Introduction 1)

Since the mid-1990's all countries in North-East Asia have at various speed initiated liberalising their national economies, welcoming the participation of private investors notably in the energy sector. The North-EastAsia sub-region covers a vast territory with only limited infrastructure and most national markets in energy products are yet to be built. In this context, regional cooperation in the energy sector could best start with joint development of individual projects, building up infrastructure and trust, the two preconditions for a future "common market".

This paper is mainly based on a review of selected country reports and discussion papers presented at recent international meetings on development perspectives of the energy sector in the "North-East Asia" sub-region¹⁾. It first summarises current trends in

*** This paper presents the personal views of the authors and do not necessarily reflect those of the organizations that the authorswork for. The paper was drafted and discussed with co-authors during the period February to September 2002.

Developments that have occured after this period are not discussed. Not all views expressed are necessarily shared by all co-authors. The authors thankfully acknowledge the encouragement and support provided by Korea Energy Economics Institute (KEEI), Republic of Korea.

****Professor Fengqi Zhou is the former Director General and currently Senior Advisor to Energy Research Institute (ERI) of State Development Planning Commission (SDPC), Beijing, China. Professor Zhou holds several distinuished positions, including member if Energy and Environment Steering Committee of the World Bank, member of Advisory Board of APEC Asia-Pacific Energy Research Centre, and lead co-author of IPCC Reports and World Energy Assessment (1999).

***** Susumu Abe is Advisor to Toshiba Corporation and Member of Board of Trustees of Economic Reserach Institute on North-East Asia (ERINA), Niigata, Japan.

****** Tsegmidyn Sukhbaatar is former Director General of Department of Fuel and Energy at the Ministry of Infrastructure, Ulaan Baatar, Mongolia.

******* Dr. Sang Yul Shim is Director for North-East Asia Energy Cooperation at the Korea Energy Economics Institute (KEEI), Kyunggi-Do, Republic of Korea.

********Boris G. Saneev is Deputy Director of Energy Systems Institute, Siberian Branch of Russian Academy of Sciences, Irkutsk, Russian Federation.

1) International Symposium on Energy Cooperation in North-East Asia, organized by Korea Energy Economics Institute (KEEI), Institute of Energy Economics, Japan

national energy supply and demand in North-East Asia in general, and in the Korean peninsula in particular. After reviewing the potentially feasible bi- or multi-lateral projects, which have been advocated over recent years, its authors assess the scope for North-East Asia inter-country energy sector development cooperation, particularly with regard to a prospective participation of the Democratic People's Republic of Korea (DPR Korea Based on interests expressed by participating countries, a conceptual approach is proposed to facilitate further consultations towards full realisation of mutually beneficial energy development cooperation in North-East Asia.

For the purpose of this paper North-East Asia is defined to include China, Japan, the two Koreas, Mongolia and the Eastern territories of the Russian Federation (Siberia and Russian Far East). The paper has two parts. The first part reviews the current trends and expected outlooks for energy development and cooperation in individual countries, pointing to the "base-line scenario". The second part suggests specific cooperation options to better meet common economic needs.

(IEEJ) and United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), Seoul, Republic of Korea, 7-8 June 2001; North-East Asia Expert Group Meeting on Inter-country Cooperation in Electricity Sector Development, co-organized by the secretariat of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), Representation of "Unified Power Grid of Russia" (RAO EES Vostok- Energo) and Economic Research Institute (ERI) of Far East Branch of Russian Academy of Sciences, Khabarovsk, 23-24 October 2001; and Informal Meeting on Energy Sector Cooperation in North-East Asia, convened by Korea Energy Economics Institute (KEEI), Seoul, Republic of Korea, November 2001.

