Features | Economy | East Asia

A ‘Pipe Dream?’ Russia, North and South Korea’s Gas Pipeline Quest

A pipeline across N. Korea to provide natural gas to S. Korea has generated buzz. Will old divisions scrap the deal?

By Brad Babson for

The idea of building a commercially and politically viable gas pipeline from Russia’s Sakhalin Island fields across North Korea to provide a long-term supply to South Korea has been percolating for years as an enticing potential win-win-win for all three countries.  The underlying logic of mutual economic gain and potential stabilizing benefits of energy interdependence has kept open the channels for consultation among the parties despite the ups and downs in inter-Korean relations, political transitions in both Koreas, and the breakdown of multilateral diplomacy seeking solutions to the continuing security challenges on the Korean peninsula.

Prospects are brightening that the pipeline might resurface in 2013 as a serious topic for more intensive attention and possible progress due to what seems to be a relatively smooth transition to a more economically focused and future-oriented regime in North Korea, upcoming presidential elections in South Korea that are expected to lead to a more pro-engagement policy with the North no matter which candidate is victorious, and Russia’s recent decision to forgive 90% of North Korea’s debt and invest in future economic cooperation.

The process over the past year or so has involved a series of bilateral consultations between Russia and the two Koreas, with Russia both seeking to advance its own interests in the deal and broker the interests of the two Koreas.  This, however, has not lead to a viable plan. North Korea has demanded significantly higher transit fees than is normal for allowing the gas across its territory.

The world market for gas is also changing with new technologies for extraction expanding global supply and lowering prices, and the U.S. is potentially entering the global market as a supplier rather than importer.  South Korean concerns about potential North Korean disruption of gas flows for political purposes have led to creative proposals to route gas through the North in ways that would create losses for North Korea not only of revenue but also use of gas for its own needs if such disruptions were to occur.  All these factors are not conducive to productive deal-making negotiations through the current process.  Thus the prospects for an early agreement that is commercially and politically feasible remain elusive.

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Realistically, negotiations on the details of a specific pipeline plan that will succeed cannot be limited to Russia and the two Koreas alone.  There must also be meaningful economic reform in North Korea that includes both a rational energy development strategy, and improvements in economic contract management practices that are internationally acceptable.

As guarantors of South and North Korean security respectively, the U.S. and China have to be part of the negotiation process in order for any agreement to be politically viable and attractive to the private sector.  It is inconceivable that either would accept an end-run around their interests in regional security arrangements by Russia and the two Koreas, even if these parties could come closer to a pipeline deal that works for them financially.  While the Six Party process may be dead, a successor multilateral process for building consensus and support for a regional undertaking of such significance for regional stability and cooperation is required to achieve the political objective of shifting security mechanisms from reliance on military capabilities and deterrence to interdependencies of multiple kinds that create incentives for peaceful cooperation.

Bernhard Seliger of the Hanns Seidel Foundation, who has been actively working with North Korea on hydroelectric energy projects, argues that a gas pipeline project is still too risky a proposition. What North Korea needs is a learning curve experience in how to meet international standards of transparency and accountability. It also needs prior involvement in such a legal regime for its own self-interest without resorting to political games, requiring large investments, or impending on economic rationality with old-style greed for obtaining maximum foreign exchange.

It may well be that precursor steps towards the pipeline project would enhance its ultimate potential for success.  One example is educational engagement to help the North Koreans understand the practical aspects of entering into binding long-term international agreements that involve commercial as well as governmental interests, and reasons for the need of others to have trust in reliable behavior in such ventures given the immense costs of unpredictability in long-term agreements.  Another possibility is to integrate planning for the pipeline project in a wider process of dialogue between North Korea and foreign partners on Pyongyang’s future economic development strategy.

In particular, such a future-oriented strategy would have to focus on a logical investment plan for the development of North Korea’s energy sector to support that strategy, and for the potential role for gas that might be drawn from the pipeline.

It will also be important to set a pipeline agreement in the context of developments in the global market for gas that will protect both South Korean and Russian longer-term financial interests if such an agreement will be viable for them.  This requires not just the participation of governments whose security and economic interests are at stake, but also the corporate participants whose commercial interests are crucial factors for any successful deal.  North Korea may not be ready for this type of dialogue and negotiation, but it is primarily the responsibility of North Korea to see its way to engaging with others in a business-like way to proceed in a meaningful way.

2013 may well provide an opportunity to test whether the two Koreas can realign their relationship in ways that will make the prospect of a gas pipeline deal more realistic to consider. But they cannot expect this will be possible without a very open and transparent process of engaging the interests of all concerned parties whose support will be needed for any deal to succeed.

Brad Babson is the Chair of the DPRK Economic Forum, U.S.-Korea Institute, Johns Hopkins School of Advanced International Studies.