New-Year Will Be Pivotal for Northeast Asian Natural Gas Diplomacy

New-Year Will Be Pivotal for Northeast Asian Natural Gas Diplomacy

By Tim Daiss

The New Year will set the course for natural gas diplomacy in Northeast Asia for years to come, according to a new study released just before Christmas by Dr. Keun-Wook Paik, a Senior Research Fellow at the Oxford Institute for Energy Studies. The study entitled “Through the Dragon Gate: A Window of Opportunity for Northeast Asian Gas Security” was compiled for the London think-tank Chatham House (also known as the Royal Institute of International Affairs).

In his brief Paik discusses developments and forecasts for natural gas in Northeast Asia, focusing on the dynamics between geopolitical heavyweights Russia and China, including South Korea, Japan and even a wild card – North Korea.

Paik begins his analysis by stating that in the coming decade, Northeast Asia will become a major market for gas, led by China, which plans to quadruple its gas demand by 2030.

“The pattern of trade that will evolve in 2013 will define energy security relations in Northeast Asia for years to come, as permanent infrastructure is put in place and long term contracts agreed [on],” Paik explains.

One of the most fascinating aspects of Paik’s research is Sino-Russian relations. The two were allies until ideological differences created a rift in the early 1960s. They aren’t necessarily cozy now but do have a pragmatic relationship.

Russia (the world’s largest natural gas producer) ever anxious to secure new markets for its reserves, wants China’s business. China (the largest energy consumer is the world) must secure as many hydrocarbon suppliers as it can from any corner of the globe. Their geographical proximity makes Russia the logical gas supplier for China. Yet, logic does not always carry the day between the two.

China, who plans to increase natural gas consumption in the next two decades in efforts to reduce dependence on coal and cut greenhouse gas emissions, needs Russian gas – at least for now. But China has ambitious plans for its domestic unconventional gas, including developing its shale gas reserves, Paik writes.

However, as Energy Tribune reported in November, China’s shale gas sector has serious hurdles to overcome: Profitability of the projects are uncertain, lack of technical expertise is still a problem, also lack of pipeline infrastructure, tough geological conditions, and government controlled prices are major obstacles.

Even if China overcomes these barriers and meets Beijing’s goal of producing 6.5 billion cubic meters (bcm) worth of natural gas production by 2015, Paik says it will not be enough to meet demand.

China will look to Russia, and Russia meanwhile needs the guarantee of access to the Chinese market to develop its super-giant East Siberian gas fields.

The most prominent negotiations for supplying Russian gas to China is by pipeline. Yet Paik writes that pipelines have been repeatedly “stalled over price and route.”

Surprisingly, North Korea factors into the equation. Russia eyes the rogue nation with covetous eyes, and wants to forge an agreement to pipe its gas via pipeline running through North Korea to South Korea.

But the death of long-time North Korean strongman Kim Jong-il one year ago put these plans on the backburner. Paik states that this idea could be picked up again and move forward in 2013.

One can imagine the leverage that North Korea would have if the South were to rely too heavily on gas running through the Communist country. Multiple scenarios would keep pundits debating for days. However, Paik argues that for both of the Koreas a pipeline deal would be a way to improve relations.

Paik writes that Korea is Russia’s wild card and that Russia wants the Korean pipeline to come to fruition for several reasons. First, the pipeline would offer Russia an alternative to deadlocked price negotiations with China. Moreover, if Russia can forge a pipeline through North Korea it boosts Moscow’s influence on the Korean Peninsula.

Predictably, China is opposed to the deal and counters with the option of an undersea pipeline from its Shandong Province to South Korea. Likely, China recognizes Moscow’s geopolitical goal of restoring Soviet-era influence it once had globally through oil and gas deals.

Paik writes that other factors influencing Northeast Asia’s gas future is the March 2011 Fukushima nuclear disaster that forced Japan to shut down its nuclear reactors. Since then just two of the country’s 50 reactors have become operational. Consequently, Japan turned to natural gas to supply its electric utilities and became the largest LNG importer in the world.

However the same that time Paik’s work was released, the Liberal Democratic Party of Japan retook control of the Japanese lower house of parliament with promises to bring Japan’s reactors back online. Therefore, at least for now, it’s unclear how Japan’s election results will impact natural gas dynamics in Northeast Asia.

Another variable effecting gas diplomacy in Asia is what Paik calls “the various and now heated territorial disputes between Northern Asia countries in recent months, particularly in the South China Sea.” This too is currently unfolding as Chinese antagonism in the region intensifies to the chagrin of ASEAN member states and India.

Paik wraps up his study by reverting back to the Russian-China gas dynamic. “Despite the priority that Russia is giving to LNG exports elsewhere in the region, its ultimate and prime gas export market in Asia is China,” he writes.

“The next few months will be crucial for decisions on the entry of Russian pipeline gas to China,” Paik claims. “Missing the opportunity will deprive both countries of a win-win solution to their energy and development problems, and increase future global LNG prices.”

Paik argues that it is “not a given” that Russia will be able to penetrate the Chinese market to the extent it hopes.

Suffice it to say, Russia (mostly under Vladimir Putin’s control) has a nasty track record of using gas as a political weapon against Europe, a fact likely not lost on Beijing. Russia has its work cut out with energy hungry but hardnosed China. The New Year will be a pivotal one for all players involved.

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