The Foreign Service Journal, December 2003

support for Yukos’ politically powerful rival, Transneft, which wants to build a crude pipeline to the Russian port of Nahodkha that would sell oil to all comers, not just to China, but primarily to Japan. Tokyo is pushing hard for this option, offering attractive terms that mark a striking departure from its past dealings with Russia. In addition to extending credits at a much lower interest rate than those offered in previous energy negotiations, Tokyo no longer insists that the Russian gov- ernment guarantee repayment of these credits. Putin may well be using the Nakhodkha option in part as a bargaining chip in the emerging negotiations with China over the price of Kovykta gas and is likely to seek a com- promise solution to the Daqing-Nakhodkha dilemma. It would be surprising if he does back out of the Daqing deal entirely because Russian profits from pipeline gas exports to China and Korea would skyrocket as their gas demand grows after 2010. Indeed, projections of future demand are so high that Kovykta alone might not be able to keep pace with this demand, and other gas-rich areas in Siberia are already lobbying for their inclusion in a pan-Siberian pipeline export grid in which they would be linked to Kovykta. Meanwhile, South Korea’s position may be shifting. Under former South Korean President Kim Dae Jung, Seoul favored routing the Kovykta pipeline through the North as a key component of Kim’s “sunshine” policy. Since the advent of Kim’s successor, Roh Moo Hyun, however, South Korean hard-liners are pressing for a route that would bypass the North by veering south of Dandong to Dalien, where it would go under the Yellow Sea directly to Inchon. Ironically, in addition to the opposition of hard-liners in Seoul and Washington to a pipeline from Kovykta running through North Korea, Pyongyang itself is cool to the Kovykta project. Given China’s burgeoning demand for gas, observes Song Bok Ku, commercial counselor of the North Korean Embassy in Moscow, Beijing will not be willing for very long to let Kovykta gas go to Korea. Whatever short- term commitments it might make, he said, “as time goes by, there will be little left for North and South Korea.” Other sources concur that the North strongly prefers a pipeline from Sakhalin and has repeatedly conveyed this preference to Russia and South Korea. — Selig S. Harrison F O C U S D E C E M B E R 2 0 0 3 / F O R E I G N S E R V I C E J O U R N A L 51 Korea and serve the South Korean market is worth seri- ous consideration,” he concluded, “not just from the point of view of meeting South Korea’s future gas requirements through regional energy cooperation,” but because “it could transform inter-Korean relations and advance the larger goal of regional security.” Supporting this view, a leading expert on Northeast Asian energy issues, Keun Wook Paik, author of Gas and Oil in Northeast Asia (Royal Institute of International Affairs, 1995), points out that the cost of building the reactors ($4.9 billion) would greatly exceed the projected $3 billion to $3.5 billion cost of the Sakhalin pipeline. Furthermore, gas could begin flowing well before the reactors are likely to start producing and transmitting electricity, assuming that ExxonMobil can reach agree- ment with South Korea on the price of the gas and the annual volume to be purchased. Like many observers, Paik emphasizes that North Korea’s antiquated electricity transmission grid cannot handle the 2,000 megawatts of electricity to be produced by the two nuclear reactors. The cost of constructing a new countrywide grid with a 540-kilovolt capacity would be substantially higher, he estimates, than building a net- work of 250-megawatt gas-fired power stations along the pipeline route, linked to small local transmission grids. Each of these power stations and its local grid would cost from $150 to $170 million, he calculates, based on the 2002 price of gas-fired turbines made by Korea Heavy Industries. To cover the most populous parts of North Korea with eight power stations, the cost would be $1.2 to $1.36 billion, but they would not all have to be con- structed at once. At their own initiative and at their own expense, two leading European engineering firms, Asea Brown Boveri of Switzerland and Siemens of Germany, have conduct- ed extensive studies in North Korea of its existing elec- tricity distribution system and of its future energy needs. Even though the country is virtually destitute at present, both companies are gambling that the security interests of the United States, Japan and South Korea will sooner or later lead to multilateral aid to ease North Korea’s energy problem as part of a broader rapprochement, whether through a new countrywide grid linked to the two KEDO reactors or through gas-fired power stations with local grids fueled by a Sakhalin pipeline — or through a combination of both. In economic terms, there is no need to make an either-