The authors have also reviewed the proceedings other related events, including the 1st, 2nd and 3rd International Conference on Energy Integration in North-East Asia, organized by the Energy Systems Institute, Irkutsk, Russian Federation; as well as proceedings of the International Conferences on North-East Asian Natural Gas Pipelines organized in various locations since 1995 by the North-East Asian Gas &

Pipeline Forum, and conference proceedings and publications published by The Economic Research Institute for North-East Asia (ERINA), Niigata, Japan (www.erina.or.jp), and the Nautilus Institute for Security and Sustainable Development, Berkeley, California, USA (www.nautilus.org).

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-Ⅱ. Current trends and outlook in energy development in North-East Asia (the "Base-line Scenario")

The synoptic overview of current and expected trends in energy sector development in the sub-region follows the "3-Es approach" initially formulated by energy researchers and policy makers from Japan during the second half of the 1990's. The energy sector is thus looked at in each of the six countries from the perspectives of "Energy Security", "Economic Growth" and "Environmental Protection". In so doing, the authors have also attempted in setting up a set of consistent statistics, mainly based on national sources and on data published by the International Energy Agency (IEA).

2.1 China²⁾

Given its large population of nearly 1.3 billion people, and due to its potentials for rapid economic growth (8 per cent per annum, on average, over the last six years, in spite of the Asian financial crisis) China's energy security is a major concern, both within and outside the country. Indeed, China has become a net energy importer since 1997 when its production of coal declined further while its consumption of both oil and gas exceeded its own production.

China's dependence on coal as its main source of energy has declined significantly, from 80 per cent in 1990 to 64 per cent at present. In order to improve the security of its energy supply, China's diversification is expected to continue in the future, away from coal. Official plans call for building nine nuclear plants, adding 8.8 GW, thereby raising the generation capacity of its nuclear power to 11 GW and eventually making China the 9th world's largest producer. Development of hydropower is also expected to continue as generation capacity from this source is planned to almost double, from 73

2) Information in this section also draws on findings of a recent paper by Jonathan E.

Sinton and David G. Fridley, entitled "What goes up: Recent trends in China's Energy Consumption", which has been accepted for publication on Energy Policy.

GW in 1999 to 140 GW by 2015, implying a growth rate of 4 per cent per annum.

[Figure 1] Self-sufficient China

Energy Production and Trade 1990-99 (in Mtoe)

- 2 0 0 0 2 0 0 4 0 0 6 0 0 8 0 0 1 , 0 0 0 1 , 2 0 0

1 9 9 0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8

P r o d u c t io n I m p o r t s / E x p o r t s

Source : International Energy Agency and BP

In contrast to other countries in the sub-region China will likely continue to depend on combustible renewable energy sources and waste (CR&W), which accounts for 20 per cent of its total demand for primary energy.

From the perspective of energy security, China energy development policy emphasizes the "West Gas to East Market" and the "West Power to East Market" long distance energy transmission projects. China is reportedly also participating in a joint feasibility study to procure natural gas from the Kovyktinskoye gas field in the Irkutsk region. Russian Federation and China have reportedly also agreed on the plans construction of an oil pipeline from Irkutsk (Angarsk) to Daqing (North-East China).

From the economic growth perspective, the steady decline in China's total demand for energy, in the face of rapid albeit slowing down GDP growth, requires an robust

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-analysis in view of economic growth, structural change of the economy, and improvement of energy efficiency. In their recent paper commissioned by the US Department of Energy, however, Sinton and Fridley pointed to a decline in end uses of coal, reflecting the convergence of a number of trends, both short- and long-term.

Firstly, the economic slowdown beginning in 1998, according to these authors, appears to have the largest impact on coal use. In addition, the emergence of a buyer's market in coal, they argued, has allowed consumers to purchase cleaner coal with higher heat content and this factor alone would account for 40 per cent of the total decline. The third reason for the decline lies with the Government's promotion of industrial restructuring through closures of small plants and consolidation into larger facilities, the latter being much more energy efficient.

