Shale Gas Revolution and Desperate “Eastward” Energy Policy of Russia

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Recommended Citation

Oh Sung-hwan, "Shale Gas Revolution and Desperate “Eastward” Energy Policy of Russia", Uncategorized NAPSNet Special Reports, March 04, 2014, https://nautilus.org/uncategorized/shale-gas-revolution-and-desperate-eastward-energy-policy-of-russia/

by Oh Sung-hwan

4 March 2014

This Special Report was originally published as a Working Paper 2013-11 by the Center for Energy, Governance and Security at Hanyang University, Seoul.


I. INTRODUCTION

North America’s shale gas revolution has fundamentally changed North America’ s energy market, thereby bringing new opportunities and challenges to the Northeast Asian LNG market.

For North America, due to the increase in shale gas production, the export-import structure of gas in the US has been reversed, and the possibility of energy independence has increased. In the meantime, Canada, being almost fully dependent on the US for gas export, can not help but explore new markets, which is in fact the Asian market.

For major Northeast Asian gas importers, such as Japan and Korea, which are heavily dependent upon the Middle East and East Asia, Russia’s East Siberia is considered a new alternative  for the purpose of diversifying LNG import sources for the past decade. Therefore, Northeast Asian countries tried their best to secure East Siberian gas through  enhancing their bilateral relationships with Russia. However, due to the recent shale gas revolution in North America,  the Northeast Asian region now encounters new opportunities  in  LNG  contracts, which is totally  different  from the  situation in the past.

In the meantime, once  the   negotiation  on  gas  prices  between Russia and China is settled, 38bcm  of Russian  gas  will  be  introduced to China, In this regard, Korea and Japan should pay attention to the possible revamp in the Northeast Asian energy market and the impact related to securing energy supplying  sources.

Under these circumstances, the introduction of American shale gas with a cheap price and favorable conditions Ci.e., Henry Hub price, without the clauses of take  or pay  and  destination,  etc.),  or Canadian gas with relative advantages  in  terms  of  transportation  distance  and gas reserves, is predicted  to exert  a  significant  impact  on  the Northeast  Asian  LNG market.

Given that Northeast Asia has been significantly dependent on the Middle East or neighbouring East Asia in terms of energy security, if the region become the beneficiaries of North America ‘s shale gas revolution, the most notable thing would be that America and Canada, which have been alliances in political and military contexts, will become alliances of Korea and Japan in energy security as well. It can be referred to as a grand paradigm shift.

Apart from North America, Australia and East Africa have huge potential in gas production, which can enhance the buyers’ power in the Northeast Asian LNG market.

For Korea, the implication of East Siberian gas is not simply limited to  the area of  energy  security,  since the PNG project (gas pipeline linking Russia and South Korea via North Korea) based in East Siberian gas fields are considered as important methods to secure peace and prosperity on the Korean peninsula and in Northeast Asia. However, this project is thought to have missed a good time to be commenced, and Russian gas is losing its price competitiveness s compared to North America and Australia.

In conclusion, it is necessary to  establish new  rules  and  policies in the Northeast Asian  energy  market and  within  the  regional  situation as a whole. Initiatives on the LNG trading hub in  the  Asian  region should be pushed forward through closer regional cooperation. In particular, Korea, Japan, and China, as major  consumers, have to share common interests and make the maximum use  of  the  favorable conditions of the shale gas revolution. Furthermore, the scope of cooperation should not be limited to Northeast Asia, which includes Korea, Japan, China, etc., but be expanded to the Asia Pacific region including North America.


II. SPECIAL REPORT BY Oh Sung-hwan

1 . The Revolution of the Energy Industry following the Introduction of Future Energy

Shale gas, as one of the energy resources for the future, is attracting global attention and expectations. Shale gas has huge deposits (i.e., adequate), is relatively cheap, affordable), and exists all around the world evenly (i.e, reliable). Shale gas is the newest version of energy resources, which could overturn the traditional concept of energy security.

Maria van der Hoeven, the Head of IEA, said that during the past 15 years the growing demand in China’ s energy market has had the biggest impact on the world oil market. Meanwhile, in the next five years, she predicted that the increase in North America’ s energy supply will be a crucial factor in the formation of the world energy market. Moreover, the concept of oil peak has also nearly vanished at present.

According to the Energy Research Institute of the Russian Federation, although energy demand in developed countries is currently decreasing, gas consumption in the world gas market is continuing to grow due to the increase of energy demand in newly developing countries, which can offset the decreased amount.  In  this  regard,  the  Institute  predicts  that  the  advent of the Golden Age of natural gas is around  the  comer  at  least  for  30 years from now on. From  a  long  term  perspective,  the  share  of oil  and gas in the world energy mix will not change significantly. For example, oil and gas accounted for 53.65% of the global energy mix in 2010 and are expected to account for 51.4% in 2040. However, the share of  untraditional energy resources such as shale gas, oil sand etc is forecasted to increase more rapidly than traditional energy resources due to the fast speed of technology  development

In the meantime, the IEA analyzes that gas demand for transportion has increased due to the shale gas boom and China’s enhancement of environmental policy, and recognizes the importance of this phenomenon. In this regard, Maria van der Hoeven, the head of IEA, also recognizes that natural gas has become one of  major  power  generating  energy  resources and predicted that natural gas will play an important role as a fuel for transport in the next 5 years. However, she added that the increase of demand in world gas market may be delayed by the factors such as the continued delay of economic  recovery in Europe  and  certain  sign  of revival of coal in the fuel market for power generation,  as  a  result  of  the rebounding  gas prices in  the  US.

At present, North America has become the only region in the world that is developing shale gas for practical purposes due to accumulated investments and research on drilling methods such as fracturing, under the patronage of the US government since 1980, while according to many experts, it would take at least 10 years for other countries to successfully develop shale gas.

Russia firmly holds onto its negative stance on shale gas development.

President Putin expressed his own opinions about shale gas in the Second Gas Exporting Countries Forum, which was held in Moscow in July 2013, as follows: “Currently shale gas is actively developed in America, but in terms of prices, shale gas is not competitive compared to conventional gas. Moreover, it is likely to demage the environment. The impact of shale gas is often over-estimated by some people. Although Russia has huge deposits of  shale gas, Russia is capable of supplying consumers all over the world with its own conventional gas alone. If the  technology  for shale gas is further developed, shale gas development in Russia can be realized. But, for the time being, there is no need to develop shale gas in Russia.”

In the meantime, even  within  the  Russian   government   supportive opinions for shale gas  development have  been  often  raised.  In  May  2010, the Energy Committee of the National Duma  expressed concerns  that  a sharp decrease in demand  for  Russian  gas  is  likely  to  take  place  due  to the shale gas development in North America, Europe and China. Thus, the Duma emphasized the necessity for R&D  on  shale  gas  development. However, Former Minister  of  Energy  Sergei  Shmatko  responded  at that time that the impact of shale gas on the world energy market would be insignificant. Further, in February 2012, Alexei Miller, CEO  of  Gazprom made it clear that  Gazprom  will  not  participate  in  the global  competition for shale gas development. In early 2013, Gazprom declared that it will concentrate on the development of traditional gases including the development of the Arctic Ocean without developing shale gas.

2 . EpicenTer of the Shale Gas Revolution: North America

In 2009, the US became the world’ s largest gas producer by exceeding Russia, and still  maintains its status.  The  output  of  American  natural  gas in 2009 amounted to 584bcm, and Russia’s output was 527.7bcm. In 2012, America’s gas production amounted to 681.4bcm, whereas Russia’s  output was 592.3bcm, accounting for 20.4% and 17.6% of the world natural  gas market respectively. According to the EIA,  due  to  the  rapid  increase  of gas production America ‘s gas import has been  decreasing  since 2011.  In 2012 the US imported only a small amount of gas from traditional gas suppliers such as Canada and Norway,  which  amount to 5  6% of  its total gas  consumption .

