Tag Archive | "energy"

A Look Back at the Korean Peninsula in 2015

By Troy Stangarone

As we look back at the events that helped to shape the Korean peninsula in 2015, it is also an opportunity to review the events we highlighted on The Peninsula in our annual 10 Issues to Watch For on The Korean Peninsula in 2015 blog and the key events that we did not predict.

Looking back at the 10 issues raised in last year’s blog, all have resonated on the Korean peninsula this year, but not all in the ways we thought they might. On five of the issues, things have largely played out as we expected, while one did not and for four others the outcomes are less clear.

Here’s a brief look back at the 10 issues and what happened:

1.      Dealing with North Korea: Understanding North Korea is never easy and it is only made more difficult by the regime’s continued pursuit of nuclear weapons. One area we highlighted to watch in 2015 was progress on North Korea’s weapons programs and discussion of the deployment of the U.S. Thermal High Altitude Area Defense (THAAD) system in South Korea to protect against the nuclear and missile threat from North Korea. While North Korea took a major step towards developing submarine launched ballistic missiles, which would give it a second strike capability, South Korea has indicated it will not be discussing the deployment of THAAD with the United States. On this issue, our prediction was half right as North Korea has continued developing its weapons programs, but there has been less progress on deploying THAAD, or some other missile defense system than we expected.

2.      Key Summits in 2015: Here we highlighted a series of key summits for the year ahead. While Kim Jong-un ultimately did not go to Russia for the May 9th ceremony commemorating the end of World War II or make any international visits, thus eliminating the prospect of a meeting with South Korean President Park Geun-hye, each of the summits played a key role this year. Japanese Prime Minister Abe Shinzo did make a positive statement on issue of history with the 70th anniversary of the end of World War II approaching, even if it did not meet everyone’s hopes. Trilateral summits among Korea, China, and Japan also resumed. Lastly, Indian Prime Minister Narendra Modi held a bilateral summit meeting with President Park in what could become an important relationship in the future.

3.      Korea-Russia Relations: In 2014, North Korea began courting Russia and our expectation was that greater cooperation would be announced at a meeting between Kim Jong-un and Russian President Vladimir Putin. However, that meeting never happened and cooperation between the two seems to have fizzled. Though, Russia and South Korea did announce efforts to expand relations at the end of the year.

4.      Better Relations Between Korea and Japan: Here our key insight was correct, as the bilateral summit meeting took place between President Park and Prime Minister Abe after Prime Minister Abe had issued his statement on World War II. At the summit meeting, both sides agreed to work on resolving the Comfort Women issue and recently announced that resolution laying the groundwork for improved relations between the two countries.

5.      Constructing Legacies: With President Barack Obama’s term in office coming towards an end, our expectation for 2015 was that he would seek to build on his legacy as president, but not look to North Korea for a potential legacy issue. While President Obama has cemented deals on Iran’s nuclear program and climate change, there has been no progress on North Korea. For President Park, the agreement reached with North Korea in August to reduce tensions seemed to be a way forward, but subsequent talks with North Korea failed to make progress.

6.      Two Major Moves on Trade: South Korea has had an ambitious free trade agenda  that we expected to continue in 2015 with two major efforts – concluding and implementing an FTA with China and making efforts to join the Trans-Pacific Partnership (TPP). The FTA with China was implemented in December, but while South Korea has continued to express interest in joining TPP, the agreement’s late conclusion has limited Seoul’s ability to join.

7.      A New Nuclear Energy Cooperation Agreement: The United States and South Korea were looking to conclude a new agreement on civilian nuclear cooperation, or 123 agreement, to replace an extension to the 1974 agreement that was set to expire next year. The two sides successfully reached an agreement in June of 2015 and updated agreement is now in effect.

8.      The Diversification of South Korea’s Energy Supplies: South Korea is highly dependent on imported fuel with more than 85 percent of its petroleum imports passing through the Strait of Hormuz. Our expectation was that in 2015 South Korea would begin to diversify those supplies. While there have been efforts to import more condensate from the United States, low petroleum prices have made imports of U.S. LNG less attractive. However, now that Congress has passed legislation allowing for the export of oil, this will be an issue to continue to watch in the years ahead.

9.      Samsung’s Future and Its Frenemy Relationship with Apple: After a loss of market share in key markets such as China and India for its smartphones, as well as falling revenues and profits, 2015 was expected to be an important year for Samsung to reverse its fortunes while managing its beneficial and competitive relationship with Apple. While Samsung saw an increase in profits in the 3rd quarter, it was due to strong results in the semiconductor and display sectors as its smartphone segment continued to face challenges. It relationship with Apple continued to remain complex as Samsung has appealed part of their legal case with Apple to the U.S. Supreme Court, but also been chosen by Apple to supply microprocessors and displays for the iPhone.

10.  Feeling the Effects of Social Change in Korea: This was perhaps our most bold insight for 2015 and in truth one that reflected more long-term trends rather than issues that might specifically come to a head over the past year. As South Korea ages and continues to grow in prosperity, it will face the social changes that come with those trends. The level of social welfare and the definition of what it means to be Korean are issues that will continue to shape South Korea. Some social issues, such as public health, came to the fore in 2015 due to outside events such as the spread of Middle East Repertory Syndrome.

