Energy Cooperation and Energy Security: Korean Perspective

Professor Sang-Gon LEE, Ph.D.

Korea Energy Economics Institute

prepared for Energy Cooperation in Northeast Asia: Directions and Implementation Seoul, October 18, 2002

Contents



Energy Situations of Korea



Energy Security: A New Angle



Energy Security Measures of Korea



Significance of NEA Energy Cooperation



NEA Energy Situations and Cooperation



North-South Korea Energy Cooperation

2

Energy & Economic Growth of Korea

1 5 .0

1 0 .0

5 .0

0 .0

- 5 .0

- 1 0 .0

8 .1

5.1

G D P 1 0 .0

10.6

1 . 0 6

8 0 ~ 8 5

0 . 6 3

8 5 ~ 9 0 6 .1

7.5

9 0 - '0 0 En e r g y C o n s u m p tio n

1 . 2 4

5 .0

9 7

1 . 8 7 9.3

9 8

1 . 2 2

1 0 .9

En e r g y /G D P Ela s tic ity

9.3

0 . 8 5

9 9 2 .0 0 1 .8 0 8 .8

6.4

1 .6 0 0 0

0 . 7 3

1 .4 0 2 .8

2.5

1 .2 0 1 .0 0 0 1

0 . 8 9

0 .8 0 0 .6 0 - 6 .7

- 8.1

0 .4 0 0 .2 0 3

Energy Consumption Trend by Source

1.4

10.7

18.2

8.2

1.1

1.8

13.5

20.4

8.3

1.3

1.8

14.2

19.7

9.3

1.3

1.8

14.1

20.6

9.8

1.6

60.4

97 54.6

98 53.6

99 52.0

00 1.8

14.2

Others Nuclear 21.2

10.3

1.8

50.8

Bituminous Coal Anthracite Coal LNG Year Petroleum 01 4

Energy Demand Projection by Sector

60% 50% 40% 30% 56.0

52.9

50.8

20% 10% 0% Industry 2000 2010 2020 20.6

23.0

24.6

Transport 21.6

22.0

22.6

1.7

2.1

2.1

Residential & Commercial Public & Others 5

Energy Demand Projection by Source

(Unit: Million TOE) 150 100 50 0 350 300 250 200 192.9

27.2

18.9

1.4

100.3

42.9

2000 61.5

2010 263.6

39.5

32.1

1.2

311.8

52.0

1.2

48.0

Nuclear Hydro LNG 139.6

123.7

Petroleum 62.6

2020 Year Coal  Oil dependency lessens (52% in 2000  44.8% in 2020), but oil will remain the most important fuel  LNG demand is projected to grow by 5.4% between 2000~2010  Coal and nuclear are to grow steadily along with the electricity demand growth 6

Energy and GHG Emission Projection

160 140 120 100 GHG (Million TC) 82.5

GHG Per Capita (TC) 119.9

2.66

3.5

138.0

125.9

3 3.00

2.69

2.5

80 60 2 1.93

40 20 1.5

0 1990 1995 1997 1999 1 Energy-related CO 2 Emission Year 2000 2010 2020 CO2 Emission (Million TC) Per capita CO2 (TC) CO2/GDP (TC/Mil. 95 won) 118.5

163.3

185.6

2.52

0.25

3.29

0.21

3.66

0.16

CO2/Energy (TC/TOE) 0.61

0.62

0.60

7

Security Aspect of Korea Energy Supply

 Energy demand: 198.4 million TOE  Energy import : US$ 37.6 billion  Korea ranks in the world • No. 10 in energy demand • • No. 4 in oil imports No. 2 in coal and LNG imports  High Import Dependency • 1990 : 87.9% → 2001: 97.3% (unit : %) 1980 Overseas Dependency of Energy Supply (Excluding Nuclear) Share of Oil in TPES Share of the Middle East Oil Supply Share of Energy Imports to Total Import Expenditure 73.5

(71.6) 61.1

98.8

29.5

1990 87.9

(73.7) 53.8

73.7

15.6

2000 97.2

(83.1) 52.0

76.9

23.4

2001 97.3

(83.2) 50.6

77.0

23.9

8

Energy Security

 Traditional Focus - Quantity Risk • Political or Strategic Energy Supply Disruption  Price Risk + Quantity Risk • Short-term Supply Shortage  Price Shocks  Environmental Risk + Price Risk + Quantity Risk • Economic Vulnerability to Environmental Sanctions

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

• Set up an efficient and environment-friendly energy supply system + emergency preparedness + International cooperation 9

Energy Security: A New Angle



3 Dimensions of Energy Security

•

Energy Supply Security

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

•

Energy Economic Security

– Broader Perspective of Fortifying Economic Security from Energy Instability: reduce vulnerability to price volatility, enhance energy efficiency, market liberalization, minimize impacts from environmental issues, ...

