Energy Cooperation and Energy Energy Cooperation and Energy Security: Korean PerspectiveSecurity: Korean Perspective

Professor Sang-Gon LEE, Ph.D.Professor Sang-Gon LEE, Ph.D.

Korea Energy Economics InstituteKorea Energy Economics Institute

prepared forprepared for

Energy Cooperation in Northeast Asia: Energy Cooperation in Northeast Asia:

Directions and ImplementationDirections and Implementation

Seoul, October 18, 2002Seoul, October 18, 2002

2

ContentsContents

Energy Situations of KoreaEnergy Situations of Korea

Energy Security: A New AngleEnergy Security: A New Angle

Energy Security Measures of KoreaEnergy Security Measures of Korea

Significance of NEA Energy CooperationSignificance of NEA Energy Cooperation

NEA Energy Situations and CooperationNEA Energy Situations and Cooperation

North-South Korea Energy CooperationNorth-South Korea Energy Cooperation

3

Energy & Economic Growth of KoreaEnergy & Economic Growth of Korea

8.1

10.0

6.15.0

-6.7

10.9

8.8

2.8

7.5

9.3

-8.1

9.3

6.4

10.6

2.5

5.1

0.63

1.06

1.24

1.87

1.22

0.73

0.85 0.89

-10.0

-5.0

0.0

5.0

10.0

15.0

80~85 85~90 90-'00 97 98 99 00 01

Gro

wth

Rat

e, %

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

Ela

stic

ity

GDP Energy Consumption Energy/GDP Elasticity

4

Energy Consumption Trend by SourceEnergy Consumption Trend by Source

60.4 54.6 53.6 52.0 50.8

18.220.4 19.7 20.6 21.2

10.7 13.5 14.2 14.1 14.2

1.8 1.8 1.8 1.8

10.39.89.38.38.2

1.81.61.31.3

1.1

1.4

97 98 99 00 01Year

Others

Nuclear

Bituminous

Coal

Anthracite

Coal

LNG

Petroleum

5

Residential & Commercial

Energy Demand Projection by SectorEnergy Demand Projection by Sector

0%

10%

20%

30%

40%

50%

60%

Industry Transport Public & Others

2000

2010

202056.0

52.950.8

20.623.0

24.6

21.6

22.622.0

1.7 2.1 2.1

6

Energy Demand Projection by SourceEnergy Demand Projection by Source

42.961.5 62.6

100.3

123.7139.6

32.1

48.0

52.0

18.9

1.2

1.2

1.427.2

39.5

0

50

100

150

200

250

300

350

2000 2010 2020Year

Nuclear

Hydro

LNG

Petroleum

Coal

192.9

263.6

(Unit: Million TOE)

311.8

Oil dependency lessens Oil dependency lessens (52% in 2000 (52% in 2000 44.8% in 2020), but oil 44.8% in 2020), but oil will remain the most will remain the most important fuelimportant fuel

LNG demand is LNG demand is projected to grow by projected to grow by 5.4% between 5.4% between 2000~20102000~2010

Coal and nuclear are to Coal and nuclear are to grow steadily along grow steadily along with the electricity with the electricity demand growthdemand growth

7

GHG (Million TC) GHG Per Capita (TC)

82.5

119.9

138.0

125.9

1.93

2.66

3.00

2.69

0

20

40

60

80

100

120

140

160

1990 1995 1997 1999

1

1.5

2

2.5

3

3.5

Year 2000 2010 2020

CO2 Emission(Million TC)

118.5 163.3 185.6

Per capita CO2(TC)

2.52 3.29 3.66

CO2/GDP(TC/Mil. 95 won)

0.25 0.21 0.16

CO2/Energy(TC/TOE)

0.61 0.62 0.60

Energy and GHG Emission ProjectionEnergy and GHG Emission Projection

Energy-related COEnergy-related CO22 Emission Emission

8

SecuritySecurity Aspect of Korea Energy SupplyAspect of Korea Energy Supply

Energy demand: 198.4 million TOEEnergy demand: 198.4 million TOE Energy import : US$ 37.6 billionEnergy import : US$ 37.6 billion Korea ranks in the worldKorea ranks in the world

• No. 10 in energy demandNo. 10 in energy demand• No. 4 in oil importsNo. 4 in oil imports• No. 2 in coal and LNG importsNo. 2 in coal and LNG imports

High Import DependencyHigh Import Dependency• 1990 : 87.9% 1990 : 87.9% → 2001: 97.3% 2001: 97.3% (unit : %)