Beyond the issues we expected to see addressed in 2015, other important developments included:

1.      North Korea’s Provocation in the DMZ: On August 4, two South Korean soldiers were maimed after stepping on landmines placed by North Korea in areas of the DMZ that are known to be patrolled by South Korea. This raised tensions along the DMZ as South Korea responded by resuming broadcasts from loudspeakers across the DMZ and North Korea threatened to attack the loudspeakers. The crisis was ultimately resolved as the two sides reached an agreement for North Korea to apologize, South Korea to suspend the broadcasts, and the two sides to arrange for a reunion of separated families.

2.      October Family Reunions: One of the positive outcomes of the August provocation was the two sets of family reunions held in October. The first family reunion saw some 100 South Koreans meet their family members for the first time since the Korean War and another 250 were able to do so during the second reunion.

3.      Agreement on the Comfort Women: While not accepted by all of the Comfort Women, the agreement by Japan to issue an apology and provide compensation was one of the major unforeseen events of 2015.

4.      Middle East Repertory Syndrome (MERS): South Korea faced a medical emergency earlier this year as MERS spread through the country causing the death of 38 individuals and another 16,000 to be quarantined.

5.      The Passing of Kim Young-sam: A former activist for democracy who later became president of South Korea passed away at the age of 87.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Eugene Lim’s photostream on flickr Creative Commons.

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North Korea Looking Abroad

By Matthew Nitkoski

Nearly six years ago, the last attempt at multilateral engagement with the Democratic People’s Republic of Korea ended with the secretive Kim regime vowing to continue its uranium enrichment program. In the intervening years, neither allies nor enemies have been able to convince Pyongyang to halt its nuclear efforts and the fragile North Korean economy has continued to face debilitating sanctions. Unwilling to reverse course on its military program, the isolated Kim regime has begun reconsidering its foreign policy position and has made new attempts to increase trade and investment with its Asian neighbors.

North Korea’s desire to find new trading partners is partially spurred by its deteriorating relationship with China. Xi Jinping has yet to meet with Kim Jong-un, but has already had several high-profile meetings with South Korean President Park Geun-hye. Already strained diplomatic relations between Pyongyang and Beijing have been further weakened by a series of high-profile murders by North Koreans sneaking across China’s border. These grisly events have given Chinese citizens pause when considering their relationship with Kim’s regime. Recent internet commentary reflects the country’s worsening opinion and the ongoing debate in Chinese society over support for North Korea.

For its part, the Chinese Communist Party is weary of supporting a regime that gladly receives food and economic assistance, but is unwilling to accept diplomatic advice. With Chinese imports accounting for around 60% of the nation’s food and energy, Kim Jong-un is also eager to reduce his dependence on Beijing. With Beijing pursuing improved relations with Seoul over issues as diverse as trade policy and cybersecurity, Pyongyang has sent out a number of diplomatic missions to garner economic support as it reforms itself and seeks self-sufficiency.

The Kim regime has primarily focused on improving trade relations with Russia, and both Moscow and Pyongyang have taken positive steps towards enhancing their economic ties. Although Russia is suffering its own economic woes due to sanctions and a collapsing currency, Moscow has made a serious effort to signal its intentions. In 2014, Russia finalized the cancelation of $10 billion of North Korea’s $11 billion debt that had accrued during the Soviet Era. The Kremlin expects that this gesture of goodwill will facilitate the construction of a gas pipeline covering the Korean peninsula, but also acknowledges that North Korea could contain profitable investments opportunities.

Moscow is continuing its efforts to improve ties with Pyongyang and, last week, the Russian Chamber of Commerce created the Council for Cooperation with North Korea. Established with the ambitious goal of doubling trade figures to $2 billion by 2020, the Council indicates that both Moscow and Pyongyang are serious about developing cohesive economic ties. Kim Jong-un has responded positively to these advancement and is rumored to be considering a trip to Russia to attend ceremonies marking the 70th anniversary of the end of the World War II. This high level diplomatic visit would serve as a capstone to a period of increasingly friendly relations between the two countries.

North Korea has also recently made attempts to engage various Southeast Asian countries in an attempt to diversify its economic relations. In August of 2014, North Korean Foreign Minister Ri Su-yong visited Laos, Vietnam, Myanmar, Indonesia, and Singapore and, while his official itinerary and talking points remain secret, many view this as an overt attempt to strengthen economic ties. Last month, Pyongyang reiterated its interest in the fast-growing region by sending Vice Foreign Minister Ri Kil-song to seven Southeast Asian countries. These renewed attempts at economic cooperation coupled with plan to develop 13 special economic zones signal North Korea’s willingness to experiment with reform and become more self-reliant in the face of souring relations with China.

The recent round of missile tests are a clear signal that Kim Jong-un will maintain his hawkish military stance. With renewed six-party talks predicated on North Korea’s nuclear disarmament, Pyongyang is seeking ways to circumvent the long-standing economic sanctions by strengthening economic ties with its Asian neighbors. Kim Jong-un is wary of any foreign interference in domestic affairs, and his moves to diversify the North Korean economy are clear attempts to reduce his country’s reliance on Beijing. The recent statement by Daniel Russel, the Assistant Secretary of State for East Asian and Pacific Affairs, could act as encouragement for Kim Jong-un as he balances reform with firm party control.