In the meantime, the IEA forecasts that in 2020 the US would be the largest oil producer by exceeding Saudi Arabia and Russia. and in 2035, the US is predicted to be an energy independent country.2)

Table World Natural Gas Production (2011) (bcm)

Country 2007 2008 2009 2010 2011 2012 2013
1 us 545.6 570.8 584.0 603.6 648.5 681.4 20.4%
2 Russia 592.0 601.7 527.7 588.9 607.0 592.3 17.6%
3 Iran lll.9 116.3 131.2 146.2 151.8 160.5 4.8%
4 Qatar 63.2 77.0 89.3 116.7 145.3 157.0 4.7%
5 Canada 182.7 176.6 164.0 159.9 159.7 156.5 4.6%

(Source: BP Statistical Review of  World  Energy  June  2013)

2) Economist, Vol. 1186, May 6, 2013, “Northeast Laugh and Russia, Middle East Cry”

At present, the US is estimated to produce 91% of the total output of shale gas in the world. The US has the second largest shale gas reserves (24.41tan), and owing to the progress in exploration technology, the success rate of its exploration of shale gas is estimated to reach up to 20%. In regard s to this level of success rate, profit arising from shale gas development can offset the cost. Currently, the shale gas boom in America is creating new i:;henomena such as a massive population influx and formation of new cities, which reminds us of the Gold Rush in the past. This atmosphere encourages landlords to develop more shale plays. According to the EIA, thanks to the oil and gas development in the US, oil production increased every month by 39%, and gas by 25% between 2007 and 2012. During the same period, employment in relevant industries increased by 40%, while the growth rate of employment in the whole industry of the private sector remained at 1%.

The US is predicted to become a net export country of natural gas by 20’22 due to the rapid increase in shale gas production, whereas until 2005 it was expected that import from overseas gas market would increase rapidly.

Now, the US is trying to replace existing facilities for  LNG  import  with LNG export facilities to deal  with the oversupply of  gas. In particular,  the US is planning to build extra LNG export tenninals for liquefaction and compression. Accordingly, the US is projected to equip facilities for LNG export with a daily capacity of 60-80bcf  between  2020  and 2025.  In 2012 the total volume of LNG in the world LNG trade market amounted to 240 million tons. In this context, in the future the US is going to enjoy its dominant status in the world LNG market as it is predicted to supply 150 million tons of LNG, by itself, for the market.

Meanwhile, the IEA announced in March 2012 that the US crude  oil import from the OPEC marked  the lowest  figures  in the  last 25 years  due to the development of shale plays  in  the  US.  For  example,  in 2010  crude oil was hardly produced in Eagle Ford, Texas; however, as a result of the development of shale plays, in March 2013,  crude  oil  produced  in  Eagle Ford accounts for 22% of  oil  produced  in Texas,  and  7%  of  the  that  in the US.

The US is well equipped with infrastructure for shale gas development including advanced pipeline networks and drilling experiences accumulated since a long time ago. This can be regarded as fairly big advantages in the light of the fact that most countries are not equipped enough with the necessary infrastructure. Actually, most countries apart from the US and Canada have little experience in drilling shale layers, and without real drilling practice, it would be difficult to understand the geological characteristics and obtain know-hows .

Now, the Northeast Asian LNG market is expecting more favorable conditions for LNG contracts, thanks to the relatively cheap  price  of American   gas.  Suppose  that   oil   price   is   $100,  and   Henry  Hub price maintains under $6.60/mmBtu, North America LNG is capable of compete with the oil-indexed Middle East LNG in the  Asian  market  in  terms  of price competitiveness.

In May 2011 the OOE approved export for the Sabine Pass LNG terminal based in Louisiana, which is the first case of export approval on shale gas made by the US government. The US government’s principle was to issue export permits to all countries with  which it concluded  an Ff A without exception, and the government has some reservations about non-Ff A countries. However, by including India at that time, the US extended its scope of permission to non-Ff A countries for the first time. Afterwards, in May 2013, the export permis sion to the Freeport LNG terminal based in Texas, was approved by the DOE. Upon this permission , the US also allowed export to a non-Ff A country. Since then, the US approved the Lake Charles LNG terminal in Louisiana and the Cova Point in Maryland in August and September 2013 respectively. Consequently, the US is strengthening  its active export policy on shale gas.

Korea’s KOGAS, the world’s largest single buyer of LNG, received the US government’s awroval and signed a contract  with  an  American company, Cheniere Energy, to purchase 3.5 million tons of natural gas for 20 years from the company’s Sabine Pass export plant from 2017.3) Japan, although being a non-FfA country, is also  going  to  introduce  US  gas from tlrree projects: Free port, Cameron and Cova point proj ects, all approved by the US government. As a result, Japan is predicted to secure around 20% of its total LNG import with shale gas from America after 2017.

3) In addition, SK E&S LNG contracted to use Freeport to liquefy 2.2m tonnes of LNG per year for the next 20 years(Today Energy News, Sep 10, 2013)

The Lake Charles LNG export terminal m Louisiana is capable of exporting to all foreign countries including non-FrA countries with a maximum volume of 2.0 bcf/d in the next 20 years. The DOE explained that the Lake Charles LNG project would not violate the public interests of the US, and went through a review of its economic and environmental impact, influence on energy security etc., for this approval, and in this reviewing process nearly 0.2 million opinions and comments from various circles were collected.4l Thanks to the approval of the Lake Charles LNG export  project,  the  US  is  capable  of  exporting 5.6bcf of  gas,  which accounts for approximately  8% of its total LNG output.

The US aim of the ongoing Panama Canal expansion project is to advance into the Asian LNG market. The project is planned to be completed by the end of 2015, although some unexpected delay has occurred. If the Panama Canal is widened enough to allow the passage of LNG tanks, the distance from the  US to the  Northeast  Asian region  will be significantly shortened, from 25,750km to 4,500km. After the completion of the Panama Canal, the cost of export from the US to Japan, for example, is expected to be lowered to around $1.50/mmbtu. According to the BG group’s estimation, the Sabine Pass project’s LNG shipping cost to Asia through the Panama Canal is predicted to amount to $11.20/mmbtu.

Canada is heavily dependent upon the  US  in  terms  of  exporting  natural gas. Canada has been exporting 92% of its natural gas to the US without difficulty. However, Canada is facing challenges due to the recent rapid decreaseSl  in  its  gas  export  to  the  US  and  the  active  export  policy  of

4) US needs the approval by the Ministry of Energy (DOE)  to  export  energy.  To export to non-ITA countries, the public benefit should  be considered as additional condition by DOE.

5) Amount  of  gas  exports  to US : 64 Million Tonnes(mt)  (2008),  53(mt)  (2009), 45(mt) natural gas of the US, which will begin to be realized in 2015,  thereby actively seeking new LNG markets for export. In this regard a quite interesting phenomenon occurred in which the new competitive relationship between US and Canada is formulated to secure new  exporting  market,  as both countries are  competing  against the  same  consumer,  the  Asian market. Consequently, Canada invested 60 million USD to develop an LNG export project in western Canada. At the same time, the US also plans  to invest 50 million USD to convert  existing  LNG  import  facilities  into  ones for export.

Currently the US LNG export pricing is linked to the Henry Hub pricing mechanism. Therefore, Asian buyers whose long-term contracts  with Middle Eastern suppliers based on oil-linked pricing could not only benefit from lowered gas prices and diversified importing routes, but also enj oyed increased flexibility in the US LNG volume  according  to  their needs. In this regard, if Canadian LNG export pricing is linked to gas-to-gas pricing mechanism, it would not only provide diversified gas prices and supplies toAsian consumers, but also give Canada more favorable conditions in competing with the US in the Asian LNG market.

3) The  Paradigm  Shift  of  Energy  Security

On the basis of the above-mentioned contents, the paradigm shift of energy security, which was caused by the shale gas revolution, may be largely defined by the following three major factors of change.