•

Energy for Security

– Geopolitical Aspect of Energy: energy as a catalyst for international economic cooperation, easing international tensions 10

Energy Security Measures of Korea

 • Solidify the Basis of Energy Supply Stability

Oil Stockpiling

– Government stockpiling started in 1980 & private sector in 1992 •

Enhance Natural Gas Supply Stability

– Long-term import contracts & expand supply infrastructure •

Enhance Electricity Supply Stability

– Construct power generation facility & prepare measures for electricity supply stability following the electric power industry restructuring •

Minimize Exposure to External Shocks

– Fuel and import source diversification •

Encourage Energy Resource Development

– Develop East Sea gas field and encourage participation in foreign resource development 11

Energy Security Measures of Korea

 Streamline Energy Economic Foundation - “ Efficientization ” of the Energy Sector •

Establish Environment-friendly Energy Structure

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

Liberalization 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 Prices

– Energy Price Reform being Implemented 12

Energy Security Measures of Korea

 Geopolitical Potentials of Energy •

Seed for Broader International Economic Cooperation

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

Reduce 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 Trade

– East-West Asia Dialogue: Recognition of Economic Interdependency – Strengthen Bargaining Power through Unified Voices 13

Why NEA Energy Cooperation?



Korean Perspectives

• Strengthen Energy Supply Security – Import source & fuel diversification – From isolated to continent-integrated energy system • Address Energy-Environment Issue – Wider access to environment-friendly energy – Alleviate siting problems • Cost-Effective Energy Supply – Transport cost reduction due to adjacency – Avoided costs on infrastructure investment • Catalyst for North-South Korea Cooperation 14

NEA Energy Security Threatening Factors

 Rapid Growth of Energy Demand • EIA forecast of annual growth rate for 1999~2020: China 4.7%, South Korea 2.8%, World Average 2.2%  Growing Dependency on Oil • • Oil becoming the leading primary energy in NE Asia Japan (2 nd largest consumer), China (3 rd ), South Korea (6 th )  Increasing Import from Outside the Region • 76% of NE Asia oil imports from the Middle East in 1999: Japan (86%), S.Korea (72%), China (46%  79% in 2020)  Vulnerability to Environmental Issues • High dependency on coal (64% in China) and oil (S. Korea 51%, Japan 50%, China 30%) 15

Why NEA Energy Cooperation?



Economic Benefits

• Resource development • • Improvement in facility use Spillover Effects: market liberalization, etc.



Environmental Benefits

• Utilization of abundant environment-friendly energy 

Emergency Preparedness

• • Less vulnerable to factors outside the region Enable emergency swap of energy supply 16

Overview of Northeast Asia

 A Diverse Mixture of Countries with • Different stages of economic development • • Disparate political and social situations Divergence in energy reserves Comparison of the Northeast Asian Countries S. Korea N. Korea Japan China Mongolia Russia Population (million) 47.6

23.41

126.7

1,271.9

2.6

146.9

1999 GDP per capita (US$) 8,654 355 23,100 784 374 4,000 Land Area (1,000 km 2 ) 99.5

120.5

377.8

9,326.4

1,556.5

16,995.8

Population Density (persons /km 2 ) 478 192 336 133 1.4

9 Proven Recoverable Reserve (Mton) Coal Oil Natural Gas 82 600   6  785 7 32 95,900 10,000 146,560 5,272  6,654 1,171  47,700 17

Primary Energy Production/Consumption in NEA

S. Korea Japan China (Unit:Mtoe)

3-country total (3a)

N. Korea Mongolia Russia

NE Asia Total (a)

World Total

(b) 3-country Share (3a /b) NE Asia Share (a/b)

