Andrei Konoplyanik is president of the Energy and Investment Policy and Project Financing Development Foundation (ENIPPF), a Doctor of Economics, Professor of the department of management in the international fuel and energy business at the State University of Management
Marina Kravets is a probationer-researcher at ENIPPF 
Andrei Fyodorov is chairman of the Political Research and Consulting Centre foundation and director for political research at Russia’s Council for Foreign and Defence Policy

Developing the Kovykta gas condensate field — potential reserves 1.6 trillion cubic metres, stable production for more than 25 years — will provide Russia with valuable markets in China and South Korea and could possibly be a vital factor in bringing North Korea in from the cold.
After 50 years of bitter confrontation between the two Koreas, signs are emerging that a reunification could be on the horizon — and the present plans for selling 20bn cubic metres of Kovykta gas by a pipeline to China with an expensive offshore branch then taking a further 10bn cubic metres to South Korea may have to be redrawn in favour of a cheaper extension through North Korea to Seoul.

In our opinion, some progress has been made towards making this option feasible — the two Koreas have been co-operating closer and intend to reunite.
This would be beneficial for both exporters and consumers of Kovykta gas — it would reduce capital investment in the pipeline, cut transport costs and, therefore, lower end-user prices.
Korean dialogue aimed at South and North Koreas’ unification is an important political process and will have a serious impact, primarily in south-east Asia. It has been given new impetus as a result of the South Korean president’s visit to Pyongyang last year and the signing of bilateral accords. Korean unification processes have been expedited, making it possible to resolve many problems which had seemed insurmountable.

The Korean dialogue is multifaceted — political, economic and humanitarian. Progress in each of those spheres will certainly not be uniform but things are moving and cannot be stopped. 
It is now possible to suggest confidently that Korean unification will be mostly completed in 2005 or 2006.
What gives such confidence about the time frames?
First, the Korean dialogue has been steady and the North Korean leader, Kim Jong Il’s planned visit to South Korea may further advance bilateral relations and contribute to the ‘opening up’ of the North Korean economy.
Second, the economic situation in North Korea requires urgent supplies of food, energy resources and power, which can only be provided by South Korea or with its support. 

Only South Korea can swiftly move North Korea out of its permanent economic crisis.
Third, the strong external factor — China, Russia, the United States, Japan and other nations are objectively (politically first and foremost) interested in Korean unification.
Developed nations regard North Korea as a threat (by the very fact that it has a nuclear potential and delivery means) to the international community. Therefore, its unification with South Korea would substantially reduce military political risks.
Fourth, ideological changes have been underway in North Korea. They have been transforming the public conscience, no longer presenting south Koreans as enemies. The reunion of many families has been a strong factor promoting early unification.

Fifth, their common history is yet another strong factor. People are willing to pool their efforts, primarily in the framework of international organisations and movements — at the Sydney Olympics a united Korean team was fighting for medals.
Working up a political model for a united Korea will certainly be the most complex problem. Such issues will have to be addressed as the functioning of the legislative and executive power system and the relatively smooth transformation and convergence of power mechanisms existing in the North and South.
Both sides recognise the problems and there will most likely be several transition stages in reunification, which will eventually lead to a uniform political system.

The economic factors of Korean unification have their own specifics. A comprehensive plan will have to be worked up for economic transformation and integration which, by its scale, can in some respects surpass that for a united Germany. 
South Korea has already started work on such a plan.
The development of economic co-operation between the North and South objectively calls, first and foremost, for restoring uninterrupted transport communications between the two parts of the Korean peninsula.

The creation of a Eurasian (Asia-Russia-Europe) transport corridor based on Russia’s Trans-Siberian railway (Trans-Sib) with a branch bound for Korea could help this process. The commissioning of the trans-Korean mainline and linking it to the Trans-Sib could resolve many economic development problems and form the main ‘growth areas’ along the mainline route.
Bringing living standards in North Korea closer to those in South Korea will be the key economic issue. Even though North Korean statistics are inaccessible, available data indicates that living standards in the North are about 30 times lower than the South’s. Per capita incomes in North Korea do not exceed $65-$90 a year — although housing and the social sphere are well developed and free, the crime rate is close to zero and there is no such thing as personal motor transport there.

The most preliminary estimates show that investment in North Korea’s development, to bring it to the level of the South, would require $20bn-$30bn a year during the first seven to ten years — is possible in principle if the parties slash their military spending radically.
The question is how open will a new Korea be to foreign capital.
If the modernisation programme is successfully implemented in the North and a common economic infrastructure is created, a united Korea can, in ten to 15 years become one of the Asia-Pacific region’s leading nations.

Harmonising living standards in various parts of one country means that relative energy consumption levels should also be similar. According to the International Energy Agency’s data, in 1999 per capita energy consumption in South Korea was 3.75 times higher than in North Korea. Any steps to modernise the North Korean economy will require large spending on energy resources — and supplies can only come from outside the country.
Only imported gas can ensure that substantial growth in demand for energy, in line with general trends in energy consumption in the Asia-Pacific region.