(2011) Consulting Strategy Technology Management Institute, Shale Gas Development, Implementation Forecast  and its  impact on  major  industry volume,  p.6

Globalization of the World Natural Gas Market and the Share of LNG

Firstly, due to the shale gas boom, the world natural gas market will become globalized, and the share of LNG will increase compared to  PNG. The natural gas market  traditionally  existed  under  locally  isolated conditions.  For  example,  the  gas  price  in  the  l\1iddle  East  only  amounts

$0.75 per 1,000 cubic feet, whereas  Asian  price  is  $17.  However,  the natural gas market will gradually be integrated into a single market in the same way the oil market was developed, as the deviation  in  local gas prices is expected to be reduced  significantly  when  global  gas  supply meets demand by expanding shale gas in North America as well  as traditional gas in Australia and East  Africa.  According  to  some estimates, the global gas price will be stablized  at  a  level  between  $4  and  $7 per 1,000 cubic feet.6l Recently, the  relatively  cheap  shale  gas  price  has facilitated the trading of LNG around the world. As a result,  the  locally isolated  gas market  is predicted  to  transform  into  the  globalized  market.

With regard to the LNG market, it will develop more rapidly than the PNG market. When it comes to the current trade volume of global natural gas, PNG accounts for 68%, and LNG accounts for 32%, a 1/3 of the total production. However, in the global LNG market newly emerging major gas supply countries such as North America, Australia and East Africa, will create new demand markets, which is predicted to increase up to 40% by 2016. Australia plans to operate 7 LNG terminals by 2016 thereby driving export policy. Indeed, Australia is expected to become the largest LNG exporter  in  the  world  in  the  next  10 years, exceeding  Qatar.  Recently

6)  San Antonio Business  Journal,  Aug 28, 2013

Mozambique,  which is rapidly  growing  as  a big  supplier  in East Africa,  is capable of exporting up to 50 million tons per annum.

Meanwhile, the shale gas boom is  expected  to  impact  not  only  the  oil and gas industry but also other sources of energy such as  renewable  and nuclear energy. These two  energy  sources  will  naturally lose  momentum for development. For example, although  the Obama administration approved construction of a new nuclear power plant in  February  2012  for the  first time in the past 34 years, the US  has  decided  to  suspend  4  reactors among 104 reactors in operation. Many experts predict that the nuclear industry in the US will be decreased  due to the  shale  gas boom.

Transformation of the Energy Supply Market following the Instruction of the US as a Major Encounter

Secondly, since the US has made inroads into the energy supply market, the market itself could experience crucial disturbance or aftermath, due to the gigantic size of the US energy market. America’ s oil production is marking the highest record since 1992. The IEA forecasts that in 2020, the US will exceed Saudi Arabia and the Russian Federation, and become the largest oil producing country. The IEA also predicted that in 203.5, the US will achieve high energy self-sufficiency, and finally become an energy-independent country. Victor Gao, former Vice President of  the CNOOC, describes the implication of the US government’ s ambitious pursuit of  energy independence as “America’ s second independence.”7) He

7) Global  Energy  Cooperation  Center(GECC),  2nd  International  Shale  Gas  Conference, volurne2, Victor  Gao,  “Energy  Revolution  and Its  Global  Implications”  Sep.  10,  2013, Ministry  of  Foreign Affairs(MOFA) assumed that  if there were no shale gas,  China  and  the  US  would eventually compete for the same barrel of oil, resulting in eventual confrontation or even war over  energy.  In  his  opinion, this is why  China has all the reason to fully and whole-heartedly support America’s energy independence. Furthermore, Gao insists that the faster and the better America  achieves Energy  Independence,  the better  it is for China.

It means that US energy dependency on the :Middle East will be significantly reduced. From the :Middle East perspective, it will also face energy security challenge. Middle East countries have to secure  new exporting  countries.

However, the US is still importing a significant amount of oil from the Middle East, to this day, so there remain questions  on  how  fast  and  how much the US is going to  reduce  its  energy  dependence  on the Middle East. For example, if we  assume that  the US imports 10 million  barrels of oil from the Middle East every  day, but  all  of  a  sudden  the US suspends all imports, then where should the  huge  amount of  oil  from  the Middle East go? It is highly unlikely that the Middle East will find new alternate export markets. If the Middle Eastern  oil has no where to go, it will  cause a sharp drop in oil  prices in the world market,  and  will  naturally  damage the US shale gas industry as well.  For  the  US,  such  a  situation would  be one of the worst scenarios that  should  be  avoided,  Thus it is necessary  to take control on the tempo of production. Moreover, some argue that the reduction of US oil dependency on the :Middle East will incur significant change in the US policy toward  the Middle  East, including  serious reduction of the US military stationed in the Middle East. However, US policy on the Middle East is not simply affected by oil, and  many investments  have  been made by the US and European countries in important Middle East countries including Qatar, which should be protected by the US military. Therefore, counter-arguments predict  that  the  l\lfiddle East will remain as one of the top priorities.  According  to  David  L. Goldwyn, a donor US State Department special envoy for international energy, suddenly having a great wealth of domestically produced gas and, increasingly, oil will not allow the Unkted States to take less interest in international affairs, including those of politically challenging countries that produce oil and natural gas in the Middle East and elsewhere.  This means the United States will  still  care  deeply  about  keeping  sea lanes open for all kinds of trade and about diversity of  global energy supply.

US self-sufficiency in natural gas has been a domestic bonanza. The country’s balance of trade has improved,  gas  is now  competitive  in  price with coal, and despite the absence of a carbon price or cap, US  carbon dioxide emissions in the first quarter of 2012  fell to  levels not  seen  since 1992, in large part due to the decline in coal-fired electricity generation as utilities substituted gas for coal.) If the US significantly reduces  its dependency on fossil  fuels such  as  oil  and  coal  by  successful  development of shale gas, US will face more favorable conditions in its fulfillment of obligations to reduce greenhouse gas  emissions.  Further,  the  US  will  be able to take advantage of this favorable conditions by adopting a  more assertive  leadership  role  once  again  in the multilateral  arena.

In the meantime, if North America’s shale gas boom  expands  to countries such as China and Europe in the mid and long term, its impact will  be much  more serious. For example, it has been  generally assessed that in China, full-scale shale gas development  would  be  difficult  for  the time being due to concerns such as the shortage of  technical  personnels  in the field of exploration, lack of pipeline infrastructure, insufficiency  of knowledge and experience in geological structure, scarce water resources, environmental pollution etc. However, shale gas development in China  will not be delayed forever. The :Ministry of  Land and Resources of  the People’s Republic of China predicts that shale gas production will increase up to 6.5bcm equivalent to 6.4% of its total natural gas production by 2016.

CNPC is exploring and developing about 83 gas fields in China including Sichuan, Shaanxi, Chongqing partly through cooperation with Shell, and while SINOPEC is in the middle of exploration and development in 23 gas fields, cooperating with Devon. It is expected that the China’s natural gas demand will increase about 10% per annum by 2016. Further, CNPC and CNOOC invested 15.2 billion US dollars in purchase of American and Canadian shale gas development companies’ stocks for the past 2 years to obtain advanced technologies and experiences. These cases, as some argue, strongly show that Chinese NOCs have special interests in securing approaches to technologies and experiences by making joint ventures with major American firms in order to shorten the necessary period of time to acquire knowledge of unconventional shale gas production . Actually, bilateral shale gas cooperation is gaining strong momentum in both the US and Chinese governments as well as from the business communities of the two countries.HJ

10) The share of China’s natural gas in the energy mix has increased from 2% to 4%, and will continue to increase up to 8% by 2015 and 10% by 2020.

11) Jane Nakano, David Pumphery, Robert Price, Molly Walton,”Prosprects for Shale Gas Development in Asia”, A Report of the CSIS Energy and National  Security Program(Aug, 2012) p9

If China starts to practically engage in shale gas development, Russia’ s gas exporting policy will be seriously affected, as China is expected to be the largest and most important market for Russia to implement its future gas export plan.)