At the same time that moderating economic growth, industrial reform and higher coal quality have resulted in a substantial reduction in coal consumption, Sinton and Fridley submitted that other trends are also having longer-term impacts. Firstly, the shift from state-owned to collective, private and foreign-invested ownership of production is widely seen as a shift to greater efficiency, particularly since the productive assets of the non-state enterprises are often newer and better operated.

Secondly and within the industrial sector, which remains the leading consumer of energy, certain energy-intensive sub-sectors (e.g. building materials and chemicals) have declined while others of lower energy intensity have gained in importance. Finally, sustained support for environmental and energy efficiency policies is a factor in the continuing decline of coal use by the residential consumers. Dropping fairly steadily since its peak in 1998, residential coal use is being aggressively replaced by cleaner forms of energy such as LPG, natural gas and electricity. It should then be recognised that energy intensity, as measured against GDP, has improved (i.e. decreased) significantly in China, as a result of modernisation and conservation policies.

[Figure 2] Declining Coal Use in China:

Coal consumption by sector (in Mtoe)

-50.0 100.0 150.0 200.0 250.0 300.0 350.0 400.0 450.0

1995 1996 1997 1998 1999

Other Transport Agric.

Comm.

Residential Industry

Source : International Energy Agency

China's total primary energy supply (TPES), which has hovered around 1.1 Billion toe (0.9 toe per person), may not increase much, if at all, in the foreseeable future as efficiency in energy consumption could continue to improve further. However, as the country's energy import requirements may continue to grow, China could engage more actively in international energy sector development projects. The electricity sector in China is currently under going institutional reforms, which is expected to result in further separation of electricity generation from grid management and a growing role for independent power producers. For the time being, the Chinese market of energy products appears rather segmented due to a lack of infrastructure. This feature implies that international cooperation such as inter-state electric ties in the first phase may only benefit some of its provinces, particularly those immediately bordering Russia Far East.

2.2 The Democratic People's Republic of Korea and the Republic of Korea

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-Whereas detailed and up-to-date information is available, depicting clearly both current trends and possible outlook up to the year 2020 for the Republic of Korea, statistical data on the energy sector situation in the Democratic People's Republic of Korea are much sketchier.

According to its official position, the Democratic People's Republic of Koreais still technically at war and a significant share of its now reduced resources has been allocated to defense to cope with a perceived threat to its national security. National security considerations have restricted the release of information on all parts of the economy, including the energy sector. Since 1998 however, the Government authorities in Pyongyang have provided some more systematic information and this paper will mainly be using official data for its analysis.

Any interpretation and analysis of the Democratic People's Republic of Korean energy policy requires a basic understanding of Juche, the overriding principle underlying all Democratic People's Republic of Korea policies. Juche calls for self-reliance, which does not necessarily imply complete self-sufficiency. Although the expression "self-sufficient economy"is often used in official documents, it really means a "balanced economy", i.e. without excessive trade deficits. Up to the mid 1980s, the Democratic People's Republic of Korea had extensive trade exchanges with the former COMECON countries, primarily through barter trade. With the more recent collapse of the barter trade system the country lost most of its former international trading partners.

According to statistics of the Democratic People's Republic of Korea, production of coal, the main energy source in the country, declined throughout the 1990's, especially after 1994 when severe floods affected coalmines. As a result, coal supply to thermal power stations has been reduced by about 50 per cent and the 4 GW thermal power capacity has not been fully utilised. Hydropower generation (the second source of energy in the

country with also 4 GW capacity) has been affected by drought and by the lack of spare parts for proper maintenance of outdated turbines.

Participatory assessment and extensive recent field visits point however to an increased use of combustible renewables and waste to partly offset the growing shortages of conventional energy sources. On balance, TPES declined by almost 60 per cent since 1991, to an estimated total of about 16 Million tonnes of oil equivalent (toe) in 2000 or 0.7 toe per capita.

