Gas Pipeline from Siberia Could Bridge Korea's Long Term Energy Gap - But Which Route at What Price?

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). The state owned Korea Gas Corp (KOGAS) (KOREA:036460) (Seoul, Korea) is the world's single largest buyer of liquefied natural gas (LNG), which provides strong motivation for the company to see the proposed Siberia-Korea pipeline project become a reality. But there are still tough discussions to be held and decisions to be made in terms of the cost and optimum transport and routing of the gas from Siberia to Korea.

At a recent signing of a feasibility study between Russia Petroleum, which is 63% owned by TNK-BP (LSE: BP) (London, UK), with partners in the pipeline project China National Petroleum Corporation (CNPC) (HK:0135) and KOGAS, it was confirmed that the estimated cost of the project had ballooned from an initial $11 billion in 1995 to $17ý18 billion. The increase is said to be because of higher than expected costs incurred in the developing the Kovytka gas fields, which hold much larger reserves than originally estimated. The gas field contains a 1.9 trillion cubic meters of the total Russian proven gas reserves of 47.57 trillion cubic meters as at the end of 2002. Russia reserves of gas are the largest in the world.

In terms of a project spanning 30 years, Russia will supply 20 billion cubic meters of natural gas a year to China and ten billion cubic meters a year to South Korea with four billion cubic meters going to the domestic market, with deliveries due to start in 2008.

The partners have not yet agreed upon the 4,900-kilometer pipeline's route. The one route is planned from Kovytka, near Lake Baikal in eastern Siberia to South Korea through China and the Yellow Sea. This line would bypass Mongolia and run through Harbin to Beijing before going undersea to South Korea.

The Koreans have been keen on the pipeline being routed through North Korea with the intention of easing that country's chronic energy shortages and defusing the crisis over its nuclear power ambitions by integrating it into the regional economic zone. But a number of Korean opinion leaders feel that the sea route is more economical than the one coming southwards through North Korea, apart from political/security considerations. Those who have been pro the North Korea routing see one the largest LNG bases in Asia at Pyongtaek, southeast of Incheon, as a shipment base for natural gas to Japan, Taiwan and South Korea.

The higher than expected cost has caused some comment of the feasibility of the project in terms of uncompetitive landed cost in Korea. TNK-BP has said, not unexpectedly, that the project was realistic, implementable and commercially viable.

BP's 50% in TNK-BP would make some 15% of the companyýs total production, a percentage unlikely to change over the next five years, said BP chief executive Lord Browne. It would represent some 11% of BP's proven oil and gas reserves and 3% of capital employed, he said at a recent corporate presentation.

Gazprom (PEC 81000040/01/02/03), the Russian state gas monopoly will be involved the feasibility study which will inspect cost-sharing, length, routes and pricing for the gas plus a further review of the gas reserves to be exploited to feed the project.

KOGAS has admitted that it has long term plans to buy a stake in the Siberian gas field. The company would be looking for a 5 to 15% stake after gas import details are finalized. The Russian industrial group Interros has said it wanted to sell its 25% in TNK-BP by 2004. Most energy resource majors have shown an interest in having 25% of the field including ExonMobil (NYSE:XOM), ChevronTexaco (NYSE:CVX), ConocPhillips (NYSE:COP), Royal Dutch Shell and Total.