The Role of North Korea in Northeast Asia Energy Relations

David Dusseault

Eurasia Energy Group

Aleksanteri Institute

11th December 2006

Some Basic Ideas

• N. Korea’s energy situation is dire;

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

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

The Scope of the Issue

Energy Imbalance

Interdependency: Enabling and Constraining Conditions

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

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

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

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

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

Regional AssessmentConstraint Northeast Asia

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

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

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

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

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

Conditions: North and South Korea

Factors Enabling Constraining

Physical Strategic corridor for transit to markets in the south

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

Informational South: Long term strategy, strategic reserves

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

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

Price dependency, market volatility, level of demand

Actors South: State energy sector undergoing a process of diversification

State as primary actor

Institutional South: Restructuring of institutional rules of the game

North: Institutional framework??

The Nuclear Issue in the Present Energy Context

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

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

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

Regional Priorities: Catastrophic Regional Conflict Avoidance

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

•Regional Development aid (Bi & Multi-lateral)

Priorities & Strategies

US Priorities: Regime Change

•Economic Sanctions (Uni - & Multi-lateral)

•Military “Axis of Evil” (Sum zero)

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

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

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

?

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

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

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

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

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