consumption increases for each of the major fuel types. As the production of coal and hydro power suffers dimin-ishing returns, however, the share of oil in primary energy consumption is projected to increase over time. Under the four scenarios, the share of coal in energy consumption declines sharply from over 70% percent in 2005 to 41–48% percent in 2020; whereas, the share of oil rises from 7.7 percent to 29–39 percent over the same period.

As for DPRK’s final energy consumption, it is projected to increase at an average annual rate of 11.1 percent over the 2000–2020 period under the High Growth scenario. As shown in Table 8, oil consumption increases with a rate of 13.7 percent per annum under the Low Growth scenario. In the case of High Growth scenario, the figure would be over 22 percent.

54

Table 9 shows DPRK’s projected final energy consumption by sector. Energy consumption in the transporta-tion sector is likely to rise fastest as DPRK’s dilapidated transportation infrastructure is rehabilitated.

2. DPRK’s Energy Supply Options

In Part Two, we look at DPRK’s energy supply options for the short term (2005) and medium-long term (2020). Short-term solutions to DPRK’s energy problems typically involve transfers of energy resources without major investment in infrastructure, such as heavy fuel oil supplies. Longer-term solutions such as gas pipeline construction require large-scale investment and co-ordinated preparation.

2.1. Short-Term Energy Supply Options

2.1.1 OIL

Supplying oil might be the simplest quick-fix for DPRK’s energy problems. The arrangement to supply 0.5 mt/y of heavy fuel oil to DPRK under the Geneva Agreed Framework of 1994 might indeed have been based on this premise. Although a fundamental solution to DPRK’s energy problems requires the modernization of the energy sector—if not the economy as a whole, supplying oil to DPRK is likely to be an essential interim measure in any diplomatic settlement on the nuclear issue.

Year Total Supply Total Cost US share

1995 0.15 15 5.5

1996 0.50 67 22.0

1997 0.50 65 21.0

1998 0.50 49 46.4

1999 0.50 62 61.6

2000 0.50 95 60.6

2001 0.50 80 70.3

2002 0.41 77.3 60.2

Total 3.56 511.3 347.5

Table 10. Provision of Heavy Oil to DPRK(Unit: mt & US$ million)Source: Choong-Young Ahn and Chang-Jae Lee, Northeast Asia Economic Coopera-tion: The first Step towards Unification (Seoul: Pakyoungsa, 2003), p. 183.

55

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Until the beginning of the 1990s, DPRK managed to obtain 2.5 mt/y of crude oil from FSU and China, but the figure decreased to well below 1 mt/y during the second half of 1990s, mainly because Russia under the non-communist leadership completely suspended crude oil exports and China reduced its oil exports by two-thirds. Table 11 indirectly confirms that the 0.5 mt/y of heavy fuel oil provided by the United States as a part of the 1994 Agreement is a very significant volume for DPRK economy.

KEEI Bank of Korea KPAJ

1990 2.45 2.52 2.52

1991 1.89

1992 1.52 1.52

1993 1.36

1994 0.91 0.91

1995 1.10 1.10

1996 0.936 0.936 0.94

1997 0.506 1.11

1998 0.609 0.504 0.61

1999 0.317 0.32

2000 0.389 0.389 0.39

2001 0.579 0.58

2002 0.47

Table 11. DPRK’s Crude oil import(Unit: mt)Note: Like the figure in Table 2, the crude oil import in this Table seems excluding the US supply volume of 0.5 mt/y.Source: KEEI (2002), Bank of Korea (2002) & The Korea Petroleum Association Journal, Sep/Oct 2003, p. 85.

DPRK authority tried to find an alternative to make up the loss of the suspended heavy oil supply by the United States. According to the Ministry of Unification, DPRK has imported a total of 0.31 mt of crude oil from China during the first half of 2004. In terms of money value, it is worth around US$ 70 million. It is worth noting that roughly 83% (US$ 58 million) of the crude oil was delivered to DPRK after Chairman Jong-Il Kim’s visit to China in April 2004. It indirectly confirms that the main purpose of Chairman Kim’s China visit was to secure the energy supply source2.

DPRK’s oil refining capacity is very limited. There are only two major refiners in DPRK, and due to lack of investment, their combined capacity has declined since the late 1980s. Crude oil for Seung-ri Chemical Plant

56

comes from Russia’s Nakhodka port, and Crude oil for Bongwha Chemical Plant comes from China through DPRK–China Friendship Crude Oil Pipeline.

Seungli Chemical Plant Bongwha Chemical Plant

Refining Capacity 2 mt/y (41,000 b/d) 1.5 mt/y (31,000 b/d)

Construction Period Sep 1973, 1.0 mt/y capacity Sep 1979, 1.0 mt/y capacity completed and operated completed and operated Feb 1977, 1.0 mt/y capacity 1979, 0.5 mt/y completed and operated expansion made

Cooperation partner Russia China

Table 12. DPRK Oil Refining CapacitySource: KEEI (2002)

In the 1990s, DPRK made some efforts to attract foreign direct investment in the oil refinery sector. The Stanton Group said that it received special permission from the Department of Treasury for investment in North Korea, and in September 1996 the firm invested US$ 13 million to establish a JV named the North Korea Equipment Stanton Development Company, with the Seung-Ri Chemical Company to produce light oil products, such as gasoline and diesel and some heavy oil needed by KEDO. In August 1998, the Stanton Group announced that a joint venture oil refinery was in operation and that it planned to invest about US$ 1 billion in the future to expand the oil refinery by two or three times3.

In 2003 DPRK authority merged the organisations handling oil import, refining, trading and exploration, and the merged organisation became Korea Oil United General Corp (KOUGC).

2.1.2 LPG

Supplying LPG may be another relatively simple short-term solution to DPRK’s energy problems. LPG does not require large-scale investment. Also, its use is largely limited to cooking and heating, with virtually no military conversion risks.

In December 2002, Jeong-Wan Kim of Korea Energy Economics Institute published a study on DPRK’s LPG demand projection and LPG cooperation between DPRK and ROK. As shown in Table 13, the pro-jected LPG demand in DPRK in 2020 is 0.589 mt in the baseline case. Under this scenario, the annual growth rate is 9.8% during 2000–2020.

57

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

2000 2005 2010 2015 2020

Residential Cooking 6.4 9.4 12.9 27.2 127.3

Residential Heating 0.1 0.2 0.3 0.8 6.1

Commercial sector 11.8 14.2 17.3 29.2 69.6

Residential others 0.5 0.6 0.8 1.4 5.1

Industrial sector 0.5 0.9 2.0 7.1 31.7

Transportation sector 7.9 10.4 14.2 17.8 31.8

Propane Total 27.0 36.0 48.0 84.0 272.0

Residential & Commercial 0.5 0.6 0.8 1.4 5.0

Industrial Sector 0.5 0.9 2.0 7.0 31.1

Transportation Sector 69.9 91.6 125.8 157.9 281.7

Butane Total 71.0 93.0 129.0 166.0 318.0

LPG Total 98.0 129.0 176.0 250.0 589.0

Table 13. Projection on DPRK LPG Demand: base case (Unit: 1,000 tonnes)Source: Jung-Wan Kim, Study on DPRK’s LPG Demand Projection and LPG Coperation between DPRK and ROK, KEEI (2002).

2000 2005 2010 2015 2020







Propane Total 27.0 36.0 53.0 102.0 697.0




Butane Total 71.0 95.0 134.0 180.0 563.0

LPG Total 98.0 132.0 187.0 282.0 1,260.0

Table 14. Projection on DPRK LPG Demand: high growth case (Unit: 1,000 tonnes)Source: Jung-Wan Kim, Study on DPRK’s LPG Demand Projection and LPG Coperation between DPRK and ROK, KEEI (2002).

58

2000 2005 2010 2015 2020







Propane Total 27.0 35.0 46.0 67.0 109.0




Butane Total 71.0 91.0 123.0 152.0 193.0

LPG Total 98.0 126.0 168.0 219.0 302.0

Table 15. Projection on DPRK LPG Demand: low growth case(Unit: 1,000 tonnes)Source: Jung-Wan Kim, Study on DPRK’s LPG Demand Projection and LPG Coperation between DPRK and ROK, KEEI (2002)

Low Growth Case Base case High Growth Case

2000 700 700 700

2015 1,557 1,686 2,142

2020 1,848 2,690 3,583

Annual growth rate 5.8% 9.8% 13.6%

Table 16. The Income Level for the three Scenarios(Unit: US$)Source: Jung-Wan Kim, Study on DPRK’s LPG Demand Projection and LPG Coperation between DPRK and ROK, KEEI (2002)

It is worth noting that the figures of DPRK’s LPG demand projection based on specialist’s view is much lower than the figures in Tables 13–15, which are based on DPRK’s economic growth. The base case figure is 0.247 mt, and that of high growth rate and low growth rate is 0.418 mt and 0.202 mt respectively.

This study suggested that it would be ideal to start to supply LPG to DPRK’s special economic zones, like Kae-seong, Rajin-Seonbong, Shinuiju and Mt. Keumgang special zone, and then expand the market gradually.

59

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Kaesung Shinuiju Mt. Keumgang Rajin/Seonbong

Area (sq. km) 66 132 Around 100 746

Designated time Nov 2002 Sep 2002 Nov 2002 Dec 1991

Concept / Purpose Industrial Industrial Tourism zone Industrial development development development

Autonomy level Local supervision Legislative, administrative Local supervision Local supervision & management & judicial autonomy & management & management

Land lease period 50 years 50 years N/A N/A

Accepted Currency Major foreign Major foreign Major foreign North Korean currencies currencies currencies won only

Corporate 14% (high potential TBA None 14%income tax sectors, 10)

Visa Requirements No visa Visa required No visa No visa

Table 17. DPRK Special Economic ZoneNote: High-potential sectors refer to infrastructure construction, light industry and avanced technology. Source: KT & I (Sep–Oct 2003), p. 30.

In April 2004, reportedly, South Korea’s LPG Industry decided to supply LPG to the Kaesung Industrial Complex. The detailed plan is not ready yet, the project could handle a supply of 250 tonne of LPG per day or 6,500 tonnes of LPG per month, and envisages 200–500 tonnes storage within Kaesung Industrial Complex. The LPG Industry projects that the LPG sales scale will be initially 200 tonnes per month, but the figure will be 1,000 tonnes per month once the project is on the right track, and in 2006 the scale will reach to 4,000–6,000 tonnes per month4.

2.2. Longer-Term Solutions

2.2.1. ELECTRICITY INTERCONNECTION AND GENERATION

Electricity Interconnection

During the Cold War period, DPRK’s power industry received a substantial amount of energy assis tance from the Soviet Union and China. In the electricity sector, the Soviets made a significant contribution to DPRK’s thermal power generation while China provided support in hydro-electric generation through joint projects. After the Cold War came to an end, however, DPRK’s relations with Russia rapidly deteriorated.

However, in recent years, both sides have been trying to improve relations. Since 2000, President Putin has met Chairman Kim Jong-Il three times. The two leaders discussed power sector cooperation at each of these meet-

60

ings. In July 2000, when President Putin visited Pyongyang, DPRK-Russia Economic Cooperation Co-opera-tion Committee discussed about energy cooperation. In September 2000, Power & Coal Industry Minister Tae-Rok Shin visited Russia and discussed the related projects. In August 2001 when Chairman Kim Jong-Il visited Russia, both countries adopted a Moscow Declaration containing the refurbishment of DPRK’s thermal power plants and officially announced the power sector co-operation between the two countries. In August 2002, the third summit between Chairman Kim Jong-Il and President Putin was held in Vladivostok. Chairman Kim asked Russia to supply electricity in this meeting. Both leaders also discussed the issue of nuclear power plant development in the border area of DRPK and Russia and the joint use of the electricity.

In parallel with the summit meetings between the two leaders, a number of working level meetings between the two countries have been held. In October 2001 a memorandum between Vostokenergo and DPRK’s delegation led by Power and Coal Industry’s deputy minister Nam-Chil Park in Khabarovsk after the discus-sion of Russia’s electricity supply to DPRK based on available electricity (2–4%) from Primorskii Krai. Both parties also agreed to have the second DPRK-Russia working level meeting in Vladivostok to discuss the practical and technical issues, like the development of transmission line between Khasan and DPRK together with voltage conversion facility construction, and the electricity supply volume and price.

In February 2002, Chairman Kim Jong-Il asked Russia’s electricity supply to DPRK during his meeting with Russian Ambassador and then RFE region’s presidential representative (plenipotentiary) Constantin Fulikovsky visited DPRK and discussed the ways of supplying electricity to DPRK. What followed was Power and Coal Industry Minister Tae-Rok Shin met Vostokenergo director general Victor Minakov’s deputy to discuss about the ways of signing the electricity supply agreement.(In April 2002, Minister Tae-Rok Shin was replaced by Kwang-Hong Oh).

In April 2002, DPRK Cabinet Deputy Premier Chang-Deok Cho visited Russia and proposed the exchange of 400 MW scale electricity exchange and in return joint logging and construction manpower provision, and discussed a power transmission line project linking southern Primorskii region with DRPK.

In September 2002, a memorandum among ACE Engineering Inc (S. Korea), Korea National Energy Com-mittee (DPRK), and Vostokenergo and Energy System Institute (Russia) was signed for the preliminary FS on Northeast Asian region’s Electric Power Interconnection.

The concept of electricity supply from Primorskii Krai to DPRK was clearly presented by Victor Kalashnikov, Khabarovsk based Economic Research Institute during the International Workshop on Upgrading and Inte-gration of Energy Systems in the Korean Peninsula: Energy Scenarios for the DPR of Korea, held in Como, Italy, Sep 19–21, 2002. A major DPRK delegation led by Prof. Kyong Bong–Kim joined in this workshop.

The basic concept is Russia–DPRK Interconnection line Development — Section: Vladivostok–Khasan–Chongjin— Transmission line capacity: AC 500 KV— Length: 375 km— Power Generation Installation Capacity: 500 MW & 3.0 billion KWh— Capital Cost: US$ 130–150 million— Capital Cost: US$ 130–150 million

61

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Besides this pilot project, there is also a relatively big project (the so-called Podkovalnikov commissioned study which covers the inter-connection of Amur & Khabarovsk–Primorskii–DPRK and ROK).

Electricity Generation

Based on 1994 Oct Geneva Agreement, DPRK was supposed to receive 0.5 mt/y of heavy fuel oil until the completion of KEDO project. Consequently operation of Seonbong Thermal Power Plant was possible due to the heavy oil supply. During the 1990s, the level of this power plant’s operation rate was only 30%. Cur-rently the power generation volume from this power plant stands at 1,700 GWh and it represents less than 10% of DPRK’s total power generation volume.

Recently DPRK began focusing on building a limited number of small and medium-sized power plants with improved average power generating capacity. The North Korean Central Broadcasting Agency announced that DPRK has initiated the construction of 250 small and middle-sized power plants all across the country and 40 of which are already completed. DPRK has also built seven wind power generators with the help of the Nautilus Institute in the United States. The generators are reported to be in operation, but their generat-ing capacity is only 9 KW per unit5.

According to the Ministry of Electricity and Coal Industry, DPRK authority is planning to complete a 600 MW hydro plant which is under construction and the project would require a 20 units of 50 MW, 40 MW, 20 MW and 5MW capacity hydro generating equipment6.

62

Plant name Province Capacity(MW) Remarks

Eastern region Sodusoo River North Hamkyung 510 a valley-remodelling type

Hochon River South Hamkyung 394 the same

Jangjin River South Hamkyung 381 the same

Bujon River South Hamkyung 262 the same

Anbyon Youth Kangwon 100 a dam type

Western region Soopung North Pyongan 700 the same

Taechon* North Pyongan 400 a valley-remodelling type & a dam type

Taepyong Bay North Pyongan 190 a dam type

Daedong River South Pyongan 200 the same

Woonbong Jagang 400 the same

Wiwon Jagang 390 the same

Kanggye Youth Jagang 246 a valley-remodelling type

Jangja River Jagang 90 a dam type

Total 4,263

Table 18. DPRK’s Hydro Power PlantsNote: * The Taecheon plant is one of the four Nature Improvement projects proposed at the fourth plenary session by the sixth Central Committee of the Korea Workers’ Party and it is currently in the first stage of construction.** The Mountain Geumgang power plant in Tongcheon which is not listed in this table is estimated to have about 800 MW gen-eration capacity, and it became the largest hydro power plant in DPRK after the completion of the construction at the end of 2003. Source: Korea Trade Investment Promotion Agency, North Korea Business Fact book (Seoul: KOTRA, 2001), p. 75.

Plant name Province Capacity(MW) Remarks

Eastern region Seonbong7 North Hamkyung 200

Chongjin North Hamkyung 150

Western region Bukchang8 South Pyongan 1,690 a condensated water type

Soonchon South Pyongan 200 a combined heat type

Pyongyang Pyongyang 500 the same

Chongchun River South Pyongyang 200 the same

East Pyongyang Pyongyang 50 the same

December Nampo 50 the same

Total 3,040

Table 19. DPRK’s Thermal Power PlantSource: Korea Trade Investment Promotion Agency, North Korea Business Factbook (Seoul: KOTRA, 2001), p. 75.

63

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

1,600 MW plant Boiler from 16 units of 320 t/h to 6 units of 630 t/h.

Generator from 16 units of 100 MW to 4 units of 200 MW

500 MW plant Boiler from 12 units of 210 t/h to 6 units of 420 t/h.


50 MW Boiler from 3 units of 210 t/h to 4 units of 210 t/h


Table 20. Modernization of Existing Thermal Power PlantsSource: Sung-Gwan Kim, “On the Direction for Rehabilitation and Modernization of the Existing Generation Capac-ity”, presented at an international workshop on Upgrading and Integration of Energy Systems in the Korean Peninsula: Energy Scenarios for the DPRK of Korea, organised by Italian Ministry of Foreign Affairs, Landau Network-Centro Volta, World Information Service on Energy, and Fondazione Opera Campana dei Caduti, Como, September 19–21, 2002

According to Leguen Consulting (president: Jean-Pierre Le Guen)’s study on DPRK’s Energy Plan, the pos-sibility of hydro power usage stands at 45% and that of thermal power stands at 40%. (According to Korea Institute for International Economic Policy’s North Korea Development Report 2002/03, the actual operat-ing rate of North Korea’s hydro-electric power plants is at about 20 percent due to outdated power facilities and frequent breakdowns.) The study also pointed out that the daily need of power to avoid permanent electrical black-out is 900 MW.

Plant name Province Capacity(MW) Type

Soopung North Pyongan 320 Hydro

Daedong South Pyongan 90 Hydro

Nampo South Pyongyang 800 Tidal

Seonbong North Hamkyong 250 Natural Gas

Kimchaek North Hamkyong 250 Natural Gas

Kimchaek 2 North Hamkyong 350 Coal

Pyongyang 6 Pyongyang 525 Coal

Pyongyang 2 Pyongyang 175 Coal

South Pyongyang 900 Nuclear (KEDO)

North Pyongyang 800 Tidal or Natural Gas

Table 21. Projected Power Plants in DPRK until 2015Source: Jean-Pierre A. Le Guen, DPRK Energy Plan: from 2000 to 2020, presented at a Multilateral Forum on “Economic Devel-opment of DPR Korea and the Future of Co-operation with Erope”, oganised by Landau Network-Centro (Como) and the Associa-tion fort he Promotion of the International Economic and Technical Exchange (APIETE), DPRK, held in Rome, Oct 20–21, 2003

64

2.2.2 LNG SUPPLY

In August 2001, the Chosun Ilbo reported that Kogas had been lobbying to supply a 18,000 tonnes of natural gas (5.9 billion Korean won or US$ 4.6 million) to North Korea from the beginning of 2003 and gradually increasing the supply up to 0.71 mt, worth 210 billion Korean won or US$ 161.5 million until 2009. Kogas has undertaken a feasibility study on supplying natural gas to an industrial complex in Kaesong, a famous DPRK city adjacent to the 155 mile demilitarised zone (DMZ).

The pipeline development cost would be around 50–60 billion Korean won and Kogas suggested part of the fund could come from the Inter-Korean Cooperation Fund. According to the FS, the most ideal supply network will be a pipeline connecting the Grand Unification Bridge in the South with the Kaesong Industrial Complex across the DMZ.

The two Koreas have been promoting the construction of a large scale industrial estate in an area contiguous to Kaesong in their joint efforts to expand inter-Korean economic co-operation.

Chosun reported that in July 2001 the Ministry of Unification has given a green light to Kogas to contact DPRK. In the same month MOCIE minister Jae-Shik Chang said that the Government would be able to review the supply of electricity to North Korea if the North is positive about inter-Korean economic coop-eration. But the minister’s remarks invited a strong opposition from the Opposition Party (GNP) and the United States.

However, the Ministry of Commerce, Industry and Energy (MOCIE) said that it has never reviewed the op-tion of supplying natural gas to the Kaesong Industrial Complex, and Kogas FS work will not necessarily be accepted as the government’s policy. The Kogas FS work was done by a local engineering firm.

In beginning of 2003 when the concept of Sakhalin gas supply to the Korean Peninsula was covered by the Korean media, both Kogas and Ministry of Commerce, Industry and Energy (MOCIE) floated the concept of LNG supply to DPRK. Both argued that the pipeline passing through DPRK territory is not acceptable due to the energy supply security.

During the 8th International Conference on Northeast Asian Natural Gas and Pipeline: Multilateral Cooperation, Prof. Tussing gave a brief presentation on natural gas supply from South Korea to DPRK. The main concept is that to construct a 200 km pipeline from Seoul Metropolitan area and a 400 MW gas fired power plant. He argued that the pipeline passing through DPRK territory will take over ten years,9 this LNG supply to Pyongyang would be a short term (2–3 years) solution. Clearly this is an option favoured by the South not by North.