[Figure 3] Total Primary Energy Supply in the Democratic People's Republic of Korea

1991-2000 (in Mtoe)

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Other Hydro Coal

Source : Official Democratic People's Republic of Korea Government statistic

Equally important, most facilities, including thermal power stations and irrigation networks, are plagued by outdated technology and the lack of spare parts. As a consequence, useful energy, at the end use level, must be about one third less than this already reduced TPES would imply.

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-Since 1998 the country has increased its efforts to improve both the supply and the demand sides of the equation. A notable example is illustrated by the construction of the Kaechon-Taesong Lake canal³⁾, to divert water from the Taedong River and supply it to 19 existing reservoirs along a 154-km canal, using gravity rather than surface pumping. This should save 145 MWh per annum in irrigating 99,600 ha of paddy and maize fields, while providing additional hydropower in the future.

At the same time that the break-up of the barter trade system, economic sanctions and unfavourable weather conditions have resulted in a significant reduction in its energy production; the country has been facing systemic challenges, not just bottlenecks. As indicated by reports of the Nautilus Institute for Security and Sustainable Development, negative feedback loops between and among energy and economic sectors exacerbate the situation. The lack of sufficient coal to run factories that craft spare parts or make steel means that there will not be sufficient spare parts to keep coal trains operating or enough steel to repair tracks, but, delivery of coal to factories is difficult because the trains are not often running. The lack of power idles coalmines, resulting in fuel shortages at power plants⁴⁾.

The Democratic People's Republic of Korea needs immediate assistance to cope with an emergency situation. Financial and technical support would in particular be needed to rehabilitate the power generation equipment at existing hydropower facilities, some of which currently operate at only a fraction of the initially designed output.⁵⁾

3) Project implemented with assistance from OPEC, which provides US$ 18 Million while Government contributes US$ 56.6 Million.

4) See "The DPRK Energy Sector: Estimated Year 2000 Energy Balance and Suggested Approaches to Sectoral Redevelopment", Report prepared by Nautilus Institute for Security and Sustainable Development for Korea Energy Economics Institute (Draft, 13 September 2002).

5) Upon request of the DPRK Government, ESCAP Secretariat, in early 2002, assigned

While TPES declined significantly in the North, the Republic of Korea has experienced continued expansion, except for 1998. In fact, overall economic growth in the Republic of Korea is widely seen as dependent on "three lows":

low interest rate, low exchange rate against the Japanese Yen, and low oil prices on the international markets. The export-led strategy, in spite of certain fragility revealed during the Asian Financial Crisis, has been extremely successful, making the country a member of the OECD.

In the Republic of Korea, the demand for primary energy has been increasing even faster than its GDP and the country's dependence on energy imports albeit declining - still stands at some 85 per cent⁶⁾, the highest among OECD countries. TPES per-capita has now reached 4.1 toe, a level comparable to that of Japan. For the future, real GDP was projected to grow 5.5 per cent per annum up to 2010 and 4.2 per cent per annum thereafter. More recently⁷⁾, the KoreaEnergy Economics Institute (KEEI) has reviewed its "medium term energy outlook", pointing to an annual growth of 3.5 per cent in the demand for primary energy up to 2006.

In contrast to the past, the increase in demand for energy will mainly come from the transport and residential-commercial sectors, which, by 2020, would account for 49 per cent of the total, against 42 per cent in 2000. As a result, per-capita TPES is projected to reach 5 toe in 2010 and 6 toe in 2020. It should also be noted that the demand for electricity tends to peak in the summer time (Cf. Chart, below), suggesting possible savings on reserve capacity in case of inter-state electric ties (ISET) with its northern neighbours

experts of Hydroproject Institute, Moscow, to undertake a pre-feasibility assessment on the rehabilitation needs at the Mirim Run-of-River Hydropower Barrage, a facility near Pyongyang. The related Advisory Services report has been approved by the parties concerned.

6) For the purpose of this paper, nuclear power is considered as part of domestic production and imports are net of oil re-exports.

