June 29, 2018 / 7:49 AM / in 4 months

Trans-Korea gas pipeline project reappears, but challenges remain

SEOUL (Reuters) - The long-planned and much derided Trans-Korea gas pipeline project is back on the agenda, buoyed by hopes North and South Korea can make peace.

If realized, it would be a pipeline dream-come-true for South Korea. Lacking its own energy resources or pipelines to regions with gas, South Korea has been shipping the fuel in on tankers as liquefied natural gas (LNG).

Based on trade data and average LNG prices in 2017, that cost South Korea around $12 billion in 2017. With LNG prices rising, this year’s tab will likely be even bigger.

With relations between North and South warming, albeit from sub-zero levels, the idea of constructing a 1,200 km (740 mile) long pipeline to bring Russian gas through North Korea to the South’s industrial hubs has been revived.

The project is now part of South Korea’s New Northern Policy.

South Korean President Moon Jae-in and his Russian counterpart Vladimir Putin last week agreed to strengthen energy cooperation as North Korea’s neighbours push for denuclearisation of the Korean peninsula.

State-run Korea Gas Corp (KOGAS) and Russian state gas company Gazprom will conduct a joint pipeline study, according South Korea’s energy ministry.

Despite the renewed enthusiasm, the project remains riddled with risks and challenges.

To view Russia to Korea gas pipeline map, click reut.rs/2N6fEYl

WHY A PIPELINE?

Estimating pipeline development costs is notoriously difficult, with most projects ending up far above initial estimates. Land pipelines in Europe and North America of similar length have cost between $5-10 billion to develop.

Still, piped gas tends to be cheaper than LNG due to the cost of liquefaction by the producer and regasification by the importer.

What’s more, relying entirely on LNG imports exposes South Korea’s industry to a volatile market prone to price spikes.

Should shipping lanes ever get interrupted, South Korea would even risk running out of gas.

Assuming relations with the North normalise and remain good, tapping Russia’s enormous reserves would bring a steady flow of gas to South Korea, improving security of supply and reducing exposure to LNG price shocks.

For a graphic on South Korea LNG imports, click reut.rs/2N7Ax5u

COULD IT HAPPEN?

The pipeline was included in a 2008 memorandum of understanding between KOGAS and Gazprom.

The plan was to supply 7.5 million tonnes of Russian gas annually over 30 years from Vladivostok into North Korea and on to the South, starting from 2015.

But the agreement fell apart after the death of North Korean leader Kim Jong Il and as North Korea advanced it nuclear weapons programme, said Park Sang-chul, professor of energy policy at Korea Polytechnic University.

The risk of handing North Korea the power to interrupt supplies to the South were deemed too big.

“But as we’re heading in the direction of peace, the likelihood of the gas pipeline has increased,” said Park.

Critics, however, also point to disputes between Russia, Ukraine and the European Union over pipeline supplies and fees, which showed Moscow’s willingness to use its gas as a political tool.

SANCTIONS

Beyond political risk, the biggest hurdle is sanctions, which block joint ventures with North Korean firms, prohibit financial transactions with North Korea, and forbid sales and purchases of commodities.

U.S. President Donald Trump has said sanctions on North Korea would remain in place until it is nuclear-free.

Because of the conflict in Ukraine, there are also U.S. and European sanctions against Russia preventing western firms from participating in Russian oil and gas projects.

Should all obstacles be cleared, the pipeline could be completed within three years, according to South Korea’s POSCO Research Institute.

To sweeten the deal for North Korea, which suffers from chronic electricity shortages, a gas-fired power station could be built there.

“North Korea can also benefit by receiving transit fees or having gas infrastructure,” said Kim Kyong-sool, a senior research fellow at state-funded energy think tank Korea Energy Economics Institute.

Based on comparable European pipelines, transit fees for North Korea would be around $100-150 million annually, according to Park.

BUY AMERICAN!

Despite the project’s improving prospects, critics say it would be safer to import more gas from South Korea’s most powerful ally, the United States.

Thanks to a boom in shale gas production, U.S. LNG exports are soaring, including to South Korea.

Shipping data shows U.S. LNG supplies to South Korea this year already surpassed those of all 2017, jumping from 2.2 million tonnes in 2017 to 2.6 million tonnes in the first half of 2018.

Reporting by Jane Chung; Editing by Henning Gloystein and Lincoln Feast.

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