The South Korean Contrast
In many respects, the energy policy of South Korea is a scaled-down version of Japan's. If anything, South Korea has greater vulnerabilities than Japan, with some 95 percent of its primary energy demand met by foreign energy supplies. With no domestic oil reserves, South Korea is the world's fourth largest oil importer, with energy imports accounting for roughly 20 percent of its total import bill-more than twice that of Japan. Prior to the 1997 economic recession, oil accounted for 63 percent of South Korea's primary energy. The 1998 recession reduced this to 54 percent, but a surprisingly robust 10 percent economic growth in 1999 appears to have restored both consumption levels and the percentage of oil in South Korea's energy mix (to the 60 percent range). While South Korea still has a host of serious financial and structural economic problems that were exposed by the 1997 financial crisis and are only slowly being addressed, this analysis assumes moderate growth (4-5 per-cent) over the coming decade.
Like Japan, South Korea has sought-with limited success--to diversify sources of supply, particularly for oil and natural gas. The other basic elements of South Korea's energy policy are: to build larger strategic petroleum reserves; to increase the use of natural gas and nuclear energy; and to increase energy efficiency and conservation. The country also is looking to the energy frontier of the Russian Far East and hopes for energy cooperation in North-east Asia to realize prospective oil and gas resources that could alter its supply patterns.
One difference between the Korean and Japanese responses to the two oil shocks was that South Korea expanded the use of coal as an alternative to OPEC oil dependency, particularly after 1979-80. By 1985, coal accounted for 39 percent of primary energy demand before environmental concerns and low oil prices reduced its role by nearly half, to about 20 percent at present. In its moderate business-as-usual scenario, the Tokyo-based Asia-Pacific Energy Research Center projects that coal will continue to account for roughly 20-23 percent of South Korea's energy mix to 2010.
It is worth underscoring that despite immediate hardship at the time, the two oil shocks of the 1970s had little impact on South Korea's economic miracle. South Korea reached OECD income levels of just over $10,000 per capita by 1996 (when it became the world's sixth largest consumer of oil). Its energy growth pattern may help illuminate future demand growth elsewhere in Asia. From 1975 to 1992, South Korea tripled per capita energy consumption, while averaging about 8 percent growth annually. Oil demand quadrupled from 1985 to 1995, reflecting rapid structural change in the South Korean economy, focused on rapid expansion with booming steel, shipbuilding, petrochemical, auto, and electronics industries. Oil demand rose by only 3 percent annually from 1980 to 1987, but averaged about 20 percent annually from 1987 to 1995, though economic growth was about the same, at around 8 percent in both periods. No less intriguing is the fact that oil decreased its share in South Korea's total energy mix in the first period, yet comprised 85 percent of the increase in total energy demanded in the latter period.
One persuasive analysis suggests several factors were responsible for this. The oil shock of 1979-80 and resulting price hikes dampened demand, along with government efforts to foster more energy efficiency and conservation in the slower growth phase. A military coup that brought General Park Chung Hee to power, with more ambitious development plans, also may have played a role. In the latter period, the collapse of oil prices in the mid-1980s was one factor. This occurred while South Korea's economic growth hit high gear, and as an urban middle class mushroomed. This meant a surge in electricity demand, with more reliance on oil- fired power plants. But South Korea's exploding oil demand was in no small measure also the result ofboth burgeoning internal transport needs and widespread diffusion of private automobiles as incomes more than doubled. During this period, car ownership increased by 25 percent annually. Korea's case is all the more remarkable because by the mid-1980s, it was already a relatively urbanized, industrializing economy, yet its oil consumption quadrupled in the decade before the economic crisis.
While growth in South Korea's oil consumption is not expected to continue at any-where near the 1975-95 pace, oil demand is projected to increase by up to one-third by 2010, roughly an additional 600,000 bld. Despite its best efforts, South Korea remains heavily dependent on Gulf/Middle East oil, which supplies about 75 percent of its needs. While Seoul has sought to increase imports from Southeast Asia, Africa and Latin America, these remain small portions of South Korea's total energy picture and are unlikely to displace significant amounts of Middle East crude over the coming decade.
Beyond seeking alternative oil suppliers, Seoul also has pursued a two-pronged oil security strategy , strikingly similar to Japan's. South Korea is gradually building up its strategic petroleum reserve, perhaps the most reliable assurance against short-term supply disruptions. Its current stockpile is the equivalent of a 60-day oil supply; the South Korean government is constructing additional storage facilities and plans to increase stockpiles to 90 days, which would meet OECD requirements. The other prong is the effort to obtain equity stakes in foreign oil and gas exploration and production. The Korean National Oil Corporation has 18 exploration and production projects in 12 countries overseas, four producing fields, and is pursuing exploration projects in Vietnam and Indonesia. But like Japan's government-subsidized efforts, this has resulted only in modest achievements, at less than 50,000 bid.