Global  Competition in the Northeast Asian LNG Market and Establishment of the Bases for Easing the Regional Gas Premium

Thirdly, shale gas will cause global competition in the Northeast Asian LNG market. Thanks to its relatively cheap prices, it could provide bases to ease Northeast Asian premium. For example, Korea and Japan have established strong alliances with the US traditionally in the fields of world politics security and military security. On the other hand, in terms  of energy security they are heavily dependent on the lVIiddle East and neighbouring resource-rich  Asian countries. However, thanks to the emergence of shale gas, Korea has established a  strong alliance to  the field of energy security, thereby resulting in totally different and new situation. For Korea and Japan, the concept of alliance is expected  to expand even to the area of energy security, which means that a grand energy paradigm shift will occur from the energy security perspective. For Japan, a recent approval by DOE for Freeport LNG Terminal project and Lake Charles LNG Terminal project will help Japan ‘s energy security, and its economic recovery. For referen ce, in Japan, with the suspension of nuclear power plant after the Fukushima accident in 2011, its dependency on fossil-fuel based power generation increased up to 88 percent, which is the highest record in its history. And the increasing  amount  of  importing LNG for power generation negatively  affected  Japan’s  trade  balance  in favor of deficit. But, thanks to  the  approval  of  shale  gas import  by  US, they certainly can  expect the benefit  in improvement  of  trade balance,  and in reducement of the excessive dependency on the Middle East, thereby helping  to promote  energy security in Japan.

For example, Japan’s LNG imports amounted to only 3.4 trillion  yen  in 2010, but imports increased up to 6 trillion yen in 2012, an increase of two folds in the two years. In  2012  Japan’s trade  deficit  was around 7 trillion yen, of which a great portion of the deficit was the result  of  the  surge in LNG imports.

On the  other hand,  in the Northeast Asian gas market there has been no alternative except Russian gas until several years ago,13. But, due to North America’ s shale gas boom, Northeast Asian countries are going to lose their strong sympathy on the Russian East Siberian natural gas development project. This project has been one of the biggest interests by Northeast Asian countries for the last decade. Consequently, this situation could lead the Northeast Asian countries to gain more leverage in the negotiations  with  Russia. In  fact, Russia’s  gas export  market  is suffering a dilemma: first dilemma is a continuous decrease of European countries’ demand on Russia’s gas. Russia actually exported 64% of its total gas export to Europe. The second dilemma is a  decrease  of  the  world  gas price due to North America’s shale gas boom. The third dilemma is the increase of global competition between Russia and other major gas producing  countries  such  as  Qatar  and  Australia.  These  countries  are trying to expand their gas production.

In the meantime, apart from non-traditional gas, there will be some big changes with regard to the list of traditional gas exporting countries  to Korea. Currently, Korea  imports  around  18%  from  Indonesia, and 12% from Malaysia, but these countries  cannot  remain  as  big  exporting countries anymore in the near future  due to  decreasing reserves of natural resources, complicated drilling method, long period of time for development etc. These countries will  be  transformed  from  LNG  exporting  countries into LNG importing countries. On the contrary, Korea will import from Australia around 20% of its total gas import volume by 2017(Currently, Australian gas accounts  for  only  about  2%).  East  Africa  is  also  expected as a potential emerging big  exporting  region  in  the  mid  and  long  term. For example, there are Tanzania  and  Mozambique.  In  these  countries, civilians consume only less than 10% of its total  gas product.  This means more than 90% of its gas production will  be  distributed  to  the  world export market.

Countries in Northeast Asia need to look for vanous importing routes including the US, Australia and Mozambique while  they  promote  joint efforts to  lower  Asia’s gas premium.

Before coming to a close, along with the aforementioned three big paradigm shifts in the global  gas market,  the immense influence of shale gas on the global oil market should not be overlooked . The IEA Executive Director Maria van der Hoeven assesses that the increase of North America’ s oil production offsets the shocks of the oil supply market which has been tight during recent several years. This means that  the shale gas boom has relieved the situation of the oil market.  Moreover,  with  the world economic growth rate forecasted to be 4.5% according to the optimistic projection, she  predicts  that  the  world  oil  demand  is  expected to increase by 8% between 2012 and 2018,  but  that  this  demand  can  be fully covered by the increase of the non-OPEC member countries’ productions, which is predicted to increase more than 10% from  2012  to 2018. Some productions indicate that in the  next  5  years  most  of  the newly emerging demand in the world oil market can  be  covered  by America’s shale oil. According to this  forecast,  OPEC  member  countries will have  increasingly less  room  for  maneuver  with  regard  to the  volume of oil production.

The increase of oil production in the US nourishes different opinions among OPEC member countries. America, which is marking the highest records in its history of oil production since 1992, declared its plan that the US will significantly reduce its oil dependency on OPEC in the future. According to EIA, US oil imports decreased 21% in 2012 compared  to 2011, and oil imports in January 2013 decreased 5.9% compared  to  the same period in the previous year. If this tendency continues, 2013 is predicted to mark the highest record of self-sufficiency  on  oil.  In particular, the  staggering increase of US oil  production s reorganizes the world oil market. It contributes not only domestically, to the US energy self -sufficiency, but also internationally, to the stable maintenance of world oil prices.

4. The Impact on the Northeast Asian LNG Market

Notwithstanding the fact that LNG imports of four countries including Korea,  Japan,  China  and Taiwan account  for  63%  of  the  total  volume of the world’s LNG trade, the reg:i:m has be.en paying a five-fold higher gas price than the United States). Such paradoxical phenomenon that Asian countries are experiencing is referred to as the ‘Asian Premium’ .

For example,  in  October 2012 Henry  Hub  gas price was $3.21/mmBtu while   JCC,   the   LNG  price   for   Asian   countries,   reached$17.12/mmBtu. This shows how big the gap is between the two regions. The reason why the Asian Premium occurs is mainly due to the absence of an LNG trading market in  Asia and long term contracts for LNG purchase indexed to oil prices .

With regard to this Asian Paradox, IEA said in its report that Asia has no effective regional gas market where prices are determined by  the regional market supply and demand, and no LNG hub to facilitate the exchange of natural gas and the development d a transparent price signal to steer investments in natural gas infrastructure. The agency also noted that the absence of  these mechanisms  result  in higher  gas  prices  in the region and thus, developing  LNG  trading  hubs  is needed  in the region to reduce  the Asian  Premium.

According to recent statistics, the oil-indexed pricing in the Asia-Pacific region decreased from 95% in 2005 to 88% in 2010, which in fact  shows small signs of improvement  in terms  of  the Asian Premium.

In accordance with shale gas development, the US is pursuing an LNG export policy to make inroads into Asian markets,  and thereby  current rigid terms and conditions of LNG purchasing contacts in Asian markets are predicted to become more flexible. As mentioned in the previous section, Korea’s KOGAS signed a contract with Cheniere to purchase 3.5 million tons of LNG per annum in the Sabine Pass liquefaction starting from 2017 for 20 years on the basis of the Henry Hub price.16)  This contract was the first approval for ING export made by the DOE to KOGAS along with the BG Group, Gas Natural Fenosa, and Gail Gas. In this regard, it is noteworthy that this contract was unprecedented,  being the first US export permitted to the Asian LNG market in appliance with the Henry Hub pricing mechanism. In addition, KOGAS signed a contract with the TOTAL to resell 0.7 million tons of LNG among 3.5 million tons secured from the US. The implication of this contract is significant given that previously, under the contract in compliance with the JCC, an Asian LNG buyer was prohibited to resell to third parties, and was locked to one destination. The Japanese also wants to index LNG  against  the  Henry Hub prices in the USA This condition is becoming fashionable throughout

Japan, as the largest LNG importer in the world, endeavors to overcome the oil indexed LNG pricing mechanism, and stabilize the LNG import price. In this context, the :Ministry of Economy, Trade and Industry (METI) launched the LNG Future Market Association in November 2012. This association is comprised of major stakeholders in the LNG market such as INPEX, Sumitomo, Marubeni, Mitsui, Mitsubishi, The Tokyo Commodity Exchange, Japan Commodity Clearing House and Institute of Energy Economics, Japan etc. According to the report published by METI earlier in April 2013, the association proposed the Japanese government to establish an LNG spot market with a payment in kind by early 2014, and set up tentative price standards on the spot market through the collecting and disclosing of its data for six months. Given the currently increasing risk in the short term and in kind LNG trading, this proposal is useful for risk hedging, and if the index in the spot market approaches the  supply and demand equation in the real LNG market, then this index could earn credit from the market and be  used as a  price indicator,  thereby contributing to the stabilization of LNG price.20)

Furthermore,  the  report  made  a  suggestion  to  encourage  other  Asian consumers including Korea and Taiwan to join the association, and reflect their opinions and hopes, thereby raising the liquidity of the spot market.

