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Abu Dhabi, UAEWednesday 22 August 2018

 North Korea can play a role in energy markets

Opportunities are linked to geography, energy needs and potential hydrocarbon resources

North Korea is interesting to energy players in three ways: its potential to become another energy-hungry Asian tiger, its own natural resources, and its use as a transit route. AFP
North Korea is interesting to energy players in three ways: its potential to become another energy-hungry Asian tiger, its own natural resources, and its use as a transit route. AFP

As nuclear-related sanctions on one country return, those on another might ease. Negotiations with North Korea are set to be long and bruising, but some vague commitments on denuclearisation have already opened a path to more normal relations with the US and the world. Then, what roles might Pyongyang play in north-east Asia’s energy nexus?

There is now a tacit US acknowledgement that its nuclear programme makes its regime secure from external overthrow. It remains a dictatorship mostly isolated from the world and with a horrendous human rights record. The economy is so opaque that the saying is that any statistic about North Korea with a decimal point is wrong

We can surmise at least that gross domestic product per capita is barely back to the level of 1987, after the disastrous1990s famines, and it ranks in the world’s 20 poorest countries. Yet North Korea’s autarkic, totalitarian economic system has been gradually cracking since the late 1990s, with a nascent private sector.

In energy as in economic terms, North Korea today is a midget. With a population of 25 million (against South Korea’s 49 million), its GDP was estimated in 2015 at $40 billion, adjusted for purchasing power, compared to its southern twin’s $1.91 trillion.

It is not surprising that current energy use is miniscule. It consumes just 18,000 barrels of oil per day, most of which has to be smuggled in, and produces no oil or gas of its own. Current sanctions restrict its coal exports, a key source of its limited foreign currency earnings. Satellite images show the country almost completely dark at night. Electricity generation capacity is around 7.2 gigawatts, less than a tenth of the South’s, and drought means its hydroelectric plants run well below full output.

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But North Korea is interesting to energy players in three ways: its potential to become another energy-hungry Asian tiger, its own natural resources, and its use as a transit route.

In a report last month, UBS estimated some spectacular possible economic growth rates over the next two decades: anywhere from 11 to 21 per cent annually, if peace were achieved with the South, or even reunification. The North might follow the path of China and Vietnam, which have remained autocratic and notionally Communist while allowing free enterprise within a state capitalist framework.

Its current poverty is in enormous disparity to its well-educated work force, natural resources and attractive geographic location. This would mean an economy at least eight times bigger than today’s, with energy demand probably rising proportionately. A phased, controlled reconciliation would also boost the South’s economy and hence its own energy demand.

Consuming even at the levels of Vietnam, the North would need ten times as much oil as today. It would also require a huge scale-up of electricity generation, where in contrast to its weapons programme, planned nuclear power plants have gone nowhere.

Key to the initial phase of North Korean economic opening would be use of its natural resources to provide export revenues and energy for business and industry. This has been tried before; from 2004 to 2012, a UK-based oil company, the minnow Aminex, engaged in a quixotic quest for oil and gas exploration rights, but made little headway. A Mongolian company, HBOil, followed in 2014 but similarly backed out last year because of sanctions.

Geologist Mike Rego, who reviewed data for Aminex, noted that oil was discovered off the west coast in the 1980s, with the area possibly a northward extension of China’s Bohai Bay, a prolific producing area. There are also signs of oil and gas onshore, but nothing has been developed.

The country has significant coal resources, as well as various metals including gold. In particular it is believed to have the second-largest deposits in the world, after China, of rare earth minerals, used in electric motors and wind turbines.

So far, North Korea has been an obstacle to trade, but it could become an important transit route: its key geographic position ties in Russia, China and South Korea. All of the South’s gas currently comes in tankers as liquefied natural gas (LNG). Because of its relatively high cost and perceived insecurity of supply, the share of gas in South Korea’s consumption is small, just 14 per cent, compared to double that in the US.

Russia is building new pipelines to supply China, where gas also has only a limited share. Its main eastern port, Vladivostok, where it plans to build an LNG export plant, is just 150 kilometres from the North Korean border, and from here a pipeline could run down the natural resource-rich east coast to the South. Access to a new, attractive market would give Moscow more pricing leverage regionally, develop its underpopulated far east, and secure an ongoing political role.

For now, a pipeline is just a dream. Much more trust would be required between the two capitals, and Pyongyang would need to build a reputation of reliability with smaller foreign investments. Connecting the four countries’ electricity grids could be an initial step, since here North Korea would be more reliant on its neighbours’ supplies than vice versa.

Normalisation is still clearly a long way off, and North Korea’s economic climate remains chilly. But the US has already made major concessions to Pyongyang without receiving much in return. If sanctions are eased, the country may yet go from Hermit Kingdom to the next Asian energy hotspot, opening opportunities for the bold or foolhardy.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

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