Cablegate: South Korea to Import Russian Gas Through North Korea

VZCZCXRO0915
RR RUEHAG RUEHAST RUEHCHI RUEHDA RUEHDF RUEHFK RUEHFL RUEHHM RUEHIK
RUEHKSO RUEHKW RUEHLA RUEHLN RUEHLZ RUEHNAG RUEHPB RUEHPOD RUEHROV
RUEHSR RUEHYG
DE RUEHVK #0109 2820656
ZNR UUUUU ZZH
R 080656Z OCT 08
FM AMCONSUL VLADIVOSTOK
TO RUEHC/SECSTATE WASHDC 1018
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION COLLECTIVE
RUEHUL/AMEMBASSY SEOUL 0269
RUEHVK/AMCONSUL VLADIVOSTOK 1114

UNCLAS VLADIVOSTOK 000109

SIPDIS

E.O. 12958: N/A
TAGS: PREL EPET KS KN RS
SUBJECT: SOUTH KOREA TO IMPORT RUSSIAN GAS THROUGH NORTH KOREA

REF: VLADIVOSTOK 094

Summary
-------

1. Gazprom and Korean Gas Corporation signed a letter of
understanding outlining a thirty-year, USD 90 billion deal to
bring Russian natural gas to the Republic of Korea via a
pipeline through North Korea. Construction of the pipeline is
scheduled to begin in 2011 for completion in 2015. North Korea
has yet to participate in talks on the deal.

First, the Easy Part
--------------------

2. Gazprom and state-owned Korean Gas Corporation (Kogas) have
signed a letter of understanding that will have Russia exporting
USD 90 billion worth of natural gas to South Korea annually for
thirty years. The 10 billion cubic meters per year will amount
to approximately 20 percent of South Korea's overall demand.
The deal was announced following a September 29 meeting between
President Medvedev and South Korean President Lee Myung-bak in
Moscow. The companies will sign the final agreement for the
deal in 2010 after a feasibility study is complete, and gas
shipments will begin in 2015.

Figuring Out the Tough Parts Later
----------------------------------

3. To transport the gas, the companies have agreed to construct
a natural gas pipeline from Vladivostok to South Korea through
North Korea. Construction for the proposed USD 3 billion
project would begin in 2011, with gas flow beginning in 2015.
North Korea, however, has not yet taken part in talks regarding
the deal. According to a Consulate contact, it was Russia who
initially proposed the plan and will be in charge of convincing
North Korea to take the deal.

4. In return, North Korea will collect USD 100-150 million in
transit fees annually for the duration of the contract.
Consulate contact suggested that Pyongyang will also reap
financial benefit by providing most of the labor for the Russian
and North Korean segments of the pipeline. [Note: North Korean
workers in the Russian Far East are a significant revenue stream
for Pyongyang, which provides the manpower through virtual
indentured servitude and pockets most of the salaries. End
Note.]

The Backup Plan
---------------

5. If Pyongyang declines the financial incentives and refuses
to approve the pipeline plan, the deal for the gas itself will
still stand. Russia and Korea announced plans to jointly
construct a liquefied natural gas facility near Vladivostok and
develop port facilities outside of Slavyanka. This construction
would be undertaken concurrently with the pipeline project and
would allow gas transport to South Korea by ship, an alternative
route that would add about 30 percent to the overall cost of the
gas.

6. Presidents Medvedev and Lee also announced agreements to
jointly develop oil and gas off the West coast of Kamchatka,
connect the Trans-Korean railroad with the Trans-Siberian, and
develop a chemical plant outside Vladivostok.

Comment
-------

7. The deal will help both countries realize plans to diversify
trade in natural gas. Russia has been looking for an
alternative to the European market, and Korea wishes to reduce
its dependence on gas from the Middle East, which currently
provides 90 percent of the country's demand. North Korea did
agree in April to a joint project with Russia to renovate its
rail links connecting the two countries, though that deal did
not include connections with the South (reftel), so an agreement
may be possible. However, considering that the construction of
the pipeline will not begin for several more years, and that the
North Korean leader is in poor health, it is also possible that
both parties are assuming that Pyongyang will be irrelevant when
the time comes to begin construction.

BENJAMIN

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