In this connection, Singapore, where the market price of Asian petroleum products is decided, established a plan to  operate  large  LNG  storage facilities, and expects to introduce shale gas from the  US. Therefore, Singapore seems to have big potential to be connected to the LNG  spot market, or function as a common  market.  In  particular,  the  IEA  believes that Singapore is the most  likely  hub  in  Asia  for natural  gas  trades  with the capacity of reducing government interventions. By the report of Bloomberg, Singapore has a new LNG terminal with up to seven  storage tanks and a capacity of 20 million  tons  that will  begin  receiving  LNG from Qatar.21)

In the meantime, as one of the important prerequisites to  reduce the Asian premium , it is important that gas trading  circumstances within the region are formed and infrastructure secured. For Korea, KOGAS’ s construction technology in LNG import terminal and LNG storage tank is recognized worldwide as the best ones, and it is expected to play important roles in the process of the formation of LNG spot market. Lately in 2011, 60 LNG tanks in three LNG import terminals such as Incheon, Pyeongtaek and Tongyeong are under operation. In 2010, Korea’s LNG storage capacity amounted to 8.7 mcm, which  can cover 42 days under average gas demand, and 22 days in the peak period.22) At present, the 4th LNG import terminal in Samcheok, with 14 tanks,  is  under construction  and  projected  to  be  completed  by  2014.  In  addition, the Swagato Chakravorty,  “Asian  LNG  trading  Hub:  Singapore  Could  Change  Asian LNG Pricing” Energy  and Capital,  Feb, 11, 2013 construction of the 5th LNG import tenninals is being reviewed  to secure a stable supply for the metropolitan region in which gas demand is concentrated. For China, there are currently 6 LNG import tenninals m operation, and 10 more tenninals  are planned  to be  constructed.

Eventually, the Northeast Asian  region,  despite  its  massive  volume  of gas consumption and gas trade, is experiencing a dilemma of not only the Asian Premium but also very  limited  gas  trade  within  the region. Thus the Asia LNG Market Forum, which was held in 2012  in  Shanghai  and where the CEOs of five major LNG importing countries  including  China along with Korea, Japan, Taiwan and India convened, became in fact a starting point  for the  discussion  on reducing  the Asian Premium.

At present, initiatives for the launch of a Northeast Asian trading hub, apart from the abovementioned Japan’s endeavor to create a LNG spot market, are in the middle of review by nations and cities including Korea, Shanghai in China, Singapore etc. Any city in Korea, Japan, China, or Singapore could be a possible location  for  the Northeast  Asian  gas hub, but joint research to enhance the integration of gas hubs and the connectivity among the countries in the region need to be conducted, thereby increasing the synergy effect within the region. The ideal condition for the gas hub would be a place with enough storage facilities and trades of both LNG and PNG. In short, a massive-scale gas flow  should  be formed constantly.

If the gas trade between China and Russia is achieved, Shanghai  could be a good candidate city for the Northeast Asian gas hub. Korea could improve  the ability  to  control  seasonal  gas  demand thorough gas  swaps with  Shanghai.

Now, various ways for cooperation in regards to the Northeast  Asian gas hub are being discussed in industries and the academia of Korea and China. For example, some discussions on joint projects between Korea and China are ongoing such as the joint development on shale gas in China, joint operation of LNG terminals in China, joint application for tenders on energy and natural resources development in third countries, and the take over by overseas companies through the establishment of joint ventures. In particular, the joint project for connection of gas transport infrastructures between Korea and China, is becoming more persuasive. For implementing this project, concrete ideas such as connecting underseas gas pipeline between China and Korea, or transferring North America’ s shale gas, purchased by Korea, to China through large size LNG  ships were raised for further discussion.

Eventually, the gas hub in Northeast Asia could  serve  as  a long-term and systemic solution to resolving high gas prices in the region. Existing rigid conditions on the LNG long-term LNG contract, imposed by a supplier to a consumer such as ‘Take  or  Pay’or  ‘Destination  Clause’ should be promoted.

Meanwhile, since the  North  American  gas  industry,  taking  advantage  of its relative advantage in price and  flexible  conditions,  is  seeking  the Northeast Asian LNG market, the establishment of  an Asian  gas hub must be regarded as favorable conditions by North America,  and this  also meets the  country’s interest.

Therefore, with regard to the Asian gas trading hub, Korea, Japan,  and China, as major consumers, have to share common interests and make the maximum   use   of   the   favorable  conditions  of   the shale gas  revolution.

Furthermore, the corporation should not be limited to Northeast Asia, which includes Korea, Japan, China, or Russia, but be expanded to the Asia-Pacific region including North America.

On a different note, Russia, which advocates traditional gas suppliers, is standing against the initiatives of Northeast Asian gas consumers, such as trying  to mitigate  the Asian  Premium,  and  establishing  a gas hub.

Russian President Vladimir Putin urged to unite traditional gas  supplying countries in the Summit of “2nd Gas  Export  Country  Forum”,  which  was held in Moscow on July 1, 2013. According to the ITAR-TASS report, President Putin called gas supplying countries for a unified response as follows: “Consumers impose economically unacceptable conditions for LNG supply to us, and try to change the principles of LNG supply based on long-terrn contracts, and abolish the  oil  indexed  gas  pricing  mechanism. That is to say we  are facing  serious challenges.”24)

This Moscow Forum was held for the second round after the  one  at Doha, Qatar in 2011. The forum was attended Heads of states or relevant Ministers from member  countries such as Russia, Qatar, Iran, Venezuela, Egypt, Lybia, Nigeria, UAE, Oman, Trinidad and Tobago, Equatorial Guinea etc., and Heads of delegations from observer countries such as Kazakhstan, Norway, Netherlands, Iraq etc.  The participating countries’ share of export in the world gas market accounts for 45%.

President Putin strongly spoke for the stance of gas supplying countries through an interview during the Forum  as  follows:  “Given  that  the  world gas demand in 2018 is expected to increase 16% compared to the current demand, and amount to 4tcm, gas supplying countries should enhance international cooperation,  to protect  their  own  interests. In particular,  some consuming countries are claiming for changes about the basic  principles  on gas supply  such  as  long-term  based  contracts  and  the  oil linked  gas pricing mechanism. However, it is likely to impede investment from gas supplying countries, and cause problems in each country’s gas supply and demand in the long term.”

“Currently, trade in the spot gas market is increasing,  but  this  trade  can not replace the long-term contract based on the ‘Take or  Pay’  principle. Given that it is necessary  to  share  appropriate  risks between  the  supplier and consumer for a  fair  gas  trade,  only  long-term   contract  could guarantee energy security of each Parties. The European Union’s Third Package is a relic of premodern days, and this  Package  significantly damages the countries, which have been contributing to  the  development  in the  European  gas  industry  for  the  last  several  decades.

II . Russia’s Role in Energy Cooperation in Northeast Asia

1.  Russia’s Gas Export and Northeast Asian Energy Policy

1) Northeast Asian Gas Market

The Northeast Asian region, which accounts for about 25%  of  the  total GDP and the population of the world, respectiv ely is the world’s largest energy consumer. Four  Northeast  Asian  countries (China  No. 1, Russia  No. 4, Japan No. 5 and Korea No. 10) are listed among  the  top  10  largest energy consumers in the  world,  while  the   region  includes  one  of  the largest energy provider s, Russia with 8.8 billion barrels of crude oil and 32.9ton25l  of  natural gas.

In Europe, due to its recent continuous economic  downturn,  the projection of the economic growth rate and energy consumption is being consistently assessed as negative. On the contrary, in the light of rapid growth of population and fast development of industry in the Asian region, the region is expected to continue to increase its  energy  consumption, which will be driven mainly by China and India in the next 30 years. Accordingly, the status of the Asian region in the world energy market continues to rise.

