The world envisages a new paradigm in meeting energy requirements, because many countries around the world have experienced structural changes in the political and economic environment. Especially, with the advent of the Euro community, the world economy faces a new kind of regionalism, characterized by openness in national boundaries and densely inter-connected market expansion to a regional bloc.

Recently, there have appeared various perspectives for energy cooperation between the two Koreas, in which South Korea is requested to take a pivotal role in improving and promoting energy supplying capacity of North Korea. As a matter of fact, it is well recognized in the two Koreas that the dire energy difficulties should be overcome most urgently for a smooth transition of the North Korean economy. Since energy supplying capacity is prone to determine the self-reliance of the economy most primarily, there is no reason for North Korea to hesitate revamping its energy supplying functions of the economy from every viewpoint: technical, administrative and even institutional. This is why North Korea is requesting external aids so as to re-build its basic energy infrastructure such as power plants and electric power grids.

Furthermore, at this moment, South Korea is drawing a grand vision for an integrated energy supplying system for the future of the unified Korea. It is well known that one of the principal goals of South Korea’s sunshine policy was to prevent the collapse of North Korea, which has suffered from widespread famine and a deteriorating industrial capability. Under the new government, the main backbone energy policy to North Korea is said to be that the South should be supportive for the North to design and activate energy rehabilitation programs in a practical and financially solid manner.

And also, South Korea’s policy direction for regional energy cooperation is expected to be indispensably combining energy cooperation activities between the two Koreas and other Northeast Asian countries. The energy system integrated locally and regionally is said to be a necessary condition for the sustainability and mutual benefit of the economies of Northeast Asia. Therefore, South Korea’s energy cooperation activities are recommended to induce participation of North Korea into energy projects in Northeast Asia.

Perspective on energy requirements

During the last decade, the DPRK has experienced very poor economic performance, as indicated by the fact that the economy was at best stagnating or most probably in considerable decline, through the mid-1990s. This economic decline is considered both a result and a cause of substantial disruption in energy demand and supply in North Korea over the period. The starting point of energy shortages in the DPRK was a vast drop in imports of fuels from Russia since 1990. As a matter of fact, there had been a virtual halt in economic aid, technical assistance and barter trade on concessional or favorable terms from Russia and other Eastern European nations. Imbalances in supply and demand for energy requirements were also coupled with a sharp decline in similar types of assistance from China.

Big drops in crude-oil imports brought about further shortages in the availability of refined petroleum products in the DPRK. These decreases were attributed to, in part, external economic sanctions and partly from North Korea's inability to pay for oil imports with hard currency. The lack of fuels, in particular, in the industrial sector, seriously aggravated the stagnating economy since 1990. So the worsening energy shortage in the DPRK is believed to play a key role in causing a fundamental work-failure of the DPRK economy.

When it comes to energy problems of the DPRK, it should be noted that there are several key issues. First of all, much of its energy-consuming infrastructure is out of date and in poor repair. The heating systems in residential and other buildings are based on outdated technology. On the other hand, demand for energy services in the DPRK is suppressed and latent. Because of the lack of fuel in many sectors of the DPRK economy, when and if supply constraints are removed, energy use is likely to surge. In another word, residents, industries, and other consumers of fuel are increasing their use of energy services toward desired levels, even though the DPRK is deficient in energy product markets.

Total primary energy use in the DPRK sharply decreased to 14,030 thousand TOE (Tons of Oil Equivalent) in 1998, 41.4 percent less than in 1990 and rebounded to 15,640 thousand TOE in 2002. Crude oil imports dropped to 4,376 thousand bbl in 2002 from 18,472 thousand bbl in 1990. Especially, it is worthwhile to note changes in electricity generation during the same time period. In 2002, the electricity supplied was less than 70% of the level in 1990. As expected, the role of oil energy greatly diminished, while coal energy and hydropower generation still remained one of the most important fuels. Coal accounted for more than 65 percent of the total primary energy supply in 1990s. In particular, North Korea heavily depended on hydropower generation for meeting its primary energy supply. After 1990, coal and hydro energy sources took over the decreased portion of oil products in the total primary energy supply. It is worthwhile to note that energy supplies of North Korea were larger than those of South Korea before the early 1980s.

North Korea was ahead of the South in terms of energy use and electricity capacity per capita before 1981. After then, North Korea’s energy use per capita has been diminishing or stagnating over more than 10 years, while there are no big changes in power capacity. It is reportedly known, however, that a large portion of electricity generation capacity of North Korea has not been working due to the lack of fuels and the disrepair of generating facilities. As a matter of fact, North Korea’s power production reached its peak in 1990 and never returned to that level for almost 15 years, although North Korea declared that electricity production was a power engine for revitalizing its crippled economy.

