Case study V: External Effects II: Russia NE Asia Relations

1
Case study V External Effects II Russia NE Asia
Relations

• David Dusseault
• Eurasia Energy Group
• Aleksanteri Institute

2
Introduction

• Russias EC in the NE Asian Context
• Regional Dynamics N. Korea
• What is Russias Role?
• Sakhalin Specifics
• Conclusions

3
Russias Economic Development and the Energy
Sector

• Fuel Energy Complex (FEC) is a heterogeneous
  political, social and economic environment
• FEC is crucial in RFs social-economic
  development (national champion) a solution for
  increasing external energy demand
• Two discernable, irreconcilable resource
  dependent strategies NREM HTIM
• A third way Putin links natural resources to
  value added high tech economic development and
• Price dependency, nature of institutions, with
  actor strategic preferences resulting agency
  are major vulnerabilities in all models.

4
NE Asian Context
5
Regional Assessment
Constraint Northeast Asia
Physical Unique geological conditions Lack of pipeline and other basic infrastructure difficult climatic conditions in Eastern Siberia, Yakutia, and Sakhalin
Financial High 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
Informational Compatibility 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.
Institutional Unpredictable 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.
6
Energy Imbalance
7
Conditions North and South Korea
Factors Enabling Constraining
Physical Strategic corridor for transit to markets in the south Distance from significant reserves North Lack of necessary infrastructure to supply for demand
Informational South Long term strategy, strategic reserves Strategy still relies on the state as major player in sector decision-making process, direction of future development.
Financial South 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
Actors South State energy sector undergoing a process of diversification State as primary actor
Institutional South Restructuring of institutional rules of the game North Institutional framework??
8
The Nuclear Issue in the Present Energy Context

• Nuclear stand-off on the peninsula is tied to
  regime survival
• NKs 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.

9
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)

?

• Regional Priorities Catastrophic Regional
  Conflict Avoidance
• FDI, financial credits, ROK Japan loans (Bi
  Multi-lateral)
• Regional Development aid (Bi Multi-lateral)

10
Sakhalin Is Russia the Answer?

• Begun in the 1970s
• Division of Sakhalins shelf between Japan
  USSR
• Project shelved in the 1980s but tenders offered
  in 1991
• Two Licenses offered Sakhalin II (1994) Shell,
  Mitsui, Mitsubishi and
• Sakhalin I (1995), Exxon-Mobil, SODECO, ONGC,
  Rosneft, SMNG.

Data and materials for slides 11-18 obtained from
RAD 08/ 06 M. Bradshaw, Sakhalin II in the
Firing Line
11
Sakhalin Oblast
12
The IOCs are Coming!

• Production Sharing Agreements (PSA) set the
  standard for FDI in the energy sector
• Set legal responsibilities, ensured long term
  risks, guaranteed profitable returns
• Internationally binding and
• Customised to the demands of each project.

13
How Important is Sakhalin?

• July 1999 Sakhalin II produces Russias first
  offshore oil
• 2005 produces 11M tonnes of Crude
• 6 month extraction season
• 2003 Shell commits 10B USD for LNG year round
  oil export
• Largest integrated oil and gas project in the
  world today.

14
Importance continued

• Both Sakhalin I II will produce 7 of
  Asia-Pacific demand
• LNG is already sold out Japan, S. Korea, US
  Mexico
• Sakhalin II 8 of Japans LNG
• Plans for a third LNG plant 16M tonnes per year
  and
• Russias planned increase in exports to Asia
  3-30

15
Bumps in the Road

• Plagued by delays and cost overruns
• Phase 2 costs increased from 10 20B USD
• LNG pushed back from mid 2007 to late 2008
• Total costs 12.8 to 17B USD (Exxon)
• External influences include labour, materials,
  exchange rates.

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And what about the environment?

• Genuine concerns
• Sakhalin II Phase 2 unfit for purpose (EBRD)
• Final decision pending and funding on hold
• Pacific grey whales, salmon stocks, Aniva bay
  ecology, indigenous population and
• PSA is not a good deal for Russia.

17
A Failure to Plan?

• Re-routing of pipelines
• Environmental impact studies after the fact
• Work standards in difficult terrain
• Sharing the benefits with the locals?

18
The Kremlins Volte-face

• Increased costs cause delays in production
• PSAs no longer embody Russian interests
• Renegotiation?
• Asset swaps Shell Sakhalin II 25 share for 50
  stake in Zapolyarny gas field and
• Gazprom benefits reserves LNG.

19
Causes for Concern

• Products of Actor Agency
• Monopolistic economic logic intertwined with a
  traditional geopolitical approach in both up
  downstream projects
• Unresolved legal issues regarding the control
  over resources between federal authorities
  IOCs
• IOCs and state backed energy companies share a
  partial, but not common ideological basis for
  energy sector development projects and
• Regional energy relations are institution-free.

20
Conclusions Implications for the NE Asia
Russia

• Expectations Is it in Russian interests to
  exploit E. Siberian energy resources for export?
• Anticipation Will Russian energy majors be able
  to deliver and on what terms? Will NE Asia remain
  a golden opportunity for Russias FEC?
• Contingency What strategies can NE Asian states
  Russia develop under prevailing conditions to
  ensure stable energy relations?