According to the EIA, global gas demand is predicted to increase 9% per annum by 2016, with the rapid economic growth in East Asia, as China is forecasted to increase its  gas demand  10% per  annum  on average by  2016. In addition, the Institute  of  Energy  Economics  Japan(IEEJ)  predicts  that the share of natural gas as a percent of total energy use in  Asia  will increase substantially  from 16% in 2008 to 21% by 2035.

With regard to LNG trade, LNG importing countries are expected to increase continuously from 2011 to 2026, and among them China and India are assessed to emerge as key ING  consumers. In  fact,  60%  of the increased portion in the world LNG trade is predicted to  be  attributed  to Asia, and the share of China and India may account for 76%   87%.

2) Overview of  the Russian Federation’s  Energy Status

In 2012, the revenue from raw materials including oil and gas accounted for 50.2% of the Russian government’ s total revenue, and in 2011 it was around 48%.

Due to its high dependency on the energy industry, Russia is vulnerable to the fluctuation of the prices of the world’s raw material market including oil and gas. Therefore, Russia needs to secure energy export and import routes in order to ensure the country’s sustainable economic growth.

As the demand in Europe is decreasing due to the region’s  econonuc crisis, and the price in the Europe’s ING market is lowered due  to the North America’s shale gas revolution, Russia is actively looking forward to new opportunities in the Asian market, and trying to reduce its dependency upon Europe in the long run.

In  the  mean  time,  despite  the  boom  in  the  world’s  gas  market,  Russia, with  its largest  gas deposits  in the  world,  ironically  is  facing  the  situation of becoming  an outsider  in the world  gas market.

According to the Ministry of Economic Development of the Russian Federation, the increasing competition among  the  suppliers  such  as  Russia, the US, and  the  Middle  East  in  the  world’s  natural  gas  market,  is predicted to bring serious impact  on  Russia’s  energy  market.  If Russia  is not able to tackle its high gas production costs, it is likely to lose its competition  in the  world’s  natural  gas market.

In 2009 the US became the largest gas producing country by exceeding Russia. Moreover, according to the BP’s survey, Iran, with gas reserves of 33.6tcm, turned out to have the largest gas reserves in the world by exceeding Russia as well.26)

In April 2013, the Ministry of Economic Development of the Russian Federation published the report that the competition in the world’s gas market by the increase of North America’ s shale gas export, would pressure Gazprom to lower the price of gas exports by 2016.

Energy Research Institute of the Russian Academy of Sciences predicts that the period of next 10 to 15 years from now would be a critical time for the Russian gas industry as shale gas production is expected to increase sharply . Thus, based on the premise that extraordinary circumstances do not take place during this period, Russia’s oil and gas export is predicted to decrease by 20%. Accordingly, this would lead to the reduction of investment in the energy sector, and afterwards, in 2040 the share of investment in the energy sector in Russia’s total amount of investment, is forecasted to account for 11.2%, which means half the amount of 2010.

According to the report of the l\lfinistry of Economic Development, the average price of Russian gas supplied to Europe amounts to $399.9 per 1,000m’, but is forecasted to decrease  gradually down  to $329 per  1,000m’ by 2016. In this regard, as the REC Daily suggested, given the new circumstances that the  gas price based on Henry Hub in the spot market amounts to $157 per 1,000m’, whereas the price  of National  Balancing Point is $363 per 1,000m’ , many  experts  assess that  it  is inevitable  for  Gazprom to show an accommodating stance in pricing mechanism for gas export in order to remain  competitive.

In fact, as ‘Energy Strategy of Russia 2010(1995)’ and ‘Energy Strategy of Russia 2020(2003)’ were prepared before North America’s shale gas boom, there was relatively less difficulty in understanding the real situation in the energy market, predict the near future, and make  a  decision  on energy policy. However, with regard to ‘Energy Strategy of Russia 2030, which was approved in November 2009, there are some in the Russian government and the academia, who are concerned that it does not reflect the key factors including the shale gas revolution in the world energy market, thus, a huge gap is likely to form in the near future.

3) Russia’s  Gas  Exports  and  “Eastward”  Energy  Policy

Russia’s East Siberia, where there exists a great deal of large-scale gas fields including Kovykta (with reserves of approximately 2tcm) and Chayanda (with reserves of approximately 1.3tcm), is endowed with huge gas reserves, which account for 20% of Russia’s total reserves. During the past several years, numerous Russian people have insisted on the need for Russia to make inroads into the  energy  market in the Asia-Pacific region.

However, the problem in East Siberia is that the infrastructure is yet to be equiwed for export, and even facilities  for  domestic  supply  are  not sufficient. Due to the weak infrastructure, gas production is yet to be realized, and a considerable  amount  of  gas produced  is  flared on  the  spot, or reinjected  to maintain  the pressure of  the geological  stratum.

The Russian government has  been  preparing  the  so-called  ‘Eastward’ energy policy since a decade ago to fix these difficult situations. In August 2003, the government issued ‘Energy Strategy of Russia 2020’, addressed toward the Asia-Pacific region as a  new  export  market. Through  such effort, Russia aimed to promote the energy export structure which  was heavily dependent on Europe, aiming  to  take up 30% of the Asia-Pacific oil market, and 15% of its gas market by 2020.27) As the first step, in December 2004, the Russian  government  launched  the  proj ect  of  the Eastern  Siberia-Pacific  Ocean Pipeline(ESPO), connecting  between  Tayshet of East Siberia and the coast of Perevoznaya of Primorye Province, with a distance of 4,118km.28l

Afterwards in September 2007, Russia, in  parallel  with  the  ESPO, officially approved the Unified Gas Supply System(UGSS) in the east  to explore new  opportunities  in  the  Asia-Pacific  energy  market  by extending the existing gas pipeline in  operation  in  West  Siberia  to  the  Northeast Asian   region.   The Eastern  UGSS’s  plan  is  to  establish  four major gas production centers in Krasnoyarsk, Sakha, Irkutsk, and Sakhalin  within  the East Siberian and Far Eastern regions,  and  then  by  connecting  monolithic gas pipeline to supply to the local people along  with  the  consumers  in Asia- Pacific countries including China, Korea etc.

When the Eastern UGSS was approved, there are many points yet to  be fixed or cleared. Consequently, according to the construction plan on the Eastern UGSS approved by Gazprom in 2012, the export of  Russian gas to Asia including China and Korea will  be  realized  through  the  ‘Chayanda gas field-Khabarovsk-Vladivostok  pipeline.

In the meantime, despite various development projects on East Siberia announced by the Russian government, oil companies have shown rare interests in East Siberia since 2008. In fact, during 2008 and 2012, the number of mining fields newly sold in lots has not even reached 20. This low level of interests shown by oil companies  on new mining fields on East Siberia was attributed to the geological uncertainty on the  new mining fields unlike ones that are already sold out, increase of investment costs in the initial stage due to insufficient infrastructure, and the uncertain prospect on gas sales.  As this tendency continued, there have been many setbacks and delays in the development plans of  East Siberian natural gas pursued by the Russian government, apart from the Sakhalin gas fields, which are in the middle of production. According to the original plan by the Russian government,  Chayanda  and Kovykta projects should be completed by 2016 and exports of both projects should start from 2017. However, Kovykta gas field project is expected to start production  at the earliest after 2019, and the development of the Krasnoyarsk  gas  field is also forecasted to be delayed inevitably.

Consequently,  President  Putin  called  for  overall  reviews  on  Russia’s  gas policy and the Eastern UGSS, by raising reasons such  as  the  shale  gas boom in a meeting of the presidential energy commission, held in October 2012. Accordingly, the progress of all negotiations, which are conducted by Russia with China,  Korea  and  Japan,  respectively,  is  expected  to  be strongly affected by the outcome and contents of the Eastern UGSS, which will be approved by the Russian  government.