North Korea’s energy infrastructure requirements

The energy industry and supply system of North Korea collapsed due to serious shortages in investment in energy infrastructure, which was caused by the closed economy system. In particular, its energy supplying capacity is absolutely deficient. The energy self-reliance of North Korea amounts to 93%, of which coal is 72%, hydropower 16% and renewable energy sources 5%. As of 2002, North Korea's power generation capacity is estimated to come to 7.77 million kw in total (hydraulic: 4.81 million kw and thermal power: 2.96 million kw). The power plants and the transmission-distribution facilities are in serious need of rehabilitation, retrofitting and upgrading.

Given its lack of hard currency and the domestic economy’s poor conditions, North Korea faces limitations to either technology or capital required to improve energy efficiency and conservation, to rehabilitate its electricity transmission/distribution grid or to develop reliable power plants.

North Korea's current shortage of electricity supply is chiefly attributable to the falling operation rate due to the dilapidation of the generating facilities, insufficient supply of fuel coals for thermal power generation and the use of low-heat coals. In addition, the difficulties are compounded due to much loss in the power transmission. The outdated transmission facilities and backwardness in the facilities management technology is also believed to be responsible. To upgrade this out-dated infrastructure in North Korea, a massive investment is required. The reality, however, looks dire since it is impossible for North Korea to get those massive financial resources under the present stalemate it is facing. At present North Korea is reportedly exerting efforts to build small-sized (smaller than 10,000 kw capacity) power plants whose construction costs are relatively lower and construction period is shorter.

On the other hand, North Korea’s crude oil import volume in 2000 was only 15% of its 1990 imports. Even though the situation was getting better in the last two years, the absolute import level in 2002 was only 0.6% of the level of crude oil imports of South Korea. The oil shortages look more serious on the basis of import volume per person. Furthermore, there was no rise at all in its refining capacity since capacity peaked at 70 thousand BPSD in 1975, largely due to suspension or reduction of oil supplies from its close socialist countries.

Since North Korea has no capital to strengthen its oil industry at the moment, its energy policy gives the first priority to securing energy requirements. Internally, North Korea is doing maintenance and repair work for coal mines and simultaneously, putting emphasis on development of alternative renewable sources such as wind power, tidal power, solar energy, and so on. On the other hand, energy policy is focused on revamping outdated coal-fired power plants and building-up power grid lines across the country. Externally, North Korea plans to import Russian electricity and develop institutional capacities by dispatching its energy experts to education/training programs overseas.

Win-win strategies for the two Koreas from an energy cooperation perspective

At present, South Korea sketches a grand vision in order to foster stable and sustainable growth of the Northeast Asian community. From a geopolitical and geo-economic perspective, North Korea is one of most important factors in Northeast Asia and one pole of the integrated energy system on the Korea Peninsula. South Korea needs to design energy strategies for the nation, which will be conducive to rehabilitation of the crippled economy of North Korea and provide solutions to the troubled energy security of the nation, simultaneously. To this end, it is very timely that South Korea is designing integrated energy supply master plans, which can lay an institutional foundation for the energy infrastructure of the Korean peninsula and suggest a consistent policy direction. Now it is imperative for South Korea to take more practical positions based on various viewpoints with complete understandings of internal and external structural changes.

First, South Korea has to lay a solid foundation for the integrated energy supply system in the Korean peninsula. This foundation will promote economic cooperation activities, since revitalizing the energy sector will have an enormous backward and forward effect on the rest of the economy of the two Koreas. In addition, energy cooperation activities will produce mutual trust between the two Koreas, which has been broken over the long division under different political and economic systems. To integrate the energy supply system is to practically improve the energy security of the two Koreas, which will yield mutual benefits for the two Koreas.

It should also be noted that energy cooperation activities between the two Koreas will provide solutions to energy problems in South Korea. Most importantly, special energy projects will support the rehabilitation programs of North Korea’s energy sector, which urgently requires massive external assistance. As a matter of fact, to provide energy requirements from generating fuels to maintenance technology on site is to rehabilitate the economy in crisis most practically, since energy shortages have been the main cause of difficulties of the North Korean economy. Ultimately, cooperative provision of energy infrastructure requirements will lead to promotion in mutual exchanges between the two Koreas and reduction in political and military tensions. To build confidence between the two Koreas is a prerequisite in handling energy cooperation activities in the future.

Possible energy cooperation projects

Oil and gas projects

South Korea has accumulated abundant technology and management know-how for revamping refineries and petrochemical industries. Possible projects include providing maintenance facilities, participating in repair of existing refining facilities, joining in processing business of oil refinery products, and providing heavy fuel oil for power plants. Prospective cooperation activities also include development of oil-industry infrastructure such as construction of oil harbors, oil transporting pipelines and a state-of-art refinery complex. In addition, much emphasis should be put on cooperative activities in the crude oil logistics between two Koreas, since to share oil storage and transportation facilities would be greatly advantageous to all. Furthermore, oil companies of South Korea can invest in oil exploitation projects in North Korea with an advanced drilling technology and financial resources.