Last week, Assistant Secretary Russel advised that, “A change in North Korea does not need to be a regime change as the example of Burma shows.” Kim Jong-un clearly understands the unique challenges he will face as the leader of North Korea, and these recent attempts at engaging the international community signal his intent to develop the state economy. While it seems unlikely that the regime will suddenly revise its status quo, these political overtures are clear indications of North Korea’s attempt to stake out its own claims for economic opportunity and solidify its political independence.

Matthew Nitkoski is a MA candidate in International Affairs at the Elliot School for International Affairs at George Washington University and an intern at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Adam Barker’s photostream on flickr Creative Commons.

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10 Issues to Watch For on The Korean Peninsula in 2015

By Mark Tokola, Troy Stangarone, and Nicholas Hamisevicz

Last year saw a series of significant events on the Korean peninsula. On the economic front, South Korea concluded free trade agreements with Canada, New Zealand, Australia, and Vietnam, and reached substantial conclusion on a deal with its largest trading partner, China. While inter-Korean relations avoided the pitfalls of 2013 when the Kaesong Industrial Complex was closed for nearly half a year, the hope that a surprise visit by senior North Korean officials to the Incheon Games would lead to deeper dialogue with North Korea has yet to be fulfilled. With more work to be done on the trade front and in inter-Korean relations, here are 10 economic and foreign policy issues to follow in the year ahead:

Dealing with North Korea in 2015

It has been said that the more things change, the more they stay the same and 2014 was a year where relations with North Korea often seemed like change but more of the same. From the family reunions to the visit to the Incheon games by senior North Korean officials, opportunities to build on the relationship soon fell back to familiar patterns. Will 2015 will be another year such year for the U.S.-ROK alliance and its relations with North Korea?

While North and South Korea are trying to find ways to have inter-Korean meetings, the two sides are having trouble agreeing to terms for the meetings. Once more military exercises start up, it will be even more difficult for inter-Korean relations to progress.

At the same time, reports suggest North Korea continues to improve its missile and nuclear weapons capabilities. Last year the United States indicated it would like to deploy THAAD, Terminal High Altitude Defense, systems on the Korean Peninsula to help protect U.S. troops and South Korea from missile attacks by North Korea. This prompted debates in South Korea about if the deployment of U.S. missile defenses would make South Korea safer, more vulnerable to attack, or draw it into bilateral tensions between the United States and China, as well as Russia to a lesser extent. South Koreans also discussed whether their country should build their own missile defense system. A slight compromise would be to have the systems on U.S. bases in South Korea. Whatever the determination is for the U.S.-Korea alliance, North Korea will likely continue to improve its missile and nuclear weapon technology and therefore keeping the issue of missile defense at the forefront in 2015.

Key Summits in 2015

This year will also bring a series of potentially critical summits between the leaders of Asia. Possibly the most intriguing is the potential for Kim Jong-un to make his first overseas visit as the leader of North Korea. Russia invited Kim Jong-un to attend a ceremony in Moscow on May 9th celebrating the end of World War II. Reports suggest Kim Jong-un has likely accepted the invitation. At the same time, Russia has indicated that it has extended an invited Park Geun-hye and Xi Jinping as well, raising the question of whether either would choose to meet with Kim Jong-un bilaterally.

What are the prospects for a Park Geun-hye – Kim Jong-un summit in 2015? The Russia visit would be the best opportunity, but that might be politically difficult for Park despite more than 80 percent of Koreans indicating in a recent Asan Institute survey that an inter-Korean summit is necessary.

In May, Japan’s Prime Minister Abe Shinzo will likely visit the United States. If he visits, the U.S. is likely to quietly encourage Abe to make a positive statement on the anniversary of World War II that would help bring countries closer together rather than remain distant because of historical issues. Korea will be watching this visit closely for comparison with Park Geun-hye’s visit in 2013 and interpreting the level of support the U.S. gives to Japan.

Another summit to look for is a trilateral summit between Korea, China, and Japan. At the end of 2014, Park Geun-hye suggested the resumption of trilateral summits. This would be a welcome move, especially because both Xi and Park seem uncomfortable with a bilateral meeting with Abe. If this occurs before Abe’s statement on World War II, the hope would be the two sides actually try to talk about areas of cooperation moving forward, especially a China-Korea-Japan FTA. However, a discussion that only focused on the historical challenges in the region could encourage Abe to make a statement more to his personal belief rather than for the betterment of Japan both domestically and in foreign relations.

It will also be interesting to see if India’s Prime Minister Narendra Modi makes it back to Northeast Asia in 2015. His positive relationship with Abe is well known. Park Geun-hye has only met Modi on the sidelines of an East Asia Summit meeting in November, where she invited him to South Korea. South Korea and India have been doing a better job of having high level meetings between officials, and a summit meeting between the two leaders would demonstrate a commitment to that effort and to improving relations.

