Options for Enhanced Cooperation

11) The largest being Bureiskeya (2 GW) in Amurskaya Oblast

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-The demand for primary energy is expected to grow by 3.5 percent per annum in the Republic of Korea, probably half as much in China at least in the next few years.

The demand is projected to remain flat in both Japan and Russia Far East.

Consumption in DPR Korea and Mongolia may revive but these markets are much smaller than the other ones. On balance, the authors of this paper expect the demand for primary energy coming from North-EastAsia to continue increasing at about 2 percent per year in the foreseeable future, well short of the accelerating growth often mentioned in other quarters "NE Asia's (excluding Russia, DPR Korea and Mongolia) total energy demand will increase at an annual average rate of 3.4% over the 1999-2020 period. China will lead with 4.7%" (CEERD-AIT, June 2001)¹²⁾. Emerging trends suggest however that the demand for "clean" energy, notably hydropower and natural gas, will probably increase more rapidly. In China, in particular, the demand for natural gas although from a low base - is being projected to double every five years or so.

Elsewhere, oil supply from non-OPEC sources is expected to decline in the years to come and the Middle East will have to increase its production dramatically to meet world demand for oil. If real prices of oil were to increase by one third to US$ 28 per barrel, the Middle East according to the IEA - would have to produce up to 80 per cent of the world total some 10 years from now, against 40 per cent at present. In other words, energy security remains the main issue because of expected developments on the supply side, in the face of only modest growth in the demand for primary energy. North-EastAsia is thus well advised to lessen its dependence on Middle East oil as soon as possible. This is no news except for the urgency dictated by the usual lead-time to complete energy projects.

Cooperation among countries in the sub-region has already started at the project level on a limited scale. The question is whether these projects would yield sufficient

12) "NE Asia's (excluding Russia, DPR Korea and Mongolia) total energy demand will increase at an annual average rate of 3.4% over the 1999-2020 period. China will lead with 4.7%" (CEERD-AIT, June 2001)..

results on time. Considering both, energy resource availability and future energy needs of the countries in the sub-region, it will be essential to study potentials for inter-country cooperation in the energy sector.

3.1 The optimal solution: Development of inter-governmental consensus towards a Sub-regional Energy Sector Development Strategy

Most proposals advancing the development of cooperative projects have highlighted their expected potential benefits in terms of economic growth, energy security and environmental sustainability. In North-East Asia, the greatest challenge lies in building consensus on the perceived impacts of some of the proposed "mega-projects", be it the trans-boundary gas oil of gas pipeline network or the interconnection of national electricity transmission grids.

Since the mid-90's, private sector experts have demonstrated increasing interests in exploring the potentials for mutually beneficial cooperation in the energy/electricity sector within North-East Asia. In this connection the sub-region could greatly benefit from the establishment of a consultative mechanism where Government officials of the concerned countries have an opportunity to meet and have a common definition of the problem(s); one that reflects an understanding of "own" interests, the interests of

"others", and how the two converge towards mutually beneficial projects and results.

In the expressed view of several countries of the sub-region an independent inter-governmental forum such as a Senior Officials Meeting (SOM), in which the designated officials can exchange views, share information and discuss strategic options would be most useful. In their communiqu, the participants attending the ESCAP Expert Group Meeting on Inter-Country Cooperation in Electric Power Sector Development have recommended the establishment of such an SOM. The Meeting would call on expert advice in several areas, including (a) Energy Planning, Programming and Restructuring, (b) Emerging Energy Technology and Scientific Cooperation and their Financial, Social and Environmental Impact, (c) Electric Power

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-Interconnection, (d) Inter-State transit of Fossil Fuels, and (e) Development of a North-East Asian Energy Charter. Technically the options suggested to be reviewed by the working groups will be complementary in nature, whilst they may compete for funding. In addition, it has been submitted that the United Nations, of which all the six countries are members, should be entrusted to function as an "interim"secretariat for the envisaged Senior Officials Meeting.

Another way to find an optimal solution for the North-East sub-region would be to rely on market mechanisms to improve the resource allocation process. In this regard, Japan and Republic of Korea have implemented the first phase of their energy sector reform programmes. The other countries are also reviewing their legal environment to make energy and electricity projects more attractive to private investors. Although further liberalisation and competition may be needed in all countries in the sub-region to cut costs and prices, it is submitted here that the establishment of a Common Market would take time. Thus, the future Senior Officials Meeting, with assistance from UN Agencies, could first build a firmer consensus on the "principles" identified at the Khabarovsk meeting, especially those related to (a) the development of free and fair trade and (b) investment promotion and protection.¹³⁾

3.2 Prospects for development of trans-boundary trade in natural gas

Since 1985, and more frequently over the recent past, proposals have been advanced in particular by Russian and Korean researchers, on the development of natural gas fields in the Russian Far East to supply the North-East Asian markets. Figure 8 indicates the location of the main fields (Western Siberia, Kovyktinskoye/ Irkutsk, Sakhalin, Yakutsk/Sakha) as well as alternate trunk and feeder pipeline routes.

