Challenges and Opportunities in Sino-DPRK Energy Cooperation

For over five decades, Pyongyang has attempted—and failed—to develop domestic sources of petroleum. Its inability to do so has forced Pyongyang to rely almost entirely upon crude oil imported from other countries. In 1991, the DPRK imported 2.44 metric tons (worth US$307 million) of crude oil, of which 1.1 metric tons (mt) were from China, 1.0 mt were from Iran and 0.34 mt were from the Commonwealth of Independent States (CIS). Nevertheless, the volume of North Korea’s imported oil dropped to a mere 0.32 mt in 1999 before rising to 0.6 mt in 2002 [1]. It is believed that China currently supplies the DPRK with an annual amount of 0.5-0.6 metric tons (mt/y) of crude oil. Therefore, suspension of China’s crude oil supply—Pyongyang’s energy lifeline—for even a short period would undoubtedly aggravate North Korea’s fuel shortage situation and devastate its economy. Pyongyang’s recognition that its enormous dependency on foreign energy could easily allow it to be coerced by foreign governments has been the impetus behind its search for an independent source of offshore petroleum.

Early Attempts

During the 1990s, Pyongyang invited Western oil companies to bid for offshore oil exploration projects and managed to sign separate contracts with Meridian Oil NL of Australia, Taurus Petroleum Development AB of Sweden and London-based SOCO International. Yet, no breakthroughs were made through the cooperation with these Western firms. Instead, in 1998, the DPRK’s Oil Bureau (now the Ministry of Oil Industry) managed to independently discover an offshore oilfield in the Sook-Cheong County/West Korea Bay, fulfilling Pyongyang’s dream of becoming a domestic oil producer (Chosun Ilbo, May 26, 2001). While the annual crude oil production from the Sook-Cheong County’s offshore oilfield remains very limited (only 0.3 mt/y), it was nevertheless a significant volume and a blessing to Pyongyang. In addition to the exploration of the Sook-Cheong County offshore oilfield, DPRK authorities initiated the exploration of the adjacent Anju Basin. To assist with the exploration, Pyongyang imported Russian equipment and invited Russian experts with experience in developing West Siberian oil.

This limited success in the West Korea Bay prompted North Korea to pursue additional oilfield exploration projects. Due to the country’s notorious nuclear weapons program, however, Pyongyang was unable to secure joint ventures with prominent Western companies. According to an industry source, Malaysia’s state oil firm, Petronas, had planned to begin the exploration of North Korea’s offshore oilfields at the beginning of 2004. Concerned with the potential encroachment of its sovereignty, however, Beijing staunchly protested the deal, causing Petronas to suspend the project. Despite the enormous setback, Pyongyang quickly turned to two additional options before finally clinching a deal with Beijing.

Pyongyang’s first deal was struck with South Korea’s KNOC (Korea National Oil Corp.). According to the Dong-A Ilbo, “In April 2004, the DPRK’s Ministry of Oil Industry asked KNOC to take part in the exploration and development of the DPRK’s West Korea Bay and proposed a working level meeting at Kumgang mountain.” The revelation of the deal by the Dong-A Ilbo, however, forced Pyongyang to give up its joint venture with KNOC. Pyongyang then turned to the UK-based Aminex plc. In September 2004, British newspapers reported that Aminex had secured a deal with Pyongyang “to explore and develop all the country’s potentially oil-bearing territory, with a decisive say in production.” One newspaper added, “The deal—signed secretly in Pyongyang during the summer in the presence of the British ambassador—gave Aminex 20-year rights over the industry, via a joint venture with the government. It has also negotiated the right to receive royalties, revenues and the pick of the best acreage should it prove productive” (The Observer, September 19, 2004; Financial Times, October 6, 2004). Nevertheless, over a year later, the joint venture yielded only publicity for Aminex and nothing else.

Turning to Beijing

Frustrated with the lack of progress, Pyongyang finally decided to make a strategic alliance with Beijing in order to jointly explore the DPRK’s offshore oilfields. On December 24, 2005, a DPRK delegation led by Deputy Premier Ro Tu-Chol arrived in Beijing and signed an agreement to jointly develop offshore oilfields with Chinese Deputy Premier Zeng Peiyan (China Energy Report Weekly, December 24-30, 2005). After several months of silence, the Chinese Foreign Ministry Spokesman Liu Jianchao announced on June 7 that China and North Korea had reached a preliminary agreement to jointly develop oil resources in cross border areas; both sides would sign a more detailed arrangement in the future (Dow Jones China Energy Report, June 9). These two reports confirm that while the Sino-DPRK cooperation is still in its early stages, a very significant step was taken.