The share of gas in primary energy consumption in Asia-Pacific countries grew substantially in the 1990s. In South Korea the share increased from one per cent in 1990 to ten per cent in 2000 and will reach 33 per cent of total primary energy consumption by 2015, according to forecasts.
In North Korea, the demand for primary energy is now mostly met by coal (83 per cent) and water power (12 per cent). Imported liquid fuel is about four per cent and is used exclusively for transport needs.

Natural gas is not present in North Korea’s energy balance. If it remains on its own, it is very likely that gas will be limited to that it gets as payment for transit of Kovykta gas to South Korea — if a pipeline is laid through North Korea. 
But with unification there will emerge additional economic incentives — that will eliminate the relevant political risks — for an onshore pipeline through the Korean peninsula. It would then be more likely that North Korea’s power stations will convert to natural gas as a more up-to-date and environmentally friendly fuel.

Our assumption is that Korea will reunite in 2005, and we have considered scenarios under which the North will reach per capita energy consumption levels of 60, 70, 80 and 90 per cent of that in South Korea ten, 15 and 20 years afterwards.
The chart shows natural gas consumption in a united Korea, based on those scenarios with account of an increase due to the unification effect and growing per capita power energy and gas consumption in the North.
We calculate that the share of natural gas in North Korea’s primary energy resources balance will range from 12 to 24 per cent, depending on which scenario is realised, due to the economic effects of unification. In absolute figures, an increase in demand for gas will average between 18m and 20m tonnes of oil equivalent depending on the scenario.

Korean unification will substantially increase demand in the Asia-Pacific natural gas market.
Where can the extra gas come from? That additional market demand has not been taken into account so far when the economic efficiency of various gas production and transport projects have been considered.
And is that effective demand — can the potential consumers pay for it?
To answer that it is necessary to estimate potential cuts in military spending as a result of unification.
According to The World Factbook, in 1998 North Korea’s military spending amounted to $4.9bn, or 33 per cent of its GDP. Unification will certainly release a substantial share of that defence spending.

If North Korea halved its military spending, about $2.5bn could then be used to improve living standards, meet demand for energy and import fuel. If power-generation was converted to natural gas, it would be logical to invest part of that money developing a gas infrastructure in the North and buying supplies. Potential investment by the South into the economy of the North during the first years after unification should also be taken into account.
So far South Korea has mainly imported liquefied natural gas (LNG), the bulk of which has come from neighbours such as Indonesia (65 per cent) and Malaysia (25 per cent). 
It would be logical to suggest that additional demand for gas due to Korean unification will also be met with LNG (including Sakhalin gas).

During talks when the Russian president visited Seoul this year, the South Koreans expressed interest in importing Russian gas to diversify supply sources. South Korea can cope with that by having a pipeline network supplying gas from sea terminals to consumers.
As the new Kovykta pipeline system is planned to run from Eastern Siberia to China and on to South Korea, a united Korea’s growing demand for natural gas could be met from Russia.
So far, North Korea has been considered as a country across which a gas pipeline cannot run, or at best be a transit country, but with reunification it would become a consumer. The planned pipeline’s capacity could be increased from 30m tonnes of oil equivalent a year to, say, 45m tonnes with all the resulting economic benefits.

This will increase the estimated capital cost of an onshore export gas pipeline by $1bn to $8bn compared to the $9bn for one with an offshore section.
But the increase in the pipeline’s capacity will, according to our estimates, reduce transport tariffs by about 20 per cent (for the description of the calculation see ‘The pipeline that is one too many’, Oil & Capital, No 10, 2000). That would reduce the end price paid by consumers for Russian gas and improve the competitive edge of North and South Korea and the Asia-Pacific natural gas market as a whole. 

China’s wait-and-see stance to the Kovykta project should also be taken into account. Because of recent discoveries in China, Beijing may decide to cut down gas imports and replace them with its owns. That would be unprofitable for Russian exporters but a price cut due to a 20-per cent mark-down of the transport tariff could let Kovykta gas be in demand in China.
As for Korea, potential competition with LNG should be considered.
According to the World Energy Outlook forecasts, in 2010 LNG will fetch $140 a tonne of oil equivalent in the East-Asian region.

For Kovykta’s gas, the price in South Korea, according to L. Bodarenko’s estimates (The economy of trans-national gas industry projects in Eastern Siberia, Materials of the Moscow International Energy Club’s conference, Moscow, 1998), will also be around $140 a tonne of oil equivalent ($120 per 1,000 cubic metres).
If those estimates were made independently and the prices remain comparable, Kovykta’s gas will be able to compete in the Asia-Pacific market. But considering trends in LNG production, where intense research and development is leading to the reduction of production and transport costs, the situation is likely to change. Cuts in gas prices due to lower transport tariffs will improve the Kovykta position in Korea and other Asia-Pacific markets.

So, when making feasibility estimates for an export gas pipeline from the Kovykta field to China and on to South Korea, the potential ‘Korean unification effect’ should be included. Russian exporters could benefit from an increase in more competitive supplies in their new Asian market.