Especially, LPG (Liquefied Petroleum Gas) looks like a very promising energy source, The DPRK designated several districts as special economic zones in which foreign companies are permitted to operate in a market economy way. These districts include the Najin/Sonbong Free Trade Zone, the Sinuiju Administration Zone, the Kaesong Industrial Complex, and the Kumgangsan Special Sightseeing Area. The occupants in these special districts expect that a somewhat different energy supply system for cooking and heating will be established. For these districts, LPG fuel is believed to be the most preferable energy source.

As one type of inter-Korea economic cooperation, LPG provision to the DPRK is expected to yield several benefits to two Koreas. In South Korea, the national trunk line of LNG was set up over the main provinces of the country. Therefore, natural gas is accessible to dwellers of any kinds of housing in the densely populated areas in South Korea. This fact implies that LPG industry is approaching to limits of market expansion. As a matter of fact, the LPG industry of South Korea is facing diminishing demand. If the LPG industry of South Korea gets into the DPRK market, the effects could be mutually beneficial to two Koreas, since the DPRK can take over the South Korea’ soundly accumulated technology in providing LPG to the consumers, while the LPG industry of South Korea meet an expanding market.

LNG projects under planning can be represented by provision of natural gas to the Kaesong Industrial Complex. Though embryonic, the projects include building-up of a LNG supplying base at Paju in Kyunggi Province and construction of a 44-km gas trunk line of 30 inch-diameter to Kaesong. From the viewpoint of energy cooperation in Northeast Asia, PNG projects look most promising, in case the trunk line will be originating from the Far East of Russia and pass though North Korea. The PNG project will not only provide South Korea with an opportunity to use abundant natural gas resources, but also give North Korea an opportunity to earn hard currency by levying on passing charges of facilities, even when out-flows of supplied gas to North Korea’s users from the line will not be allowed. Furthermore, since North Korea’s participation in the project would be guaranteed, there will be another big forwarding industrial chain-effect to the rest of the North Korea economy.

Electricity projects

Over the last several years, focus between the two Koreas was on the electricity supply from the ROK to the DPRK as a practical cooperation project. North Korea requested the South to provide 500 thousand kw at the Joint Ministerial Meeting in December 1999. South Korea tabled a proposal at the Committee of Economy Cooperation Promotion that the South can discuss concrete energy aid programs after taking fact-finding surveys on the real situation of electricity shortages in North Korea. The two Koreas had a discussion meeting on “fact-finding surveys and energy aid programs” but failed to reach any agreement. South Korea insisted firstly on a fact-finding survey for checking electricity situation and secondly discussion on cooperative aid programs. But North Korea argued that a joint fact-finding survey can be allowed only under the condition of electricity provision in a scale of 500 thousand kw. The energy projects related to electricity provision, however, are still most keenly attracting interest from various quarters.

First of all, electricity supply project to the Kaesong Industrial Complex is already well matured with opening of the pilot business complex in June 2004. According to the basic plan, at the 1st stage, electricity provision will be carried out by expanding electric power grid lines of South Korea to the Kaesong Industrial Complex. Electricity of 100 thousand kw will be provided by laying a transmission line of 24-km between Musan and the Kaesong Industrial Complex. At the second and third stage, the plan is under consideration to construct power plants on the site.

On the other hand, the inter-connection of electricity power grids between the two Koreas has been the hottest issue after North Korea’s assistance requests for electricity of 2 million kw. One of the issues the two Koreas are facing is to overcome a technical hurdle, attributed to differences in technical specifications and in standard quality of electricity. It is required that a complete fact-finding survey should be carried out for scrutinizing the electricity supply system of North Korea and designing electricity provision options. The anticipated costs of electricity aid (500 thousand kw) are split into two parts. Firstly, the construction cost of a transmission power line is expected to amount to 146.6 billion won (US$ 12.22 million), and secondly, the generating costs will reach to 227.5 billion won (US$ 18.96 million) annually. And a prospective project would provide technical and financial assistance for upgrading power plant facilities of North Korea. Overall repair costs of power plants in North Korea are estimated to reach to 2,358.5 billion won (US$ 19.65 billion) in terms of the price basis of 2000. Because of the large scale of financial costs, it seems prudent to proceed on these projects gradually after evaluating their performances by taking pilot projects.

Integration of the power grids of the two Koreas into the power grid trunk lines of Northeast Asia takes one big cooperative effort for which the various countries concerned have to prepare from a multinational view point. It should be kept in mind that the integrated power grid line of the Korean peninsula in embryo is expected to be inter-connected to the main trunk power grid lines of Northeast Asian countries, which will be built up in the future in order to transmit electricity generated in Eastern Siberia of Russia to China, South and North Korea, and Japan in the end.