Korea-Russian Relations

Russia may find tactical advantages in its recent diplomatic outreach to North Korea.  Russian spokesmen have confirmed that an invitation has been issued to Kim Jong-un to visit Moscow on May 9 to attend the 70th anniversary of the end of World War II.  Russian gestures towards North Korea demonstrate to foreign countries and to the Russian public that Russia is not without friends, despite its increasing isolation.  The outreach may also be intended to signal to U.S. and to the EU that their economic sanctions against Russia carry global costs.  Russia can hope for an economic lifeline from China in terms of energy contracts, and can offer North Korea a lifeline of its own to counterbalance the diplomatic and economic pressure the DPRK is experiencing from the West.

However, Russia’s long-term strategic interest is better served by a cooperative relationship with South Korea rather than the DPRK.  Russia’s trade with South Korea is vastly more important to the Russian economy than are its ties to North Korea.  Furthermore, as China has experienced, being associated with the DPRK’s eccentric, brutal and uncooperative regime bears an ongoing reputational cost in world opinion.  For its part, the ROK would like to ensure that Russia does not serve as an impediment to its project to peacefully unify the Korean peninsula.  Behind the headlines of Kim Jong-un’s possible visit to Moscow, look for increasing, practical cooperation between Russia and the ROK in 2015.

Relations Between Korea and Japan

This year marks the 50th anniversary of diplomatic relations between South Korea and Japan. Combined with 2015 being the 70th anniversary of the end of World War II, there is anticipation and hope that these two occasions can be an impetuses for better relations in Asia, especially between Korea and Japan. The biggest hope is for a bilateral summit meeting between South Korean President Park Geun-hye and Japanese Prime Minister Abe Shinzo. With Prime Minister Abe promising a statement on the anniversary of the end of World War II, it wouldn’t be surprising if President Park waited until after the assessment of that statement to consider meeting with Abe. There is a sense from some on both sides that each country is willing to wait for a new counterpart. However, with the LDP’s victory in the elections in December, it is almost certain that these will be the two leaders for the next three years.

Just before Christmas, the U.S. brokered a deal for a trilateral intelligence sharing arrangement with its two allies in Northeast Asia. From the U.S. perspective, the hope was this trilateral agreement would both satisfy some of the current security needs not being met because of a lack of a GSOMNIA agreement between Korea and Japan as well as being an catalyst for Korea and Japan officially signing and completing a bilateral GSOMNIA between themselves.

Constructing Legacies

In his State of the Union address, President Obama acknowledged he had only a short time left as president. These are important times for any U.S. president as they try to shore up a legacy and accomplish goals they have set for themselves and for the country. Often, these years are marked by efforts in foreign policy. In Asia, U.S. presidents in their last years in office have attempted to reach out and engage North Korea. There is some speculation that this could happen again with the Obama administration; however, recent events make that seem unlikely. Moreover, at a time in his presidency where there could be a possible outreach, North Korea once again has undertaken actions that have antagonized the United States, forced the Obama administration to respond in a tough manner, and reduced the likelihood of the Obama administration having the willingness and political capital to engage North Korea in a positive way. North Korea greeted both President Obama’s election and reelection with missile and nuclear tests, and now they began his last two years in office with the cyber attacks on Sony Pictures. While there could be some engagement, the U.S.-North Korea relationship is more likely to remain antagonistic, especially in 2015.

South Korean President Park Geun-hye will also be thinking about her legacy as she enters the third year of her constitutionally mandated one term, five year presidency. The third year is typically when South Korean presidents try to make their legacy moves as they still have time to implement their plans and the next election cycle has not yet begun. This is especially the case for Park Geun-hye. The year has started off with the focus on inter-Korean relations with the hope that something can come of the annual New Year’s statements that offer openings for dialogue between the two Koreas, but the two sides currently appear unable to find common ground. In addition to North Korea, many will be looking to see if Park Geun-hye can make the moves and reforms necessary in the domestic economy to increase growth.

Two Major Moves on Trade

At the APEC summit in Beijing last year, China and South Korea announced the substantial conclusion of the Korea-China FTA. With expectations that the final details on the agreement will be concluded early this year, the implementation of the Korea-China FTA will place South Korea in the unique position of having FTAs with the United States, the European Union, and China – the world’s three largest economic actors.

In addition to South Korea’s FTAs with the United States, the EU, and China, we should expect to see movement on South Korea’s efforts to join the Trans-Pacific Partnership agreement. South Korea announced its interest in joining the agreement being negotiated among Pacific Rim nations in late 2012, but with the increasing prospect of President Obama receiving the Trade Promotion Authority that he needs to conclude the agreement South Korea will likely push to join the talks prior to their conclusion later this year.

A New Nuclear Energy Cooperation Agreement

The U.S.-South Korea 123 Agreement of 1974, or nuclear cooperation agreement, was extended for two years in 2013. The agreement was set to expire in March of 2014 and governs civilian nuclear cooperation between the United States and South Korea. With the agreement set to expire in 2016, the two sides will be looking to conclude a new agreement in 2015.

The major issue in the talks centers around South Korea’s desire to enrich uranium at the front end of the nuclear fuel cycle and to reprocess spent nuclear fuel on the back end. For reasons of non-proliferation, the United States has opposed enrichment and reprocessing provisions in new 123 agreements. With the deadline to extend the current agreement approaching, the two sides will be searching for a way to address the United States’ non-proliferation concerns while also meeting South Korea’s nuclear power ambitions. Some potential outcomes include another short-term extension, long-term agreements that either include or do not include enrichment and reprocessing rights, or an agreement tied to a joint pyroprocessing study to develop a more proliferation resistant reprocessing technology.