1980 1990 2000 2001

Overseas Dependency of Energy Supply(Excluding Nuclear)

73.5(71.6)

87.9(73.7)

97.2(83.1)

97.3(83.2)

Share of Oil in TPES 61.1 53.8 52.0 50.6

Share of the Middle East Oil Supply 98.8 73.7 76.9 77.0Share of Energy Imports to Total ImportExpenditure

29.5 15.6 23.4 23.9

9

Traditional Focus - Quantity RiskTraditional Focus - Quantity Risk• Political or Strategic Energy Supply DisruptionPolitical or Strategic Energy Supply Disruption

Price Risk + Quantity RiskPrice Risk + Quantity Risk• Short-term Supply Shortage Short-term Supply Shortage Price Shocks Price Shocks

Environmental Risk + Price Risk + Quantity RiskEnvironmental Risk + Price Risk + Quantity Risk• Economic Vulnerability to Environmental SanctionsEconomic Vulnerability to Environmental Sanctions

““Energy Security” - Stable, Cost-Effective and Energy Security” - Stable, Cost-Effective and Sustainable Supply of EnergySustainable Supply of Energy

• Set up an efficient and environment-friendly energy Set up an efficient and environment-friendly energy supply system + emergency preparedness + International supply system + emergency preparedness + International cooperationcooperation

Energy SecurityEnergy Security

10

Energy Security: A New AngleEnergy Security: A New Angle

3 3 Dimensions of Energy SecurityDimensions of Energy Security• Energy Supply Security

– Traditional Concern of Securing Stable Energy Supply: import Traditional Concern of Securing Stable Energy Supply: import source and fuel diversification, contract flexibility, reliable source and fuel diversification, contract flexibility, reliable delivery routes & system, domestic infrastructure integrity, delivery routes & system, domestic infrastructure integrity, storage, participation in resource development, ...storage, participation in resource development, ...

• Energy Economic Security– Broader Perspective of Fortifying Economic Security from Broader Perspective of Fortifying Economic Security from

Energy Instability: reduce vulnerability to price volatility, Energy Instability: reduce vulnerability to price volatility, enhance energy efficiency, market liberalization, minimize enhance energy efficiency, market liberalization, minimize impacts from environmental issues, ...impacts from environmental issues, ...

• Energy for Security– Geopolitical Aspect of Energy: energy as a catalyst for Geopolitical Aspect of Energy: energy as a catalyst for

international economic cooperation, easing international tensionsinternational economic cooperation, easing international tensions

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Energy Security Measures of KoreaEnergy Security Measures of Korea Solidify the Basis of Energy Supply StabilitySolidify the Basis of Energy Supply Stability

• Oil StockpilingOil Stockpiling– Government stockpiling started in 1980 & private sector in 1992

• Enhance Natural Gas Supply StabilityEnhance Natural Gas Supply Stability– Long-term import contracts & expand supply infrastructure

• Enhance Electricity Supply StabilityEnhance Electricity Supply Stability– Construct power generation facility & prepare measures for electricity supply stability following the electric power industry restructuring

• Minimize Exposure to External Shocks Minimize Exposure to External Shocks – Fuel and import source diversification

• Encourage Energy Resource DevelopmentEncourage Energy Resource Development– Develop East Sea gas field and encourage participation in foreign resource development

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Streamline Energy Economic Foundation Streamline Energy Economic Foundation - “- “EfficientizationEfficientization” of the Energy Sector” of the Energy Sector

• Establish Environment-friendly Energy StructureEstablish Environment-friendly Energy Structure– Promote Energy Efficiency and Savings– Spread New and Renewable Energy– Expand Environment-friendly Energy Supply & Technology

• Liberalization of Energy IndustriesLiberalization of Energy Industries– Deregulation of Domestic Oil Price, Elimination of Entry Barriers to

Oil Industry & Rationalization of Coal Industry– Electric Power Industry Restructuring in Progress– Gas Industry Restructuring being Pursued

• Eliminate Distortions in Energy PricesEliminate Distortions in Energy Prices– Energy Price Reform being Implemented

Energy Security Measures of KoreaEnergy Security Measures of Korea

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Geopolitical Potentials of EnergyGeopolitical Potentials of Energy• Seed for Broader International Economic CooperationSeed for Broader International Economic Cooperation

– Northeast Asian Regional Energy Cooperation: easier to implement because of coinciding practical interests

• Reduce Political Tensions and Promote HarmonyReduce Political Tensions and Promote Harmony– Inter-Korean Dialogue of Energy and Economic Cooperation

– Development of European Coal and Steel Community after WWII to today’s European Union

• Consolidated Approach to International Energy TradeConsolidated Approach to International Energy Trade– East-West Asia Dialogue: Recognition of Economic

Interdependency– Strengthen Bargaining Power through Unified Voices

Energy Security Measures of KoreaEnergy Security Measures of Korea

14

Why NEA Energy Cooperation?Why NEA Energy Cooperation?