2.2.3 COAL DEVELOPMENT

(*This section is a supplementary one for Prof. Nay Htun’s paper)Coal is a main energy source in DPRK and its prominent role in energy supply is unlikely to change in the foreseeable future. In DPRK, there are quite significant coal reserves but the quality of coal is not so high. This is the reason why less than 40% of coal production is allocated for power generation and steel sector.

65

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Mine name Coal type Reserves(billion tonnes)

Pyongnam North Mine Anthracite Coal 3.67Pyongnam South Mine Anthracite Coal 1.26Gowon Mine Anthracite Coal 0.32Others Anthracite Coal 6.49

Sub-Total 11.74

Hambook North Mine Bituminous Coal (Brown Coal or Soft Coal) 1.91Hamnam South Mine Bituminous Coal (Brown Coal or Soft Coal) 0.57Others Bituminous Coal (Brown Coal or Soft Coal) 0.52

Sub-Total 3.00

Total 14.74

Table 22. DPRK’s Major Coal Mine’s ReservesSource: Ministry of Unification, quoted by a KEEI study (1999)

Majority of anthracite coal areas are overlapping with those of Bituminous coal. In DRPK there are over 100 centrally controlled mines, of which 70 mines are anthracite mines and the rest 30 mines are bituminous mines. Besides this, there are regional based 500 minor mines in DPRK.

Currently domestic coal accounts for almost 90% of the fuel for industry, 45% of energy for power genera-tion, 80% of the energy for household usage. (The share of coal in energy consumption: electricity generation 39%, household 15%, railway 2%, metallurgy 8%, industry 33%, and other 3%)10.

DPRK ROK

Coal Type Anthracite Brown Coal(Bituminous Coal) Anthracite

Reserves (bn t) 2.7 2.2 0.237

Calorie (kcal/kg) 5,260–7,800 3,480–6,000 3,000–7,000 Average: 6,150 Average: 4,200 Average: 4,567

Lime ratio (%) 8–25.85 3.51–33.71 25.5–73.0

Vaporization (%) 3.5–9.15 43.65–52.46 2.0–7.2

Table 23. DPRK Coal Quality(Unit: mt & %)Source: WEC Survey of Energy Resources (1995), quoted by a KEEI study (1999)

66

According to Interfax China Energy Report, 11 The Baoshan Iron and Steel Co Ltd, the listed arm of Chi-na’s largest steel producer, Shanghai Baosteel Group Corp, imported 12,000 tonnes of anthracite coal from DPRK. Ren Yong, a senior official of the firm’s Sales Department confirmed that “the anthracite will be used to fuel the company’s private power plant to ensure our normal steel production”. The official added that “Due to the increasing strains on domestic coal supplies, Boshan Iron and Steel Co. and Baosteel have been seeking other sources to widen its raw material supply channels in recent years”. The official also noted that “the company purchased coal as fuel for its private power plant from domestic suppliers, primarily from China’s largest coal production base, northern Shanxi province, but this is the first time Baosteel has im-ported power coal”.

This interesting news confirms that more DPRK coal can be used for gas-for-power plants if a timely invest-ment is made to DPRK’s coal-for-power plant refurbishment or new construction in DPRK.

Power Sector Industry (Steel)Sector Others & Public Welfare Total

1975 2.991 2.706 17.832 23.529

1980 3.935 3.690 18.930 26.555

1985 6.296 4.305 19.930 30.532

1990 6.765 4.151 19.106 30.022

1995 4.920 3.536 13.564 22.020

Table 24. DPRK’s Coal Consumption, by Sector (Unit: mtoe)Note: As of 2000, South Korea imports a 59.6 mt (US$ 2.03 billion worth) of Bituminous Coal, of which 40.0 mt for steam (US$ 1.2 billion) and 19.6 mt for Iron & Steel (US$ 0.83 billion).Source: IEA Energy Statistics and Balances of Non-OECD Countries, 1997, quoted by a KEEI study.

67

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Production (mt) Ratio in primary energy(%)

1980 30.27 72.0

1985 37.50 75.2

1990 33.15 69.2

1991 33.10

1992 29.20

1993 27.10

1994 25.40

1995 23.70 68.6

1996 21.00

1997 20.60

1998 18.60

1999 21.20 70.2

2000 22.50 71.7

2001 23.10

Table 25. DPRK’s Coal Production Trend Source: National Statistical Office, Korea (2001 Dec) & Bank of Korea (2002)

Table 25 shows that DPRK’s coal production recorded 37.5 mt in 1985 but the production declined to as low as 18.6 mt in 1998, even though the figure rose to 23.1 mt in 2001. The production level could significantly increase if a new investment is made.

2.2.4 INDIGENOUS OIL SUPPLY

In September 2001, it was reported that Sovereign Ventures Pte. Ltd. (SVPL), Singapore, was seeking experienced partners to explore and develop the first onshore oil and natural gas concession in DPRK to be granted to a foreign company. 12 The concession was awarded by KOEC (Korean Oil Exploration Co)13 and it covers some 6,000 sq. miles or about 5% of North Korea‘s landmass. Known as PSCA Techon-Rajin, it is on the Chinese border across the Tumen River in the north-eastern part of the Korean Peninsula and southwest of Vladivostok, Russia.

According to Ben Tan, executive vice president of SVPL which was formed in 1993 as the upstream sub-sidiary of the Korasia group, 14 the concession provide for an initial three year testing period for geophysical

68

exploration, a two year exploration drilling stage and if successful, 20 years for development and production. No corporate tax will be applicable during the first 5 years of operations. During the following 2 years, com-pany profits are to be taxed at 5%, escalating to 10% after that. Extensions of the concession agreement can be negotiated on mutually agreeable terms.

SVPL aims at investing at least US$ 10 million in the total project, including at least US$ 2 million in the seismic testing and exploratory drilling stages. SVPL estimates that the concession area’s recoverable reserves are well in excess of 150 million barrels of oil or its equivalent to gas. SVPL anticipates a 30% success rate in exploration drilling and up to 70% success with development drilling. 15

The SVPL’s onshore venture confirms DPRK authority is very serious about oil and gas exploration business. DRPK authority’s activities on both onshore and offshore E&P business are rarely introduced to the western world comprehensively, even though a few articles have covered the topic occasionally. DPRK authority has a high expectation on its offshore exploration but only a superficial work has been done to understand the true scale of the potential oil and gas resources in DPRK offshore.

Brief Review on Exploration Activities in DPRK offshore

Since the 1960s North Korea has made serious effort to be an oil producer. The preparation is divided into four stages:

i) 1960’s preparation for exploration

In 1965, North Korea established “Administration Bureau of Fuel Resources Geological Exploration (?)”, and in 1968 an institute specialised in oil exploration was set up in Sook-Cheon County.

The first extensive geophysical exploration was done jointly with China during 1965–1980. In 1967, North Korea conducted a joint geological study with the FSU in the Tumen estuary. On top of this, North Korean scientists conducted their own geophysical studies along the coastal seabed of the East and West Seas.

ii) 1970’s Foreign technology importation

In 1976 North Korea sent a delegation to FSU Caspian Sea’s offshore field to study the offshore exploration method and imported.

In 1977 North Korea signed a protocol with Asia Exploration Consultants (AEC) of Singapore regarding oil exploration and development, but this never went beyond the protocol stage.

In September 1979 seismic work was first undertaken and a jack-up named “Enda Star” was used to drill a well near the Chinese claimed boundary, beginning in September 1980. (This activity was halted in January 1981) 16

In 1980 Norwegian subsidiary of Geco Geophysical Ltd, part of Schlumberger was contracted to survey Blocks 1, 2 and 3.

69

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

iii) 1980’s exploration work implementation

In 1981, a 2,000 km marine seismic survey was begun in the central portion of Korea Bay by Geco techni-cians and equipment on a 15,000 sq. km seismic option granted in 1979 to INAP et al., Yugoslavia’s national company.

China has also carried out a seismic survey of the western Korea Bay, including parts of the boundary. Two western-designed jack-ups drilled close to the border in 1980. Some minor oil and gas discoveries were ap-parently made in the same region earlier, and the structures continue across the boundary into North Korean jurisdiction. This was why China was interested in assisting North Korean in its exploration efforts. However, both sides left the demarcation issue unsettled, and there have been no reports of Chinese participation in North Korea’s offshore exploration and development since the second half of the 1980s. (The boundary issue will be discussed later)

In October 1983, “Crude Oil Exploration Bureau” was established under the Cabinet. And North Korea secured an exploration drilling ship (14,000 tonnes level) from Singapore and initiated the exploration work in Nampo offshore.

In 1986, North Korea signed agreement with FSU on “North Korea-FSU economic zone and continental shelf boundary” and decided to develop the continental shelf jointly. Both Far Eastern Division of FSU Acad-emy of Sciences and Pyungsung division of North Korea’s Academy of Sciences undertook a study on North Korea’s coastal area’s geological structure and the untapped resources, and found signs of oil from Heungnam offshore. But no further progress was made.

In 1987 Leeward petroleum (UK) was contracted for exploration projects.

Reportedly North Korea discovered 425 b/d of crude oil in Zone C in the Yellow Sea at the end of 1988 with the help of an Australian company, Meridian Oil NL, 17 which made a contract with North Korea covering the western Korea Bay on July 31, 1987. It was also reported that North Korea confirmed gas reserves in the Heungnam area.

iv) 1990’s: foreign investment attraction18

In 1993, North Korea upgraded Crude Oil Exploration Bureau as Ministry of Crude Oil Industry,19 and then during April 1994 Supreme People’s Assembly adopted a resolution that “To increase the investment on the crude oil industry for upgrading the industry related equipment and concentrating on exploration of the promising areas and finding more crude oil reserves bases.”20

iv–i. Meridian Oil / Beach Petroleum

The first western company obtained exploration license in DPRK was Meridian Oil NL of Australia in 1990. Meridian was formerly part of the Independent Resources Ltd (ILR) group, which acquired control of Beach Petroleum NL, Adelaide, and its then parent company, Claremont Petroleum NL.

70

Until the late 1980 s Claremont owned part of the interests in the West Korea Baty held by Meridian. In 1994, Beach Petroleum’s new management accepted an offer to acquire permits to explore the two other concessions. These were located above the old Meridian blocks, now let to Taurus Petroleum AB, Stock-holm, and the whole East Sea side. Beach Petroleum decided to take the option on the east side, covering approximately 29,000 sq. km.

Beach Petroleum signed a 25 year Production Sharing Agreement (PSA) with ZosonSulbi (translated as N. Korea Equipment), a state trading firm that acts on behalf of the Ministry of Energy. The contract is composed of a 5 year exploration period and a 20 year production period. No taxes or signature bonuses are payable, with the exception of a production payment bonus that becomes payable if a certain level of production is reached.

Beach Petroleum’s PSA with North Korea was similar to that of Meridian, with the share determined on a sliding scale based on total output from the concession.

In 1997 Beach Petroleum farmed out a 25% interest to a Malaysian company, Puspita Emas Sdn. Bhd, in return for financing the costs of shooting 1,000 km of additional seismic in July 1997. The firm also reprocessed 7,000 line km of seismic shot during the Soviet period and evaluated data from the two wells drilled (The two wells confirmed oil shows).

After all, Beach Petroleum has identified eight prospects and nine leads. These include buried hill struc-tures, with the potential up to 500 000 000–1000 000 000 barrels. Beach Petroleum’s studies tell that the onset of oil generation is likely to occur in the Lower and Middle Miocene sediments at subsurface depths of below 2,100 metres.

iv–ii. Taurus Petroleum AB

Meridian Oil’s seismic data was sent to a processing center in London but North Korea failed to pay the processing. As a result, N. Korea failed to get the data back.

North Korea re-advertised the concession. According to Petroleum Intelligence Weekly (April 6, 1992), a half dozen European and Australian companies were invited to examine prospects after North Korea’s Min-istry of National Resources Development drafted framework laws governing production sharing contracts.

Taurus Petroleum AB decided to take the permits in 1992, without knowing Meridian’s earlier activity.

In February 1993 Taurus Petroleum AB signed a PSA with ZosonSulbi. The agreement provides for a 5 year exploration period, extendable by a further 3 years on payment of US$ 1 million. The agreement pro-vides for North Korea to secure a rising share of production in proportion to the level of output, starting at 55% of production. Like Meridian Oil, no taxes or signature bonuses are payable and Taurus Petroleum has 100% ownership rights.

The exploration phase is divided into four periods. The first period (2 years extendable to December 1998) requires reprocessing and interpretation of the earlier seismic shot by Geco, together with acquisi-

71

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

tion and processing of new seismic carried out in 1997.

Under the PSA, the firm must drill one well in the second period of the exploration phase at an approxi-mate cost of US$ 7 million and then one more well in each of the two succeeding years.

iv–iii. SOCO International

In May 1998, SOCO International plc, a London based exploration and production company spun off from Snyder Oil Corp of Fort Worth, Texas decided to take the third concession.

THE PSA covers an exploration area of 7,000 km, two thirds offshore and one third onshore in the Anju and Onshon basins. Like the other concessions, the area had already had some drilling and seismic shot. SOCO International planned to shoot additional seismic at the end of 1999.

Soco International has begun drilling onshore. The local Korean contractor was responsible for the drill-ing, using a Romanian-made rig. By the end of summer 1998, the firm had drilled through 3,000 metres with the eventual goal to reach 4,300 metres.

The terms of PSA Soco International has signed was to spend US$ 350,000 for 5 years. It was a minimum fee the firm has to pay to see whether further investigation is warranted.

Characteristics of DPRK Offshore Geology

On October 7th, 1997, a seminar titled “Explanatory Meeting for Hydrocarbon Exploration Opportunities Offshore DPR Korea” was organised by North Korean and Japanese promoters in Tokyo.21 Dr. Dong R. Choi, a Korean geologist, based in Australia and a technical adviser for Petrex Co. Ltd., Tokyo, presented a summary of the massive survey logs on North Korea‘s oil formations. In this seminar, the characteristics of North Korea’s offshore geology were summarised as follows:

West Korea Bay (exploration area: 18,600 sq. km)

— The basement made of thick carbonate rocks (5,000 metres) of the Late Proterozoic and Early Paleozoic is overlain by the Mesozoic (6,000–10,000 metres) and Cenozoic (4,000–5,000 metres) sediments. Source rocks are the Jurassic black shale (3,000 metres or more), Cretaceous black shale (1,000–2,000 metres), and pre-Mesozoic carbonates (several thousand metres) as well. Reservoir rocks are the Mesozoic–Ce-nozoic sandstone with high porosity and pre-Mesozoic fractured carbonate rocks. Petroleum traps are anticline, fault-sealed, buried hills and stratigraphic types.

— Existing exploration data: 4,500 km of integrated geophysical surveys with grid of 2 × 4 km. Seven wells have been drilled, recovering oil and gas from several wells and hydrocarbon shows from all of the wells. 22

72

Korea East Sea (exploration are: 30,000 sq. km)— Pre-Mesozoic gneiss and carbonate rocks are overlain by the Mesozoic and Cenozoic sediments, 6,000–

7,000 metres in thickness. A source rock is the Tertiary thick marine shales (1,500 to 2,000 metres) and underlying Mesozoic? Rocks. Reservoir rocks are Tertiary sand stone of a good reservoir physical property and fractured carbonatte rocks which constitute the basement. Trap structures–anticline, fault-sealed, buried hill, facies-sealed, stratigraphic types and reefs.

— Existing exploration data – Integrated geophysical surveys with a grid of 10 × 20 km throughout the ba-sin, with a grid of 2 × 2 km over some parts. Two wells drilled, oil and gas shows found from both wells.

Until a comprehensive exploration is made, any suggested figure on the potential hydrocarbon reserves car-ries no weight at all. As both China National Offshore Oil Corp (CNOOC) and Korea National Oil Corp (KNOC) have the capacity of exploration by their own technology and equipment with financial capacity, the exploration of the Yellow Sea including DPRK’s West Korea Bay is a matter of time, once the thorny offshore boundary is settled.

The Yellow Sea’s Boundary Issue23

Petroleum issue in the Yellow Sea is currently a dormant one as the exploration has never reached to the areas of uncertain jurisdiction. Under the current situation, even a preparatory attempt to figure out any existence of hydrocarbon resources could trigger the kind of claims and counterclaims that have been witnessed other part of Asia. However, the Yellow Sea coastal states will have no choice but to exploit offshore deposits in disputed areas in some point.

What is needed for the Yellow Sea coastal states is a wisdom of win-win strategy. To find a solution that can be equally applied to the boundary dispute between DPRK and China, and South Korea and China is very difficult.

If China maintains the silt-line principle based on the concept of the natural prolongation of the continental shelf or alternatively claims an exclusive economic zone (EEZ) extending from Haiyang Island, 69 km off Liaodong Peninsula, problems could arise. A boundary along the silt line would give almost the entire Korea Bay Basin to North Korea, whereas if the equidistant-line boundary was applied, only a small pod of possible oil bearing sediment would lie on the North Korean side of the line.

When it comes to the Yellow Sea boundary issue between South Korea and China, the argument point is different. The silt line boundary in the Yellow Sea would place the entire basin on the Chinese side of the line. If the bound-ary was the equidistant line, most of the basin would be on the Chinese side but half a pod of potentially oil bearing sediment, including a tip of the area with the best perspectives, would be on the South Korean side.

In Autumn 2003, Interfax China reported that China is conducting active surveying and prospecting for marine energy deposits, including those of the highly efficient “combustible ice” in the northern Yellow Sea and part of the East China Sea, as well as a widely-known survey program on track in the northern South China Sea.24 Qingdao Institute of Marine Geology (QIMG), under the auspices of China’s Ministry of Land and Resources (MLR) confirmed that geophysical analysis under the sea had already indicated the presence of

73

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

hydrocarbon deposits. However, fearing the prospect of a territorial dispute with Japan and the South Korea, especially in the North Yellow Sea, the Chinese government have been carrying out the program discreetly, said the official of the QIMG, who would not discuss the progress made by the prospectors in the area.

Recently Japan’s plan to conduct gas survey activities in disputed areas of the East China Sea is the main rea-son of the latest flare-up in a long territorial row between China and Japan in the East China Sea. However, the real driving force of Japan’s plan is China’s plan to start the commercial development of the Chunxiao gas field which is located about 350 km east of Ningbo, close to Shanghai.25

These reports indirectly confirm the necessity of the Yellow Sea and East China Sea’s boundary issue settle-ment, and the difficulty of the offshore boundary disputes. As the Yellow Sea does not have the Daiyutai or Senkaku Islands type territorial dispute, it would be easier to settle the boundary dispute if all three parties agree to sit together and to settle this critically important issue. The win-win situation will come only when all parties agree to tackle this long-standing issue.

Joint Exploration and Development Cooperation between North Korea, South Korea and China

Reportedly in May 2000, both UK’s Soco International and Sweden’s Taurus Petroleum have proposed Hyundai Corp and KNOC (Korea National Oil Corp) to form a consortium for the oil and gas exploration in the Yellow Sea. Hyundai Corp estimated the Block B and C’s reserves are around 100 million–1 billion barrels, and the estimate is based on the two discoveries from the ten drilling wells. The firms saw that the economics of exploration in the west Korean Bay can be justified if a minimum discovery of 40–50 million barrels reserves is made. The firm wanted to apply for the Korean government fund for the exploration. The firm wanted to take the next step after the June 2000 Summit meeting, but no significant step was taken after the Summit.

In South Korea, KNOC is responsible for the continental shelf exploration and development. In North Korea, the counterpart is KOEC which holds the responsibility for oil development and oil concession matters.26 In 2003, KOEC issued the oil concession to Sovereign Venture Capital. Both KNOC and KOEC have never sit together to discuss about the Yellow Sea boundary issue and West Korea Bay exploration.

It is interesting to note that KOEC has asked KNOC to take part in West Korea Bay exploration and devel-opment. The target area is the block given to Norwegian GGS (Global Geo Services) where the contract term is expired on April 30, 2004.27

The most ideal situation is to have a meeting among KOEC, KNOC and CNOOC to discuss the Yellow Sea boundary issue and joint exploration (regardless of the settlement of the boundary issue). In particular, the joint exploration in the Yellow Sea and any discovery from the work will offer a unique opportunity to settle the boundary issue once for all.

DPRK’s Oil Discovery

According to Chosun Ilbo (May 26, 2001), North Korea achieved the dream of becoming oil producer in 1998. Even though the scale of annual crude oil production from Sook-Cheong County’s offshore is very

74

small (0.3 mt/y), but to the North Korean authority it is a significant volume (in 1991 the import volume of crude oil was 1.89 mt but the volume recorded only 0.61 mt in 1998). Besides the West Korea Bay explora-tion, North Korean authority initiated the exploration in Anju Basin by inviting Russian specialists having had experiences in West Siberian oil development and importing the Russian equipment.The report added that overall supervision of the oil development is being led by DPRK premier Sung-Nam Hong. Under his leadership, both Oil Bureau (headed by Mr. Jung-Shik Ko) and KOEC (headed by Mr. Jung-Shik Ko) were responsible for the oil exploration and development.

In late August 2002, Singapore based Soverign Venture Pte Ltd announced that it has found oil and gas re-serves from the contracted area and the firm expects to be able to recover a minimum of 1 tcf of natural gas and 10 million barrels of oil reserves from the concession area.

Even though a very limited result, DPRK’s exploration effort has witnessed a sweet success. Until a compre-hensive exploration work is done, no one would know the real scale of its oil and gas potential in its offshore. DPRK has every reason to initiate a comprehensive exploration for its offshore areas to ease the energy sup-ply shortage problem but current political situation is blocking any reliable & big name western company’s commitment for the exploration work. Until the nuclear crisis is peacefully and completely settled, it would be very difficult to attract the western investment in oil and gas exploration business.