The Diversification of South Korea’s Energy Suppliers

While South Korea has trace amounts of fossil fuels, it is dependent on imports of fuel from unstable regions to drive its economy. As of 2012, petroleum and other liquid fuels accounted for 41 percent of South Korea’s primary energy consumption, while natural gas accounted for another 17 percent. More than 85 percent of its petroleum imports came from inside the Strait of Hormuz and more than 50 percent of its liquefied natural gas (LNG) comes from the Middle East as well.

That should begin to change in 2015. In 2014, South Korea put in place incentives for refiners to import oil from regions other than the Middle East to diversify the sources of Korea’s petroleum imports, while the United States issued a notification that exports of condensates, a form of ultra-light crude oil, would be allowed.  The combination of these two changes, along with South Korea’s ability to import LNG from the United States under the KORUS FTA, should help South Korea begin a process of diversifying the sources of its energy imports in 2015.

Samsung’s Future and Its Frenemy Relationship with Apple

After a year in which Samsung lost its smartphone lead in key markets such as China and India, and faced a renewed challenge from Apple which introduced widescreen models to compete with the larger Samsung models, especially the Samsung Galaxy Notes, 2015 will be an important year for the South Korean conglomerate. At the same time, American business news followers likely will be confused by alternating headlines which one week will describe ongoing legal battles between Apple and Samsung regarding intellectual property rights, and which the next week will talk about business cooperation between the two companies, such as Apple’s reported use of Samsung processors in its next generation of iPhones.  So, are the two companies rivals or business partners?

As Samsung seeks to turn around declining smartphone sales that saw its corporate profits drop for the first time since 2011 and navigate a leadership transition to Lee Jae Yong, they will likely be both. We saw a similar situation in the past, in which two other companies came to dominate a market, while appearing to be simultaneously competing and cooperating.  Boeing and Airbus have filed countless trade actions against one another, arguing unfair competitive practices.  Boeing generally focuses on what it considers Airbus’ non-commercial financing arrangements with European governments; while Airbus charges that Boeing has been given an unfair advantage through U.S. government military contracting.

In reality, the relationship between extremely large companies such as Apple and Samsung, and Boeing and Airbus, is complex.  They will fundamentally seek to “out compete” each other while at the same time cooperating when it is in their interest to do so to maintain their market position.  We should expect more of this in 2015.

Feeling the Effects of Social Change in Korea

As South Korea’s population ages, increases in wealth, and becomes more socially tolerant and diverse, the effects of those changes will have noticeable effects, even during the short term of the year 2015.  The increasing percentage of the population born in the two decades following the end of the Korean War (the Korean “baby boom”) will put increasing pressure on the ROK’s health care and pension systems.  It may also lead to a reexamination of Korea’s history during the 1960’s and 70’s.  The demographic shift could even create a market for nostalgia-themed popular entertainment and culture as a counterpoint to K-pop.

The increase in wealth is likely to lead to an increased focus on quality of life, particularly among recent college graduates.  Safety and health issues, including Korea’s high suicide rate, are likely to become bigger political topics.  The trend, discernable among all of the world’s advanced economies, towards an increasing acceptance of diversity, and growing concern for the well-being of minorities, immigrant populations, and refugees, will fuel debate in South Korea about the speed of change, and will put further distance between South Korea and North Korea.  As the 2017 national elections begin to appear on the horizon, 2015 will see political debate regarding whether the right can regain broad, popular support, whether the left can unify around a common platform and leadership, and whether a third political force will emerge.  Social change will create the shifting ground upon which all of these debates will take place in 2015.

Mark Tokola is the Vice President of the Korea Economic Institute, Troy Stangarone is the Senior Director for Congressional Affairs and Trade, and Nicholas Hamisevicz is the Director of Research and Academic Affairs. The views expressed here are the authors’ alone.

 

Image created by Sang Kim of the Korea Economic Institute of America.

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U.S. Bureau of Industry and Security gives huge New Year’s Gift to U.S. and Korea Energy Consumers

This is the second post in a two part series on U.S.-Korea energy cooperation. The first post can be found here.

By KEI President and CEO Donald Manzullo, J.D.

On December 30, 2014, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce, which regulates the exports of certain sensitive items from the United States, gave a gift to U.S. and Korean energy producers and consumers.  Ever since 1975, when Congress enacted the Energy Policy and Conservation Act in response to the Arab oil embargo by the Organization of Petroleum Exporting Countries (OPEC), the U.S. has imposed a ban on crude oil exports to protect its national security interests.  At the time, it made little sense to export U.S. crude oil, particularly after the contentious debate to construct the Tans-Alaskan oil pipeline just two years earlier, only to increase U.S. dependency on imported oil from unstable or unfriendly regimes.

However, now the tables are turned on OPEC.  As a result of the technological revolution in “fracking” and horizontal drilling, the U.S. has reversed its decades-long decline in domestic oil production.  Thus, many policymakers are questioning the rationale for the U.S. export ban on crude oil exports and some are calling for its outright repeal.