Korean PerspectivesKorean Perspectives• Strengthen Energy Supply SecurityStrengthen Energy Supply Security

– Import source & fuel diversificationImport source & fuel diversification– From isolated to continent-integrated energy systemFrom isolated to continent-integrated energy system

• Address Energy-Environment IssueAddress Energy-Environment Issue– Wider access to environment-friendly energyWider access to environment-friendly energy– Alleviate siting problemsAlleviate siting problems

• Cost-Effective Energy SupplyCost-Effective Energy Supply– Transport cost reduction due to adjacencyTransport cost reduction due to adjacency– Avoided costs on infrastructure investmentAvoided costs on infrastructure investment

• Catalyst for North-South Korea CooperationCatalyst for North-South Korea Cooperation

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NEA Energy Security Threatening FactorsNEA Energy Security Threatening Factors

Rapid Growth of Energy DemandRapid Growth of Energy Demand• EIA forecast of annual growth rate for 1999~2020: EIA forecast of annual growth rate for 1999~2020: China 4.7%, South Korea 2.8%, World Average 2.2%China 4.7%, South Korea 2.8%, World Average 2.2%

Growing Dependency on OilGrowing Dependency on Oil • Oil becoming the leading primary energy in NE Asia Oil becoming the leading primary energy in NE Asia • Japan (2Japan (2ndnd largest consumer), China (3 largest consumer), China (3rdrd), South Korea (6), South Korea (6thth))

Increasing Import from Outside the RegionIncreasing Import from Outside the Region• 76% of NE Asia oil imports from the Middle East in 1999: 76% of NE Asia oil imports from the Middle East in 1999:

Japan (86%), S.Korea (72%), China (46% Japan (86%), S.Korea (72%), China (46% 79% in 2020) 79% in 2020) Vulnerability to Environmental IssuesVulnerability to Environmental Issues

• High dependency on coal (64% in China) and oil (S. Korea High dependency on coal (64% in China) and oil (S. Korea 51%, Japan 50%, China 30%)51%, Japan 50%, China 30%)

16

Why NEA Energy Cooperation?Why NEA Energy Cooperation?

Economic BenefitsEconomic Benefits• Resource developmentResource development• Improvement in facility useImprovement in facility use• Spillover Effects: market liberalization, etc.Spillover Effects: market liberalization, etc.

Environmental BenefitsEnvironmental Benefits• Utilization of abundant environment-friendly energyUtilization of abundant environment-friendly energy

Emergency PreparednessEmergency Preparedness• Less vulnerable to factors outside the region Less vulnerable to factors outside the region • Enable emergency swap of energy supplyEnable emergency swap of energy supply

17

Overview of Northeast AsiaOverview of Northeast Asia

A Diverse Mixture of Countries withA Diverse Mixture of Countries with• Different stages of economic developmentDifferent stages of economic development• Disparate political and social situationsDisparate political and social situations• Divergence in energy reservesDivergence in energy reserves

Comparison of the Northeast Asian Countries

Proven Recoverable Reserve(Mton)Population

(million)

1999 GDPper capita

(US$)

Land Area(1,000km2)

PopulationDensity(persons/km2)

Coal OilNatural

GasS. Korea 47.6 8,654 99.5 478 82 6

N. Korea 23.41 355 120.5 192 600

Japan 126.7 23,100 377.8 336 785 7 32

China 1,271.9 784 9,326.4 133 95,900 5,272 1,171

Mongolia 2.6 374 1,556.5 1.4 10,000

Russia 146.9 4,000 16,995.8 9 146,560 6,654 47,700

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Primary Energy Production/Consumption in NEAPrimary Energy Production/Consumption in NEA

(Unit:Mtoe) Coal Oil NaturalGas Nuclear Hydro Total Self

Sufficiency

Production 2.2 - - 28.1 0.5 30.8S. Korea

Consumption 42.9 101.8 18.9 28.1 0.5 192.316.0 %

Production 2.1 0.7 2.2 82.5 7.9 95.4Japan

Consumption 98.9 253.5 68.6 82.5 7.9 511.318.7%

Production 498.0 162.3 25.0 4.3 19.0 708.6China

Consumption 480.1 226.9 22.3 4.3 19.0 752.694.2%

Production 502.3 163.0 27.2 114.9 27.4 834.83-countrytotal (3a) Consumption 621.9 582.2 109.8 114.9 27.4 1456.2