Coal projects

Anthracite coal is said to be the key to the pending energy crisis of North Korea, since its energy supply and demand depend greatly on its own coal reserves. On the other hand, South Korea needs to locate large-scale consumers of anthracite coal. Before the 1988 Seoul Olympics, anthracite coal had met more than 20 percent of the primary energy use of South Korea. After then, the share started to drop so rapidly that coal use in South Korea recorded only 1.9% of total energy supplies in 2002. It is a history of energy industry that during past two decades, South Korea has revamped its outdated energy industry and streamlined the troubled domestic anthracite-coal industry. To reconstruct the domestic coal mines, South Korean had to scale down its coal industry in a very stable and gradual manner even when Korea experienced plummeting anthracite coal use over the same time span. As a result, at this moment, massive reserves of anthracite coal are waiting for appropriate consumers, spreading out big financial costs to the economy.

As of 2003, there were reportedly more than 10 million tons of anthracite coal reserves, of which 60 percent are reserved and managed by the central government. At a time in which North Korea faces so dire an energy crisis, it looks plausible and practical that the two Koreas map out energy cooperation projects utilizing these energy sources in most efficient ways. On the other hand, it is recommended that the South join in improving productivity by doing maintenance and repair work for North Korea’s obsolete coal mines. At the same time, the idle coal production equipment of the South can be utilized in the North. Provision of equipment for shaping coal briquettes is very urgent and a clean coal technology should also be included in cooperation aids.

Strategies for promoting energy cooperation

In order to proceed smoothly with energy cooperation activities, South Korea should devise a well-coordinated strategy. The new strategy should cope with the energy crisis in a politics-free manner and at the same time, induce North Korea to take a position toward regime openness in the economy and international relations. And it should be made clear that the settlement of North Korea’s nuclear program is the prerequisite for massive aid from the South and international community. On the other hand, cooperation activities should be planned toward a desirable direction for reconstruction of North Korea’s energy. One branch of the desirable direction requests that cooperation activities be designed for improving North Korea’s standardization of specification and technology in energy industry, and securing technical interconvertibility between the two Koreas. The direction also demands that cooperation activities lay down primary surroundings for a market-oriented energy supply and demand mechanism of North Korea.

Furthermore, there are several prerequisites for cooperation activities between two Koreas. The first is to scrutinize and describe the real picture of the energy industry of North Korea before choosing appropriate cooperation options. Another important prerequisite is to obtain national consensus in South Korea before taking a deeper step to practical cooperation projects, since those projects will require South Korea to shoulder huge financial burdens. In addition, energy cooperation projects can produce enormous effects on all the sectors of the economy in a most fundamental way. Their effects will impact the economy and national security. Therefore, energy cooperation activities should be activated and coordinated comprehensively under the political circle’s thoughtful consideration. It also needs to secure international consensus for the necessity of cooperation activities from the international community, since as shown at the Six-Party Talks, so many countries have different interests in the ultimate destiny of North Korea.

There should be step-by-step approaches in cooperation activities. At the first stage, activities should be designed for utilizing the comparative advantages of the two Koreas in all the sectors of each economy. The energy systems of each Korea should be coordinated to be complementary with one another. And also activities should be designed for North Korea to improve its energy self-reliance and ultimately enable it to contribute to energy system integration after Korean unification. In principle, energy cooperation activities have to be mutually beneficial to the two Koreas, since such activities need massive investment, which would be shared by Korean people of the South and North. Furthermore, funding should be shared over several generations due to the properties of energy infrastructure. This being the case, cooperation activities should proceed in accordance with the resolution phases of the Six Party Talks as follows:

Phase I (the nuclear issue being resolved from the comprehensive view): Cooperation activities in first priority include exchanges in energy experts between two Koreas, provision of surplus fuels to North Korea, maintenance aid for the crippled power plants, building-up of energy cooperation framework, electricity provision to the Kaesong Industrial Complex and Kumgangsan special sight-seeing zone.

Phase II (the phase in which the international community agrees on energy assistance to North Korea): Main activities are specified with maintenance of existing refineries, cooperation in oil-product processing, interconnecting electricity grids of the two Koreas, participation in developing energy resources of the North, participation in building up new power plants, and revamping the existing power industry.

Source: Excerpts from a presentation given at the Interreligious and International Federation for World Assembly 2004, “Establishing a World Culture of Heart: Innovative Approaches to Peace in a Changing World,” in Seoul, Korea, July 2004. Dr. Yang Euy-seok is a Research Fellow in the Northeast Asia Energy Cooperation Division, Center for Energy Research, Northeast Asia, Korea Energy Economics Institute