An outright repeal of the ban on crude oil exports would require an act of Congress.  With divided government, it is not clear that this proposal would clear all the hurdles to become law.

However, there is an interim step.  Not all oil production in the United States comes in the form of crude oil.  While there is a ban in crude oil exports, there is no ban on petroleum exports.  While this may seem to be a semantic difference, petroleum is a “value-added” processed product.  It is similar to the difference between wheat as a commodity versus bread made from wheat.

There is one type of oil product called condensate, which is a liquid oil formed at the surface from the incidental gas produced in a conventional oil well or dry natural gas well.  Condensate is easily formed from shale production. About 12 percent of all oil produced in the U.S. is condensate.

The issue has been whether condensate is crude oil or a petroleum product.  If it is a petroleum product, then it is not subject to the oil export ban.  Last June, BIS issued a commodity classification decision to two private companies that agreed with them to permit the export of their ultralight condensate petroleum products without the need for an export license.  Word got out about this individual ruling and several media outlets thought that the oil export ban had been lifted.   This caused much confusion over the past several months because BIS believed it was simply reiterating existing policy that retained the crude oil export ban but allowed the export of petroleum products without the need for prior U.S. government approval through an export license.

As a result, BIS issued a clarification last week through the unusual method of publishing a “Frequently Asked Questions (FAQS)” which is generally used to guide readers of the basic facts of an issue, on its website with respect to administration policy regarding condensate exports.  In short, BIS made it absolutely clear that condensate exports are not covered by the U.S. crude oil export ban and can be freely traded without the need to receive an individual export license.  In its FAQS, BIS essentially reaffirmed its June ruling to the two private companies that condensate morphs from crude oil to a “petroleum product” like refined oil if it is “processed through a crude oil distillation tower.” (See www.bis.doc.gov/index.php/policy-guidance/faqs).  This is not the same as a conventional refinery, but a much cheaper and easier process used to stabilize the condensate.  Condensate can then be mixed with natural gas to produce Liquefied Natural Gas (LNG).  Condensate is also used to dilute heavier oils to make them light enough to go through pipe lines, and generally cannot be used as fuel for trucks or cars because the octane is not high enough.

The U.S. is literally floating in condensate, as a byproduct of shale operations in North Dakota and Texas. That’s why condensate is also referred to as ultra-light shale oil. With the U.S. shale gas boom and the energy needs of South Korea, which is the world’s second largest LNG importer, this simple clarification makes quite a pair for increased sales in the U.S. and cheaper imports of LNG from the U.S. as opposed to sources from the Middle East.  This release from BIS over the holidays may increase export sales by as much as 1 million barrels a day by the end of this year, according to Citigroup analysts, thus benefiting consumers in South Korea and workers in the U.S. energy sector.  What a wonderful gift!

President Manzullo served in the U.S. House of Representatives from 1993-2013 and chaired the Foreign Affairs Subcommittee on Asia and the Pacific. The views expressed here are the author’s alone.

Photo from Daniel Foster’s photosream on flickr Creative Commons.

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Opportunities for U.S.-Korea Energy Collaboration

This is the first post in a two part series on U.S.-Korea energy cooperation. The second part can be found here.

By Kim Heejip

The global energy market has been going through dynamic changes recently, unseen for many years.  The recent price drop of oil and gas in the global market has been extremely rapid.  Since November 27th, when the last OPEC meeting was held, the price of oil has dropped nearly 50 percent.  These changes are posing new opportunities and threats to the global economy and markets.  Equally, they provide a great opportunity to U.S. and Korea to generate mutual benefits through enhanced energy collaboration between the two countries.

There were two major drivers in North Asian energy market in 2014.  They were 1) the shale oil and gas revolution in the U.S., resulting in an over-supply of oil and gas, and 2) the Russian efforts to extend their pipeline to the North Asia region increasing their energy exports, which have been reduced significantly in Europe due to their aggressive foreign policy efforts.  Russia made an agreement in May with China on piped gas sales and the purchase of 28.5 million ton per year for 30 years starting from 2018.

Korea faces great opportunities in both oil and LNG (Liquefied Natural Gas) to diversify energy sources, decrease the energy import burden, select energy partners and eliminate the long-lived Asian energy premium.  With the recent global price drop in oil and gas, global attention is growing on whether the U.S. government will ease their export restrictions and how the price of North American oil/gas will move.  In addition, the U.S. and Korea have very strong long-term strategic ties through their firm geopolitical and defense partnership, trading and business partnership, and the recent FTA.

If the U.S. and Korea can work out more energy collaborations, the two countries will be able to achieve significant mutual benefits including increased security ties, enhanced economic benefits, and an improved trade balance.  In doing so, the U.S. will be able to secure the access to the 5th largest and a continuously growing energy import market in the world.  The U.S. will also be able to enhance domestic businesses and create more jobs, while establishing a strong presence in the growing Asia-Pacific area.  Korea will be able to increase its national security by securing a safe energy route and economic benefits through the diversification of its energy import sources and a potentially reduced import cost.

