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Cablegate: Korea and Russia to Study Possible Gas Pipeline

VZCZCXRO0829
RR RUEHVK
DE RUEHUL #3610/01 3620650
ZNR UUUUU ZZH
R 280650Z DEC 07
FM AMEMBASSY SEOUL
TO RUEHC/SECSTATE WASHDC 7883
INFO RUEHMO/AMEMBASSY MOSCOW 8403
RUEHBJ/AMEMBASSY BEIJING 3654
RUEHKO/AMEMBASSY TOKYO 3790
RUEHUM/AMEMBASSY ULAANBAATAR 1614
RUEHBK/AMEMBASSY BANGKOK 7052
RUEHFR/AMEMBASSY PARIS 1580
RUEHSH/AMCONSUL SHENYANG 3550
RUEHVK/AMCONSUL VLADIVOSTOK 1358
RHEHNSC/NSC WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC 1747
RUEKJCS/SECDEF WASHINGTON DC//ISA/DSCA/DUSDAT//
RHHMUNA/CDR USPACOM HONOLULU HI//J5//
RHMFISS/COMUSKOREA CC SEOUL KOR

UNCLAS SECTION 01 OF 03 SEOUL 003610

SIPDIS

STATE FOR EEB/ESC/IEC/ENR, INR AND EAP/K
STATE ALSO FOR IO/EDA - DE OTALVARO
NSC FOR TONG
DOE FOR INTERNATIONAL AND FE
USDOC FOR 4440/MAC/EAP/OPB/ITA/TA
COMM CENTER PLEASE PASS SCJS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ENRG PREL RS KN KS
SUBJECT: KOREA AND RUSSIA TO STUDY POSSIBLE GAS PIPELINE

1. (U) SENSITIVE BUT UNCLASSIFIED.

SUMMARY
-------

2. (U) The governments of Korea and Russia agreed during a December
11-12 meeting in Moscow to jointly conduct a feasibility study for a
possible gas pipeline extending from the Russian Far East (RFE) to
South Korea. According to the Ministry of Commerce, Industry and
Energy (MOCIE), the study is very preliminary, and does not reflect
a determination by either side that a pipeline should be
constructed. Three possible pipeline routes will be studied --
through the Sea of Japan/East Sea, through North Korea, and through
China and the Yellow Sea/West Sea. Meanwhile, Korea is set to begin
importing 1.5 million tons per year of liquefied natural gas (LNG)
from the Sakhalin II project in 2008.

3. (SBU) Korea remains dependent on foreign suppliers for more than
96 percent of its primary energy consumption. Its drive to pull all
available bilateral (and also multilateral -- see septel) levers to
make Russia a major and secure source of supply was underscored in
one of the first acts of Korea's new President-elect, who met with
the Russian Ambassador two days after his election and publicly
proclaimed his support for Russo-Korean energy cooperation. Russia,
however, seems in no hurry to fulfill Korean hopes. Even in the
best of cases, a pipeline connecting Russia to South Korea is
unlikely to be built before 2020. End summary.

CONSIDERING OPTIONS ON ADDITIONAL GAS SUPPLIES
--------------------------------------------- -

4. (U) The bilateral Korea-Russia Natural Resources Cooperation
Council met in Moscow December 11-12. This was the eighth meeting
of the council, which was founded in 2000. The Korean delegation
was led by Ahn Cheol-shik, Director General for Energy Industry at
the Ministry of Commerce, Industry and Energy (MOCIE), and included
representatives of the Korea Gas Corporation (KOGAS), Korea Electric
Power Corporation (KEPCO), Korea Resources Corporation (KORES) and
the Korea Energy Economics Institute (KEEI). The Russian delegation
was led by Deputy Minister of Industry and Energy Anatoliy
Yanovskiy.

5. (U) According to a December 13 MOCIE press release, the two sides
agreed to conduct a joint study of the economic and technical
feasibility of a gas pipeline to provide Russian gas to Korea. The
study will be conducted by Russia's Gazprom and the state-run Korea
Gas Corporation (KOGAS).