57.3%

Production 13.8 - - - 0.9* 14.7N. Korea

Consumption N/A N/A N/A N/A N/A N/A-

Production 3.3 - - - - 3.3Mongolia

Consumption N/A N/A N/A N/A N/A N/A-

Production 115.8 323.3 490.5 33.7 14.2 977.5Russia

Consumption 110.4 123.5 339.5 33.7 14.2 621.3-

Production 635.2 486.3 517.7 148.6 42.5 1,830.3NE AsiaTotal (a) Consumption 732.3 705.7 449.3 148.6 41.6 2,077.6

88.1%

Production 2,137.4 3,589.6 2,180.6 668.6 230.4 8,806.6World Total(b) Consumption 2,186.0 3,503.6 2,164.0 668.6 230.4 8,752.4

-

Production 23.5% 4.5% 1.2% 17.1% 11.8% 9.4%3-countryShare (3a /b) Consumption 28.4% 16.6% 5.0% 17.1% 11.8% 16.6%

Production 29.7% 13.5% 23.7% 22.2% 18.4% 20.8%NE AsiaShare (a/b) Consumption 33.5% 20.1% 20.8% 22.2% 18.1% 23.7%

19

Long-term Outlooks of NEALong-term Outlooks of NEA

(Unit: Quadrillion Btu)

1999 2005 2010 2015 2020Average annual percentage

change (1999-2020)

S.Korea 7.3 9.2 10.3 11.8 13.2 2.8Japan 21.7 22.8 23.5 25.1 26.0 0.9China 32.0 43.2 55.3 69.1 84.1 4.7World 381.8 439.3 489.7 547.4 607.1 2.2

(Unit: Million TC)

1999 2005 2010 2015 2020Average annual percentage

change(1999-2020)

S. Korea 107 128 144 159 175 2.4Japan 307 324 330 342 353 0.7China 669 889 1,131 1,398 1,683 4.5World 6,091 7,015 7,835 8,773 9,762 2.3

Total Energy Consumption Forecast (EIA)Total Energy Consumption Forecast (EIA)

Carbon Dioxide Emission Forecast (EIA)Carbon Dioxide Emission Forecast (EIA)

20

Energy Cooperation SchemesEnergy Cooperation Schemes

Natural GasNatural Gas• Development & Trans-NEA Development & Trans-NEA

Pipeline Construction: Pipeline Construction: Irkutsk, Sakhalin, Yakustk...Irkutsk, Sakhalin, Yakustk...

ElectricityElectricity• Power Grid Interconnection & Power Grid Interconnection &

Power SwapPower Swap

OilOil• Joint Utilization of Storage Joint Utilization of Storage

Facility, Joint Transportation, Facility, Joint Transportation, & Joint Efforts to Correct the & Joint Efforts to Correct the “Asian Premium”“Asian Premium”

21

Prospective PNG ProjectsProspective PNG Projects

Okka

Pyunyang

Wonsan

Seoul

UlanbaartorKomsomolsk

Khavarovsk

Vladivostok

Yakutsk

Irkutsk

Beijing

Halbin

Changchun

Shenyang

Ulan-Ude

Chita

Balgovshchensk

Tynda

Krasnoyask

Surgut

Tianjin

SanDong

Shanghai

Urumqi

Tokyo

Nigata

Xi’an

22

Power Grid Interconnection ProspectPower Grid Interconnection Prospect

Tokyo

Shenyang

AmurIruktsk

Beijing

Mongol

China

Russia

Japan

N. Korea

S. Korea

Peace Network

E.Siberia-NEA Line

Hydro Power

Nuclear Power

Sakhalin

23

Political and Institutional ObstaclesPolitical and Institutional Obstacles• Relations among the countries within NEA & Inter-Korean Relations among the countries within NEA & Inter-Korean

tensiontension• Uncertainty in investment and market conditions, esp. in Uncertainty in investment and market conditions, esp. in

transitional economiestransitional economies

Economic ObstaclesEconomic Obstacles• Financing of huge investment costsFinancing of huge investment costs• Competition with other energy projects outside of NEACompetition with other energy projects outside of NEA