75

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Appendix A: Useful figures on DPRK Economy and Energy Industry

Unit DPRK(A) ROK(B) Ratio(B/A)

Population 1,000 22,369 47,664 2.1

Economic growth % 1.2 6.3 –

GNI US$ 762 10,013 13.1

Trade total US$ bn 2.26 314.6 139,2

Export US$ bn 0.73 162.5 223

Import US$ bn 1.53 152.1 99

US $ exchange rate won/$ 2.21 (Jan–June) 1,251 – 153 (July–Dec)

Energy production

Coal mt 21.9 3.32 0.2

Power generation installation capacity GW 7.77 53.8 6.9

Power generation volume GWh 19,000 306,500 16.1

Crude oil import mt 0.597 109.10 181

Rice production mt 1.73 4.93 2.8

Car production million 0.0048 3.147 656

Copper & Iron mt 1.04 45.39 44

Cement mt 5.52 55.51 10.4

Fertiliser mt 0.5 3.3 6.6

Table A–1. Major Economy Index Comparison, DPRK vs ROK (2002)Source: The Korea Petroleum Association Journal, Sep/Oct 2003, p. 82. Of the 7.77 GW installation capacity, 2.2 GW is in operation. Due to 0.5 mt/y of heavy oil supply suspension, around 13–15% power capacity is reduced.

76

1990 2000

Unit DPRK ROK DPRK ROK

PGIC GW 7.14 21.01 7.55 48.45

PGV GWh 27,700 107.700 19,400 266,400

Refining Capacity mb/d 0.07 0.84 0.07 2.438

Crude oil import mbbl 18.5 308.4 2.9 893.9

Coal production mt 33.15 17.22 22.5 4.20

Table A–2. DRPK & ROK Energy Facility Comparison Note: PGIC means Power Generation Installation Capacity, and PGC means Power Generation VolumeSource: National Statistical Office, Korea (2001 Dec)

Energy supply (mtoe) Energy Consumption per person(toe)

DPRK (a) ROK (b) b / a DPRK (a) ROK (b) b / a

1990 23.946 93.192 3.9 1.18 2.17 1.8

1995 17.270 150.437 8.7 0.80 3.34 4.2

2000 15.687 192.887 12.3 0.71 4.10 5.8

90–99 -4.1% 7.5% – -5.0% 6.6% –

Table A–3. DPRK’s Primary Energy SupplySource: National Statistical Office, Korea (2001 Dec)

1990 1995 1996 1997 1998 1999 2000

Primary energy(mtoe) 23.946 17.280 15.836 14.746 14.030 15.570 15.687

Coal 69.2 68.6 66.3 69.9 66.3 70.2 71.7

Oil 10.5 6.4 9.1 6.8 10.0 5.9 7.1

Hydro 15.6 20.5 19.7 18.0 18.2 18.7 16.2

Others 4.7 4.5 4.9 5.3 5.5 5.2 5.0

Table A–4. DPRK’s Primary Energy Supply Structure (Unit: mtoe & %)Source: National Statistical Office, Korea (2001 Dec)

77

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Total (mtoe) Coal Oil Firewood & charcoal Electricity

1990 14.435 63.2 15.9 7.8 13.2

1995 9.780 67.9 8.8 8.1 15.2

2000 9.060 72.0 6.5 8.6 12.9

Table A–5. DPRK’s Final Energy Consumption Structure (Unit: %)Source: KEEI (2002)

3. Pipeline Gas Introduction to the Korean Peninsula

3.1 A Brief Review on Korea’s Stance towards the Trans-national Pipeline Gas Introduction

In the wake of the collapse of the Cold War era, energy relationship among the countries in Northeast Asian region has changed significantly. Based on the Northern Policy adopted by the Ro Tae-Woo government, South Korea established a diplomatic relationship with the Former Soviet Union (FSU) in September 1990, and with China in August 1992 respectively. This changed political environment opened the door for South Korea to consider the options of energy co-operation with these two energy super giant countries.

Korea’s interest in trans-national pipeline gas introduction dated back to the late 1980s when Hyundai Group founder Jung Ju-Young began to explore the possibility of Sakha gas development and gas pipeline intro-duction to the Korean Peninsula. In July 1992, a Korean consortium led by Korea Petroleum Development Corporation (PEDCO, now Korea National Oil Corp: KNOC) established, and Daewoo Corp became the driving force from the private sector in pursuing this Russian gas import project.

In November 1994, a preliminary Feasibility Study between Korea and Sakha Republic, Russia was signed. The 12 months FS work cost US$ 20 million, of which US$ 10 million was in the form of data provision from Russia, and a US$ 10 million cash payment from Korea.

The FS route: Gas fields in south-western part of Sakha Republic–Yakutsk–Tynda–Blagoveshensk–Khabarovsk–Vladivostok–DPRK–ROK: 5,143 km, of which the Russian section is 4,383 km.

It is worth noting that as of 1995, there are only five gas fields with over 100 bcm (C1 reserves). At that time, Chayandinskoye’s proven reserves were only 209.5 bcm, and the field was the biggest one. Its position can be compared with Tarim Basin’s Kela-2 field with only around 250 bcm proven reserves for the 4,000 km west-east pipeline. However, Chayandinskoye’s reserves significantly increased to 755 bcm in 1997 and eventually to 1240 bcm in 2001.

78

Discovery / Production A+B+C1 C2

Sredne-Vilyuiskoye 1965 / 1975 164.6

Sredne-Tyunskoye 1976 156.2 9.2

Sredne-Botuobinskoye 1970 152.3 18.6

Taas-Yuriakhskoye 1981 102.7 11.3

Chayandinskoye 1989 164.8 44.7

Table 26. Gas Fields in Sakha Republic(Unit: bcm)Source: Keun-Wook Paik, Gas and Oil in Northeast Asia: Policies, Projects and Prospects (London: RIIA, 1995), p. 224.

In December 1995 the FS was completed and the verdict was not positive due to a poor economics of the long distance pipeline development. No further step was taken after the preliminary FS. 28

In the same year, through its 1995 energy plan the Korean government made clear for the first time that it intends to replace a substantial portion of LNG imports by long distance pipeline gas, and to balance the ratio between LNG and pipeline gas ideally in the next decade. According to the report prepared by Kogas for Korean Parliament’s Trade and Industry Committee annual inspection in October 1997, as shown in Table 2, the timing of pipeline gas introduction would be around the year of 2006. The core of this plan lies in a fact that the pipeline gas could be supplied to South Korea with a much cheaper price than LNG, and it was the selling point to the Korean government.

79

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

PFS work period

— December 1996 – July 1997

Organisations

— Gas field study: Korea Resources Institute — Gas Pipeline study: Korea Gas Engineering Co., Ltd— Economics and Investment Environment study: Kogas Research Centre and Korea Energy Economics Institute.

PFS work result

— Proven reserves: 500 mt. Potential reserves are 1.15 bt. It is necessary to secure 260 mt more for international project. Estimated investment cost: US$ 3.0 billion. — Pipeline construction: a total of 4,100 km connecting Irkutsk–Mongolia–Beijing–Shandong peninsula–Yellow Seas–Pyongtaek route has no difficulty in construction. It is not passing through a permafrost region. Estimated investment cost: US$ 8.0 billion. — Gas production capacity and market: 20 mt/y, of which 6 mt for Russia, 7 mt for China and 7 mt for Korea. — Imported gas price: around 22–25% cheaper, compared with LNG price. — Total investment required: US$ 11 billion. Project financing possible. — Preliminary conclusion: economical and realistic, if further proven reserves are added and a proper project structure is developed.

Future plan

— A full FS during 1998–99, with US$ 100 million cost — Agreement among the related parties: 2000–2001 — Gas field and pipeline development: 2001–2006 — Gas export start: 2006

Table 27. Kogas Report on Irkutsk Gas Import Preliminary FS WorkSource: Report prepared by Kogas for Korean Parliament’s Trade and Industry Committee annual inspection in October 1997.

While KNOC failed to take the further step for the pipeline gas development, Kogas saw pipeline gas import as an opportunity to expand its business domain. As Irkutsk Oblast has asked Korean companies to develop its giant gas field in 1994, Kogas decided to take an initiative towards Irkutsk region’s Kovytin-skoye gas field development. In mid-1995 a Korean Consortium composed of Kogas, PEDCO, Kohap, Halla, LG, Hyosung, Daewoo, and Yukong (joined in April 1996 and the company name is changed as SK) was established. Prior to this consortium establishment, both Halla and Kohap were competing with each other to take the initiative for this Kovyktinskoye gas project.

It was the Hanbo group that has taken a real step for this giant gas project. In early 1996, the Hanbo group later bankrupt due to the financial strain from its ambitious steel plant building set up East Asia Gas Company (EAGC) as its sole subsidiary, with the initial capital of $12 million, for its active participation

80

in Irkutsk region gas development. In July 1996, EAGC announced that Hanbo group bought 27.5% of equity of Russia Petroleum having exploration and development license in Kovyktinskoye and Verkh-nechonskoye gas and oil fields in Irkutsk region. A total of US$ 44 million, of which US$ 25 million for the 27.5% equity purchasing and US$19 million for a three year loan to Sidanco, was invested.

Due to Hanbo group’s bankruptcy in early 1997, EAGC had a difficulty in keeping the 27.5% equity. Consequently, the 20% was re-sold to Sidanco in November 1997 when BP decided to invest US$ 571 million in Sidanco. 29 EAGC kept the rest 7.5% for a while and the figure became 8.37% after the 4th emis-sion. But it was diluted to 7.1% due to its failure to join in the 5th emission in 1999. It was early December 2000 the rest 7.1% was sold to BP-Amoco and Tyumen Oil Company (TNK).30

When a Korean press reported the secret disposal of EAGC shares, Korean government admitted that there was nothing the government could do to stop EAGC’s share disposal but argued that it would not affect its plan to join in the Kovykta gas development project.

Kogas consortium was not keen on taking the equity stake of Russia Petroleum due to the following rea-sons:

— The first is Kogas believed that Korean gas market opening capacity would provide a strong negotiation leverage. The possibility of 10 bcm gas market provision in the early stage of this trans-national pipeline development was the key point, and CNPC was respecting Kogas position as the gas market provider. It would have been ideal if the Kogas consortium and EAGC made a compromise by joining the forces, but the opportunity was missed.

— Secondly the reason that Kogas consortium was slow to grasp the importance of securing the equity position in the giant Kovytinskoye field lies in a fact the consortium was very suspicious of the real scale of field’s proven gas reserves. But now it is clear that Kovyktinskoye gas field’s reserves are big enough to satisfy not only Irkutsk region itself but also both China and Korea’s gas demand.

— The third is that Kogas consortium was reluctant to admit the fact that EAGC’s initiative was abso-lutely correct. When EAGC announced its equity positioning in Russia Petroleum, Kogas consortium together with Ministry of Trade, Industry and Energy (MOTIE) was very strongly objecting the ap-proval for EAGC’s investment in Russia Petroleum. Kogas had virtually no experience in upstream business and they argued that it is only a downstream business. It only confirms that at that time Kogas consortium did not have a clear picture with regard to its equity positioning in the upstream sector in the major trans-national pipeline development.

Kogas consortium’s preference was to pursue the FS work first and then to make the decision later. In 1998, a Japanese consortium led by JNOC (Japan National Petroleum Corp) and Sumitomo Corp took an initiative by proposing a five country FS work on the pipeline connecting Kovykta gas field with China, Korea and Japan via Mongolia but the twelve months negotiations collapsed just Christmas eve due to the failure of drawing consensus. Both China and BP did not take the role of Japan as coordinator of the FS very seriously as Japan is not offering any gas market for the development. In other words, two important players of the negotiation group did not see the necessity of offering a carried interest to the Japanese

81

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

consortium. A very unique opportunity to start a multilateral (five country in Northeast Asian region) cooperation was missed.

The collapse of the 1998 negotiation meant the region has lost a chance to make a multilateral energy proj-ect and had no choice but to return to Sino-Russian cooperation formula. Without Korea’s participation, it would have been a bilateral cooperation project. In May 1999, Korea expressed its interest in Sino-Russian FS work on Kovykta gas project, and its participation laid the groundwork for a trilateral cooperation format.

In November 2000, Kogas, CNPC and Russia Petroleum signed an agreement for a full Feasibility Study on the Kovykta gas development. In January 2001, Kogas Consortium was restructured, from seven to nine members. The members are Kogas 27.3%, LG Corp. 14.8%, KNOC 14.0%, Hyosung 12.8%, Daewoo Construction 7.7%, Daesung Industry 6.7%, Hyundai Corp 6.7%, Daewoo International 5.0%, and Han-wha 5.0%. In June 2002, FS work was supposed to be completed but postponed until June 2003. A total of US$ 6.0 million (of which 50% by the Government and 50% by Korean Consortium) has to be paid for the Korean portion of the study.

Eventually, the FS work was completed in November 2003. The FS concluded that the project development is commercially and technically viable. So the three parties aimed at securing each government’s approval until the end of March 2004 but two major issues—Gazprom’s stance and the border price—are blocking the approval. Besides this, the final decision on the Angarsk–Daqing crude oil line and Angarsk–Nakhodkha crude oil line will affect the fate of this trans-national gas pipeline fundamentally.

3.2 DPRK’s Stance towards Pipeline Gas Introduction

DPRK authority has shown its reluctance to express interest towards the pipeline gas introduction despite that it has been studying the import option since the mid 1990s. It took for a while for DPRK authority to understand that the KEDO project cannot be completed without the transmission line development.

At present, DPRK authority is not willing to change its stance towards the KEDO project and to accept the pipeline gas option, but will take the introduction of the pipeline gas option very seriously when the nuclear crisis is permanently settled.

The scale of benefit from the economic development of DPRK by the introduction of the long distance gas pipeline passing through DPRK territory will be very different from that of KEDO project. Assuming that a 1.5 bcm natural gas would be allocated to DPRK as a transit fee plus South Korea’s subsidy to prevent the collapse of economic system of DPRK, the pipeline gas would deliver at least a minimum level of gas and power to a number of major cities in DPRK. Unlike KEDO project, both Russia and China are very well positioned in this pipeline project.

To observe the progress of trans-national natural gas pipeline projects in Northeast Asia, DPRK established the Natural Gas Research Society, DPR Korea (NGRS DPRK), under the leadership of DPRK’s Asia Pacific Peace Committee in 1998. NGRS DPRK has sent its delegate to 1998 Ulaan Baator (4th) and 1999 Yakutsk (5th) Northeast Asian Gas & Pipeline Forum conferences.

82

The 4th International Conference on Northeast Asian Natural Gas PipelineHeld in Ulaan Baatar, Mongolia, Aug 16–18, 1998

Prof. Kyung-Bong Kim DPRK Natural Gas Research Society (NGRS)

Mr. W. G. Pak State PlanningCommission & NGRS

Mr. M. S. Pak Association for Cooperation of National Economy & NGRS

Mr. Y. H. Yun Institute of National Economy & NGRS

Mr. S. J. Ri State Academy of Science & NGRS

Mr. R. S. O Industrial Construction Enterprise & NGRS

Mr. U. H. Hyon The Non-Conventional Energy Development Center & NGRS

Mr. H. S. Kim NCEDC & NGRS

Dr. Busuph Park Kumgangsan International Group

The 5th International Conference on Northeast Asian Natural Gas Pipeline,Held in Yakutsk, Russia, July 25–27, 1999

Prof. Kyung-Bong Kim Chairman, DPRK Natural Gas Pipeline Association

Mr. Won-Kook Park Secretary, DPRK NGPA

Mr. Ki-Soo Kim Engineer, DPRK NGPA

Mr. In-Sung Kang Member, DPRK NGPA

Ms. Un-Hi Hyun Member, DPRK NGPA

Mr. Hae-Sung Kim Member, DPRK NGPA

Mr. Myung-Nam Cho Member, DPRK NGPA

Ms. Kyung-Yoon Park Kumgangsan International Group

Table 28. DPRK Delegation to Mongolia and Sakha RepublicSource: Dr. Keun-Wook Paik

83

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

In February 2001 Kogas delivered its message to undertake a joint study on the pipeline gas introduction and in September 2001 South Korea announced that it had reached a preliminary agreement with DPRK on a joint FS work for the natural gas pipeline passing DPRK territory. (Later Kogas argued that the firm’s FS work on the DPRK section did not see any progress as DPRK authority demanded Kogas’ preliminary commitment that the pipeline would pass through DPRK territory. Kogas could not take any further step due to this condition).

2001 MOU with a Dutch Consortium

On April 6, 2001, Prof. Kim’s NGRS signed an unpublished 18 point MOU with a consortium of three Dutch trading companies (HS International Trading, Tamalone International, and Boscalis International) The MOU gave the consortium the exclusive right to build the North Korean portion of the pipeline from the Russian border to the South Korean border. DPRK expected that the Dutch consortium would act as an intermediary in promoting the pipeline project with ExxonMobil, Japanese companies, and South Ko-rean gas officials. The MOU envisaged the construction of three gas-fired power stations along the pipeline route with a total capacity of 500 MW (2 units of 200 MW + 1 unit of 100 MW).31

2002 Agreement: KoRus Project

On August 3rd, 2002, FSI Energy signed an agreement with Chairman Kyung-Bong Kim, NGRS DPRK. The agreement gave FSI Energy exclusive transit rights with regard to the pipeline from Northern Sakhalin to the Korean Peninsula. Under this agreement, FSI Energy must identify the source of natural gas supply by 1st June 2003. FSI Energy is trying to take advantage of the political influence of Congressman Curt Weldon (Republican from Pennsylvania) who became the chairman of the House Armed Services Com-mittee. A Korea’s Weekly Sisa Journal (February 6/ 13, and March 13, 2003 issue) has reported on this project comprehensively.

According to the article, FSI Energy is the driving force of KoRus Pipeline Project aiming at supplying Sakhalin gas to North and South Korea by pipeline. In late May 2002, a US delegation composed of 12 congressmen and led by Congressman Kurt Weldon planned to visit Pyongyang but DPRK authority refused to issue the visa. Congressman Kurt Weldon was being advised by Dr. Roy Kim, vice president of FSI Energy.

On August 3rd, 2002, according to Dr. Kim’s interview with Sisa Journal, FSI Energy signed a twelve clauses agreement with DRPK Pipeline Gas Research Society (led by Prof. Kyung-Bong Kim, former head of DPRK Academy of Science) with regard to the exclusive right of pipeline construction development for the DPRK territory section. This agreement requires securing the gas supply source until June 1st, 2003 and the approval from the both government of the signatories.

The interview story argued that US DOE secretary Abraham has helped the introduction of US DOE officer to review the project, and FSI Energy applied a US$ 10 million for the FS work. The interview also argued that FSI Energy’s contact point in the State Department is Mr. Robert Manning, the famous Korean Peninsula specialist, and through him the KoRus project is being briefed to the State Secretary Colin Powell.

84

This KoRus project was officially introduced during the KIEP-KEI policy Forum on Northeast Asian Energy Cooperation held in Washington DC on January 7th, 2003. However, this KoRus project was not taken seriously by the major institutions in the United States and South Korea. KoRus project failed to secure the gas supply source until June 1st, 2003 as stipulated in the agreement. Even though FSI Energy is still promoting the project, it seems very unlikely the supply source would be available unless the project is taken care by all the related governments. In short, this is a state level infrastructure project not a com-mercial one that can be taken care by a small private company’s initiative.

Both 2001 MOU and 2002 agreement indirectly confirm that DPRK authority is seriously interested in pipeline gas introduction, but is not ready to officially discuss the issue with Washington and Seoul as the approach could affect the settlement of KEDO project.

3.3 Natural Gas Supply Sources for the Korean Peninsula

3.3.1 IRKUTSK GAS EXPORT TO THE KOREAN PENINSULA

It is inconceivable to separate the option of Irkutsk gas supply to the Korean peninsula from the Chi-nese energy authority’s approach towards Russia’s East Siberia oil and gas development and its export to China.

The year of 1992 witnessed two major approaches by the China National Petroleum Corp.(CNPC) with regard to pipeline gas imports. The first approach encompassed East Siberian oil and gas development and their export to China. It was suggested in July 1992 by Prof. Zhang Yongyi, then vice president of CNPC, who proposed the development of oil in East Siberia to Russia and Japan. Prof. Zhang added that the oil pipeline could be extended to Japan via Korea, if Japan got involved in the project. The second approach was Central Asian gas import to China. This was proposed by CNPC together with Mitsubishi at the end of 1992.

During 1993–94 period, CNPC identified Kovykta gas project in Irkutsk region as the priority project for the trans-national pipeline development between Russia and China, and in November 1994 a memoran-dum of understanding was signed between CNPC and Mintopenergo.

In September 1993, CNPC began to negotiate with the Russian for exploration of Markovskoye and Yaraktinskoye oil and gas fields in Irkutsk region. (These two fields are located between Kovyktinskoye and Verkhnechonskoye fields.) CNPC’s Russian counterpart was a group of Irkutsk’s Petroleum and Gas Geological Company and Geophysical Research Institute, together with 14 other local companies and organizations. CNPC’s two exploratory wells were drilled in the two virgin fields.

A milestone of East Siberian gas development was laid in early November 1994 when CNPC and MINT-OPENERGA signed a memorandum of understanding for the construction of a long distance pipeline to promote East Siberian oil and gas resources. The 1994 agreement was the first official expression of their determination for the pipeline development. The trans-boundary pipeline, proposed by Sidanco, aims

85

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

at transporting annually 20–30 bcm from the Irkutsk region in East Siberia to the coastal cities of East China, and possibly to Korea and Japan.

Another major agreement was made in late June 1997, when a Russian delegate led by Premier Viktor Chernormyrdin visited Beijing. It was the governmental framework agreement between Russia and China to export natural gas and electricity from East Siberia to China was signed. Under the natural gas deal, Russia would export 25 bcm/y of gas from Irkutsk region over 30 years. The $1.5 electricity deal over 25 years envisages a supply of 20 billion KW/h of electricity from Irkutsk to either Shenyang, Liaoning prov-ince or to Beijing. Basically this framework agreement was a re-confirmation of the 1994 memorandum.

