South Korea and Russia Sign $3 Billion Gas Pipeline Agreement

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Researched by Industrial Info Resources (Sugar Land, Texas)--After recent summit talks in Moscow between South Korean President Lee Myung-bak and Russian President Dmitry Medvedev, South Korea's Ministry of Commerce, Industry and Energy announced that the country plans to import up to 10 billion cubic meters of gas per year from Russia for 30 years, beginning in 2015. The gas would be transported through a $3 billion pipeline that would run from Russia's Port of Vladivostok to South Korea through North Korea. The pipeline is part of a $90 billion deal between the two nations whereby South Korea would import Siberian gas from Russia and allow Russia to branch out of the European market. At the same time, the deal would possibly bring the two Koreas closer.

Russian gas giant OJSC Gazprom (LSE:GAZP) (Moscow, Russia) and Korea's sole liquefied-natural-gas (LNG) provider, Korea Gas Corporation (SEO:036460) (Sungnam, Gyeonggi province), signed an agreement to seal the deal. It is also a renewed attempt to complete the Trans-Korean Peninsula Pipeline project, which was first discussed more than a decade ago. Most of the delays, so far, have been related to Gazprom's attempts to gain control over some of the largest Siberian deposits to ensure that the company has enough resources to maintain a continuous gas supply. The companies have now agreed to prepare the investment rationale and begin commercial negotiations within 2010.

Another complication that delayed the project was the decision about how the gas would be transported, by pipeline through North Korea or the more expensive undersea route. According to Moon Hong-shik, an analyst at the South Korean Institute for National Security Strategy, North Korea should be willing to allow the pipeline to run through the country, but working out the details of the agreement were sure to be difficult, considering the political relations between the north and the south.

Russia is expected to initiate talks with North Korea regarding the pipeline project. However, if the talks are not successful, Russia will supply South Korea with LNG or compressed natural gas. Once the study of the route is complete, a final agreement will be signed between the countries in 2010. If the talks are successful, South Korea and Russia could provide North Korea with energy assistance through the pipeline. North Korea had complained about the sluggish speed of energy assistance.

Presently, Gazprom meets about 25% of Europe's gas needs, and the company is also in talks with China regarding a gas delivery deal. It hopes to reach a pricing agreement soon and begin gas delivery by 2013-14. Further, as Russian energy projects gain momentum in Asia, the European Union has been notified that it should be ready to face competition while acquiring gas.

South Korea has turned to Russia for energy supplies as it faces a great deal of competition for energy from Japan and China. The country consumes about 37 billion cubic meters of gas per year, most of which is in the form of LNG that is transported in tankers. About 16% of South Korea's power generation projects are gas based. In 2007, South Korea imported 25.5 million tons of gas, most of which came by sea from Indonesia, Malaysia, Oman and Qatar. According to South Korea's Ministry of Commerce, Industry and Energy, LNG in the global market cost $499 a ton in 2007, while gas delivered by pipeline cost $410 a ton. Korea Gas estimates that the domestic demand for gas will reach 27.7 million tons in 2008, and to meet that demand, it has already signed agreements to purchase 25.8 million tons of gas this year. The pipeline project, when completed, will help the country meet 20% of its domestic demand.

In 2007, a development program called the Eastern Gas Program was approved by Russia's Ministry of Industry and Energy. The program encompasses an integrated gas production, transportation and supply system in the Far East and eastern Siberia. The program considers the possibility of exporting gas to China and other Asia-Pacific countries. It involves the development and construction of the Sakhalin-Khabarovsk-Vladivostok gas transmission system. The project is presently in the design stage.

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