Pre-feasibility studies undertaken suggest that the Russian Far East could indeed

13) For the text of Khabarovsk Communique please see www.unescap.org/enrd/enrgy/

erseep.htm

become an important source of energy supply for all of North-EastAsia, especially from a security standpoint. However, depending on the particular project variant and depending on the pipeline routing chosen, its length and the type of fuel to be transported¹⁴⁾, investment cost estimates range from some seven to US$ 25 billion.

Although internal rates of return could be higher than 15 per cent, further confidence building efforts through information exchange on national goals and programmes are still needed as well as additional studies to ascertain the most promising options, from economic and financial perspectives.

3.3 Prospects for development of trans-boundary electricity trade

In addition to the potentials for trading in natural gas, recent studies have also assessed the technical potentials - highlighting the possible economic benefits - of interconnections of national electricity grids across borders, in particular between Russian Federation, China, and the two Koreas. Reports adopted at recent workshops organised by the Nautilus Institute¹⁵⁾ did consider one such a potential and recommended a significant up-grade of the DPR Korean electric power grid, in particular to cope with the operational requirements of the KEDO nuclear power plant s¹⁶⁾ under construction.

14) In recent papers, Kler A. M., N.I. Voropai, Saneev B.G., Sokolov A.D., Popov S.P.

and Tyurina E.A. have suggested that convesion of gas to methanol and its transportation would be more economically viable as long distance transportation of natural gas is comparatively energy intensive and cost,

15) See www.nautilus.org 16) See www.kedo.org

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-[Figure 8] Natural Gas Fields and Proposed Gas Pipeline Routes for North-East Asia

Note: Overview adapted from maps of North-East Asian Gas & Pipeline Forum, EIA and CNPC

The monthly distribution of the Republic of Korea's demand for electricity points to two peaks during the year, the highest one in July-August and a second peak lower than the former in wintertime (See Figure 4 above). In spite of such a double-hump seasonal distribution, professor L.S. Belyaev and his colleagues from the Russian Academy of Sciences¹⁷⁾ have pointed out that Inter-State electrical ties between the

17) See details in " A Methodological Approach to and Experience of Effectiveness Assessment of Interstate Electric Ties in North-East Asia" by L.S. Belyaev, S.V.

Podkovalnikov and P.V. Kostenko from the Energy Systems Institute of Russian Academy of Sciences.

Russian Far East with DPR Korea and the Republic of Korea would allow all parties to realize significant economic gains. Firstly, Republic of Korea could diversify its energy import sources and import up 8.9 TWh annually from Russia (8.4 TWh) and DPR Korea(1.4 TWh), with transmission losses of 0.9 TWh. Secondly, the combined system could save on generation capacity by almost 8 GW by 2020, leading to net savings of US$ 12.3 billion in investment expenditure (US$ 14.3 billion less 2 billion). Finally, it is suggested that all three countries could save on annual operating costs by as much as US$ 200 500 million for Russia, US$ 250 300 million for DPR Korea and US$ 1,400 1,800 million for Republic of Korea. Other study teams¹⁸⁾ have pointed out that in the intermediate and long term perspective the feasibility of transmission infrastructure projects depends on the volume of electricity transmitted and traded.

3.4 Prospects for cooperation in hydrocarbon development and cross-border trade in oil

The Russian Federation and China have reportedly agreed upon construction of the planned oil pipeline from Angarsk via Chita to Daqing with deliveries scheduled to begin in 2005. Studies are reportedly also underway on options to expand potential oil exports from Russian Federation to Japan. Whereas all detailed commercial terms for the eventual realization of cooperation potentials require to be negotiated directly and bi-laterally between the interested private sectors and other parties, achievement of the necessary stable and conducive policy environment can greatly benefit from the enhancement of a multi-lateral consensus in the North-East Asia sub-region.

18) See discussion paper prepared by Karsten Neuhoff, University of Cambridge, Department of Applied Economics, Sidgwick Avenue, Cambridge, England. The paper entitled Shall we interconnect Linking electricity systems in DPRK and North-East Asia was presented at the Workshop on Upgrading and Integration of Energy System in the Korean Peninsula, Como, Italy, September 2002.