One thing worth noting  is that under the country’s financial circumstances, the most important issue for Russia would be to secure financial resources in the Russian Far East. Actually, the development of the region will be very difficult without foreign loans. In this case, Russia could request an advanced payment or the provision of a loan when concluding a contract with Asian-Pacific buyers. For example, on March 22, 2013, China signed a contract with Russia to provide a two billion loan and an advanced payment for Russian oil.

In this regard, there are some critiques from Western viewpoints that Russia’s position on the Eastern UGSS could be assessed  as  an  example of its duality. According to them, although the Eastern UGSS, which will develop new gas fields  in the Far Eastern region, needs to be pushed forward as a priority, but Russia is reluctant to invest in the  region because of its financial deficiency. On the contrary, Russia is conducting the South Stream project actively in order to bypass Ukraine, although this project is very expensive, and will not yield any productivity.

Russia has been trying to expand its exporting routes to the Asian-Pacific region. To this end, Russia has promoted negotiations with China, Korea and Japan regarding the supply of gas.

According to BP sources of 2011, while Russia exports 140.6 bcm to the European  market  annually,  its export  to  the  Northeast  Asian  market currently remains at only 14.4bcm, in other words, export to Euro£ is ten fold greater than that of Northeast Asia. As  of  now,  although  the  gas price has not been set in  China’s case, 38 bcm is to  be exported to China annually once price negotiations are made.  Then,  the  share  of  the Northeast  Asian  market  is  expected to increase sharply.

However, Russia’s gas supply to Northeast Asian countries has not  seen much progress despite quite a long period of  negotiation.  In  particular, cheap US gas pnces are transforming the  Asian  market  in  a more challenging way. Furthermore, as China, the largest potential consumer of Russian gas, has secured gas supply from  not  only  Central  Asia  and  the East Africa  but  also from  its own  supply, this challenge  in Northeast  Asia is being aggravated. In the case of Japan, while the nation is predicted to increase its demand  of natural gas as an alternate energy resource because of the suspension plan on nuclear  power  plants  since  the Fukushima  accident, the biggest obstacle in ongoing negotiations between  Russia  and  Japan  is that Gazprom is insisting  on the oil-indexed gas price.29l

2. Russia-China Energy Cooperation

President Xi  Jinping of China  visited  Russia  from  l’viarch  22nd to  24th for his first trip  abroad  as China’s  top  leader.  President  Xi  Jinping confirmed that China  will  make  developing  relations  with Russia  a  priority in its foreign policy orientation  and  agreed  on  cooperation  in  the  oil  and gas  sector.

During  the  March  visit  of  China’s president,  Xi Jinping,  to  Moscow

Russia and China have signed a package of agreements in the oil and gas sector. Under the memorandum between Gazprom and China National Petroleum Corporation, the Russian gas giant will build  a  spur  to  China from the  Power  of  Siberia  gas  pipeline  (Yakutsk -Khabarovsk -Vladivostok) to supply China with 38 billion cubic metres of gas with  the potential  to boost shipments to 60 billion cubic metres in future. Russian gas flows to China, agreed for 30 years, will start in 2018.30)

China currently imports 0.33 bcm of gas from Russia, which is the smallest amount of Russian gas being imported compared to the 9.76bcm and 3.88 bcm of imports by Japan and Korea, respectively. However, if the joint development project on Chayanda gas field between China and Russia is realized, China is expected to import a huge amount of gas from Russia, which amounts to ten  folds the amount  of Russian gas imported by Korea at the moment.

The 38 bcm is less than the planned 68 bcm per year it would have shipped under an earlier agreement which envisaged shipments from both untapped new fields in East Siberia which would be linked to China by a new pipeline, and West Siberia.31l

In signing the memorandum of understanding, Gazprom gave up it’s dream of using  its core fields in West Siberia to supply both Europe and China and become a ‘swing supplier’ capable of transporting the same gas east and west, thus supplying gas in the most lucrative price option.

Gazprom and CNPC agreed that 38 bcm of Russian gas per year would flow from the Chayanda gas field through Russia’s East Siberian fields to China starting from 2018. However, the current MOU still falls far short of settling  on  a  final  supply  although  the  two  countries  have  agreed upon the gas pricing formula.32)

China prefers gas import from the Russia’s East Siberian fields that  is within a 2,(X)Okm range to imports from the West Siberian fields within a 5,000km range. Thus China is only considering gas imports from the East Siberian  fields  for  China-Russia PNG negotiations.

Even with the reduction of the agreed gas  volume  from  68 bcm  to  38 bcm, China would be Gazprom’ s largest  customer,  ahead  of  Germany, which imported over 33 bcm  of Russian  gas last year33)

In a sign that CNPC has taken a more accommodating stance in return, the Chinese energy company agreed to discuss an up-front payment  for the 30 years worth of gas supplies, which would likely be an interest free arrangement that could whittle down the proj ected cost of delivering the gas, according to analysts “It is a new vehicle to balance the price gap,” said Keun-wook Paik, a senior fellow at Oxford Institute for Energy Studies.

The current MOU still falls far short of a final accommodation on price between  the  world’s  largest conventional   gas   producer   and   the fastest -growing energy consumer. Both sides have committed to signing a deal by year end but neither has shown any sign of conceding on price.3.5l

Both countries plan to conclude a legally-binding agreement including price conditions by the end of 2013, but it is expected that the deal will not be easily concluded as there have been great differences in opinion on the gas price for a long time. The High Development cost of the Chayanda gas  field,   which   will  be a supply  source of Russia’s gas exports, is another variable of the deal.

Analysts say there is little possibility the two will agree on a final price deal as China moves to take advantage of the rapidly expanding supply options and secures contracts to  cover  the  rising  gas demand  in  the coming decades. “We do expect a deal to eventually be concluded,” Chinese analysts wrote in a note. “However, unless  and  until  we  get  news  from both sides that a price has finally  been agreed  to,  we  will  consider  the deal not yet done, and we are not fully convinced it will be  reached  in 2013.”)

In fact, Gazprom and CNPC concluded  the  contract  on  important conditions in the gas supply from Russia to China  through  the  Eastern Siberian line(Agreement on the maj or terms and conditions of pipeline gas supply  from  Russia  to  China  via  the  eastern  route) ,  during  the  G20 Summit held in September 2013 in Saint-Petersburg. Still, most of  the conditions of this agreement have almost no differences  with  the  MOU signed in March. Moreover, no agreement related to  prices  was included in this contract, as both sides  could not reach an agreement upon  prices. According to some press sources, with  regard  to  the  pricing  system, Gazprom wants the level of oil indexation to yield a price equivalent to its European  sales  while China  wants  a lowered price based  on  Henry  Hub.

In the mean time, China’s priority lies in PNG as China shares its vast border with gas producing countries including Russia. Therefore, the country is not inclined to participate in the LNG proj ect. Moreover, dramatic progress has recently been made in China’s PNG importing conditions particularly from Turkmenistan and Myanmar.

First, with regard  to Turkmenistan,  all  the PNG  introduced  from  abroad to China so far comes from Turkmenistan through CACGP(Central Asia-China Gas Pipeline). According to BP Statistical Review of World Energy, in 2010, China first began to import 3.55 bcm of gas from Turkmenistan (21.7% of  total amount  of  gas  export  by  Turkmenistan, which amounts to 16.35 bcm). In 2011 China imported  14.3 bcm  of  gas from Turkmenistan (46.2% of  total  gas  export  by  Turkmenistan,  amounted to 46.2% ), and in 2012 imported 21.3 bcm of Turkmenistan  gas. Furthermore, Turkmenistan is expected to increase its gas export to China thanks to the Galkynysh gas field, which  entered  into  operation  in September 2013, with an estimated reserve of 13.1 21.2 tern, which is considered to be one of the top five gas fields in the world. In 2020, Turkmenistan is projected  to  increase  the  volume  of  gas  supply  to  China up to 65 bcm  per  annum.