7) See Korea Energy Review Monthly October 2001.

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-where the peak load takes place in the winter time.

[Figure 4] Seasonal Variation in Electricity Peak Load in Republic of Korea (July 1999 July 2001)

-5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0

99-07 99-09 99-11 00-01 00-03 00-05 00-07 00-09 00-11 01-01 01-03 01-05 01-07

Source : Korea Energy Economics Institute Korea Energy Review Monthly, October 2001

Considering its high dependence on energy imports, security of supply is of major concern. The Republic of Korea has expanded its use of LNG and nuclear power since the 1980s and KEEI's projections point to further product diversification in the future, away from coal and oil. By 2020, nuclear power and LNG are expected to account for one third of total demand, compared with one quarter at present. More specifically, eight nuclear power plants are under construction or planned to add 8 GW, bringing its generation capacity to 21.7 GW and eventually making the Republic of Korea the 6th world's largest producer of nuclear power, well ahead of the United Kingdom and Canada. Further development of nuclear power is now facing siting constraints. In any case, the future product mix should help lowering CO2

emission from the current level of 0.6 tonne of carbon (t-C) per toe of primary energy. In this regard, recent field visits to the Incheon LNG terminal and the Soinchoen gas power plant point to a major trade-off decision, balancing pollution with direct costs: LNG, though cleaner than coal and oil, is also much more expensive as a source to produce electricity.

Several recent discussion papers have outlined technically possible cooperation opportunities between the Democratic People's Republic of Korea and the Republic of Korea. These options are reviewed in the second part of this paper.

2.3 Japan

Targets and goals for the country's energy sector policy are periodically reviewed by the Advisory Committee for Energy which also drew up an outlook for the year 2010 and beyond. The overriding goal of Japan's energy policy is "to simultaneously attain the 3-Es, i.e. Energy Security, Economic Growth and Environmental Protection". This paper has adopted the 3-Es approach, developed by the Ministry of International Trade and Industry (MITI), to review the energy situation throughout North-East Asia.

Back in fiscal year (FY) 1996, Japan's Final Energy Consumption reached 363.5 Million toe and CO2 emission stood at 314 Million tonnes of carbon (t-C), or 0.86 t-C per toe consumed, only a marginal improvement against 0.89 t-C in FY-90. Based on these results, and assuming an economic growth rate of 2 percent per annum, it was projected that final energy demand could possibly reach 422 Million toe in FY 2010, without additional conservation measures (the "Business As Usual" scenario), implying an income elasticity of 0.55. In this scenario, Japan's economy would generate 347 Million t-C in 2010, well above the level of FY-90 (287 Million t-C).

Clearly, such a scenario would fail to meet the targets established under the United Nations Framework Convention on Climate Change requiring developed economies,

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-including Japan, to bring greenhouse gas emissions 6 percent below the level reached in 1990, between the years 2008 and 2012. Japan's energy planners have then developed another scenario in which its final energy consumption would increase only marginally and CO2 emissions would return to the 1990 level. This alternate energy development scenario calls for a further expansion of nuclear energy, additional measures to conserve energy as well as the accelerated development and introduction of renewable sources of energy.

More recent statistical data published by IEA and British Petroleum point however to a stagnation of Japan's TPES, most probably due to anemic economic growth. Such a situation will likely continue in the immediate future since Japan has just entered another recession period.

From the economic growth perspective, Japan's electricity sub-sector is characterised by high prices to both industry and households. In fact, there is a clear inverse correlation between prices and the demand for energy throughout OECD countries, implying relatively high price elasticity. In countries where selling prices are relatively low, such as Canada, USA and also the Republic of Korea, energy intensity, as measured against GDP, is relatively high. On the other hand, when energy prices are high, such as in most European countries and Japan, energy intensity is relatively low.

As Japan introduces additional structural reform measures to bring down costs and prices, chances are that the country's demand for energy would remain constant even in the absence of economic growth.