86

Region Field (Licensed Company) Reserves (C1+C2)

Sakhalin Islands Odoptu, Chaivo, Arkutun-Dagi (Sakhalin I project) 485 bcm + 307 bcm

Piltun-Astokskoye, Lunskoye (Sakhlin Energy Investment Corp) 800 bcm + 185 mt

Irkutsk Kovyktinksoye 1,932 bcm + 90 mt (Russia Petroleum) condensate + 2.3 bcm helium

Verkhnechonskoye (Russia Petroleum) 280 mt

Republic of Sakha* Chayandinskoye (Sakha Republic Gov) 1240 bcm + 50 mt

Sredne-Botuobinskoye (Sakhaneftegas) 171 bcm

Taas-Yuriakskoye (Sakhaneftegas) 114 bcm

Talakanskoye (Surgutneftegas) 124 mt + 50 bcm

Krasnoyarsk** Yurubchonskoye 282 mt + 374 bcm + (Yukos) 29 mt condensate

Kuyumbinskoye (Slavneft) 154 mt

Sobinskoye (Gazprom) 159 bcm

West Siberia Palkliahinskoye, 3,021 bcm, of which Bolshehetskaya (Gasprom) C1 751 bcm, C2 596 bcm and C3 1,203 bcm

Kazakhstan Karachaganak (BG-Agip-Texaco) 1,300 bcm

Turkmenistan*** 9.2 tcm in-place, of which 4.6 tcm proven

Shatlyskoye roughly 1,000 bcm recoverable (est)

Dayletabad 1,380 bcm recoverable

Table 29. Main Gas Supply Sources for China and Korean PeninsulaNote: * As of 2002, the estimated recoverable oil and gas reserves in Sakha Republic are 2.39 billion tonnes of oil, 9,420 bcm of gas, and 409 million tonnes of condensate respectively. ** The geological oil and gas reserves of Yurubchen-Tokhomskaya area composed of Yurubchen, Kuyumbinskoye, and Tersko-Kamovskoye fields stand at 1.2 billion tonnes and 1,000–1,200 bcm respectively. *** Besides the above mentioned, the gas fields like Bagadzhin, Kirpichlin, Naipskoye, and Gugurtlinskoye record over 100 bcm gas reserves.Source: Dr. Keun-Wook Paik

87

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

The most important agreements were signed in February 1999 after the fourth regular meeting between Premier Zhu Rongji and his counterpart Yevgeny Primakov. Both sides signed 11 agreements, of which three are related with oil and gas. — The first is on a preliminary feasibility study on crude oil export from Angarsk to Daqing through a 20–30

mt/y capacity pipeline— The second is on a feasibility study on Irkutsk region’s natural gas export to north-eastern China through

a long distance pipeline— The third is on a preliminary feasibility study on a western Siberia’s gas export to Shanghai by a trans-na-

tional pipeline passing through Xinjiang region.

Based on this 1999 agreement, a three year FS by the parties (CNPC, Kogas and Russia Petroleum) was un-dertaken in November 2000 and the result was submitted in November 2003.

It is worth noting that the ten years preparation period of the Kovykta gas project can be divided into five stages (See Table 30).

Table 30. Five Stages for Kovykta Project Negotiation

Source: Dr. Keun-Wook Paik

This period is characterised as “bilateral relationship development period” between CNPC and Mintopenergo.This is the first stage for the western investment, initiated by Korea’s Hanbo group and then by BP’s serious move.This is the negotiation period for “five country FS work” (Had it hammered out a compromised option, it would have opened the door for the genuine “multi-lateral cooperation era” in Northeast Asia). The driving force of this negotiation was Japan, but its initiative to lend a major loan for the FS work was not supported due to its failure to open their gas market for the development.The focus was once again on bilateral relationship between Russia and China until the three party FS work agreement is signed.Both Russia and China agreed to invite South Korea to the project to minimise the risk of market availability in the early stage of the project. Even though the official agreement for the feasibility study of the Irkutsk gas project was signed in November 2000, the negotiation was suspended for at least 7-8 months due to a number of unresolved issues since Autumn 2001. The negotiation resumed in Summer 2002. The result of the FS was completed in November 2003.

1994–1996

1996–1997

1998

1999–2000

2000–2003

88

Kovykta Gas Development32

The Kovyktinskoye gas and condensate field discovered by parametric well 281 drilled in 1986 by Vostsib-neftegasgeologiya, the subdivision of former Ministry of Geology of Russian Federation and located in the Zhigalovsky region, 350 km to the north-northeast of Irkutsk.

Field size 7,499.5 sq km

Depth of Occurrence (along the vertical) 2,838–3,388 metres

Pay Thickness Up to 78 metres

Effective Thickness Up to 29 metres

Sandstone Porosity 10–19%

Gas Saturation 0.6–0.9

Formation Pressure 25.7 MPa

Reservoir Temperature 55 degree C

Condensate Content 67.0 g/cu.m

Content of CH4 in gas 90.3 moles / %

Reserves (as of early 2003)* 1,931.6 tcm + 90 mt of condensate + 2.3 bcm of helium

Table 31. The Characteristics of Kovykta Gas Note: On Feb 28, 2000, Federal Geological Committee confirmed that Kovykta’s C1+C2 reserves are 1,120 bcm. If the adjacent Khandinsky and Yuzhno-Ust-Kutsky blocks’ 280 bcm are included, the total will be 1,400 bcm.* On March 15, 2002, the 1,932 bcm (of which C1 1,100 bcm +C2 754.7 bcm) reserves registered by Central Commission for Reserves of Russian Federation Ministry of Natural Resources. Source: Russia Petroleum Investor

When the project was initially introduced to the western world, the proven reserves of the field stand at 870 bcm, of which C1 was only 277 bcm. However, as of 2002 the figure became 1932 bcm, of which C1 was 1,000 bcm. The uncertainty on the proven reserves was totally cleared. The turning point of Kovykta project development was BP’s acquisition of 45% of equity of Sidanco’s interest in Russia Petroleum by providing US$ 172 million of the cost of appraising the Kovykta field. BP’s positioning in the project helped the ac-celeration of the exploration and it confirmed the real scale of the proven reserves.

The project’s three years FS work was completed in November 2003. The main objective of the feasibility study was to show whether gas supply to China and Korea will be effective and commercially viable. The study has evaluated the viability of the core concept that Russia Petroleum would sell CNPC 600 bcm of gas (20 bcm/y) and Kogas 300 bcm (10 bcm/y) over 30 years.33 The supply would start in 2008 to reach to the level of 30 bcm/y by 2017. The study calls for up to 4 bcm/y of gas to be supplied to Irkutsk and Chita

89

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

regions and Buryatia. The required total investment for the project will total US$ 17 billion, much higher than the US$ 12 billion price tag initially suggested in 1995.

About 400–500 wells with average depth of 3,000 meters will be needed to develop Kovykta field. This proj-ect includes the construction of nine gas treatment plants, 20 compressor stations, and 20 collection stations. Russia’s projected demand for the Kovyta gas in is 4 bcm, while that of north-eastern China and northern China is 12 bcm and 8 bcm respectively, and that of Korea is 10 bcm per year. The next step of this FS work is to get the approval from the governments of all parties concerned.

Shareholders Equity %

BP 33.39

TNK 29.03

Interros 25.82

Irkutsk State Property Committee 11.24

Table 32. Russia Petroleum’s Shareholder Structure: as of late 2003Source: Interfax Petroleum Report

If the project is approved by all three governments, the value of this project will soar. The biggest beneficiary of the project will be BP-TNK group with a 62% of the controlling stake of the project. It is worth noting that Interros Holdings Company’s 25.8% equity was put on sales soon after the FS work completion and the estimated price for the equity is around US$ 500 million. However, the most important players—Gazprom and CNPC—that would decide the fate of project development, and they did not take any action on this equity offer.

According to a recent report, Gazprom has proposed a new gas pipeline directing Nakhodka and then to South Korea via Donghae or Sea of Japan.34 This news indirectly indicates that the pipeline route passing through China’s north-eastern provinces could be ruled out by Gazprom. It remains to be seen what would be the fate of this Kovykta gas pipeline route eventually.

3.3.2 SAKHA GAS EXPORT TO THE KOREAN PENINSULA

It is not an exaggeration to say that the initiative of East Siberian gas export to Northeast Asian market was taken by Sakha Republic. It was as early as the 1960s that the possibility of Yakutian gas export to Japan was explored and promoted, and suspended in the wake of the Former Soviet Union’s Afghanistan invasion in late 1979. In the late 1980s Korea’s Hyundai group revived the forgotten project, and eventually in 1995 the preliminary feasibility study commissioned for the Sakha gas development, funded by Russia and South Ko-rea for the amount of $10 million respectively, was implemented. But the outcome was not very encouraging, and no further step has been taken.

90

In other words, the conclusion was that Sakha gas export to Korea would not be acceptable for the time being due to remote location, harsh environment and consequently poor development economics. However, Sakha Republic is boasting of a relatively big proven gas reserves (over 1 tcm), and is well positioned to offer enough proven reserves that could justify a long distance and trans-national pipeline development

According to Vasiliy Moiseyevich Efimov, then president of Sakhaneftegas, as of 1998 the registered C1 category reserves in Vilyuisk region (10 fields: 437.8 bcm) and Botuobinsk region (21 fields: 586.3 bcm) are 1,000 bcm. Besides this, the reserves of Chayandinskoye field in Botuobinsk region are estimated at 755 bcm (previously 208 bcm), of which 535 bcm is exploitable. Already 64 wells have been drilled in the field.

Desperate to restore as the main gas export source in the region, Sakhaneftegas has made a proposal for East-Siberian consortium based on Irkutsk region, Sakha Republic and Evenki Autonomous region of Krasnoyarsk Krai in 1998, and the proposal is being supported by Rosneft, Chita region Administration, JSC UES of Russia, Administration of Evenki Autonomous region and Russia Petroleum. Interestingly, Sakhaneftegas has signed an agreement with Russia Petroleum for joint development of Kovyktinskoye and Chayandinskoye fields, even though the priority will be given to Kovyktinskoye first.

At that time it was the only way to remove any suspicion on the reliability of the proven reserves scale. The significance of this proposal lied in a fact that the combined development of Kovyktinksoye and Chayan-dinskoye fields will guarantee solid proven gas reserves that could justify 4000 km long distance pipeline development for a long period. It was not surprising to see this hybrid export scheme was presented at the 4th United States-China oil and gas industry forum by Xu Ding-Ming, then counsel of department of industrial department, State Development Planning Commission.

The hybrid export scheme has two options, even though there is no difference in the pipeline section within the Chinese territory. The first is a 4,961 km pipeline, of which the Russian section distance is 1,960 km and the two pipelines from Kovykta and Chayanda field are meeting at Bodajbo adjacent to the northern tip of the Bai-kal Lake. The second is a 5,626 km pipeline of which 2.2625 km is in the Russian territory. This second option gives the absolute priority to the Kovykta project as the Chayanda is connected as a back-up supply source.

As Kovykta’s gas reserves are big enough to pursue a 30 bcm/y gas export for 30 years, there is no need to make Chayandinskoye gas field as the back up supply source for Kovykta gas project. Chayandgas project alone can pursue its own export scheme. In terms of development preparation, Chayandagas project is far behind against Kovykta project.

However, a significant work has been done during the last few years. First of all, on July 26, 2002 Sakhaneft-egaz completed a preliminary FS for a gas pipeline that will export gas from Chayandgas to Shenyang (This work started based on the agreement signed between CNPC and Sakhaneftegas in April 1999 soon after the Feb 1999 agreement) The initial export volume will be 12–15 bcm/y and the figure could expand to 20 bcm/y in the later stage. Secondly, Moscow’s Central Commission for Reserves of Russian Federation Ministry of Natural Resources approved the revised figure of Chayandagas proven gas reserves as 1,240 bcm as of 2002. Thirdly, in October 2002, Gazprom and Sakha Republic Government signed a framework agreement on forming a joint venture to bid a tender for the development license for the Chayandinkskoye field and other fields in Sakha Republic.

91

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

In particular, Gazprom’s strategic alliance with Sakha Republic Government has a special implication. In early 2002, Sakha Government reported to the local legislative assembly that Yukos has secured a 47% con-trolling sakes of Sakhaneftegas which used to be controlled by Sakha Republic government. In other words, Yukos initiative forced Sakha Republic Government to be minor shareholder in Sakhaneftegas. Sakha Re-public Government’s choice was to have a strategic partnership with Gazprom which has initially neglected Kovykta project and wanted to be a dominant player in the solely the Russian Federation government asset.

In February 2003, Gazprom chairman Alexei Miller and Rosneft president Sergei Bogdanchikov asked presi-dent Putin to instruct the Russian Federation Ministry of Natural Resources and other relevant ministries to consider developing the Chayandinskoye, Talakanskoye, Sredne–Botuobinskoye, Kovyktinskoye and Verkh-nechonskoye oil and gas fields under a single project and initiate an auction in accordance with effective legislation, and Putin accepted the proposal.

In March 2003, the Russian Government held its first Cabinet meeting to discuss the development of oil and gas reserves of Eastern Siberia and the Far East. During this meeting, the government adopted the draft of the Programme to Establish a Unified System of Production, Transportation and Supply of Gas in Eastern Siberia and the Far East in view of possible export of gas to markets in China and other countries of the Asia Pacific re-gion as the basis for further work. Besides this, the government also decided to include the Gazprom-developed programme in the draft Principal Provisions of the Energy Strategy of Russia for the Period until 2020.

Interfax report in early 2004 confirmed that the proposals from the state energy firms, in particular Gazprom, Transneft and Rosneft are being taken very seriously by President Putin.35

“In February 2004, Transneft revealed its revised pipeline plan and won the approval of the Amur region, Khabarovsk and Primorye territories’ governments. Interestingly the authors of this revised plan ignored the previ-ous plan of Angarsk–Nakhodka line with a branch line to Daqing.

Transneft’s Symeon Vainshtok said it would take a year to draft a new feasibility study of the revised pipeline project and it will take another year to design it and about four years to build it. The new route has some characteristics. First, it begins much further west in Taishet and the distance from the pipeline to Lake Baikal has been doubled. Transneft is no longer considering routes that would send the pipeline south of Lake Baikal. The new pipeline will be 4,130 km long, compared with 3,765 km for the Angarsk–Nakhodka pipeline. The pipeline will be able to transport 56 mt/y of oil. The project includes the construction of 32 pumping stations, of which 13 will have oil storage facilities. The route includes 48 river crossings and 115 road and railroad crossings.

Besides this Transneft’s revised plan, the government of the Sakha Republic (Yakutia) along with Gazprom, the Natural Resources Ministry, and Surgutneftegaz has drawn up an alternate route to the Pacific Ocean with oil and gas pipelines in a single corridor.

This route would run from Nizhnyaya Poima (Transneft pipeline system)–Yurubcheno–Tokhomskoye field-Verkh-nechonskoye field–Talakan field–Chayanda field–Lensk–Olekminsk–Aldan–Neryungri–Tynda–Skovorodino–Bla-goveschensk–Khabarovsk–Vladivostok–Nakhodka. The fields like Kovykta, Dulsimininskoye, and Yaraktinskoye would be hooked in later. Thus, a single network would include all major oil and gas fields in Yakutia, Irkutsk region, and Krasnodar territory. The pipeline would stretch 6,224 kilometers.

92

The project that combines the oil and gas pipelines was submitted to President Putin at a meeting on the develop-ment of Far East transport infrastructure on February 26, 2004 in Khabarovsk. President Putin designated the pipeline as a strategic interest and told Sakha President Vyacheslav Shtyrov to work up the project. President Putin also said all designs for the pipeline must be included in the documents to be submitted to the government.

The main problem is the necessary amount of proven oil reserves, while proven gas reserves in the region are sufficient to cover domestic needs and export. Specialists said Russia’s state balance includes about 1 billion tonnes, but one and a half times that is needed to ensure the effective operation of an oil pipeline.”

Here it is worth noting Gazprom’s intention to develop Eurasian gas pipeline system. Prof. Alexey M. Mas-tepanov, Gazprom argued that “the export of Kovyktinskoye gas will lead to temporary closing-down of Chayandinksoye gas field for the long term. This fact will complicate the organisation of complex gas supply of the Far East region. As a result the gas fields of Yakutis will lose the market for a long period of time. It will be a great loss of profit for the Russian state. Chayandinkoye gas field can satisfy the prospective demand of China and Korea, and Gazprom proposes to realise this project starting from 2009–2010 period.”36

If this approach is accepted and supported by Moscow authority, then Kovykta gas export to China and Korea will never be realised. Unfortunately Korea has given up its vested interest in Sakha gas quite a long time ago. China will not mind too much as long as the price is acceptable and the introduction timing is not delayed too long.

3.3.3 SAKHALIN GAS EXPORT TO THE KOREAN PENINSULA

In 1991 the Concept of Developing Yakutian and Sakhalin Gas and Mineral Resources of Eastern Siberia and the USSR Far East, the so-called Vostok(East) Plan was announced. The key element of the plan was construction of a 3230 km gas pipeline from Sakhalin across Russian territory through North Korea to South Korea, and a 3050 km pipeline from Yakutsk to Khabarovsk. In other words, China saw a possibility of gas import from this Vostok plan, which was an inconceivable during the Cold War period.

Like Sakha gas, Sakhalin offshore development was discussed since the 1960s, but until the early 1990s no real development was made partly because of uneasy relations between the former Soviet Union and Japan and partly because of poor development economics. As shown in Table 33–34, the gas reserves in Sakhalin I (Exxon 30%, Sodeco 30%, Roseneft and Sakhalinmorneftegas 20%, and ONGC Videsh Ltd 20%), and Sakhalin II (Shell 55%, Mitsui 25%, and Mitsubishi 20%) stand at 485 bcm and 460 bcm respectively. Besides this, ExxonMobil-Texaco consortium is estimating the gas reserves of Kirinskya prospect in Sakhalin Block III at 720 bcm. If the figures in Tables 35–38 are proved after exploration, Sakhalin offshore could produce enough gas that can not be absorbed by Japan’s gas market alone.

93

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Fields Odoptu, Chayvo, Arkutun-Dagi

Consortium name Sakhalin I Project

Partners Exxonneftegas Ltd 30%: Operator SODECO 30% ONGC Videsh Ltd 20% Sakhalinmorneftegas-Shelf 11.5% Rosneft-Astra 8.5%

Recoverable Reserves Crude oil: 307 mt or 2.3 billion barrels Natural Gas: 485 bcm

Estimated development cost US$ 12–15 billion, of which Phase I, oil development US$ 4.0 billion

Production start Crude oil: peak 26.5 mt/y 4. Chayvo: Dec 2005 5.Odoptu: Dec 2007 Natural Gas: 2007/8. Peak production 21 bcm/y

Table 33. Sakhalin I. Project

Fields Piltun-Astokskoye, Lunskoye

Consortium name Sakhalin Energy Investment Corp (SEIC)

Partners Shell 55%: OperatorMitsui 25% Mitsubishi 20%

Recoverable reserves Crude oil: 185 mt Natural Gas: 800 bcm

Estimated development cost US$ 10 billion, of which Phase II, natural gas development (800 km pipeline + LNG terminal) US$ 8.5 billion

Production start Crude oil: 1999. Peak 6–9 mt Natural Gas: 2006/7. Peak production 13.7 bcm/y or 9.6 mt/y

Table 34. Sakhalin II. Project

94

Fields / Structure Kirinsky

Consortium name PegaStar Neftegas LLC

Partners ExxonMobil 33.3% ChevronTexaco 33.3% Rosneft 16.6% Sakhalinmorneftegas 16.6%

Projected recoverable reserves Condensate: 62 mt Natural Gas: 713 bcm or 25.4 tcf

Estimated development cost US$ 6.4 billion

Exploration Need to get an agreement on PSA. FS draft prepared.

Table 35. Sakhalin III. Project

Fields / Structure Astrakhanovskiy Block, Shmidtoskiy Block

Consortium name Sakhalin IV project

Partners BP: 49% Rosneft: 25.5% Sakhalinmorneftegas: 25.5%

Projected recoverable reserves Crude Oil: 110 mt or 0.82 billion barrels Natural Gas: 440 bcm or 15.7 tcf

Estimated development cost Not available

Exploration In 2000, the first exploration well was drilled. Technical and economic evaluation of Astrakhanov structure was completed.

Table 36. Sakhalin IV. Project

95

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Fields / Structure Kayaganskiy, Block, Vasyukanskiy Block Vostochno-Shmidtovskiy Block Elizavetinskiy Block

Consortium name Sakhalin V project

Partners BP: 49% Rosneft: 25.5% Sakhalinmorneftegas: 25.5%

Preliminary estimate of the reserves Crude Oil: 783 mt or 5.87 billion barrels Natural Gas: 432 bcm or 15.4 tcf


Exploration In 2000, 5000 km 2D seismic work done. In 2002, a total of 2,300 sq. km 3D seismic work done. On July 2,2002 Rosneft was awarded with exploration license of Kaygansko-Vasukanskiy Block

Table 37. Sakhalin V. Project

Fields / Structure Sakhalin Vi Block, including a license are of PetroSakh CJSC

Consortium name Sakhalin VI project

Partners Rosneft: 50.0% Alpha-Eco: 50.0%

Preliminary estimate of the reserves 520 million tonnes of oil equivalent, of which 1/3 for oil and 2/3 for natural gas


Exploration In 2002, 450 sq. km 3D seismic work done. The license agreement provides for four exploration wells drilling before 2005.

Table 38. Sakhalin VI. Project

As far as Sakhalin gas sources are concerned, Japan was paying special attention despite the long standing the territorial disputes between Japan and the Russian Federation. Around 1998 period Japex and four Japanese steel companies investigated the possibility of introducing 2,225 km pipeline connecting Sakhalin Islands and mainland Japan. The pipeline is composed of three sections: the first section with 625 km from Katangli to Prigorodnoye, the second section with, 1300 km from Prigorodnye to Niigata through offshore, and the last section with and 300 km from Niigata to Tokyo. In fact, then Japan’s Ministry of International Trade and

96

Industry (MITI) minister, Shinji Sato announced at the International Energy Agency ministerial meeting held in May 1997 in Paris that Japan is considering the Sakhalin offshore gas import pipeline. It was the first official remarks by Japan’s minister on international pipeline development between Russia and Japan.