6. (SBU) The Director of MOCIE's Gas Industry Division, Cheong
Seung-il, explained to ESTH Chief on December 18 that Korea and
Russia had signed a Memorandum of Understanding (MOU) in 2006
providing for delivery to Korea of 1.5 million tons of LNG per year
from the Sakhalin II project. The contract covers the period
2008-2028. (Note: 1.5 million metric tons equates to about 6
percent of Korea's annual imports of around 26 million metric tons
of LNG. End note.) Cheong observed that, due to rising demand from
industry and the power-generation sector, additional supplies will
be needed in 5-10 years, and Russia is an obvious potential source.
No decision has been yet made, he said, whether the additional
supplies should be LNG or piped gas. The planned feasibility study
will help to arrive at a determination.

7. (SBU) The timing for a joint study appears to be auspicious,
Cheong indicated, because Russia has completed plans for upgrading
and extending the links in its Unified Gas Supply System (UGSS).
Cheong recalled that Korea, China and Russia had undertaken an
earlier feasibility study on a proposed pipeline route from the
Irkutsk gas field beginning in 1999, but the project was scrapped by
Gazprom.


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8. (SBU) The joint Gazprom/KOGAS study will examine three options
for pipelines to bring gas to South Korea. One route would be under
the Sea of Japan/East Sea. The second, and cheapest, would be
overland through North Korea. A third would be through China and
under the Yellow Sea/West Sea.

9. (SBU) The timing of a potential pipeline development is unclear.
From Korea's point of view, the sooner the better to get additional
sources of supply. Korea asked Russia for both a timetable and
estimates of the potential volume of supply, but did not get clear
answers. The issue of prices has not yet been broached. Cheong
noted that, with Vladivostok scheduled to host the APEC summit in
2012, Russia may focus on completing its domestic gas pipelines by
that date. A KOGAS official opined to an ECON FSN that a pipeline
to Korea, if it eventuates, would likely not be in place before
2020.

10. (SBU) An alternative to piped gas would be additional LNG
supplies. Cheong commented that it remains unclear how Russia will
use the gas from Sakhalin I and Sakhalin III. Currently it appears
likely that gas from Sakhalin I will be used for domestic
consumption. Gas from Sakhalin III may be available for export, he
said, but indicated it is not certain whether Korea would be one of
the recipients.

11. (SBU) Cheong added that the disposition of one of Sakhalin III's
four blocks, the Kirinskiy Block, remains uncertain. Korea offered
to participate in developing it, but believes that Russia sees it as
a strategic asset and may keep it for development by itself.

OIL AND PETROCHEMICALS ALSO DISCUSSED
-------------------------------------

12. (U) A Korean consortium, led by state-run Korea National Oil
Corporation (KNOC) and comprised of private companies including
GS-Caltex, SK, Daewoo International, Kumho Petrochemical and
Hyundai, has been participating with Russia's Rosneft in the
exploration of the oil fields of West Kamchatka. The Korean
consortium holds a 40 percent state in the field, which has reserves
estimated at 10.3 billion barrels. The two sides agreed during the
Council meeting to drill two exploratory holes in West Kamchatka
during 2008.

13. (U) Russia invited Korean investment in Eastern Siberia to
capture and use ethane and helium, byproducts of gas production.
MOCIE will invite the Korean private sector to investigate that
possibility.

PRESIDENT-ELECT EXPRESSES KOREAN HOPES
--------------------------------------

14. (U) Korea's hopes for energy cooperation with Russia were
underscored when, just two days after his election sweep,
President-elect Lee Myung-bak met with the Russian Ambassador.
According to news reports, Lee expressed Korea's strong interest in
joint energy development projects in Eastern Siberia, and alluded to
the possibility of employing North Korean labor. "I want this
project to start in the early stage of my term," Lee reportedly
said.

COMMENT
-------

15. (SBU) Korea remains dependent on foreign sources for more than
96 percent of its primary energy demand. It is therefore no
surprise that Korea pulls every lever, whether bilateral or
multilateral, in the hope of securing new sources of supply to
reduce its vulnerability to instability in the Middle East. It is
by no means clear that Russia sees a significant short-term interest
in fulfilling Korea's hopes. Talk of a gas pipeline reaching all

SEOUL 00003610 003 OF 003


the way to South Korea will never die, but even in the best case it
will be many years before one materializes. End comment.

YUN

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