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-3.5 Perspectives for productive dialogue between the two Koreas: Conditional Commitments:

Considering the natural and political geography of the sub-region it is evident that a productive and mutually beneficial dialogue between the two Koreas would condition the economic rate of return of most trans-boundary energy projects under consideration.

Special efforts, cooperation and possible assistance in effectively addressing the immediate energy sector development needs in the DPR Korea could well be compensated by long-term concessions that enhance the economic feasibility of infrastructure for cross-border energy trade and long-term energy security and energy supply diversification for the Republic of Korea.

Regarding the gas pipelines network, arguments for building on-shore pipelines running through the Korean Peninsula appear convincing¹⁹⁾, from an economic standpoint and from environmental considerations. It is worth noting that the authorities from DPR Korea have already indicated their interest in principle in considering the trans-boundary gas pipelines and electricity transmission projects. The envisaged Senior Officials Meeting could then contemplate the option of involving DPR Korea and Mongolia as active partners in completing the ongoing feasibility studies.

Given the usually long lead times required before any multi-lateral mega-project can materialise bringing in a win-win situation - the participants in the North-East Asia energy sector development dialogue should also take into account the time dimension and recognise the immediate needs of DPR Korea and Mongolia, as suggested above. It is, in particular, submitted that if the South of the Korean Peninsular were to participate in renovation efforts of the North, the DPR Korea authorities would most probably reciprocate, committing themselves to expediting their part towards an early

19) See details in paper presented by Sunwoo, Hyun-Bum of the North-East Asian Gas and Pipeline Forum.

completion of the two transit projects. The inter-Korean dialogue and consultation process may then advance through the statement of "conditional commitments" from the parties concerned, thereby forming the basis for a negotiated "optimal solution", one in which all parties would be better-off than in the "base-line scenario".

There are clearly several promising opportunities for international cooperation within the energy sector in North-East Asia. Conditional commitments are expected to expedite the necessary preparatory consultations and studies for inter-state energy cooperation, which would ultimately go a long way towards building physical infrastructure and trust required for the establishment of a Common Market in the future.

▣ References ▣

Belyaev, L.S., S.V. Podkovalnikov and P.V. Kostenko, A Methodological Approach to and Experience of Effectiveness Assessment of Interstate Electric Ties in North-East Asia, Energy Systems Institute of Russian Academy of Sciences, undated

Neuhoff, K., Shall we interconnect Linking electricity systems in DPR Korea and North-East Asia, presented at the Workshop onand Integration of Energy System in the Korean Peninsula, Como, Italy, September 2002

Sinton, J. E. and David G. Fridley, What goes up: Recent trends in China's Energy Consumption, forthcoming in Energy Policy

BP, BP Statistical Review of World Energy, annual editions

Hydroproject Institute in Moscow, The Advisory Report of a pre-feasibility assessment on the rehabilitation needs at the Mirim Run-of-River Hydropower Barrage, a facility near Pyongyang, assigned by Secretariat of United Nations Economic and Social Commission for Asia and the Pacific, in early 2002, upon request of the DPR Korea Government, and approved by the parties concerned

Korea Energy Economics Institute, Korea Energy Review Monthly, October 2001 Nautilus Institute for Security and Sustainable Development, The DPRK Energy

Sector: Estimated Year 2000 Energy Balance and Suggested Approaches to

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-Sectoral Redevelopment, prepared in draftfor Korea Energy Economics Institute, September 2002

International Symposium on Energy Cooperation in North-East Asia, organized by Korea Energy Economics Institute, Institute of Energy Economics, Japan and United Nations Economic and Social Commission for Asia and the Pacific, 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, Representation of

"Unified Power Grid of Russia" (RAO EES Vostok- Energo) and Economic Research Institute of Far East Branch of Russian Academy of Sciences, Khabarovsk, 23-24 October 2001

Informal Meeting on Energy Sector Cooperation in North-East Asia, convened by Korea Energy Economics Institute, Seoul, Republic of Korea, November 2001 International Conferences on North-EastAsian Natural Gas Pipelines organized in

various locations since 1995 by the North-East Asian Gas & Pipeline Forum Three proceedings of International Conference on Energy Integration in North-East

Asia, organized by the Energy Systems Institute, Irkutsk, Russian Federation, September 1998, September 2000, and September 2002

www.unescap.org/enrd/enrgy/erseep.htm for the text of Khabarovsk Communique www.erina.or.jp for information on conference proceedings and publications by

The Economic Research Institute for North-East Asia, Niigata, Japan

www.nautilus.org for information on publications by the Nautilus Institute for Security and Sustainable Development, Berkeley, California, USA

www.kedo.org

2003. 6, pp. 133-144

Energy Security in Asia: Providing for Current and Future Energy Needs

Yonghun Jung* ²⁰⁾

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