Major Obstacles Remain

Nevertheless, several major obstacles lay ahead for the comprehensive exploration of the Yellow Sea and the East China Sea. In late 2003, it was reported that in addition to its widely known survey program in the South China Sea, China was also actively surveying and prospecting for marine energy deposits, including for the highly efficient “combustible ice,” in the northern Yellow Sea as well as in parts of the East China Sea (China Energy Report Weekly, October 18-24, 2003). The Qingdao Institute of Marine Geology (QIMG), under the auspices of China’s Ministry of Land and Resources (MLR), confirmed that geophysical analysis under the sea had already indicated the presence of hydrocarbon deposits. Yet, additional exploration of the Yellow Sea has been on hold as the offshore boundary issue between North Korea and China remains unsettled. China has not yet indicated if it would base its sovereignty boundaries on the slit-line principle or on the claims of an Exclusive Economic Zone (EEZ) extending from Haiyang Island, less than 43 miles off the Liaodong Peninsula. A slit-line boundary would give almost the entire West Korea Bay to North Korea, whereas if the equidistant-line boundary based on the EEZ were applied, only a small portion of the possible oil-bearing sediment would lie on North Korea’s side of the line.

Like Beijing, Pyongyang understood the potential of the offshore oilfields in the disputed waters. Dr. Bu-Seop Park, a specialist on the issue of North Korea’s oilfields exploration, gave a rare interview in late 1998 with the Shin Dong-A during which he claimed that the oilfield reserves in West Korea Bay could hold as much as 155 mt (Shin Dong-A, December 1998) [2]. This optimistic estimate indirectly reveals why both China and North Korea are so keen to explore West Korea Bay. If China and North Korea could jointly identify just one-tenth of Dr. Park’s figure, it would be more than enough for North Korea to ease its fuel supply shortage and would allow China to further diversify its sources of petroleum.

The second obstacle lies in the burden of the Aminex deal. The key question is whether the Sino-DPRK agreement signed in December 2005 will override the exclusive exploration and development rights that were given to Aminex in 2004. This could be a legally challenging issue, and given the lack of details from both the Sino-DPRK and the Aminex agreements, it is difficult to determine how the DPRK will attempt to reconcile the two. What is certain is that Beijing will insist that Pyongyang clarify the discrepancy before any further exploration will be undertaken by the Chinese.

The third obstacle comes from North Korea’s attempt to balance its relationship with both China and Russia. It is safe to say that during the 1990s, the DPRK was a forgotten partner of Russia. Under Putin’s leadership, however, Russia has begun to restore its relationship with North Korea, and during the last five years, Moscow has offered three proposals to Pyongyang for energy cooperation. In 2001, Russia offered to provide electricity that would travel from Vladivostok to Chongjin. Yet, no breakthroughs were made due to a disagreement over the method of payment. Russia’s willingness to consider payment in the form of mineral resources and mining rights provisions could produce a breakthrough, though that is yet to be seen. Moscow also offered to provide natural gas from the Sakhalin Islands and East Siberia to the Korean Peninsula by way of a transnational pipeline and sent Gazprom CEO Alexei Miller to discuss the issue in Pyongyang. Nonetheless, given the North Korean leadership’s aversion to dependence on external sources of energy supply sources (the same attitude that Pyongyang has shown toward South Korean Unification Minister Dong-Young Chung’s proposal to supply electricity from the South to the North), the offer was not favorably received. The last proposal for energy cooperation was to provide crude oil to the Sheungli Petrochemical Plant built by the Former Soviet Union and located in the Hamkyung North Province. While most of the refined products would be delivered back to Russia, a certain amount of oil would be allocated to North Korea as the processing payment. The proposal was reportedly made by President Putin’s Far East Plenipotentiary Representative, Konstantin Fulikovsky, during his meeting in Pyongyang with DPRK Cabinet Premier Bong-Ju Park on August 16 (Yonhap News, September 3, 2005). While no significant breakthroughs for Russian-DPRK energy cooperation have yet been made, given Russia’s willingness to provide North Korea with very favorable terms, it is only a matter of time before energy cooperation between the two countries resumes.

The successful discovery and development of the offshore oilfields will have significant implications for the entire region. A sizable oilfield would allow Pyongyang to achieve its much-desired energy independence while simultaneously weakening Beijing’s influence over Pyongyang. China would no longer be able to use its energy lifeline to pressure North Korea into complying with its requests (as it had done in March 2003 when Beijing had suspended oil supplies to the DPRK for three days to force Pyongyang to attend the Six Party Talks). The recognition of these realities, combined with Beijing’s frustrations over Pyongyang’s unannounced missile tests in July, serve as a hindrance toward any significant breakthroughs in energy cooperation. Still, Sino-DPRK offshore oilfield exploration should not be ruled out. China could potentially use the successful discovery of offshore oil reserves to pressure Pyongyang into dismantling its nuclear weapons program. While these remain purely speculatory assumptions, what is certain is that a breakthrough in the joint exploration of the offshore oilfields cannot be entirely ruled out.

Notes

1. These figures did not include the 0.5 mt/y of heavy oil supplied by the U.S. government to the DPRK as part of the 1994 Agreement.

2. A Korean weekly reported that CNOOC has identified a major structure that may contain as much as 5-6 billion barrels of oil in DPRK’s West Korea Bay. See, Sisa Journal, January 10, 2006, pp. 60-63.