Decisions on the routes for sending Russian gas to China, South Korea and Japan in the coming months will define the future pattern of Northeast Asian gas trade. With major gas demand increases expected in each country and numerous territorial disputes fuelled by the intensifying search for new energy deposits, these decisions will have profound implications for both energy security and geopolitics.
China plans to quadruple its gas consumption to beyond current European Union levels by 2030 in order to shore up energy security, reduce dependence on coal and meet its carbon intensity target. South Korea and Japan similarly want stable supplies of cleaner energy – in Japan’s case, to urgently fill the gap left by the shut-down of nuclear reactors
Russia aims to send 19-20% of its gas exports to the Asia Pacific market by 2030. To achieve this, it must start developing its super giant gas fields in East Siberia. President Vladimir Putin has repeatedly intervened in person urging Gazprom to pursue a deal that would allow Russia to develop these fields. But the economic justification can only come from a more assured stake in the Asian market, namely by securing long-term pipeline delivery contracts.
Negotiations to bring gas to the largest potential market - China - have been repeatedly stalled due to disagreements over price and route. Meanwhile, Japan and South Korea want assurances that their energy needs will be served, and Russia is keen to diversify and maximize its export options.
Unless an agreement on the routes is reached next year, much of the Chinese market will turn to liquefied natural gas (LNG) imports from elsewhere. This will reduce the potential future market for Russian pipeline gas and so undermine the economic viability of developing eastern Russian gas fields. The result will be more expensive gas both regionally and globally, at a time when energy price fears are already high. Moreover, China will have no choice but to intensify its domestic exploration efforts, not least in the South China Sea.
In October, Vladimir Putin signalled the urgency of building a pipeline from the Sakha Republic to the Port of Vladivostok, but details were uncertain. This could allow Russian gas to penetrate China if there was a branch line to Heilongjiang. However, the line could bypass China completely by going to South Korea through North Korea – a controversial but concrete proposal on the table.
Russia has kept alive the North Korea option partly in order to put pressure on Chinese negotiators. Such a deal would increase Russia’s political status in the Peninsula and increase its political role as a mediator in the international crisis over North Korea’s nuclear weapons programme. In response, Chinese company officials have been negotiating with South Korea separately for a subsea pipeline through China which would create the necessary volume demand for a Russian line into China’s Northeast.
Final decisions on routes will not be made in a vacuum.
Both candidates in this month's South Korean presidential election have expressed an intention to pursue pipeline-development, and Ms Park Geun-hye of the ruling GNP party has spoken supportively of the North Korean pipeline in a bid to boost her party's credentials on North-South cooperation. If such a scheme should gain South and North Korean support, it would likely be dealt with under the existing Six Party Talks to resolve the issue of North Korea’s nuclear weapons and the political ramifications would go well beyond matters of energy security.
Meanwhile, potential gas resources remain a fundamental factor in the ongoing territorial disputes in the East and South China seas between China, Japan, Taiwan, Korea and Vietnam. Relations between China and Russia are strained not only over issues such as Chinese immigration and economic influence in eastern Russia, but also by Gazprom’s involvement in Vietnamese offshore projects which China sees as compromising its claims in the South China Sea. If Northeast Asian states cannot agree a satisfactory deal for Russian pipeline gas in 2013, the stakes in these disputes - and the risk of conflict - will heighten.
A Sino-Russian agreement will be critical to the outcome. It could be facilitated by broader cooperation between China, Japan and South Korea, the reinforced commitment of the Chinese government to reform domestic gas prices, and a more collaborative approach to cross investment between Gazprom and Chinese national oil and gas companies. Missing this opportunity will not only deprive China and Russia of a win-win situation on energy, but also undermine long-term energy security and geopolitical stability in the region and beyond.
Through the Dragon Gate? A Window of Opportunity for Northeast Asian Gas Security
Keun-Wook Paik with Glada Lahn and Jens Hein, December 2012