During April 1999 and Spring 2002, both Exxon Japan Pipeline Ltd and Japan Sakhalin Pipeline Co. (JSPC) have been preparing a FS for this Sakhalin gas supply to Japan. The three years FS work cost US$ 40 million. JSPC is composed of Japex 45%, Itochu 23.1%, Marubeni-Itochu Steel Inc. 18.7%, and Marubeni Corp 13.2% and was the operator in efforts to develop the FS. The FS assumed that the pipe diametre is 26–28 inch (65–70 cm) and delivery capacity is 8 bcm/y. The distance from Sakhalin I to Tokyo and Niigata is 900 miles (1,400 km) and 700 miles (1,120 km) respectively. The FS concluded the project was technically and commercially viable.

However, the Japanese utilities decided to give a blessing to Sakhalin LNG rather than Sakhalin pipeline gas. A breakthrough was made from Sakhalin II’s LNG export to Japan during the first half of 2003. Three Japanese utilities, Tokyo Gas, Tokyo Electricity and Kyushu Electricity agreed to import a total of 2.8 mt of LNG from Sakhalin II from 2007. In 2004, SEIC announced that Toho Gas and Tokyo Electric-ity agreed to import 0.6 mt/y of LNG from Sakhalin Islands (See Table 39). Basically the contracts with the Japanese utilities have wiped out the possibility of pipeline gas supply from Sakhalin I to Japan until 2012–13 period.

Signed year Company Volume Contract Period

2003 Tokyo Gas 1.1 mt/y 2007–2031

Tokyo Electricity 1.2 mt/y 2007–2029

Kyushu Electricity 0.5 mt/y 2010–2031

2004 Tokyo Electricity 0.3 mt/y extramaximum 0.7 mt 2007–2008

Toho Gas 0.3 mt 2010–2033

Sub-Total 3.4 mt/y + 0.7 mt 2007–2033

Table 39. Sakhalin LNG Supply to JapanSource: Dr. Keun-Wook Paik

It was not a co-incidence that Sakhalin I began to float the idea of gas supply to north-eastern provinces soon after SEIC’s LNG deal with the Japanese utilities. Reportedly, the idea of gas supply to China was originally promoted by Rosneft, a shareholder of Sakhalin I project. Sakhalin I consortium plans to resume the talk with the Chinese, halted over differences on gas price in 2002.37 In terms of location, north-eastern provinces in China are well positioned to be the beneficiaries of Sakhalin offshore gas development. According to SD-PC’s long term plan, China is also considering of importing Sakhalin offshore gas to Heilongjiang province during the period of 2011–2020. China has studied the possibility of Sakhalin gas import to Heilongjiang

97

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Jilin and Liaoning provinces in late 1990s but did not take any step on this option as the priority was given to Irkutsk gas and Sakha gas.

Korea’s interest in Sakhalin gas dated back to early 1994 when the Korean Government and companies have considered the possibility of initiating the LNG supply from the Lunskoye gas field. Then a minority equity positioning in the Sakhalin II project has been studied continuously.

Since 2000, Sakhalin Islands administration intensified its efforts to secure the LNG market for Sakhalin II project’s 9.6mt/y LNG scheme, but the ambitious 2005–6 export timetable was extremely difficult to meet without a market commitment. This is the reason why Sakhalin regional governor Igor Farkhutdinov is re-peatedly telling that Sakhalin region is interested in supplying gas to Korea, and the gas supply to Korea could begin in 2005–6. Shell which has 55% of equity shares of Sakhalin Energy was lobbying very hard to secure an early commitment from Korean government. Due to Korea’s gas industry privatisation drive, however, SEIC’s fierce lobbying to penetrating Korea’s gas market did reach to nowhere.

In November 2000, Mr. Yong-Soo Kang, vice president of Kogas delivered an interesting paper at an interna-tional conference. He said that “The most possible candidate in Russian gas project for the Northeast Asian gas market are the Irkutsk project and the Sakhalin project….. Kogas hopes to carry out the feasibility study on the Sakhalin project to see how much the Sakhalin project will contribute to the Korean gas market and to find possible ways to cooperate each other in the region. Then he added that for the implementation of Sakhalin Project, two different options can be considered. One is the pipeline gas option which is to con-struct the pipeline through Khabarovsk, Vladivostok, and North Korea, and the other is the LNG option which is to construct the export terminal in the ice free southern port of the island. The length of pipeline from Sakhalin to Korean gas market is about 2,300 km and the day of voyage for LNG carrier is about 2.5 days compared with 7 days from Southeast Asian countries and 15 days from Middle East countries”.38

However, Sakhalin I Project has never shown its interest in the option of gas supply to the Korean Peninsula by pipeline via North Korea. Strictly speaking, Kovykta gas project cannot compete with Sakhalin offshore gas project as the latter is much more economical. In fact the distance from northern Sakhalin to Korea is around 2,700 km and the majority of Russian section terrain is flat. The Sakhalin pipeline option should be much cheaper than that of Kovykta project.

98

Delivered Price to Korea (US$ / mmbtu)

Gas field Transit Arrival Transportation TT+ gas Countries Country Tariff (TT) field cost

Sakhalin Russia, China, N. Korea S. Korea 2.401 2.901–3.401

Russia, N. Korea S. Korea 2.364 2.864–3.364

Yakutsk Russia, China, N. Korea S. Korea 2.795 3.295–3.795

Russia, N. Korea S. Korea 3.083 3.583–4.083

Irkutsk Russia, Mongolia, China S. Korea 3.124 3.624–4.124

Russia, Mongolia, China S. Korea 3.153 3.653–4.153

Russia, China, N. Korea S. Korea 3.027 3.527–4.027

Table 40. Projected Delivered Gas Price to KoreaSource: Sang-Kon Lee, “Energy”, in Choong-Yong Ahn and Chang-Jae Lee, ed.,Northeast Asia Economic Co-operation: The first step towards Integration (Seoul: Pakyoungsa, 2003), p. 89.

However, Moo-Hyun Roh Government has shown a serious interest in the option of Sakhalin gas supply to the Korean Peninsula by pipeline via North Korea. South Korea’s national security advisor Jong-Il Ra said that “thermal power stations drawing from Russian gas would provide a peaceful alternative to Pyongyang’s nuclear programme… This is one of the possibilities we are looking at… Gas could be drawn from either Irkutsk or Sakhalin.” Advisor Ra added that Seoul’s plans for a gas pipeline were at an early stage and had not been discussed in detail with its allies or North Korea”.39

It is worth noting that there was a major difference of stance towards this Sakhalin pipeline gas option be-tween the president office and Kogas and Ministry of Commerce, Industry and Energy, and currently Korean government’s priority is given to the Irkutsk gas option.

Three Options for Sakhalin Gas to the Korean Peninsula

The main concept of Sakhalin pipeline gas introduction to the Korean Peninsula is that gas for power plant would replace the problematic nuclear power generation option once for all. The most ideal way to take care of gas for power plant in line with the pipeline gas introduction to North Korea is to build a brand new eight units of gas fired power plants alongside the 900 km North Korean territory.

99

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

1) Gas for Power Only Option

LWR Plants – 1,000 MW × 2 units

Suspended

Gas fired Power Plants – 250 MW × 8 units

Development in line with the pipeline construction– It requires a total of US$ 5.3–6.0 billion, of which US$ 3.5–4.0 billion for pipeline, and US$ 1.8–2.0 billion for power plants.– For a new transmission line within 8 cities, US$ 0.25 billion is required.

The total cost: US$ 5.55 –6.25 billion

2) LWR + Gas for Power I. Option

LWR Plants – 1,000 MW × 1 unit

Development with a half capacity– As the cost of 2,000 MW nuclear power generation is US$ 2.8 billion, it would cost US$ 1.4 billion for 1,000 MW. Including the basic cost, it would be at least US$ 3.0 billion. – The project requires a nation-wide power transmission line (US$ 1.0–1.5 billion)




3) LWR + Gas for Power II. Option

LWR Plants – 1,000 MW × 2 units

Development with the full capacity– As the cost of 2,000 MW nuclear power generation is US$ 2.8 billion, and the original total plant cost is US$ 4.7 billion. – The project requires a nation-wide power transmission line (US$ 1.0–1.5 billion)




100

3.4 Summary

After submission of FS result in November 2003, Korean Government started to study the result of the three years study and the final decision was supposed to be made around end of March 2004. It is worth noting that a working group meeting for Irkutsk project was held in CNPC during February 10–12, 2004 and this Beijing meeting decided the schedule of general meetings and joint co-ordination committee meetings: March 29–31 in London, April 19–21 in Seoul, May 10–12 in Beijing, June 7–9 in Moscow, and June 21–23 in Seoul.40 The start of commercial negotiations without Government’s final approval indirectly confirms that the Ministry of Commerce, Industry and Energy is ready to approve the project as soon as the two major issues (*see Appendix B) blocking the go-ahead of Kovykta project are settled.

DPRK authority did never admit their interest in initiating the pipeline gas introduction rather than KEDO project completion officially, but 2001 MOU with a Dutch consortium and 2002 agreement with FSI En-ergy indirectly confirms DPRK authority is very interested in pursuing the pipeline option. The stumbling block lies in a fact that the issue of KEDO’s future is not finalised.

There are three major pipeline gas supply options for the Korean Peninsula. The front runner is the Kovyktin-skoye field in Irkutsk region, followed by Chayandinskoye gas field in Sakha Republic. The last is Sakhalin I project whose priority was to penetrate gas market. Due to Sakhalin II’s LNG supply to the Japanese utilities, however, the option of Sakhalin I’s pipeline gas supply to Japan before 2012–13 is evaporated. ExxonMobil never showed its interest in pipeline gas supply to the Korean Peninsula, in particular via North Korean terri-tory, and both Kogas and Ministry of Commerce, Industry and Energy are very strongly opposing the option of pipeline gas passing through North Korean territory thanks to the supply security concern.

Korea’s gas industry has expanded very rapidly due to construction of a 2,440 km nation-wide natural gas trunk network. Unlike Japan where the ratio between gas for power and city gas sectors are 70% vs. 30%, Korea’s gas demand is driven by city gas sector. During the IMF period, power generators preferred the cheap coal for power option rather than the gas for power. Without the expansion of city gas sector based on the pipeline network development, it would have been very difficult to absorb the volume initially allocated for the power sector. During the last few years, Kogas could not decide a major gas supply contract due to the privatisation issue and Russian gas import by pipeline from 2008. MOCIE cannot continuously delay the gas supply contract any further. This is the reason why Kogas invited a bidding for 5 mt/y of LNG supply for 20 years from 2008.41

In 2003, POSCO and SK’s LNG supply contract with Indonesia’s Tangguh project signalled a turning point in Korea’s gas supply pattern, and in July 2004 MOCIE virtually approved LG Group’s scheme of 1.5 mt/y of LNG import from 2008 9starting 0.7 mt/y during 2004–6 period and 1.3 mt/y in 2007).42 If KEPCO’s proposal for its own LNG supply is also approved by MOCIE, Kogas’ monopoly position as an exclusive gas supply source will collapse. It will be more difficult for Kogas to save the 7 mt/y of pipeline gas market continuously unless an earliest breakthrough is made in the trans-national pipeline development.

101

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Appendix B: The Factor of Pipeline Route and Gas Price

The biggest obstacles for Kovykta gas supply to South Korea via China are the role of Gazprom in the project and the thorny border price issues. Initially the uncertainty of the scale of proven gas reserves of Kovykta gas project was also a major concern to both CNPC and Kogas but now the reserves are more than big enough to handle the 30 bcm/y of gas export over 30 years.

The Role of Gazprom as Co-ordinator of gas export to Northeast Asia

There was confusion about the role of coordinator with regard to Kovykta gas export to Northeast Asia. Gaz-prom argues it has the mandate to co-ordinate the gas export projects from the central authority. In fact, dur-ing the key not speech at the 22nd International Gas Conference held in Tokyo in June 2003, Alexei Miller, CEO of Gazprom officially confirmed that Gazprom has been authorised by the Government to or-ordinate the establishment of a united system for gas production and transportation.43 However, his talk did not give any hint how the co-ordinating role would be taken care by Gazprom.

BP-TNK with a controlling stake of 62 percent in Russia Petroleum is desperate to secure a solid support from Gazprom. Industry officials have said recently that Russia is considering changing the source of the gas supply to China and South Korea, eyeing gas from the Republic of Sakha instead of Kovykta in the Irkutsk region. In January 2004, Gazprom said there were “numerous violations” in the Kovykta license that would have to be resolved before it would participate. Gazprom has outstanding offers to join the project from all the shareholders. Vekselberg said Gazprom “is a little afraid to lose their position (as the gas export monopoly), but we don’t want to change anything.” He said it was possible to have a “more sophisticated“ arrangement with Gazprom that would allow it into the project without necessarily requiring the shareholders to sell it an equity stake. “We’re ready to organize gas exports through Gazprom,” he said, noting the proposition doesn’t mean Gazprom would have “total control“ of the pipeline but could perhaps have “operating control”.44

According to BP-TNK board member and project manager Sergei Tulinov, the scheme for Gazprom’s entry into the huge Kovykta project will probably be determined by July 2004, and there are many ways Gazprom could join the project besides purchasing shares in Russia Petroleum. Irkutsk region Governor Boris Govorin said earlier that Gazprom should buy shares in Russia Petroleum from the regional government and Interros, which own respectively 10.78% and 25.82% of the company.45 These two reports indirectly confirm that Gazprom’s stance towards the project development is decisive.

Pipeline Route

During the third session (July 2002) of the co-ordinating committee for managing work to draft the Kovykta project FS, the Chinese party asked the western route of the gas pipeline (Mongolian line) will not be con-sidered from now on.

According to Xinhua news agency’s China OGP, the reasons China wants to have the eastern route rather than western route are threefold:

102

— The main reason is China prefers to minimising the political risk and saving the transit fee by avoiding a transit country, Mongolia.

— The second is the economic benefits brought by the pipeline could make the Mongolians suddenly richer than people in China’s inner Mongolia, a potentially negative influence on the stability in the Autono-mous region.

— The third is by choosing the east route, China will be able to deliver the economic benefits of the pipelines to northeast China, a region in desperate need of economic and social benefits from the Sino-Russian oil and gas pipelines.

Strictly speaking, Mongolian line is the most economic one for all party. However, the giant discovery of Su-lige-6 gave enough space for the Chinese planners to re-consider its stance towards the Mongolian route. The exclusion of the Mongolian route option is a fatal blow to South Korea as there is no chance that the price of the eastern route could be as competitive as LNG price. Considering that a report prepared by Kogas for the Parliament’s Trade and Industry Committee annual inspection in October 1997 argued that the imported pipeline gas price will be 22–25% cheaper than that of LNG, Kogas will have a difficult time in justifying to import more expensive gas through the Manzhouli routes.

Mongolia Route Manzhouli Route I Manzhouli Route II

Kovykta– Kovykta– Kovykta––Irkutsk– –Irkutsk– –Irkutsk––Ulan Bataar– –Manzhouli– –Manzhouli––Beijing– –Harbin– –Harbin––Shandong Peninsula– –Shenyang– –Shenyang––Yellow Sea– –Shinuiju– –Dalian––Pyeongtaek –Ilsan– –Yellow Sea– –Pyeongtaek –Pyeongtaek

3,819 km, of which: 4,065 km, of which: 4,249 km, of which:— 1,027 km in Russia — 1,850 km in Russia — 1,850 km in Russia— 1,017 km in Mongolia — 1,879 km in China — 1,659 km in China— 1,490 km in China

Table B–1. Proposed Pipeline RoutesSource: Ministry of Commerce, Industry and Energy (MOCIE), Korea

At present, Korean side is only talking about the Manzhouli route I and II, and Korea’s preference is the Man-zhouli II route as it would be bypassing the North Korean territory and the construction and maintenance cost would be cheaper than Manzhouli route I option. During the Parliament hearings in late September 2003, Kogas president Kang-Hyun Oh said that the cost of pipeline gas passing through DPRK will be 1.8 times expensive than that of the Yellow Sea line, assuming the gas supply period is 30 years. He also added that the timing of pipeline gas supply could be delayed to 2010–2013 from 2008.46

103

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Gas price

It will be eventually the city gate price of this imported pipeline gas that would decide the fate of this Kovykta project. This is the most difficult part. The Russian side wanted to have US$ 100 / 1000 cm level price, but is willing to come down to US$ 75 /1000 cm. The Chinese side wants to pay US$ 20–25 / 1000 cm as the consumers in north-eastern China cannot afford to pay the much higher price.

According to the Gazprom’s calculation, the production cost alone represents US$ 30 / 1,000 cm and the transportation cost is at least US$ 30 / 1,000 cm, without adding tax and profit. Gazprom is not sure whether China is really ready to take the price of US$ 70/1,000 cm.

The real pressure on the gas price comes from the LNG price secured by China in August 2002. China OGP, Xinhua News Agency reported the following detailed price breakdown, as shown in Table 9 & 10. Considering that CNOOC has initially projected that the LNG price China would get will be around US$ 3.84 / mmbtu, there is over US$ 1.0 / mmbtu price discount when the Indonesia’s Tangguh price is applied. (Author’s interviews with industry and financial sector specialists tell the LNG price delivered to the Chinese soil will be around US$ 2.5 / mmbtu. The price is still lower than US$ 3.0 / mmbtu even after the regasifica-tion. Indeed it is a great bargain price.)

BP Indonesia ALNG Qatar

Wellhead gas cost 0.60–0.80 0.65–0.95 0.55–0.75

Liquefaction cost 0.45–0.65 0.40–0.60 0.40–0.60

Transportation 0.45–0.65 0.65–0.85 1.00–1.10

Regasification 0.30–0.60 0.35–0.55 0.40–0.60

CIF cost 1.80–2.70 2.05–2.95 2.35–3.05

Table B–2. The Estimated Breakdown of LNG Price(Unit: $/mmbtu)Source: HSBC, quoted by China OGP, vol. 10, no. 16, August 15, 2002.

yuan/cm US$/mmbt

Receiving station price 1.176 3.838

Gasification cost 0.145 0.473

Average cost of pipeline transportation 0.130 0.424

City gate price (VAT not included) 1.451 4.736

City gate price (VAT included) 1.622 5.294

Table B–3. LNG Price for a 6 mt/y Supply Initially Calculated by CNOOCSource: China OGP

104

Industry sources confirm that this unprecedented price opened the door for a new LNG price era in North-east Asia. LNG suppliers were very unhappy about this massive price discount that would wipe out the Asian price premium which Japan and Korea have taken for granted to pay for a long period.

As shown in Table 39, during the first of half of 2003, Sakhalin II project announced that a total of 2.8 mt/y of LNG—of which 1.2 mt/y for Tokyo Electricity, 1.1 mt/y for Tokyo Gas, and 0.5 mt/y for Kyushu Electric-ity from 2007 were signed. Sakhalin Energy Investment Co (SEIL) refused to expose anything related with the delivered gas price and only highlighted the short distance from Sakhalin Islands to Japan, but industry sources are confirming that the price is hovering around US$ 3.5 / mmbtu. As shown in Table B-4, the average LNG price to Japan in 2002 was US$ 4.27 / mmbtu. The figure indirectly confirms less than 20% discount was made. 47 In other words, Japan got some discount from the Sakhalin LNG price, but the scale of discount is not as good as the Guangdong and Fujian LNG price.

KoreaCIF JapanCIF EU CIF UK(Heren NBP index) USAHenry Hub

1985 – 5.23 3.83 – –

1986 2.77 4.10 3.65 – –

1989 3.30 3.28 2.09 – 1.70

1991 3.56 3.99 3.18 – 1.49

1993 3.35 3.52 2.53 – 2.12

1995 3.37 3.46 2.37 – 1.69

1996 3.80 3.66 2.43 1.85 2.76

1998 2.83 3.05 2.26 1.92 2.08

2000 5.03 4.72 3.25 2.68 4.23

2001 4.84 4.64 4.15 3.22 4.07

2002 4.24 4.27 3.47 2.58 3.33

Table B–4. Gas Price Comparison (Unit: US$ / mmbtu)Source: BP Statistical Review of World Energy (June 2003) & MOCIE (2002)

In August 2003 when Indonesia’s Tangguh project was chosen as the POSCO & SK’s 1.15 mt/y of LNG sup-plier, the price factor played the most important role. The price reported to the Korean Government is as good as that of Guandong and Fujian LNG price. It remains to be seen whether LNG price offered to both CNOOC and POSCO/SK will be a prelude of new LNG price regime in the coming years.

105

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Against this unprecedented LNG supply price, to secure the pipeline gas price 20–25% cheaper than the dis-counted LNG price is simply not possible. Even to secure a pipeline gas price around US$ 3.0 /mmbtu is a very tough target to achieve.

It is also worth noting that China’s stance towards the Russian pipeline gas can not be justified if China’s domestic pipeline gas price is considered. In mid-September 2001, PetroChina announced that the average gas price for West-East pipeline will be 1.327 yaun / cm (US$ 4.332) This is a guideline price prepared by the State Development Planning Commission (now National Development and Reform Commission) for the WEP’s 12 bcm gas. The guideline price is composed of 0.45 yuan / cm (US$ 1.47) as well head price and 0.877 yuan / cm (US$ 2.87) as the transportation tariff.