The U.S. and Korea should make efforts to enhance their collaboration in energy.  First, the U.S. and Korea should increase the export of U.S. oil and gas to Korea by utilizing the FTA between two countries.  Second, Korea should make efforts to participate more in energy development efforts in the United States.  Third, the U.S. and Korea should expand their collaboration beyond energy to energy-related manufacturing areas such as steel, shipbuilding, and engineering.

Kim Heejip is a Visiting Professor on Energy Policy with the Graduate School of Public Administration at Seoul National University and is the former managing director for Accenture Korea. The views expressed here are the author’s alone.

Photo from Shell’s photostream on flickr Creative Commons.

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Overcoming North Korea to Build a Eurasian Economic Space

By Troy Stangarone

At a recent international conference in Seoul, South Korean President Park Geun-hye called for a “Eurasia Initiative” to link Europe and Asia via trade, transit, and energy.  However, achieving President Park’s vision will require developing a means of integrating North Korea into the broader Eurasian framework and mitigating the risk of Pyongyang arbitrarily shutting down energy and transit links as it did this past summer with the Kaesong Industrial Complex.

Under President Park’s proposal, Eurasia would become one economic space linked together by rail and road links from Busan to Europe that would carry goods and resources, such as energy, from producers to consumers while tying together the infrastructure needed for electricity, gas, and oil. Trade barriers would be gradually taken down by linking together free trade agreements such as the Trans-Pacific Partnership, the Regional Comprehensive Economic Partnership, and the Korea-China-Japan FTA. Together, these efforts would link South Korea to the rest of Eurasia in a way that has not existed for more than six decades.

Since the end of the Korean War, South Korea has been cut off from parts of Eurasia by ideology and territory. During the Cold War, South Korea, like much of the West, had limited economic ties with the Soviet Bloc and the scars from the Korean War meant that South Korea was formally cut off from China until 1992. Today, South Korea exists as a virtual island, physically cut off from Eurasia by North Korea. As a result, even as trade has boomed with China and other nations, for physical goods it must take place via either air or sea rather across land routes.

The biggest advantage of transcontinental rail links for South Korea is greater connectivity to China. While the connections would allow South Korea to drastically cut the transit times for goods to Europe from 45 days by ship to 14 days by rail, the cost of shipping via rail means transcontinental shipments are likely to be more of a niche delivery system for the foreseeable future. However, because China is South Korea’s largest trading partner and much of the trade between South Korea and China consists of parts to be assembled for other markets, increased access into China could yield significant gains for South Korean producers.

Creating a true transcontinental railroad, however, requires South Korea to be able to ship across North Korea into the rail systems in Russia or China. South Korea previously worked to reconnect the Gyeongui line , which once linked Seoul and Pyongyang, to ship goods between the South and its factories in Kaesong with the goal of eventually shipping them north through China or Russia to other markets. Despite having tested the track, a short period of freight shipments came to an end in 2008. On the northern end, Russia recently completed a link at the port in Rajin that will give rail in North Korea, and potentially South Korea, access to the Trans-Siberian Railway. However, significant investment will likely be needed in upgrading infrastructure in North Korea to make this a reality.

Additional access to Northeast Asia over land would also help to address South Korea’s energy needs. Without natural endowments of gas or oil, South Korea is dependent on energy imports to power its economy. However, despite being the world’s second largest importer of liquefied natural gas (LNG), South Korea pays some of the highest prices for LNG in the world. Integrating energy resources across Eurasia would allow it to tap into Russia’s vast supplies of natural gas.

The idea of a pipeline to export Russian natural gas seemed like a potential reality only a few years ago. In 2011, the first steps were taken, including a preliminary contract between Gazprom, Russia’s state controlled gas company, and Kogas, Gazprom’s South Korean counterpart. Crucially, the project also had the support of Kim Jong-il, as it would have provided North Korea with lucrative transit fees.

However, political risk from North Korea may not be the only obstacle to the project. In the time since the original agreement was reached, the commercial logic may be beginning to change. Innovations in shale gas exploration have begun to change global energy markets with the United States set to become a net exporter of energy and one of the world’s largest sources of LNG. At the moment, gas from Russia would potentially reduce costs for South Korea, who current plays a little more than twice what Europe pays for LNG. If South Korea’s contract with Russia were for the same price Europe pays, it could realize significant savings.

However, it is unclear how long South Korea would be able to realize these savings. Russia has historically sought to tie its price for gas to the price for oil, unlike countries such as Norway which charge based on spot prices. In Europe, which accounts for 70 percent of Russia’s gas exports, the current pricing structuring is beginning to make Russian gas less competitive on European markets. If the changes in the U.S. industry and other markets produce a unified market for gas prices, which does not exist currently, South Korea could be tied into higher prices in the long run if it is unable to strike a deal with Russia that includes spot prices. Additionally, South Korea may be able to secure LNG from the United States for competitive prices without the political risk a pipeline through North Korea could entail.

Ultimately, notwithstanding concerns over cost, it is political risk that will hold back either of these projects. As the shutdown of the Kaesong Industrial Complex demonstrated earlier this year, North Korea is willing to shut down projects for non-commercial reasons despite the potential economic costs it would incur.

For the gas pipeline, the political risk is likely manageable. In its preliminary deal with Russia in 2011, assurances were given that if North Korea cut off the pipeline the gas would be delivered via tankers. If structured this way, North Korea would ultimately only hurt itself through lost revenue. Though, self-insurance in the form of adequate LNG reserves to tide South Korea over until the switch to tankers could be made would likely be needed to remove the temptation from Pyongyang.

