The Role of North Korea in Northeast Asia Energy Relations David Dusseault Eurasia Energy Group Aleksanteri Institute 11th December 2006

Some Basic Ideas N. Korea’s energy situation is dire; Causes include common regional constraints as well as domestic economic strategy; and NK is a crucial actor in regional energy relations due to location & potential knock on effects derived from regime’s survival strategy.

The Scope of the Issue

Energy Imbalance

Interdependency: Enabling and Constraining Conditions 1.Physical Constraints: uneven resource distribution, finiteness of natural resources, existence of energy sector infrastructure, geography, climate, accessibility of resources; 2.Informational Constraints: elites do not possess full information regarding their resources or how to fully maximise their benefits accrued from natural resource wealth; 3.Financial Constraints: finite financial resources for investment and resource exploitation, commodity prices, market size; 4.Actor-based Constraints: number of competing actors, how actors perceive their interests and how they determine to develop their interests; and 5.Institutional Constraints: ability of state institutions to flexibly determine the rules of the game over time without marginalising actors or seeking rent.

Regional Assessment ConstraintNortheast Asia PhysicalUnique geological conditions; Lack of pipeline and other basic infrastructure; difficult climatic conditions in Eastern Siberia, Yakutia, and Sakhalin; FinancialHigh costs of new field development due to geological & climactic conditions; ill developed financial sector in the country, could lead to high dependence on international financial consortia; somewhat unclear investment climate for attracting FDI InformationalCompatibility of domestic know-how with demands encountered in exploiting the new fields; quality information as commodity; high variation of information concerning optimal regional energy development strategy; access to information & level of communication amongst relevant actors. InstitutionalUnpredictable legal and institutional environment could lead to energy supplies being dealt with on a bi-lateral as opposed to a multi-lateral regional basis. Existing institution free environment allows for creativity in determining future institutional regimes. Actor-basedEconomic logic partly intertwined with a traditional geopolitical approach in projects like the ESPO pipeline as a result of the states’ role in the energy sector development. IOCs and state backed energy companies share a partial, but not common ideological basis for energy sector development projects. Unresolved legal issues regarding the control over resources between federal & regional authorities.

Conditions: North and South Korea FactorsEnablingConstraining PhysicalStrategic corridor for transit to markets in the south Distance from significant reserves; North: Lack of necessary infrastructure to supply for demand InformationalSouth: Long term strategy, strategic reserves Strategy still relies on the state as major player in sector decision- making process, direction of future development. FinancialSouth: Possess significant financial resources to support international energy sector projects; represents large market making super projects more attractive Price dependency, market volatility, level of demand ActorsSouth: State energy sector undergoing a process of diversification State as primary actor InstitutionalSouth: Restructuring of institutional rules of the game North: Institutional framework??

The Nuclear Issue in the Present Energy Context Nuclear stand-off on the peninsula is tied to regime survival; NK’s regime survival strategy has been directly linked to external aid (food and energy (KEDO)); Energy can still form the basis for a flexible long term strategy to incorporate NK back into the international community.

Regional Priorities: Catastrophic Regional Conflict Avoidance FDI, financial credits, ROK Japan loans; (Bi & Multi-lateral) Regional Development aid (Bi & Multi-lateral) Priorities & Strategies US Priorities: Regime Change Economic Sanctions (Uni - & Multi-lateral) Military “Axis of Evil” (Sum zero) NK Priorities: Regime Survival Nuclear Threat (Sum zero) FDI, financial credits, WB loans; (Bi & Multi- lateral) KEDO energy package, UNDP development aid. (Bi-& Multi-lateral) ?

Conclusions Re-think of US sum zero regime change strategy; Development of mutually beneficial, long term plan to incorporate NK into the international community; In the short term: resumption of HFO shipments and incremental easing of economic sanctions in return for negotiations over nuke issue; In the medium term: step by step programme for verifiable dissolution of nuclear programme in return for increased financial and technical assistance; In the long term: inclusion in regional based development initiatives with further cuts to conventional forces on the peninsula.