City gate price announced City Gate price announced mid-September 2001 in September 2003

Yuan / cm US$ / mmbtu Yuan / cm US$ / mmbtu

Henan Province 1.16 3.786 1.14 3.721

Anhui Province 1.24 4.048 1.23 4.015

Jiangsu Province 1.31 4.276 1.27 4.145

Shanghai 1.35 4.407 1.32 4.308

Zhejiang Province 1.37 4.472 1.31 4.276

Average 1.327 4.332 1.27 4.145

Table B–5. West-East Pipeline Guideline Price by SDPCSource: China OGP, Xinhua News Agency & Interfax China Energy Report

Due to this expensive domestic pipeline gas price, power producers are refusing to sign the take-or-pay con-tract with PetroChina. The producers are arguing that the price over 1.1 yuan/cm is not acceptable.

If the Chinese authority changes its stance towards the pipeline route and agrees to accept the Mongolian route, the pipeline gas price to the Bohai Bay areas will be definitely lower than US$ 3/mmbtu, and there is a very strong possibility of setting the city gate price in Inchon at US$ 3.0–3.2/mmbtu.

One thing very certain is that the pipeline passing through Manzhouli will not offer a kind of price the Mongolian route can provide. This price issue will be a very thorny part of negotiation for the introduction of Kovykta gas to China and Korea.

As mentioned earlier, Gazprom proposed Kogas a new pipeline route for Kovyta gas export to Korea during in early Moscow meeting. Gazprom is ruling out the pipeline route passing through China and envisages a kind of parallel oil and gas pipeline towards Nakhodka and then the extension of gas pipeline South Korea via

106

Donghae (or Sea of Japan). It may make sense to the Russian top leaders in terms of maximising the benefit of oil and gas development in East Siberia and Sakha Republic and the export to Northeast Asia. However, the economics of the gas pipeline will not be easy to justify the development. Kogas did not take this pro-posal positively. Considering that Kogas management is placing a top priority to the price competitiveness of the gas supply, Gazprom will have a very difficult time to persuade Kogas to take the expensive gas from the newly proposed route. China will not be the exception.

Appendix C: Korea’s Natural Gas Industry and the Gas Market Availability

Natural gas expansion in Korea is regarded as a great success case in the industry’s expansion. A western major executive described Korea’s gas expansion as follows: “Kogas was established by the Korean government to handle the construction and operation of LNG terminals, importing LNG and transportation of the im-ported LNG domestically. Until 1992 when the LNG import scale reached 4.6 bcm/y, Kogas returns were specifically fixed at 0% to underpin the early development of the gas import and transmission infrastructure. In parallel, a rolling programme of market development in local distribution companies was undertaken, and city gas companies were financed by cheap government loans to cover up to 80% of the cost of pipeline construction.” It is not an exaggeration to say that Korea’s gas expansion was a result of government’s prefer-ential policy and the domestic trunk pipeline development. In fact, in late December 2002, a total of 2,442 km nationwide natural gas pipeline network was completed after 12 years construction with 2.5 trillion won (roughly US$ 2.1 billion) of investment.

According to Korea’s city gas business regulations, the Ministry of Commerce, Industry and Energy (MO-CIE) should announce Korea’s Long Term Gas Supply Plan every two years. The 4th Long Term Natural Gas Supply Plan (LTNGSP) was officially announced by the Ministry of Commerce, Industry and Energy (MO-CIE) in March 1999, and a year later the 5th LTNGSP was announced in March 2000. The 6th LTNGSP was announced in November 2002 and the 7th LTNGSP is expected to be announced in October or November 2004.48

107

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

City Gas Power Residential Commer-cial Industrial Sub-Total Generation Total Demand

1994 1.612 (66%) 0.536 (22%) 0.306 (12%) 2.454 (100%) 3.329 5.783

1997 3.768 0.959 1.043 5.770 5.377 11.147

2001 E 5.487 1.567 2.526 9.580 6.406 15.986

2001 A 5.720 1.831 2.749 10.300 5.287 15.587

2002 6.061 1.845 2.937 10.843 5.269 16.112

2003 6.639 2.020 3.245 11.904 6.355 18.259

2004 7.002 2.163 3.504 12.669 7.224 19.893

2005 (5) 6.893 2.073 3.132 12.098 6.202 18.300

2005 (6) 7.377 2.333 3.773 13.483 6.500 19.983

2006 7.892 2.483 4.035 14.410 6.727 21.137

2007 8.290 2.612 4.282 15.184 7.305 22.489

2008 8.666 2.747 4.542 15.955 6.228 22.183

2009 9.023 2.891 4.819 16.733 4.671 21.404

2010 (5) 7.715 2.850 4.352 14.917 6.054 20.971

2010 (6) 9.368 3.076 5.038 17.482 4.168 21.650

2015 (6) 10.902 3.857 6.484 21.343 6.997 28.240

AnnualGrowthRate 4.7% 5.5% 6.3% 5.3% 2.0% 4.3%

Table C–1. Korea’s Long Term Natural Gas Demand Projection (Unit: bcm)Note: 1. 2001 E means 5th LTNGSDP estimate, and 2001 A means actual record.2. The figures of power generation include IPPs.3. (5) means 5th LTNGSDP estimate, and (6) means 6th LTNGSDP estimate. Source: Ministry of Commerce, Industry and Energy, The 6th Long Term Natu-ral Gas Supply and Demand Plan (1999–2015), November 2002.

108

Gas demand for power generation during the 6th LTNGSP period is projected to make a modest increase with a growth rate of 2.0%, it is lower than that of 2.2% by the 5th LTNGSP. In terms of volume, gas demand for power generation during 2001–2010 is projected to be around 4.2–7.3 mt. In short, Korea’s long term gas demand projection confirms that the gas expansion until 2010 will be driven not by power generation but by the city gas.

As witnessed during the 4th–6th LTNGSDP projection, the government demand projection’s figure was al-ways lower than the actual demand. Kogas has taken care of the supply based on the seven main long-term supply contracts from Indonesia, Malaysia, Qatar, Oman, and Brunei. After 1997, Kogas did not sign any long term contract due to the Kogas privatisation issue that could make a new supply contract very difficult in case the gas supply business is privatised. Besides this, Kogas was trying to save the pipeline gas volume for the Kovykta gas import. However, the growing demand caused a lot of problem49 and Kogas has decided to adopt a relatively short term contract option to take care of the supply shortage. Kogas projected the supply shortage will reach to 2 mt/y in 2007, and 5.1 mt/y in 2010.

Kogas LNG supply strategy is to apply a short term supply contract to cover 3–5 years from 2004 and then to pursue a long term contract after 2007 period. As for a new long term LNG contract, the decision will be made after March 2004 when the 7th Natural Gas Supply and Demand plan is finalised. (As discussed above, recently Kogas announced the 5 mt/y of long term LNG supply bidding, and it signals MOCIE and Kogas policy change towards the long term LNG supply.) This is the reason why Kogas has signed two seven years supply contract with Australia and Malaysia during the first half of 2003.

Contract Project Name Quantity (mt) Period Date

Indonesia Arun III* 2.3 1986–2007 83.8

Korea II 2.0 1994–2014 91.5

Badak V 1.0 1998–2017 95.8

Malaysia MLNG II 2.0 1995–2015 93.6

Qater Ras Laffan 4.92 1999–2024 95.10

Oman OLNG 4.06 2000–2024 96.10

Brunei BLNG* 0.7 1997–2013 97.10

Australia NW Shelf* 0.5 2003–2010 03.01

Malaysia MLNG Tiga 1.5–2.0 2003–2010 03.05

Table C–2. Long Term Import Contracts Note: Both ArunIII, BLNG and NW Shelf were based on ex-ship supply while the rest were based on FOB.Source: Ministry of Commerce, Industry and Energy, November 2002; Gas Matters, May 2003.

109

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Year Supply Shortage Volume (mt/y)

2004 0.64

2005 0.12

2006 0.62

2007 1.99

2008 4.15

2009 3.47

2010 5.09

Table C–3. Projected LNG Supply ShortageSource: Kogas, quoted by the Gas Industry News, August 5th, 2003.

In August 2003, Kogas decided to increase the emergency stock volume from current 3–5 days to 10–15 days after 2005. Initially Kogas planned to build 61 units of gas storage tanks in 2010, 67 units in 2012 and 74 units in 2015, but decided to complete the 72 units of storage tanks until 2012. In this case, Kogas could increase the monthly stock operation period to 10–20 days in 2008, and to 15–25 days after 2009.

As shown in Table C-3, the scale of LNG supply shortage in 2008 reaches to over 4 mt/y. If the announced 5 mt/y long term LNG supply bidding goes ahead, there will not be enough space for the trans-national pipe-line gas around 2008. It remains to be seen whether Kogas and MOCIE can afford to save the gas market for pipeline gas from Russia while pursuing this major LNG supply contract.

Natural Gas in the Power Industry

The power generation sector in Korea is dominated by the state owned Korea Electric Power Corporation (KEPCO) whose ownership structure is composed of five groups: government 32.4%, Korea Development Bank 21.6%, Korea Deposit Insurance Corp 5.1%, Seoul Bank 1.3%, and others 39.6%.

As of 1998, the state company operates 85% of installed capacity and 100% of all transmission and distri-bution facilities. This monopoly situation is set to collapse at the start of privatisation of power industry. According to the promotion schedule of setting-up KEPCO’s subsidiary generation companies, as shown in Table C-4, a four stages deregulation procedure will be implemented. The first out of the five GENCOs should be disposed by late 2001 or early 2002.(see Table C-5).

110

Stage One

Preparation of Cost based Pool: –2001— Separation of KEPCO into power and transmission /distribution business— Dividing KEPCO’snon-nuclear generation assets into five wholly owned— generation subsidiaries (GENCOs)

Stage Two

Introduction of Price based Pool: 2000–2002— All power generated to be sold in the Power Pool Market on a system marginal price basis— GENCOs to be permitted to supply directly to large users— GENCOs to be sold in part to the private sector

Stage Three

Wholesale Competition: 2003–2009— KEPCO’s distribution operation to be split into Regional Electricity Companies (RECs)— RECs to be permitted to choose the GENCO from whom they wish to purchase power— RECs to be sold to the private sector— GENCOs to be permitted to sell power directly to distributors, brokers or customers outside the pool

Stage Four

Retail Competition: 2009 onwards— Retail customers to be eventually permitted to choose their power source from any distribution company or broker on market terms

Table C–4. Korea’s Power Industry Privatization50

Source: KEPCO’s GENCO Restructuring Promotion Scheme & Yong-Soo Kang, “Effects of Market Liberalization on LNG Contracts”, presented at World LNG Summit: Growth Markets, Suppliers, Contracts, Technologies in the Asia Pacific and Atlantic, organised by the CWC group in London during September 14–15, 2000: Eui-Soon Shin, “Restructuring of the Korean Electric Power Industry”, 22nd International Association for Energy Economics conference proceedings Vol. 2, pp. 250–252.

111

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Table C–5. Five GENCOsNote: O, G&DC means oil, gas and domestic coal.KOREPO: Korea Eastern Power Co.KOMIPO: Korea Midland Power Co.KOWEPO: Korea Western Power Co.KOSPO: Korea Southern Power Co.KOWESPO: Korea East-West Power Co. Source: KEPCO.

Currently Korea has six IPPs operating—Anyang/Puchon, Hanwha, LG Power, Hyundai, SK and POSCO, but these will constitute only 6% of total generation capacity. This IPP scheme was announced first in 1996 and there were four main purposes behind introducing IPPs into the power generation business. The first is to introduce competition gradually. Secondly, to increase efficiency further. Thirdly, to lessen the huge capital expenditure burden from the state power company’s shoulder. Fourthly and finally, to allow state corpora-tions to gain experiences in designing, constructing and managing power plants which then can be applied for the state company’s overseas projects.

When the IPP scheme was announced, as many as eight private companies—Dongbu Energy Consortium, Daelim Energy Consortium (with Japan’s Mitsui and US Mobil), Donghan Energy (a consortium composed of Dong-Ah Construction with Korea Heavy Industries), LG Energy Consortium, Hanjin Construction,

112

Hyundai Energy Consortium, Daewoo, and Yukong Ltd.(Later the name was changed as SK)—were com-peting for two units of 400 MW LNG-fired power plants projects that would cost a total cost of 4000 billion won ($0.5 billion). Initially, Donghan Energy and LG Energy were chosen, but Donghan Energy gave up the project due to the plant site approval problem.

The first IPP project constructed by LG Power began to produce electricity from April 2001. There are three more IPPs schemes—a 470 MW LNG fired plant by Hyundai Energy and two units of 470 MW LNG fired plants by Daegu Electricity, a subsidiary of SK. POS-Energy, a subsidiary of the state-run Pohang Iron & Steel Company (POSCO) was chosen for two units of 500 MW coal-fired power plants in Kawangyang Steel plant in Chonnam Province, but it decided to withdraw the project as Chonnam Province refused to approve the project.

In 1995 POSCO announced proposals to construct LNG import facilities and build several power stations at its Kwangyang Steel Works by the end of the century. POSCO’s US$ 5 billion project plan covers the building of an LNG receiving terminal capable of handling 6 mt/y of LNG, plus power plants with installed generating capacity of 3,600 MW per plant at the Kwangyang plant which would burn LNG and imported coal.

It is worth noting that some western companies were taking an indirect ways to take positions for the power business in Korea. In May 2000, El Paso Energy International confirmed that it signed to take a 50% stake in Hanwha Eenrgy Corp which owns and operates a 1.8 GW power generation facility in Inchon. In June 2000, Texaco Power and Gas took a 25% equity in LG Power which was established to purchase and oper-ate two LNG fuelled plants and district heating facilities from KEPCO and Korea District Heating Corp (KDHC). The Anyang and Buchon plants have a combined capacity of 951 MW and the combined 1,077 giga-calories/hour heat output would be sold to over 170,000 households in the region.

According to Korea electric power statistics, as of 1998 Bituminous and LNG-fired plant’s net efficiency rate is 37.4% and 34.7% respectively while, that of combined cycle plant is 43.0%. Considering that gas-fired CCGTs operate at a net efficiency of around 55–60%, compared with around 38% for typical coal-fired plants, this CCGT based power plant should be the choice for power generation. As shown in Table C-6, MOCIE projects that as much as 47 mt of coal will be used for power generation in 2010, while the use of LNG will be only 5.9 mt. It indirectly confirms that coal’s price competitiveness against natural gas and oil is playing a very important role in selecting the fuel for power generation.

Imported Coal (mt) Domesti Coal (mt) LNG (mt) Heavy Oil (mkl) Light Oil (mkl)

1999 27.54 0.258 4.81 2.87 0.27

2000 29.07 0.285 4.20 5.85 0.40

2005 40.57 0.261 6.05 6.16 0.43

2010 46.76 0.286 5.89 6.81 0.44

2015 48.13 0.199 6.17 6.41 0.29

Table C–6. Fuel Consumption in Power GenerationSource: MOCIE, The 5th Long Term Electricity Supply and Demand Plan: 1999–2015, December 1999.

113

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

In one point, KEPCO had aimed at importing gas for its power generation. The state-run company has es-tablished a LNG project team in 1995 to promote its own gas import policy. KEPCO saw that a timely gas supply would not be guaranteed if Kogas’ current priority in gas supply was made to the residential and in-dustrial sectors rather than the power generation sector. In fact, the pendulum of Kogas’ priority has directed from the generation sector to the city gas sector during the last few years.

At present only Kogas has a license to import LNG. Seemingly, there would be no difficulty in obtaining a license if any private company wants to import LNG and has the necessary facilities. There is, however, a de facto restriction on imports created by Kogas monopoly ownership of existing LNG receiving and storage facilities.

Kogas provides three main reasons against removing its gas supply monopoly. First of all, Kogas is playing an important role in controlling the gas supply and demand balance. Secondly, Kogas worries about investment levels in the case that KEPCO is allowed to handle its gas import directly. Thirdly, an invisible competition in gas supply source searching will deprive Kogas of negotiation leverage in gas price decision making.

KEPCO saw these reasons as not convincing enough to justify any delay of the removal of the gas supply monopoly. Based on the fact that during the summer period KEPCO used to absorb a substantial amount of surplus gas that cannot be stored by Kogas due to Kogas storage tanks deficiency, KEPCO argues that the role of gas demand control is being provided by KEPCO rather than Kogas. Besides this, there were a number of occasions that a gas supply crisis could become a reality due to the late arrival of LNG tankers caused by poor weather conditions. In this context, KEPCO wanted to handle its gas demand in the future by direct import and firmly believed that MOTIE would not be basically against the idea.

Both KEPCO and POSCO are very well positioned to handle the gas supply directly due to the relatively big demand scale. When KEPCO wanted to reduce its use of LNG as the LNG price is three times higher than imported coal and two times higher than heavy oil, Kogas threatened KEPCO that Kogas could move in IPP business to absorb the LNG volume not used by KEPCO. It confirms that gas in the power generation sector will be seriously affected by the price competitiveness.

In July 2003, POSCO & SK announced that Indonesia’s Tangguh project was chosen as the 1.15–1.35 mt/y LNG supply for Kwangyang LNG terminal and power plant. The price was as good as China Guangdong and Fujian price.

On top of this, MOCIE has given a preliminary approval to LG Group’s 1.5 mt/y of LNG supply scheme in July 2004. LG plans to import 0.7 mt/y of LNG during 2004–2006 period, 1.3 mt/y in 2007, and 1.5 mt/y from 2008.

This decision provoked a big protest by Kogas labour union. Consequently, KEEI’s presentation on the analy-sis of the economics of KEPCO’s direct LNG import scheme was postponed. Despite Kogas labour union’s protest, it would be very difficult to stop KEPCO’s plan to handle the LNG import once LG’s LNG import scheme is finally approved. KEPCO’s main point is that the supply competition will offer a competitive price to the consumers, and it is what Kogas cannot object it.

114

This situation change has re-kindled KEPCO’s interest in pursuing its own LNG supply. KEPCO’s direct LNG import will bring a fundamental change of the pattern of natural gas supply to Korea, and its implica-tions to Kogas and MOCIE’s plan to import the trans-national pipeline gas will not be small.

Update – January 2005

Summary of the new development with regard to the pipeline development in Northeast Asia during the second half of 2004

— In late July Petro China informed that it decided to terminate the negotiation with Shell-ExxonMobil-Gazprom consortium for their participation in West-East Pipeline (WEP).

— On August 4th, Gazprom had a meeting with Kogas delegation and informed that the firm would support the gas pipeline directing to Nakhodka rather than the route studied in the three year FS by Russia, China and Korea.

— During the October summit between Russia and China, Russia did not show any hint on the fate of crude oil pipeline, despite Premier Wen’s offer of US$ 12 billion financing.

— In early November, ExxonMobil chairman Lee Raymond indicated the possibility of converting its Sakha-lin I gas export option from pipeline to LNG, even though the suggestion was denied by Exxon Neftegas vice president.

— In late November, it was reported that Gazprom has made a swap deal with Shell for its entry to Sakhalin II project. The core of the deal is Gazprom would get the 25% of the project in return Shell would get a sizable equity in Gazprom’s oil field in W. Siberia. It was also reported that Gazprom could strike a similar swap deal with TNK-BP for its entry to Kovykta gas project.

— In December, reportedly the Russian authority would give the priority to Nakhodka direction crude oil pipeline development, but Transneft would recommend the Moscow authority to give the priority to the Taishet-Skovorodino section and the sideline from Skovorodino to China’s Heilongjiang province.

— At the end of December, the Russian Government decided to construct the crude oil pipeline to Nakhod-ka but details of the plan will not be ready until May 2005.

Based on these developments, it is necessary to update the August report prepared for the Working Group on Energy for the DPRK in August 2004.

The options of pipeline gas supply to the Korean Peninsula based on both Sakhalin and Kovykta gas are still alive, but the Sakhalin option is very fragile to be the priority option for the Korean Peninsula. ExxonMobil wants to avoid a project that could be very badly affected by DPRK factor, and Sakhalin 2’s progress on LNG export is gaining the real momentum. Gazprom has indicated its intention to ask Sakhalin I project to con-sider the conversion of gas export by LNG rather than pipeline.

Kovykta gas project envisaging a 30 bcm/y of pipeline gas export to north China and South Korea is being

115

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

suffered by the Russian politics. Despite the three years FS work, the project is making no progress due to Gazprom initiative to develop the Unified Gas Supply System (UGSS) in Russia’s Far East. This gas pipeline will be very seriously affected by Moscow’s final decision on Nakhodka direction crude oil pipeline. On Dec 31, 2004, Moscow announced that the Nakhodka direction crude oil pipeline will be constructed but the details will not be available until May 1, 2005. METI’s financing package seems to have influenced Moscow’s decision but the question is whether METI’s offer of over US$ 10 billion financing would follow without the settlement of the territorial disputes. Moscow has also sent signals that they could give the priority to the stage by stage development for the long distance crude oil pipeline and to the sideline pipeline to China’s Heilongjiang province.

At present Gazprom is pushing the route passing through Skovorodino–Khabarovsk–Vladivostok, but this pipeline will have a difficulty in finding the market as the region will not blindly wait for this pipeline gas from Russia. If a continuous delay of this pipeline gas introduction is made, LNG dominance in the region will be inevitable. As massive LNG expansion schemes by 2020 is being planned by the three Chinese energy majors, this LNG expansion from China will deliver a huge impact to the region’s LNG trading pattern. In-visible competition to secure the LNG supply among the regional LNG buyers will be strengthened, and the feared consequence will be the survival of LNG premium for northeast Asian LNG buyers. The most effective way in easing this LNG supply problem will be the earliest introduction of pipeline gas from Russia.

As Sakhalin 1 gas to the Korean Peninsula is not favored by ExxonMobil, the alternative for the pipeline gas to the Korean Peninsula is the Kovykta gas. However, the export route has to be redrawn by adopting the northern route preferred by Moscow authority (Kovykta–northern tip of Baikal lake–Skovorodino–Hei-longjiang province).