Even before the opening of Soviet-South Korean relations in 1990, Korean firms demonstrated a strong interest in developing oil and gas in the Russian Far East. Hyundai chairman Chung Ju Y ung's visit to Moscow in 1989 led to an "agreement in principle" to develop resources in Yakutia. After the breakup of the USSR, this evolved into a broader pledge of cooperation, although still not much more than a statement of intent. This was embodied in a Russian- Korean statement during a November 1992 visit to Seoul by then Russian president Boris Yeltsin. Yeltsin and then South Korean president Kim Young Sam pledged to pursue feasibility studies for joint development of natural gas in Yakutia, the construction of pipelines to transfer the gas to Korea, and similar efforts to develop offshore Sakhalin natural gas. Nine Korean firms formed a consortium to begin the process. But difficulties in reaching agreement on feasibility studies, part of a larger problem with doing business in Russia, has led to naught thus far. In the 2010- 20 timeframe, if sufficient quantities are available, Russian gas could conceivably be piped into Northeast Asia. Several pipeline routes have been suggested. One from Yakutsk through Vladivostok, North and South Korea, and then on to Japan via Pusan. Another would go from eastern Siberia through Mongolia, to Beijing. But the limited size of the Korean market will require cooperative ventures, most probably financed largely by Seoul and Tokyo and/or Beijing to reach an economy of scale for any of the ambitious Northeast Asian pipeline schemes to make economic sense.
Natural Gas Future
Natural gas will loom larger in South Korea's energy future, albeit principally in the form of LNG in the near term. Since 1987, South Korea's natural gas demand has increased by roughly 20 percent annually, accounting for 10 percent of world LNG consumption by 1999. Unlike the case with oil, the bulk of Korea's LNG imports has been supplied by East Asian sources, with Indonesia and Malaysia accounting for more than three-quarters of its supply. However, recent long-term (25-year) contracts with Qatar and Oman will diversify South Korea's gas sources, with the Middle East accounting for more than 40 percent by 2001. Under this scenario, Indonesian and Malaysian shares would drop to under 50 per-cent, with Brunei and Australia providing small amounts.
South Korea is substantially better positioned than Japan to rapidly expand the use of natural gas. It has invested heavily in gas distribution trunklines to create a distribution network in several major cities including Seoul and Inchon. It already has two receiving terminals, with plans to expand the capacity of both. In addition, Seoul is planning a third receiving terminal and Enron and SK Corporation are expanding the gas infrastructure to five additional South Korean cities. This diverse use of gas is reflected in the breakdown of South Korean demand: unlike Japan, where gas is used largely for electric power generation, in Korea, residential use and industrial use comprise more than 50 percent of demand. Forecasts for South Korean demand growth range from 5 percent to 11 percent annually to 2010.
Apart from the pace of economic growth, another important factor affecting gas demand growth will be the degree to which South Korea's gas and electricity industry is restructured. Seoul announced plans for privatizing public companies, including the gas monopoly, KOGAS and KEPCO, the largest utility, and others. In theory, this will create an open access system, unbundling importing from sales of gas and electricity, and opening the door to IPPs by 2002-3.
The Importance of Nuclear Power
Even more important than natural gas in South Korea's efforts to diversify supply sources has been nuclear energy.Since its first commercial power reactor was commissioned in 1978, spurred in part by the 1973-74 oil crisis, the country's use of nuclear energy has grown dramatically. South Korea's 14 nuclear power reactors at four nuclear power plants generate 44 gigawatts of electric power. Nuclear energy accounts for roughly 40 percent of Korean electricity, equivalent to 12 percent of South Korea's primary energy consumption. While Seoul plans to have 16 reactors operating by 2010, both the pace and scope of future nuclear power plant construction is problematic.
While less beleaguered by public ambivalence than Japan, South Korea's nuclear expansion plans still must contend with the public acceptance question. Public concern over nuclear safety and the problem of nuclear waste has persisted. By an odd coincidence, shortly after the Tokaimura accident, a Korean nuclear plant also had an event where radioactive water leaked from one its reactors. The first such accident at a Korean nuclear plant, it generated a wave of protest from environmental groups.
And as with Japan, nuclear power inevitably intersects with security questions. In the case of South Korea, this has an added peculiar dimension because of the North Korea problem. Even before North Korea's nuclear weapons program became a serious regional concern, South Korea had sought covertly in the mid-1970s to pursue a nuclear weapons option. This was quashed under considerable US pressure. Yet South Korea's scientific intelligentsia retains an interest in the fuel cycle.See Foreign Broadcast Information Service (FBIS), Special Memorandum, "South Korea's Emerging Nuclear Potential," February 22, 1996. This is apparent in numerous discussions the author has had with both national security and nuclear energy analysts and planners during the 1990s. Though Seoul signed a 1992 denuclearization accord with North Korea wherein both sides agreed to forgo reprocessing, if Japan realizes its much-delayed fuel cycle plans, this will both legitimize it in the eyes of some of South Korea's elite and stimulate interest in pursuing a similar course.