Geographical/Technological ObstaclesGeographical/Technological Obstacles• Technological difficulties in the tundra areaTechnological difficulties in the tundra area

Obstacles to NEA Energy CooperationObstacles to NEA Energy Cooperation

24

Implementation RequisitesImplementation Requisites

Dialogue for NEA CooperationDialogue for NEA Cooperation

• Address political & institutional concernsAddress political & institutional concerns– Investment protection treaties, Assurance of fiscal stability (tax, Investment protection treaties, Assurance of fiscal stability (tax,

tariff), Dispute settlement mechanism for resolving trans-tariff), Dispute settlement mechanism for resolving trans-boundary jurisdiction, Harmonization of technical standards, etc.boundary jurisdiction, Harmonization of technical standards, etc.

• Governmental, commercial & research Sector interchangeGovernmental, commercial & research Sector interchange– Senior Officials Meeting, Expert Forum, Business ForumSenior Officials Meeting, Expert Forum, Business Forum

An Institutional Vehicle for Infrastructure FinancingAn Institutional Vehicle for Infrastructure Financing• NEA Development Fund (Bank)NEA Development Fund (Bank)

– Finance infrastructure investment/economic development in NEAFinance infrastructure investment/economic development in NEA

– Mobilize international capital market for NEA infrastructure needsMobilize international capital market for NEA infrastructure needs

– Reduce investment risks with governments as its shareholdersReduce investment risks with governments as its shareholders

25

Stable North Korean Economy Solidifies NEA SecurityStable North Korean Economy Solidifies NEA Security• Resolving energy shortage is a prerequisite for economic boostResolving energy shortage is a prerequisite for economic boost

Mutually Beneficial Energy CooperationMutually Beneficial Energy Cooperation• Utilize comparative advantagesUtilize comparative advantages

– South(capital, technology) vs. North(labor, land)South(capital, technology) vs. North(labor, land)

Implications of North-South Korea Energy CooperationImplications of North-South Korea Energy Cooperation• Open up crossing gate of energy trade and system Open up crossing gate of energy trade and system

interconnectioninterconnection

• Induce foreign investment and stable political circumstancesInduce foreign investment and stable political circumstances

• Foster a market-oriented institutional transition in N. KoreaFoster a market-oriented institutional transition in N. Korea

North-South Korea Energy CooperationNorth-South Korea Energy Cooperation

26

Recent Development in North KoreaRecent Development in North Korea

Economic Changes in North KoreaEconomic Changes in North Korea• Currency & Wage Reform - Introduction of market-Based ElementsCurrency & Wage Reform - Introduction of market-Based Elements• ““Sinuiju Special Administrative Region” - Readies Capitalism entrySinuiju Special Administrative Region” - Readies Capitalism entry

Toward Reconciliation and CooperationToward Reconciliation and Cooperation• Reconnecting severed railways/roads between the North and SouthReconnecting severed railways/roads between the North and South

– Started clearing mines in DMZStarted clearing mines in DMZ• Agreed construction of industrial complex in GaesungAgreed construction of industrial complex in Gaesung• Reconciliation with JapanReconciliation with Japan• Participation in Busan Asian GamesParticipation in Busan Asian Games• Possible resumption of US-N.Korea TalkPossible resumption of US-N.Korea Talk• Recent revived interests in NEA Development Bank as a solution for Recent revived interests in NEA Development Bank as a solution for

financing problemfinancing problem

A positive sign for economic and energy cooperation, A positive sign for economic and energy cooperation, and for the prospect of peace and security for NEAand for the prospect of peace and security for NEA

27

Concluding RemarksConcluding Remarks

NE Asian Energy Cooperation for Energy SecurityNE Asian Energy Cooperation for Energy Security • Less import dependency from outside the regionLess import dependency from outside the region• Cost-effective supply due to area adjacencyCost-effective supply due to area adjacency• Abundance of environment-friendly energy Abundance of environment-friendly energy • Improvement in facility useImprovement in facility use• Facilitate market liberalizationFacilitate market liberalization

Obstacles can be superseded by practical interestsObstacles can be superseded by practical interests Interests of Nations are increasingly moving towards the same directionInterests of Nations are increasingly moving towards the same direction Much to be done & requires concerted effortsMuch to be done & requires concerted efforts

28

Energy...Energy...

Gam-Sa-Ham-Ni-Da!

could be either the source of conflict, or a cooperative catalyst for could be either the source of conflict, or a cooperative catalyst for strong regional ties and peaceful coexistent prosperity!strong regional ties and peaceful coexistent prosperity!

Thank You Very Much!