Kovykta gas supply to north China and Korea through the northern route has a number of advantages

— The gas pipeline can be developed in parallel with the crude oil pipeline supported by Transneft which is prioritizing the section of Taishet and Skovordino’s 2000 km section, and it can save the construction cost significantly

— This gas pipeline to South Korea will be strongly supported by both Kogas and Ministry of Commerce, Industry and Energy (MOCIE) which are very strongly against the pipeline passing through DPRK ter-ritory

— The energy supply to DPRK can be taken care by the side-line (1.5–2.0 bcm/y delivery capacity and 500–600 km distance) from the main trunk pipeline. The main trunk pipeline will not be affected by this side-line to DPRK at all.

— This pipeline gas introduction to both China and Korea will ease the burden from LNG supply competi-tion in the region very significantly, and will help diversity the region’s gas supply sources.

116

117

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Footnotes

1 The two key drivers in our study are the degree of economic reform and the degree of external cooperation, while those in the KEEI study are the speed of liberalization and the scale of resource transfers.

2 Joong-Ang Ilbo, August 17, 2004.

3 Choon-Yong Ahn, ed., North Korea: Development Report 2002/03 (Seoul: Korean Institute for International Eco-nomic Policy, 2004), pp. 459–460.

4 The Gas Industry News, April 22, 2004.

5 Choong-Yong Ahn, ed., North Korea: Development Report 2002/03 (Seoul: Korea Institute for International Eco-nomic Policy, 2004), p. 60.

6 Sung-Gwan Kim, “On the Direction for Rehabilitation and Modernization of the Existing Generation Capacity”, presented at an international workshop on Upgrading and Integration of Energy Systems in the Korean Peninsula: Energy Scenarios for the DPRK of Korea, organized by Italian Ministry of Foreign Affairs, Landau Network-Centro Volta, World Information Service on Energy, and Fondazione Opera Campana dei Caduti, , Como, September 19–21, 2002.

7 According to KOTRA’s North Korea Newsletter (April 2000, pp. 2–3), the Stanton Group based in the United States agreed to increase the 200 MW operating capacity of the Sonbong Heavy Oil Thermal Power Plant to 400 MW. See, Choong-Yong Ahn, ed., North Korea: Development Report 2002/03 (Seoul: Korea Institute for International Economic Policy, 2004), p. 460.

8 A major refurbishment work is being made. See, Joong-Ang Ilbo, April 28, 2004.

9 Technically speaking, the construction period should be 3–4 years. Prof. Tussing’s argument of over ten years time period is indirectly emphasizing the political obstacles.

10 Coal production share between anthracite and brown coal is divided into 80 vs 20 ratio. See, Jong Jin-Chang, “Clean Coal Technology in DPR Korea”, presented at an international workshop on Upgrading and Integration of Energy Systems in the Korean Peninsula: Energy Scenarios for the DPRK of Korea, organized by Italian Ministry of Foreign Affairs, Landau Network-Centro Volta, World Information Service on Energy, and Fondazione Opera Campana dei Caduti,, Como, September 19–21, 2002.

11 Interfax China Energy Report, March 27–April 2, 2004, p. 18.

12 Oil and Gas Journal, Jan 7, 2002.

13 On Dec 31, 2003, KOEC became Ministry of Oil Industry, and the Ministry became the 33rd Ministry in DPRK’s Cabinet. See, Choong-Ang Ilbo, Jan 2nd, 2004.

14 Korasia is a consortium, majority owned and managed by Singapore interests, that deals primarily in shipping and commodities trading.

15 Using Russian technology, North Koreans drilled 14 shallow wells in the basin. None was below 1,000 metres and none penetrated the Cretaceous. According to SVPL, hydrocarbon shows are said to have been found in some of the wells, a positive sign of potential discovery. The area is often called the Tumen River Basin. It extends from Tanchon in the south to Tumen in the north and covers about 1,000 sq. km. SVPL indicated new wells should go to 2,000–3,000 metres.

16 Mark J. Valencia, “Northeast Asia: Petroleum Potential, Jurisdictional Claims, and International Relations”, Ocean Development and International Law 20 (1989), p. 41.

17 The area’s oil potential is estimated at 200 million barrels. In 1990 Leeward Petrochemical Products Limited took over operatorship and a 92% working interest while Meridian retained an 8% stake.

18 Alex Stewart, “Glimmers of hope seen in North Korean basins, markets”, Oil and Gas Journal, January 4th, 1999, pp. 62–65.

118

19 Considering that KOEC became the Ministry of Oil Industry on Jan 1, 2004, it is very confusing the relationship the relationship among the Crude Oil Bureau, Ministry of Crude Oil Industry, KOEC and Ministry of Oil Industry.

20 Petroleum Resources Exploration Co., Ltd. (Petrex) was established in Tokyo on January 4, 1995 as an exclusive overseas agent of General Bureau of Oil Industry, DPR Korea. The staff have been engaged in various oil exploration programs in North Korea since 1990, and have carried out joint studies with their scientists.

21 Miyakawa Jun, a Japanese, imports North Korean books (Rainbow Trading). He is one of the Japanese minority who genuinely desire close ties with Korea. He maintains neighborly contacts with both Koreas. In view of the interest in the oil field development expressed by South Korean Chaebuls, Miyakawa gave an exclusive interview with Sisa Journal reporters on October 31, 1997 in Seoul. Subsequently Sisa Journal published a „positive“ review of the bright potential of North Korean oil fields.

22 According to a map prepared by DPRK authority, a total of 13 wells were drilled in the block (11,000 sq. km) where both Petrex from Japan and Phonenix OEL from Germany have participated.

23 This important issue was intensively discussed by an international workshop titled “Seabed Petroleum in the Yellow Sea: Geological Prospects, Jurisdictional Issues, and Paths to Cooperative Development” co-sponsored by the Woodrow Wilson International Center for Scholars and China Institute of International Studeis, Beijing, April 11–13, 2004. The report is expected to be published at the end of 2004 or beginning of 2005.

24 Interfax China Report, Oct 18–24, 2003.

25 Interfax China Report, June 26–July 1, 2004 & July 24–30, 2004.

26 Until the beginning of 2004 there was no organization representing the oil developing issues within the Cabinet, except some of the energy specialists working within the advisory committee within the governmental structure. Now KOEC is converted into Ministry of Oil Industry.

27 Dong-Ah Ilbo, May 19, 2004.

28 It is China National Petroleum Corp who took advantage of what KNOC has done. In 1997, CNPC made a strategic alliance with Sakhaneftegas, and in 2001 a Preliminary FS work on the giant Chayandinskoye was completed.

29 Soon after the November 2003 FS work completion, Interros announced that its 25.8% equity in Russia Petroleum is on sales. The estimated cost for the equity is at least US$ 500 million.

30 Considering that the 12.88% of Irkutskenergo’s Russia Petroleum was sold at over US$ 40 million in December 2000, the price of EAGC’s 7.1% shares is estimated to be around US$ 20–30 million.

31 Selig S. Harrison, “Toward Oil and Gas Cooperation in Northeast Asia: New Opportunities for Reducing Depen-dence on the Middle East”, Woodrow Wilson International Center for Schloars, Asia Porgram Special Report No. 106 (December 2002), and author’s interviews.

32 Some work has been done before the 1994 when memorandum for the development of East Siberian gas development between CNPC and MINTOPENERGA(the Russian Ministry of Fuel and Energy). In 1991 Baikalekogaz consortium and BP/Statoil alliance conducted a study on East Siberian oil and gas resources in East Siberia in the early 1990s, but BP/Statoil concluded that the study had no incentive for taking further steps due to the lack of immediate market for East Siberian oil and gas export. In 1992 the Baikalekogaz consortium was converted into Russia Petroleum. The same year Canada’s SNC and Lavalin under the sponsorship of Canadian Bitech Corp. carried out a pilot feasibility study on the Irkutsk region’s gas supply project based on Kovyktinskoye development.

33 Alastair Ferguson, ‘Kovykta Project” presented at an International Seminar on Policies and Strategies toward Korea-Russia Energy Cooperation, organized by Korea Energy Economics Institutem in collaboration with Administration of Primorskiy Krai, Russian Federation, Vladivostok, October 7, 2003.

34 Dong-Ah Ilbo, August 5, 2004.

35 Interfax Petroleum Report, March 26–April 1, 2004.

36 Alexey M. Mastepanov, and Victor P. Timoshilov, “Perspectives of Development of Eurasian Gas Pipeline System and Energy Resources of Northeast Asia: Gazprom’s Point of View”, presented at the 8th International Conference on Northeast Asian Natural Gas and Pipeline: Multilateral Cooperation, organised by Northeast Asian Gas and Pipeline Forum, March 8–10th, 2004, Shanghai.

119

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

37 FT International Gas Report, August 1, 2003, p. 14. On June 11, 2004, Sakhalin I consortium singed protocols of intent with Khabarovsk Governor Viktor Ishayev and potential consumers—Khabarovskenergo and Khabarovsk-kraigaz—for future supplies of natural gas from Sakhalin. The first supplies of gas should be made by the start of the 2005–2006 winter season and gas sales to Khabarovsk territory should reach 3 billion cubic metres per year by 2009. See, Interfax Petroleum Report, June 10–16, 2004.

38 Yong-Soo Kang, “The Potential to supply Natural Gas from Sakhalin project to Korean market” presented at the Fourth Annual Conference on Sakhalin Oil and Gas organised by IBC Global Conferences Ltd in London, 20–21 November 2000.

39 Andrew Ward, “Deal for gas pipeline could solve Korean nuclear crisis”, Financial Times, March 31, 2003

40 The Gas Industry News, April 7th, 2004.

41 “Seoul to seek bidders for record 20-year LNG contract”, Financial Times, August 18, 2004. Even though already mentioned before, it is worth noting again that the decision was made soon after Kogas delegation’s meeting with Gazprom in Moscow in early August. During this Moscow meeting, Gazprom proposed a new pipeline route direct-ing Nakhodka and then extended to South Korea via Donghae (or Sea of Japan) and this proposal indirectly signals Kovykta–China–Korea via the Yellow Sea is virtually dead. See, Dong-Ah Ilbo, August 5, 2004.

42 The Gas Industry News, July 12, 2004

43 Alexey B. Miller, “Euroasian Direction of the Russia’s Gas Strategy”, presented at 22nd World Gas Conference Tokyo 2003: Catalysing and Eco-Responsible Future, organised by International Gas Union, June 1–5, 2003, Tokyo.

44 Dow Jones China Energy Report, April 23, 2004.

45 Interfax Petroleum Report, April 16–22, 2004.

46 The Gas Industry News, September 30, 2003.

47 ABARE Economics and ERI’s joint research report pointed out the average real LNG import price to Japan over the period 1995–2001 ranged from US$ 3.27 to US$ 4.84 / mmbtu, in 2001 prices. The average price over the period was US$ 4.02/ mmbtu. Then the report argued that “LNG import prices to eastern coastal China could be marginally (US$ 0.10 / mmbtu) lower than to Japan. (See, ABARE Economics and Energy Research Institute, Natural gas in eastern China: The role of LNG, ABARE Research Report 03.1, p. 7).

48 The city gas demand in 7th LTNGSP will be 22.7 mt or 1.5 mt higer than the 6th LTNGSP projection figure. See, The Gas Industry News, May 31, 2004.

49 In late April 2003, Kogas had to suspend the supply of LNG for the power companies and consequently during April 25 and 30th, the six power generation companies under KEPCO had to use heavy oil or Kerosene instead of LNG. Dur-ing 2002–3 winter period, the LNG supply shortage was caused by excessive demand from the power companies, but this April 2003 supply shortage was caused by Kogas failure to provide the contracted volume to the power companies. Power companies under KEPCO argued that a total of 309.5 billion won (roughly US$ 258 million) loss was caused due to the replacement of LNG with heavy oil and Kerosene during Nov 15, 2002 and March 25. 2003 period.

50 This Power Industry restructuring scheme is completely scrapped. The Korean government will separate the power transmission section until 2008 and will introduce a competition system by setting up independent business units under the transmission section. See, The Gas Industry News, May 31, 2004.

121

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

1. A Preamble

This brief discussion note is prepared for the Ad-hoc Task Force meeting in Geneva, 5 to 8 June 2004. The note highlights a number of key areas pertaining to development and energy, for discussion at the meeting and for further research and elaboration.

The focus of the note is on rural development and rural energy. It presents options that could be considered for implementation within a short time frame to meet immediate food needs of the people, generate liveli-hoods and employment, and help spur economic development. Attention is directed towards coal, as the country has significant reserves, and biogas. The use of biomass in the country has doubled during the past decade.

It is important to identify progrmmes and projects that could be implemented quickly, to build confidence, demonstrate actions and show results. The quick activities should provide a good platform for expansion and scaling up. They should also contribute towards overall energy security and sustained development for the country, attract investments and foster international cooperation.

DRAFT BRIEF DISCUSSION NOTE:ROLE OF RURAL ENERGY IN DPRK

Nay Htun

122

2. Brief Overview of DPRK

The DPRK has an area of 122,762 square kilometers, constituting about 55 percent of the total land area of the Korean peninsula. Most of the country is mountainous, about 80 percent, and the 1998 estimated population is 22.6 million with a growth rate of 1.3 percent. The active labor force is estimated to be about 11 million. About two thirds of the population lives in urban areas, with about 14 percent in the capital, Pyongyang, the remaining one-third is in the rural areas. About 37 percent of the labor workforce is engaged in agriculture, 31 percent in industry, 28 percent in services and 4 percent in construction and mining.

Since 1997, as a result of a series of natural disasters, two consecutive years of floods, followed by draught and tidal waves, urbanization seems to be slowing down and similarly employment in construction and mining.

The country is endowed with natural resources. Coal is abundant, although there is a shortage of coking grades. Other important mineral resources include iron ore, lead zinc, tungsten, mica and fluorite, mer-cury, phosphates, magnetite, gold and silver. The country has a highly motivated, skilled and disciplined work force and a very good network of roads and infrastructures.

3. Economic Development—an overview

From 1910 to 1945 during Japan’s colonial administration, most of the heavy industries were concentrated in the northern part of the Korean peninsula, which was under populated and rich in natural resources. Following the end of the second world war and the partitioning into the Democratic People’s Republic of Korea, DPRK and the Republic of Korea, RoK, almost two third of industries and infrastructures were in the north and the majority of the population in the south.

The DPRK and RoK were severely devastated during the Korean War. However, with its mineral re-sources, coal and hydro power and assistance from Communist countries, particularly, USSR and China, the DPRK developed its economy and industries rapidly and significantly, achieving around 12 percent GDP growth per annum until the late 1960s. The growth and rate far surpassed that of RoK. From the 1970s, due to a number of factors, including decrease of assistance from the USSR, the economy slowed considerably.

In the 1990s, with the changes taking place in the USSR and Eastern European countries as well as the collapse of the COMECOM, the DPRK lost its traditional trading partners. The series of unprecedented natural calamities in three consecutive years during the mid 1990s compounded and exacerbated the eco-nomic situation.

The DPRK economy in 2002 is estimated to be about of that in 1987. Per capita GDP is currently esti-mated to be about US$ 480, translating into a national GDP of US$ 100 billion.

123

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

The 2002 New Year’s Day joint editorial published in all the major newspapers indicated an important evolution of economic policy. It stated the Government’s policy to modernize the economy and increase international cooperation.

In July 2002, a series of reforms were implemented. These included: withdrawing subsidies to state owned enterprises; expanding farmer’s market enterprises (these were introduced on a limited scale in the late 1990’s to revive the agriculture sector following the impacts caused by the series of natural disasters); declassifying state enterprises manufacturing goods as “strategic items” and allowing these products to be sold in the market; and incentives for workers based on their productivity. The first billboard advertising a foreign car, assembled locally, has appeared. These are indications of reforms and transitions into features of a market economy.

International observers and analysts are evaluating whether these reforms are transient or permanent.

Increasing and expanding international cooperation would help strengthen the changes that have taken place.

A major challenge and opportunity is to undertake programmes and projects that will help vitalize the economy, bring immediate benefits to the people and contribute towards meeting the humanitarian needs for food.

The rural economy would be a good entry point.

The country is committed to the idea self reliance, Juche. This is characterized by the over-riding goals of (i) independence in politics, (ii) self sufficiency in the economy, (iii) self reliance in defense.

The Appendix provides two of the many quotations by the late President Kim Il Sung. These are of rel-evance to economic planning and development of the country.

4. Rural Economy and Energy

This discussion note will focus attention on the rural economy and the energy needs.

There is currently a shortage of energy to operate farm machineries, many of which are lying idle due to lack of fuels and spare parts.

By stimulating rural agriculture and enterprises, the potential for stoking the engine for recovery and growth would be activated. It would contribute to increasing agriculture yields, meeting the food security of the country and generate livelihoods and employment pertaining to agriculture, where 37percent of the labor force is estimated to be, as well as job creation in a range of rural enterprises, including small and medium scale agro-industries.

124

The importance of agriculture as a major contributor to GDP has been historically recognized. Following the loss of the DPRK’s traditional trading partners and the series of natural disasters, the role of agriculture has increased its importance. High agriculture growth rates were envisaged in all successive seven-year plans. Agriculture is estimated to contribute from one-fifth to one-third of GDP.

Agriculture output is to a large extent dependent upon availability of fertilizers, seeds, and equally impor-tant and critical, irrigation and farm equipment. The latter inputs require energy. Based on recent UNDP country assessments and FAO studies for the 1998 UNDP Thematic Roundtable for Agriculture Recovery and Environmental Protection (AREP) in DPRK, energy consumption by farming activities is estimated to be as follow:

(In PJ) 1989 1994 2000

Irrigation & Drainage 8.0 4.3 2.6

Mechanized Equipment 23.1 11.4 4.7

TOTAL 33.1 15.7 7.3

From these estimates, there is a significant decline in energy consumption relating to agriculture, with current energy use amounting to about a quarter of that in 1989. Clearly, this has contributed to agriculture outputs, resulting in food shortages.

Fertilizer production has also decreased significantly. Nitrogen production decreased from 302,000 tones in 1989 to 28,000 tones in 2000: and during the same period, phosphates production decreased from 156, 000 tones to almost nil.

The decline in fertilizer production could be correlated with the reduction in energy use, from 14.7 PJ to 0.9 PJ

During this period of 1989 and 2000, coal for cooking and heating in rural areas declined from 74 PJ to 17 PJ. A primary cause is due to the natural disasters and extensive flooding of coal mines in the mid 1990s, most of which have not been rehabilitated for production.

This is a double jeopardy, reducing availability of energy as well as the loss of employment for a large number of miners.

It is important to take into account that the use of biomass (primarily firewood and crop residues) for cook-ing and heating in rural areas have almost doubled, from 22 PJ in 21989 to 42 PJ in 2000. This is to be expected, as this is the most readily available and affordable source of energy for the rural people to meet their needs for survival and cope with the difficulties and hardships they are undergoing.

125

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

The reliance of and increase in biomass use also offer the potential for significantly increasing biogas produc-tion and use as well as for more efficient biomass burning devices.

5. The Role of Coal

Coal occupies a very important role in the development of the country and in the lives of the people. The country has large quantities of proven coal reserves estimated to be around 2 billion tones. The quality varies from low calorie of 5 MJ/kg to anthracite with calorie content of 23 MJ/kg. There is also medium quality brown coal of around 15 MJ/kg.

The DPRK has identified six anthracite mines, with a total proven reserve of 1.2 billion tones, for rehabili-tation. To achieve design capacities of 9 million tones, increasing it from the current 4.5 million tones, the estimated cost would amount to US162 million. Forty percent of the coal would be converted to electricity and the remaining for cooking, heating by rural households, schools and clinics.

Due to the significant decrease in the use of coal over the past decade, increasing production and use to pre 1990 levels, DPRK green house gas emissions will still be compatible with Kyoto requirements.

More research will be undertaken to determine the feasibility of applying clean(er) coal technologies in the rehabilitation of the anthracite mines as well the significant opportunities for improving efficiencies and good engineering practices to reduce emissions.

Research and development in a number of countries, particularly in China, are important and would be further examined and researched for potential adaptation and use in the DPRK.

Amongst the technologies to be further examined are those recommended by the Energy Task Force of the China Council for International Cooperation on Environment and Development, for China’s comprehen-sive and determined coal modernization strategy. These include:— Pollution Control and Waste treatment: e.g. flue-gas clean up of SOx, NOx and particulates; coal bed meth-

ane, and the utilization of fly-ash, coal refuse and mine water.— Coal processing: e.g. preparation, briquettes making, coal blending and coal water mixtures.— Coal conversion: e.g. coal gasification. Gasification makes it possible to use coal with the advances in gas

turbine technologies for power only and for combined heat and power applications. Gas turbines and combined cycles offer substantial cost and thermodynamic advantages compared with steam turbine that must be used with coal combustion. The task force reported that electricity provided through gasification will have air pollutant levels as low as for natural gas combined cycle electricity. Synthetic fuels can also be produced by gasification, providing clean gas for domestic uses, and methanol and Fisher-Tropsch liquids for transportation.

— High Efficiency and advanced power generation: e.g. fluidized beds, pressurized fluidized beds, integrated gasification / combined cycle

126

A strategy to modernize coal through out the life cycle from mining to end use, through increased research, development and application of existing technologies and those that are fast emerging, supported by tech-nical cooperation, assistance and investment offer significant potentials to help speedily revive the rural economy, generate employment, meet the food and energy need of the people. Importantly, as the country is well endowed with coal reserves, attention on this energy source will support the idea of Juche and help render proposals implementable.

6. The Role of Biogas

The conversion of organic wastes through biological aerobic and anaerobic processes to produce methane gas has been known and applied for sometime. The multiple benefits are well known, demonstrated and documented. These include; freely available feed stock (wastes); clean gas (methane); improves sanitation and health (by utilizing the wastes); appropriate for rural areas; decentralized energy source; applicable for house hold use as well as scaling up to large units to serve village and community; and potential for small and medium scale manufacturing enterprises to produce the biogas units.

Biogas can play a significant role in contributing to rural energy needs and rural development.