The North Korea Factor
Nuclear concern is, of course, a major issue in regard to the real wild card in Korea's energy equation, North Korea. This was evidenced in the 1994 nuclear crisis, which led to a deal between Washington and Pyongyang to freeze and eventually dismantle North Korea's nuclear weapons program in exchange for a number of largely energy-related blandishments. But the nuclear issue that North Korea raises is but one aspect of the larger question of national reunification. The paradox here is that while Korea is a divided nation, much like Germany or Yemen were, and will inevitably be reunified, it is impossible to predict either how or when reunification will occur. After a decade of negative growth that saw its economy shrink by nearly two-thirds, North Korea is a failing state with enormous problems ranging from widespread hunger to massive energy shortages. Yet it is conceivable that Pyongyang could ; stagger on for another decade or it could collapse tomorrow-and it is impossible to predict either course.
The preferred path for reunification is a gradual process of détente, peaceful coexistence and increased economic interchange. But the communist regime in Pyongyang has been reluctant to more than experiment at the margins with economic reform or opening. The premise of a gradual process of reunification is that of a "soft landing," a hope that prompted South Korea's president Kim Dae Jung to call for a June 2000 summit with North Korea's leader Kim Jong II. At the other end of the spectrum of possibilities is the "hard landing," a sudden collapse of regime or state resulting in absorption by the South. The latter is a scenario Seoul desperately hopes to avoid. Indeed, all the major players in Northeast Asia, the United States, China, Japan, as well as both Koreas, have been pursuing what might be best dubbed a "muddle through" approach. Fearing the likelihood of conflict and/ or chaos in the event of a collapse in North Korea, the key actors in Northeast Asia have put North Korea on a life support system: China supplies food, coal and oil; the United States supplies food and heavy oil for heating. South Korea also provides a range of economic benefits.
Energy has played a central role in North Korea's decay. The country suffers from chronic electricity shortages, constant fuel shortages and highly inadequate heating. Its energy grid is crumbling and very inefficient. Of the almost 500 electricity generation facilities, only about 60 are part of a transmission and distribution grid. Yet North Korea insisted on two Light Water Reactors (LWRs) as the price for freezing its nuclear weapons program, rather than energy assistance such as coal- fired thermal plants that might have garnered more near-term payoff. In an " Agreed Framework" signed in 1994, the United States agreed to provide North Korea with 500,000 tons annually of heavy fuel oil until its LWRs are completed. This initially was planned for 2003, but an unexpectedly complex process combined with intermittent mini-crises have set back completion to no sooner than 2007-8. Even so, the reactors are not connected to an energy grid to distribute the power. Indeed, the reactor project only makes sense in a scenario of North-South economic integration, whereby they would be part of an integrated nuclear power program. But no such reality exists or is on the horizon. In the meantime, North Korea is stockpiling the majority of the US-supplied heavy fuel oil that it cannot absorb. It relies on oil for only 8 percent of its energy needs, with the bulk of its energy produced by coal.
In any case, reunification likely would mean a wholesale reconstruction of North Korea's economy. Cost estimates range from $500 billion (US) to $2 trillion, depending on assumptions about the pace and extent of reconstruction. But in regard to energy, the issues with respect to North Korea are twofold: first, reunification would change dramatically South Korea's energy equation; and second, while it looms as a future likelihood, reunification is a problem deferred at present. Suffice it to say that reunification would be an almost unfathomable burden on South Korea's economy. At the same time, it would almost certainly ramp up energy demand to levels similar to those seen in South Korea during the 1980s, after an initial period of uncertainty. What was North Korea's energy infrastructure would have to be re-constructed from the bottom up, with Seoul having new responsibilities for the North's entire energy needs.
While there is keen awareness of energy vulnerabilities in South Korea, as in Japan, beyond the energy policies discussed above, there is little evidence of any broader planning to address energy insecurities. Indeed, there appears an implicit sense that should worst-case scenarios unfold that threaten the flow of energy resources, South Korea's military would have little ability to respond. A report prepared for the Pentagon's Office of Net Assessment has concluded, "There is a strong sense in the [Korean] military that the United States will always be there to solve a Korean energy crisis...South Korea's role in any energy security scheme can only be in support of a larger multilateral effort." But South Korea's energy security policies also may be based on an implicit assumption that old notions of energy security may no longer apply in a twenty-first century Information Age global economy. The approach discussed here is more consistent with the latter energy security calculus than the former.