Production

Consumption

Production

Consumption

Production

Consumption

Production

Consumption

Production

Consumption

Production

Consumption

Production

Consumption

Production

Consumption

Production

Consumption

Production

Consumption

Production

Consumption

Coal 2.2

42.9

2.1

98.9

498.0

480.1

502.3

621.9

13.8

N/A

3.3

N/A

115.8

110.4

635.2

732.3

2,137.4

2,186.0

23.5%

28.4%

29.7%

33.5%

Oil

101.8

0.7

253.5

162.3

226.9

163.0

582.2

-

N/A

-

N/A

323.3

123.5

486.3

705.7

3,589.6

3,503.6

4.5%

16.6%

13.5%

20.1%

Natural Gas

18.9

2.2

68.6

25.0

22.3

27.2

109.8

-

N/A

-

N/A

490.5

339.5

517.7

449.3

2,180.6

2,164.0

1.2%

5.0%

23.7%

20.8%

Nuclear 28.1

28.1

82.5

82.5

4.3

4.3

114.9

114.9

-

N/A

-

N/A

33.7

33.7

148.6

148.6

668.6

668.6

17.1%

17.1%

22.2%

22.2%

Hydro 0.5

0.5

7.9

7.9

19.0

19.0

27.4

27.4

0.9*

N/A

-

N/A

14.2

14.2

42.5

41.6

230.4

230.4

11.8%

11.8%

18.4%

18.1%

Total 30.8

192.3

95.4

511.3

708.6

752.6

834.8

1456.2

14.7

N/A

3.3

N/A

977.5

621.3

1,830.3

2,077.6

8,806.6

8,752.4

9.4%

16.6%

20.8%

23.7%

Self Sufficiency 16.0 % 18.7% 94.2% 57.3% 88.1% 18

Long-term Outlooks of NEA

 Total Energy Consumption Forecast (EIA) S.Korea

Japan China World 1999 7.3

21.7

32.0

381.8

2005 9.2

22.8

43.2

439.3

2010 10.3

23.5

55.3

489.7

2015 11.8

25.1

69.1

547.4

(Unit: Quadrillion Btu) 2020 Average annual percentage change (1999-2020) 13.2

26.0

84.1

607.1

2.8

0.9

4.7

2.2

 Carbon Dioxide Emission Forecast (EIA) S. Korea Japan China World 1999 107 307 669 6,091 2005 128 324 889 7,015 2010 144 330 1,131 7,835 2015 159 342 1,398 8,773 2020 175 353 1,683 9,762 (Unit: Million TC) Average annual percentage change(1999-2020) 2.4

0.7

4.5

2.3

19

Energy Cooperation Schemes

 Natural Gas • Development & Trans-NEA Pipeline Construction: Irkutsk, Sakhalin, Yakustk...

 Electricity • Power Grid Interconnection & Power Swap  Oil • Joint Utilization of Storage Facility, Joint Transportation, & Joint Efforts to Correct the “Asian Premium” 20

Prospective PNG Projects

Surgut Krasnoyask Urumqi Yakutsk Irkutsk Tynda Xi’an Ulan-Ude Ulanbaartor Chita Beijing Tianjin Balgovshchensk Komsomolsk Khavarovsk Halbin Okka Changchun Shenyang SanDong Wonsan Pyunyang Seoul Vladivostok Nigata Tokyo Shanghai

21

Power Grid Interconnection Prospect

Amur Iruktsk Sakhalin Russia Mongol China Beijing Peace Network E.Siberia-NEA Line Hydro Power Nuclear Power Shenyang N. Korea S. Korea Japan

Tokyo

22

Obstacles to NEA Energy Cooperation

 Political and Institutional Obstacles • • Relations among the countries within NEA & Inter-Korean tension Uncertainty in investment and market conditions, esp. in transitional economies  Economic Obstacles • • Financing of huge investment costs Competition with other energy projects outside of NEA  Geographical/Technological Obstacles • Technological difficulties in the tundra area 23

Implementation Requisites

 Dialogue for NEA Cooperation • • Address political & institutional concerns – Investment protection treaties, Assurance of fiscal stability (tax, tariff), Dispute settlement mechanism for resolving trans-boundary jurisdiction, Harmonization of technical standards, etc.

Governmental, commercial & research Sector interchange – Senior Officials Meeting, Expert Forum, Business Forum  An Institutional Vehicle for Infrastructure Financing • NEA Development Fund (Bank) – Finance infrastructure investment/economic development in NEA – Mobilize international capital market for NEA infrastructure needs – Reduce investment risks with governments as its shareholders 24

North-South Korea Energy Cooperation

 Stable North Korean Economy Solidifies NEA Security • Resolving energy shortage is a prerequisite for economic boost  Mutually Beneficial Energy Cooperation • Utilize comparative advantages – South(capital, technology) vs. North(labor, land)  Implications of North-South Korea Energy Cooperation • • • Open up crossing gate of energy trade and system interconnection Induce foreign investment and stable political circumstances Foster a market-oriented institutional transition in N. Korea 25

Recent Development in North Korea

 Economic Changes in North Korea • • Currency & Wage Reform - Introduction of market-Based Elements “Sinuiju Special Administrative Region” - Readies Capitalism entry  • • • • • Toward Reconciliation and Cooperation • Reconnecting severed railways/roads between the North and South – Started clearing mines in DMZ Agreed construction of industrial complex in Gaesung Reconciliation with Japan Participation in Busan Asian Games Possible resumption of US-N.Korea Talk Recent revived interests in NEA Development Bank as a solution for financing problem 

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

26

Concluding Remarks

 NE Asian Energy Cooperation for Energy Security • • • • • Less import dependency from outside the region Cost-effective supply due to area adjacency Abundance of environment-friendly energy Improvement in facility use Facilitate market liberalization  Obstacles can be superseded by practical interests  Interests of Nations are increasingly moving towards the same direction  Much to be done & requires concerted efforts 27

Energy...

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

Thank You Very Much!

Gam-Sa-Ham-Ni-Da!

28