Further analysis and research would be undertaken to study:— current use of biogas in rural areas,— state of the technologies,— potential locations that would provide wastes at sufficient quantities for village/ community level applica-

tions and the quantities and types of organic wastes potentially available — feasibility of integrated village improvement and development systems, including farmers’ cooperative

markets, using biogas as an energy driving force. Such schemes exist in Northeast Asia and provide sig-nificant economic, development health and environmental benefits feasibility of micro, mini financing schemes to households and entrepreneurs interested in small and medium scale manufacturing.

7. Multi-Functional Energy Platforms

UNDP is supporting an innovative scheme in Africa, based on successful results in Mali. Decentralized energy is provided to villages through small robust portable diesel engines (or other source of fuels, eg. biogas, synthetic gas). A variety of end use equipment are added to the engine for grinding, milling, battery charging, lighting, electricity, water pumping, etc, to support village enterprises. Productivity is increased, livelihoods and employ-ment are generated and poverty decreased. The potential to adapt such schemes will be further examined.

8. Mini and Micro Financing for Expanding Energy Access in Rural Areas

Micro financing is successfully used for an expanding portfolio of purposes. However, not much has been undertaken in the area of energy and there is significant scope and opportunity in production, access and

127

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

service. The recent Workshop in Manila, organized by UNDP, GTZ, USAID, Philippines Development Bank and an NGO, Center for Agriculture and Rural Development, confirmed the important role micro credit and lending for energy can play in expanding and increasing energy availability and services to rural areas.

Increasing and scaling up micro financing to the higher level of “mini-financing” to assist small and medium scale entrepreneurs to provide availability, access and applications for the energy cycle from production to end use within the rural context, is another potential strategy.

Further studies will be undertaken to determine the feasibilities of micro-financing for consumers and mini-financing to catalyze and support small and medium scale entrepreneurs.

9. Enabling Institutional Mechanisms

Building upon the reforms which are taking place, there would be a need to study what would be additional enabling institutional means as well as capacity and capability building measures required for progress in expanding and increasing cleaner coal and biogas energy for rural development.

Reference Sources

UNDP Reports for the First and second Round Tables for Agriculture Recovery and Environmental Protec-tion, 1998 and 2000.UNDP Report on Sustainable Rural development in DPRK, 2004UN Common Country Assessment for DPRK, 2002China Council for International Cooperation in Environment and Development. Report by the Task Force on Energy Strategies and Technologies.2003.Engagement and Development in the DPRK, Report of the Second Annual DPRK Economic Forum, Asia Pacific Center for Security Studies, Honolulu, Hawaii, July 2000.Nautilus Institute Asian Energy Security Network.

128

Appendix: Quotes from the Late President Kim Il Sung

“The peasant market represents a form of trade whereby, at definite places, the peasants sell directly to people part of the agricultural produce, both of the collective economy of the co-operative farms and of the sideline work of individual co-operative members….In the peasant market, prices are determined spontaneously and according to supply and demand and, therefore, the law of value operates somewhat blindly. The state does not plan supply and demand or prices for the peasant market….

Since the co-operative economy and individual sideline production are in existence under socialism, it is inevitable that the peasant market exist, and this is not such a bad thing….There is more good than bad in the continued existence of sideline production and the peasant market in socialist society. We are not yet in a position to supply everything necessary for the people’s life in sufficient quantities, through state channels…..Under the circumstances, what is wrong with individuals producing these things on the side and selling them in the market? Even though it is a backward way, it should still be made use of when the advanced ways are not sufficient to cover everything….As long as the state cannot produce and supply enough of all the goods necessary for the people’s life, we must strictly guard against the “Left” tendency to abolish the peasant mar-ket so hastily…

As for the methods of control, we can only take some technical measures such as regulating the volume of sale per buyer… to limit somewhat the tendency towards concentration of goods in the hand of a few people….”

(Extracts from “On Some Theoretical problems of the Socialist Economy” March 1969)

“One of the important questions arising now in the economic development of our country is to promote trade quickly.. This reality demands further expansion and development of foreign trade. By developing foreign trade quickly in the future, we should actively support those goods that are produced in large quanti-ties in our country and in great demand abroad, and import in time those goods (that) we need. Source s of support should be actively tapped in every field of the national economy, and the production of export goods (should) increase in a big way…….. What is important in developing foreign trade is to make it multilateral and diversified….”

(Report to the Sixth party Congress, October 1980)

129

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

RENEWABLE ENERGY RESOURCES,WITH SPECIAL EMPHASISON RURAL ENERGY, WIND AND ALTERNATIVE FUELS.INITIAL THOUGHTS

Frank Pinto*

My sincere thanks to the Secretary General‘s Personal Envoy for Korea, Mr. Maurice Strong, for inviting me to participate in a working group meeting on energy futures for Northeast Asia with a particular focus on the Korean Peninsula, held in Vevey, Switzerland during 5–8 June 2004, organized on behalf of the United Nations by the University for Peace. My thanks, also, to Mr. William Martin, Chair of the Working Group, for his excellent leadership of the Working Group.

The purpose of the working group was to review economic projections for the region, evaluate energy supply and demand options for the Korean Peninsula and identify possible energy strategies to provide energy se-curity, economic competitiveness and environmental quality for the peninsula. Options considered included natural gas pipelines, clean coal technology, and renewable energy resources.

This presentation focuses on renewable energy resources in the Democratic Peoples Republic of Korea (DPRK) with special emphasis on rural energy, wind and alternative fuels. Development of wind energy through a Global Environment Facility project to be implemented by UNDP will be covered in detail.

130

1. Estimated DPRK Energy Demand/Supply: 1990–2000

The DPRK Energy Demand/Supply breakdown during 1990–2000 is estimated as follows:1

Energy demand 1990 1996 2000

coal and coke 63% 51% 44%

fuelwood and biomass 23% 39% 46%

electricity 9% 9% 9%

refinery products 7% 5% 6%

charcoal neg. neg. neg.

Energy supply 1990 1996 2000

coal and coke 70% 59% 46%

fuelwood and biomass 19% 32% 42%

electricity 4% 2% 4%

refinery products 1% 3% 5%

crude oil 6% 4% 3%

2. Estimated Trend in DPRK Energy Demand by Sector: 1990–2000

The same study estimated DPRK Energy Demand by Sector over the period 1990–2000 as follows:2

Energy demand 1990 1996 2000

industrial 48% 30% 23%

residential 32% 46% 52%

agricultural 4% 6% 7%

transport 3% 2% 2%

public/commercial 3% 4% 3%

other3 10% 12% 13%

131

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

3. Estimated Trend in DPRK Electricity Demand by Sector: 1990–2000

DPRK Electricity Demand by Sector is estimated as follows:4

Electricity demand 1990 1996 2000

industrial 60% 50% 43%

residential 10% 13% 10%

transport 10% 10% 11%

public/commercial 5% 5% 12%

agricultural 2% 6% 9%

other3 13% 16% 15%

4. Energy Issues Affecting DPRK during 1990–2000

What are the energy issues that impacted on DPRK during 1990–2000?— Over three-quarters of the country is non-arable, mountainous terrain with both rural and urban activites

concentrated in the remaining one-quarter of the land surface. It is estimated that around two-thirds of the population lives in urban areas and the remaining one-third in rural areas who have seen their energy services drop by half over the 1990s.

— DPRK, in the 1980s, built a heavily industrialized and energy-intensive economy relying on coal and older technologies. This has contributed to growing inefficiency of energy use. Due to the economic slow-down, the use of coal has decreased from two-thirds to about half the energy mix.

— Key energy sector issues include the very inefficient infrastructure, significant suppressed demand for en-ergy services manifested by electricity outages, a fishing fleet that often lacks diesel fuel, and no incentive for energy efficiency and conservation due to unrealistic energy pricing.

5. Renewable Energy Resources in DPRK

A quick review of the renewable energy resouces in DPRK shows the following:— Being a mountainous country, DPRK has considerable hydropower resource potencial estimated at

10,000-14,000 MW. 4,500 MW has been developed of which only 6% comprises small-scale hydro-power.

— Tidal power potential has been estimated to be large but has been untapped so far.— Biomass, including wood and crop residues, is mainly used in rural areas for cooking and heating, and has

been increasing its share of energy use despite the poor state of forest cover.— Solar energy has some potential but has not taken off.

132

— Wind energy has significant potential, especially in rural areas, due to preliminary data on wind velocities and it is this area which is being targeted by the Government and UNDP with the assistance of the GEF.

6. Current Situation in the Rural Electricity Sector

The current situation in the rural electricity sector has the following characteristics:— The Ministry of Electricity and Coal (MEC) is responsible for all electricity generation, transmission

and distribution and has extended the grid to most rual areas. — Electricity distribution has been based on allocations and quotas since there are no end-user meters.

Metering of electricity consumed by farm “collectives” takes place at county switching stations. Quotas are based on the economic importance of the farm “collective”, its use of irrigation pumping and other factors.

— While MEC normally has to supply grid electricity at highly subsidized rates, counties can also operate their own small hydro facilities and set fees based on a cost recovery formula. The same would apply for solar, wind and other small-scale renewable energy power generation.

7. Rationale for Working in the Wind Energy Area

The rationale for working in the wind energy area can be traced to three elements:— Wind energy development is a stated priority for DPRK. The wind resource is good particularly in the

east and west seacoasts with average reported speeds of 3–4 metres/second. — The rural sector has been hard hit in the last decade by natural disasters with consequent decreases in

energy supply/usage resulting in serious agriculture supply and distribution infrastructure breakdowns, decrease in fertilizer manufacture and severe restrictions on electricity supply. Cooperatives report power availability of 2 hours a day or less in winter.

— This becomes more serious since the rural grid is extensive and the rural sector is heavily dependent on electricity for water pumping, grinding and milling, irrigation and household uses. Thus whatever can be done to increase the access to electricity by the rural population becomes important.

8. Existing Wind Energy Industry in DPRK

The existing wind energy industry in DPRK has the following characterists:— Several small, crudely built 50W systems exist. Some 300 experimental units (50W–3.5kW capacity) ex-

ist but at least half are inoperable. A major industrial complex had undertaken prototype development of a 300W system of a crude design using a carved wooden rotor which cannot operate efficiently.

— In 1986, Denmark donated two Vestas wind generators (90kW) for grid connection. Due to out-of-tolerance voltage and frequency fluctuations on the grid, the synchronous wind generators have never operated. A 75kW system, built in DPRK as a Vestas copy, was erected in a prime wind location but

133

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

has never operated due to major defects.— In 1998, the Nautilus Insitute, a US NGO, funded installation of 7 US wind generators with a total ca-

pacity of 11kW and individual units ranging from 500W–4.5kW to cover 60 households, a school, and a clinic in a cooperative. As of November 1999, 2 of the 7 units were inoperable due to parts fatigue.

9. Highlights of the UNDP/GEF Expected Project

UNDP’s Global Environment Facility (UNDP/GEF) unit has developed a medium-sized project titled Small Wind Energy Development and Promotion in Rural Areas (SWEDPRA). By way of background, research has been carried out in national institutes on wind electric systems for the last 15 years directed by State policy. In 1991, the Governmental Policy on Science and Technology stated that R&D activities in the area of new and renewable energy (NRE) such as solar and wind energy should be further intensified to reliably open the prospects for its utilization.

In 1993 the Government issued its National Action Plan for Agenda 21 focusing on a transition to sustain-able development. In that document the development of NRE, and in particular wind energy, featured as one of the three main strategies. In 1999, as part of its First National Communication Report to the UN Framework Convention on Climate Change, the reduction of carbon emissions through end use energy efficiency measures, improved combustion efficiencies and substitution with new and renewable energies play an important role in DPRK climate change mitigation options, and DPRK reiterated its commitment to developing and disseminating wind energy technologies.

The national electricity grid is presently in crisis. Both rural and urban populations are faced with severe shortages of electricity. Unofficial sources estimate a shortfall in 1996 for the agriculture sector of 35%. Shortages are particularly severe in winter when coal for heat competes with thermal generation and when hydro capacity is low. Reports vary widely on availability of electricity; one cooperative visited reported pow-er only from 6–8 pm during the day. The Ministry of Agriculture estimates cooperatives receive electricity an average of 5 hours/day over the year. Officially, concern is expressed for greenhouse gas emissions principally from coal combustion for thermal generation and industrial fuel use. Unofficial estimates place DPRK 1990 per capita CO2 emissions at 5.9 tonnes, higher than China and South East Asia (1–2 tonnes).

Key components of the UNDP/GEF project comprise:1. Wind energy resource assessment including a survey, construct a database, mapping, develop a wind en-

ergy monitoring and simulation methodology, and staff training. (GEF: $127,200; Other: $50,000)2. Wind energy technology information and raising awareness. (GEF: $111,800; Other: $37,000)3. Locally made small wind energy system product marketing including promotional materials for coopera-

tives and technical assistance for possible export of these machines. (GEF: $96,400; Other: $136,000)4. Design improvement for small wind energy systems including performance assessment, new design test-

ing, setting of standards and evaluation. (GEF: $143,900; Other: $75,000)5. Manufacturing improvement for small wind energy systems including manufacturer capability assess-

ment, process improvements, introduction of optimum design and establishing a testing facility. (GEF: $128,500; Other: $308,000)

134

6. Technology application demonstrations for small wind energy systems. (GEF: $60,900; Other: $82,000)7. Energy planning and policy formulation training for staff in NCEDC (Non-Conventional Energy De-

velopment Center) including energy planning, project management, economic feasibility analysis, policy issues and renewable energy project development. (GEF: $56,300; Other: $7,000)

10. Summary of UNDP/GEF Expected Project Financing

A summary of UNDP/GEF expected financing for this project is: — GEF funding: $ 750,000— UNDP core funding: $ 150,000— Govt. cash funding: $ 300,000— Govt. in-kind funding: $ 245,000— Total Project: $1,445,000

This UNDP/GEF project will be implemented by the DPRK NCCE (National Coordinating Committee for the Environment) in collaboration with the DPRK Academy of Sciences.

11. Project Status Update

1. The above Project was approved by the GEF CEO (Chief Executive Officer) on 23 September 2004. The approved GEF funding was $750,000 comprising $725,000 for the project plus $25,000 for project preparation.

2. UNDP has contributed $150,000 for the Project and the Government funding and in-kind contribution will total $545,000.

3. All legal and other project initiation formalities were completed in May 2005 and the project has officially started its activities.

Footnotes* The views expressed are those of the author provided in his personal capacity and do not necessarily represent the views of the United Nations Development Programme.

1 From the DPRK Energy Sector Review prepared by the Nautilus Institute for Security, for the Korea Energy Econom-ics Institute in March 2003

2 It is estimated that energy demand decreased from 1,569 Petajoules (PJ) in 1990 to 909 PJ in 1996 and to 759 PJ in 2000. Thus energy demand in 2000 was around half what it was in 1990.

3 “Other” includes military, fisheries, unspecified and non-energy uses

4 It is estimated that net available electricity decreased from 166 Petajoules (PJ) in 1990 to 79 PJ in 1996 and to 45 PJ in 2000. Thus available electricity in 2000 was less than one-third of the 1990 figure.

135

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

The Korean Peninsula Energy Development Organization (KEDO) is an international organization estab-lished to finance and supply to the DPRK a light-water reactor project, the “LWR project,” as specified in the Agreed Framework between the United States and the Democratic People‘s Republic of Korea of October 21, 1994 (the “U.S.–DPRK Agreed Framework”).

The mission of KEDO is to implement the Agreed Framework between the US and DPRK under which the DPRK agreed to freeze and ultimately dismantle its existing nuclear program under the conditions that:— KEDO finances and constructs two proliferation-resistant light-water reactors (LWR) of the Korean Stan-

dard Nuclear Power Plant in the DPRK;— KEDO provides DPRK with an alternative source of energy for heating and electricity until the first of

the two reactors is completed

The focus of KEDO falls on strengthening the international non-proliferation regime while improving peace and stability on the Korean Peninsula by meeting or exceeding international standards of nuclear safety and environmental protection. KEDO should provide the example of how a cooperative international diplomatic effort can lead to the resolution of regional security or political crises.

STATUS OF KOREAN PENINSULA ENERGY DEVELOPMENT ORGANIZATION (KEDO)

Isamu Seto

136

1. KEDO Presence in Kumho

KEDO’s nuclear power plant construction site is located 30 km north of Sinpo, South Hamgyong Province, on the east coast of the Democratic People‘s Republic of Korea (DPRK). The small KEDO community already supports a wide range of services, including two restaurants, one seating up to 800 persons, con-venience centers, one of which contains a snack bar, karaoke room, billiard room, and other amenities, a medical clinic and hospital, stable water and electricity supplies, and a sanitary system. Satellite television is also available, with broadcast and cable channels from the ROK, Japan, Hong Kong, and the United States. Although there is no commercial telephone service between the ROK and the DPRK, there are ten leased lines from the site to the south that are operated as a dial-up service.

As of the end of October 2002, nearly 1,500 KEDO, KEDO contractor, and DPRK personnel were working side-by-side at the site.

KEDO maintains a staff of seven nationals from the Executive Board members at its office at the LWR project site. The KEDO Office at Kumho (KOK) oversees day-to-day operations at the site and maintains interfaces with the DPRK to help ensure the smooth and expeditious implementation of the LWR project.

2. Details about the LWR Project

KEDO is responsible for overall project management and nuclear safety of the LWR project until the LWR units are turned over to the DPRK. KEDO‘s Project Operations Division oversees all of KEDO‘s LWR con-tracts, construction, and site study oversight requirements. KEDO‘s Nuclear Safety and Quality Assurance Division is the division charged with assuring that the LWR project meets international standards of safety.

KEDO has contracted with the Korea Electric Power Corporation (KEPCO) in Seoul to provide the two LWR units. KEPCO is a government-invested utility, which constructs, owns and operates nuclear units in the Republic of Korea (ROK) (16 units in operation, 4 under construction). KEPCO/KEDO is responsible for project management, fabrication of equipment, licensing support, construction management, quality as-surance, procurement, and training of the operations, maintenance, and engineering plant staff.

3. Status of Kumho Site

KEDO conducted work at the Kumho site under the Preliminary Works Contract (PWC) signed by KEDO and the Korea Electric Power Corporation (KEPCO) in August 1997. The PWC had a value of more than $93,000,000, and was later superseded by and became a part of the Turnkey Contract (TKC) which was signed by KEDO and KEPCO on December 15, 1999. The TKC is comprised of four volumes containing more than 800 pages. The contract is priced in three currencies (Korean Won, Japanese Yen and US dollars) with a base value equivalent to $4.182 billion.

137

ENERGY

SCENARIOS

FOR THE DPRK –

REPORT

OF THE

WORKING

GROUP

CONVENED

BY THE

UNITED

NATIONS

Under the TKC and its forerunner, the PWC, KEPCO has created a self-supporting construction complex at the LWR project site, Kumho, DPRK.

As mentioned, much of the work performed to date has been related to establishment of the infrastructure necessary to support the LWR construction effort. The infrastructure work includes housing for workers and visitors, construction offices, medical facilities, dining and recreational facilities, banking offices, and other necessary structures such as roads and bridges. In addition, KEPCO has established independent supplies of reliable electricity, potable water, and communications.

The most significant LWR plant-related work performed thus far is the completion of site grading work, including removal of over 5.4 million cubic meters of rock and soil from the mountain in the area where the LWR plants will be located. Completion of site grading work has enabled excavation of the building foundations, which began in early September 2001, after receiving the Construction Permit from the DPRK nuclear regulatory authority. The pouring of the foundations for the reactor‘s power block buildings occurred in August 2002.

Large rock from the site grading work has been stockpiled and is now being used for construction of a breakwater and barge docking facility. The breakwater and barge docking facility form the intake channel for plant cooling water and provide a safe docking facility for barges transporting materials to the site. Tetrapods, interlocking geometric shapes made of concrete, will provide sturdy protection to the breakwater against ocean currents. The tetrapods are being manufactured at the site. The on-site docking facility was completed and opened for operation in early April 2002. Other significant accomplishments include completion of the training center for operation and maintenance personnel and simulator building.

4. Key 2002 Events

More generally, in July 2002 KEDO opened a direct air route between the DPRK and ROK to support emer-gency medical evacuation and supplement the established sea route between Sokcho (ROK) and Yangwha (DPRK) ports. This is the main sea route utilized for the transportation of personnel and materials to and from the LWR project site at Kumho (DPRK). KEDO marked the first pouring of concrete for the LWR project on August 7. In October KEDO learns that DPRK is still engaged in the production of highly enriched uranium (HEU). On November 14, representatives of the Executive Board met in NY and decided to suspend heavy fuel oil deliveries to the DPRK beginning with the December shipment. The Board noted that future shipments will depend on DPRK’s concrete and verifiable actions to dismantle completely its HEU program.

5. Latest KEDO’s Statement 03/26/2004

“KEDO continues to take the necessary measures to preserve its construction site at Kumho District, South Hamgyoung Province (DPRK) since the suspension of the LWR project (on December 1, 2003). Preserva-tion and maintenance activities are well underway.

138

KEDO met with DPRK officials to discuss issues relating to the implementation of the suspension of the LWR project.

Suspension introduced some new elements into operations at the site. For this reason, KEDO and the DPRK refined some procedures in the implementation of agreements at the site. This was recorded in a memoran-dum of understanding (MOU) approved by all four Executive Board capitals. The MOU provides clarifica-tions of existing procedures which apply during the suspension period.

The MOU reconfirms authoritatively that the protocols and agreements remain in force. The protocols and agreements are in place to guarantee the welfare of the workers at the site. It outlines measures for the entry, stay and travel of KEDO personnel during the suspension period. It underscores the cooperative atmosphere in which KEDO and the DPRK have operated for nine years.

Regarding the repatriation of equipment, materials and technical documents, this issue remains under discus-sion. KEDO and the DPRK continue to remain engaged with it.

DPRK negotiators did not raise the issue of compensation during the meeting. In turn, KEDO officials did not see a strong reason to assert its position on it.”

Documents

ENERGY SCENARIOS FOR THE DPRK – REPORT OF THE