The Siberian PNG deal has not been settled and the possibility of reaching an agreement by the end of this year seems to be low. China is not in a hurry to make  negotiations on the deal because it currently has alternative imports from Central Asia including Turkmenistan.37)

Next, with regard to Myanmar, the construction of the gas pipeline between China and Myanmar started since 2009, and was finished in June 2013. This pipeline amounts to approximately 800 km in length, is proj ected to connect Myanmar with the inland of China through Yunnan  Sheng in the future. It is capable of transporting 12 bcm per  annum,  which  will cover 1/4 of the total demand on natural  gas  in  China. With  the completion  of  the construction  of  this pipeline, China  is going  to import natural gas directly from the Indian Ocean. The Myanmar gas pipeline is expected to function as one of the major  gas transport  routes,  which include the China-Central Asian line,  China-Russian  line  and  other maritime transport  routes  etc.

In summary, Russia is urgent in securing  importers  of  its  East  Siberian gas. Therefore, if Russia does not take a  more  accommodating  stance on price negotiations such as lowering the price through subsidies,  the  deal is not  likely to be reached  within this year.

3. Korea-Russia Energy Cooperation

Korea has imported 1.5 million tons of Sakhalin II LNG per annum since April 2009, which accounts for 6% of its total gas imports. If the pipeline construction project connecting Korea and Russia via North Korea, which was agreed by the two presidents in September 2008, turns into reality, 7.5 million tons(lObcm) of additional Russian gas would be provided to Korea, accounting for 17.7% of Korea’s total gas imports.

In accordance with the planning of the abovementioned project, Korea is expected to introduce Russian gas from two gas production centers including Yakutsk and Sakhalin.

The Chayanda field being  considered as the heart of the Yakutsk gas production centers, with gas reserves of 1.2 trillion cubic meters, and is regarded as the most important part of the Eastern UGSS. In accordance with Gazprom’ s construction plan in 2012, Chayanda gas will  be transported via the Yakutia-Khabarovsk-Vladivo stok pipeline, with a length of about 3,200 km, for exports to Korea.

Still, as the measure to deal with helium, Russia’s strategic mineral  are yet to be decided, the development plan has not been prepared in detail, but substantial development is expected to commence in the near future.

When it comes to the Sakhalin center, the  production  of  gas  from Sakhalin I and II are under  way,  and Sakhalin  ill and  VI  are  scheduled for construction in  the  future.  Among  them,  Korea’s  main importing sources  will be Sakhalin  II  and  ill.

ROK-Russia-DPRK gas  pipeline project arms for not only resolving economic issues related to securing a long-term supply of natural gas,  but also dealing with political problems including the promotion of inter-Korean relations by connecting the two Koreas  and Russia, and the contribution  to the stability on the Korean Peninsular.38) Potential stakeholders such  as Russia and South and North Koreas, have discussed the  project  several times, and so far, tangible progress has not been made. In this regard, one Russian government official made an interview with Rossiyskaya Gazeta, expressing unsatisfactory feeling as follows: “According to  the information, the Korean government has recently approved the plan on the demand and purchase of natural gas for  the  period  of  the  next  15 years. Pursuant  to the plan, while gas consumption in Korea is expected to decrease  and import from US shale gas is planned to increase. There is no word on the project between Korea and Russia  at all.

However, the stalemate of this  PNG  project  should  not   be  ascribed  to Korea’s gas demand  and purchase  policy.  The  North  Korea  risk  and  PNG price are  at  the  heart  of  the  matter.  Therefore, with  regard  to  the resumption   of   the  PNG   project,   how  to  remove  these  obstacles   would be utmost important. There  are  some  arguments  that  in  case  Russia  becomes in charge of the pipeline construction in North Korea, this will reduce  the North Korea risk. But others are wonied that this will  cause a premium  in the gas price. A more persuasive argument is that  the  participation  of  the ADE or the WE in this project would reduce the North Korea  risk significantly.

After all, this PNG project should not be limited to three stakeholders as far as possible. Once stakeholders  are  expanded,  and  the  project  is upgraded enough to meet the global standards, it could solve the matters simultaneously of the reduction of North Korea risk, and  the increase of profitability.

As another solution, some scholars from China and Korea argue that in order to complement the uncertainty and vulnerability in the PNG proj ect, there is no need to be overly obsessed with the participation of North Korea. From their perspective, South Korea-China Yellow Sea natural gas pipeline project could be an important infrastructure of gas trade m Northeast Asia. A comprehensive research on this project should be conducted, and if feasible, this project could be dealt with afterwards as an agenda between Korea and China.

In retrospect, for Korea, the East Siberian  gas fields have been regarded as not ju st something related to energy  security,  but  something  special that is necessary for securing geopolitical stability. In particular, the PNG project, based in the East Siberian gas fields, has been considered as a safeguard that guarantees regional security, and an important method for realizing common interests on the Korean Peninsula and Northeast Asia.

However, this project is thought to have missed an opportune time for commencement,  as  the  North Korean  risk  is  yet  to  be  resolved,  and Russian gas is losing its price competitiveness compared to North America and Australia. Accordingly, the Korean government needs to promote the project comprehensively by conducting a thorough review  on  its  progress and problems, diplomatic and energy security  aspects,  economic  feasibility etc. The bottom line is that resuming or conducting this project is not to confine stakeholders within a triangle framework of cooperation, but  to extend the scope of cooperation. Also the project of integrated energy network with China should be newly reviewed to diversify the scope of stakeholders. After all, if the project meets the requirements in the  world energy market, and is attractive enough to create new demand,  its success will be ensured.


III. REFERENCES

Rrnsiyskaya Gaz.eta, Aug.31.2013, “Russia wants ROK takes clear stance on the ROK-Russia-DPRK pipeline project.”

Strategy Technology , Seminar on the status and outlook  of Shale gas developrrent

World Energy Market Insight, Korea Energy Economics Institute, Sep.13.2013

Yonhap News, July.1,2013 “President Putin claim; concerted action armng traditional gas prcxluccrs.”

1v1K Business News, Nov. 13.  2012,  “KCGAS  has   the  World’s  largest  LNG  storage facility.”

Hee-chun  Park  “Implication  of  the  Shale  gas  developrrent  in  North  .America  on  the

Asia-Pacific  LNG market”,  Studies  on Natural  Gas, Cec.  2012

Ch Sung-hwan, “Economic  and diplorrntic strategy for successful entry to the E.astem Siberia and the Russian Far E.ast”, ‘The outlook of development  of  the  Russian  Far E.ast and the ROK’s choice(Korea InstiMe for International Economic Policy, edited by Jung Yeo-chun)’  pp387   389

Economist, Mly. 6. 2013, ‘Southeast .Asia is happy v.hile Russia and Mddle East are unhappy. ‘

Victor Gao, Presentations for the 2nd International Shale Gas Omference(Sep. 10, 2013), “Implications  of energy revolution on world economy”

Korea Gas 1\ews, Aug. 5. 2013, Oi.oi Ki-ryun, “Gas :Exr-Orting Countries Forum” Korea  Gas 1\ews, Cec. 5. 2012, “Japan to create the world’s first LID future market” 2012 review of the Republic of Korea, Energy Policies of IEA, Countries.

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Ibld p.2

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Jane Nakano, Dwid Pumphery, Robert Price, :tvblly Walton, “Prospects for Shale Gas Thvelopment in Asia”, A Report of the CSIS Energy and National Security Prograrr(Aug. 2012) p9

Russian Petroleum Investor, Vol 14, Issue 4, April 2013, “On Course for Ollna” San ..Antonio Business Journal, Aug. 28. 2013

The Russian Energy, July. 24. 2013

Swaegato  Olakravorty,  “Asian LNG trading Hub:  Singapore  Could Oiange  Asian  LNG Pricing”  Energy and Capital, Feb.  27, 2013

* The paper also referred to the contents from International Energy

Resources Trends,’ and the ‘Special Reports on Energy Resources Issues’ which were edited by the Global Energy Cooperation Center based on the quotes from the missions of countries in developing shale gas and countries in the Northeast Asia. As the writer is responsible for all the documents from the Global Energy Cooperation Center as a director, the writer didn’t make indication of every quotation.


IV. NAUTILUS INVITES YOUR RESPONSES

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