In terms of rail access, managing the political risks might be more difficult. Shutting down the flow of goods into or out of South Korea may be more tempting for Pyongyang during a crisis. However, as much of the rail will likely supply factories in China, it may well raise the cost of North Korea closing rail or road access north by incurring China’s displeasure as well.

While both of these projects could benefit South Korea and deepen its economic ties to its neighbors, they will require a sustained building of trust between North Korea and its immediate neighbors to be realized.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views expressed here are his alone.

Photo from Visionstyler press’ photostream on flickr Creative Commons.

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Securing Korea’s Energy Future

By Troy Stangarone

Every three years, the World Energy Congress brings together business and government leaders in the energy sector to discuss the challenges an economically vibrant and growing global economy faces as it works to meet increasing energy demands. This year’s conference in Daegu recently wrapped up and focused on the theme of “Securing Tomorrow’s Energy Today”.

For Korea, a nation with few natural domestic energy reserves of its own, the prospect of securing tomorrow’s energy today is important as it moves towards greening its economy and spuring innovation. The Lee Myung-bak Administration made the idea of “Green Growth” an important part of its policy agenda, and Daegu was selected to host the 22nd World Energy Congress at the beginning of its drive to make Korea more of a global player.

As part of the push for green growth, 80 percent of the Korean government’s stimulus package during the 2008 Global Financial Crisis was dedicated to green growth and a subsequent $85 billion was committed in 2009 to the development of clean energy technology. Some of the most visible outcomes from Korea’s commitment to green growth have been the establishment of the Global Green Growth Institute in Seoul as an international organization, Korea’s selection to by the United Nations to host the Green Climate Fund, and this year’s World Energy Congress.

The vision of Korea’s economic and energy future might look something like the following commentary from the Donga Ilbo:

A man goes to work in a hydrogen fuel cell electric vehicle in the morning. He turned on an air conditioner at home with electricity that he stored in energy storage systems (ESS) last night. His company has no worries about electricity bills because it has its own photovoltaic power generator. He does not even remember the power crises which repeatedly happened in summer and winter. All buildings can check the real-time demand of electricity so that power generators can control the production and supply of power real-time. The surplus electricity is exported to other countries.

However, getting there will be the challenge. While Korea is one of the world’s great economic success stories, its economic development has been built upon a foundation of imported energy. According to the World Energy Council (WEC), Korea has dropped ten spots to 64 on its Energy Sustainability Index. One reason is Korea’s heavy dependence on imported energy from unstable regions, with almost 90 percent of its oil coming from inside the Strait of Hormuz. In the WEC’s index, Korea only ranks 103 when it comes to energy security.

In the past, one way that Korea addressed this issue is through the development of nuclear power. However, in the aftermath of the Fukashima disaster in Japan there has been a greater reticence to expand nuclear power generation worldwide, with some countries such as Germany completely phasing it out. While Korea is not planning on shuttering its nuclear power plants, the second draft of the government’s new long-term energy plan calls for maintaining the current level of nuclear power generation, the first time that the national energy plan has not called for an increase in 35 years.

While the green and renewable energy sources may one day be the solution to Korea’s energy needs, in the more immediate future one solution could be the importation of shale gas from North America. The importation of U.S. shale gas would have a series of benefits for Korea, including a more geopolitically stable supplier than the Middle East and a lower carbon emission than coal and oil.

The biggest advantage, however, could be price. Because gas has traditionally been traded regionally, prices vary across regions with no set worldwide price. This means that Korea, one of the world’s largest importers of liquefied natural gas (LNG), pays a much higher rate than domestic consumers in the United States.

As the United States gears up to become a major exporter of LNG, Korea could benefit significantly from U.S. LNG exports in two ways. First, as a U.S. FTA partner, Korea does not need the same approvals for the purchase of U.S. shale gas as other non-FTA partners. The need to develop export facilities, of which Korea is taking part, and transportation costs will drive the price for Korea beyond that typically seen in the United States, $3-4 per million British thermal units. Yet, Korea could still save significantly from the $15-16 per million British thermal units it currently pays. Second, if U.S. LNG becomes widely traded, it could help drive down and unify worldwide prices, while also giving Korea additional negotiating leverage with other potential suppliers such as Russia.

Over the last four decades, Korea’s energy consumption has grown along with its economic development. More recently, efforts at improving efficiency and nuclear power generation have helped to reduce Korea’s foreign dependence, but much as the broader shift taking place in Korea’s economy we may be seeing the beginning of a shift in the composition of Korea’s energy consumption.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views expressed here are his alone.

Photo from UNKIEPAUL/Paul Johnston’s photostream on flickr Creative Commons.

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About The Peninsula

The Peninsula blog is a project of the Korea Economic Institute. It is designed to provide a wide ranging forum for discussion of the foreign policy, economic, and social issues that impact the Korean peninsula. The views expressed on The Peninsula are those of the authors alone, and should not be taken to represent the views of either the editors or the Korea Economic Institute. For questions, comments, or to submit a post to The Peninsula, please contact us at ts@keia.org.