South Korea’s Quest for Energy Security in the Persian Gulf

Shirzad Azad

Abstract

This research studies whether South Korea’s recent nuclear energy diplomacy in the Middle East is connected to the country’s pursuit of energy security in that oil rich region. The argument here is that the economic and technical alone cannot justify Seoul’s engagement with the export of nuclear technology to the Mideast. Therefore, the concept of energy security in South Korea and its impact on the country’s foreign policy behaviors is associated to some crucial challenges to the East Asian nation’s energy security including the rise of new energy consumers particularly China and India, Sino-Japanese duopoly in the petroleum exporting region of the Middle East and the energy cost of a unified Korea which all complicate its energy security picture. Korea’s recent policy to forge a multifaceted relationship with the Middle East, partly through singing nuclear energy contracts, is associated with such perception of energy security.

Introduction

In December 2009, South Korea signed a landmark $40 billion contract with the United Arab Emirates to build four nuclear reactors in the Middle Eastern country. The contract, as the biggest-ever energy deal in the Middle East, was awarded to the South Korea Electric Power Corp. (KEPCO) and it was also the first time when the East Asian country could secure an international contract in the area of nuclear energy business. According to the deal, the state-run Korean company will build four nuclear reactors by 2020 along with other Korean construction corporations including Doosan Heavy and Engineering Co., Hyundai Engineering and Construction, and Samsung C&T Corporation[1]. Despite being the world’s third largest oil exporter, the UAE is looking for nuclear power to meet its rapidly rising electricity consumption that is going to increase almost by three times from the current 15,000 megawatts to 40,000 megawatts in 2020[2].

In a similar development, South Korea signed a $132.7 million nuclear energy contract with Jordan last March to construct a five-megawatt nuclear research reactor to be completed and operated by 2015. This plan as a crucial project for Jordan is going to be financed in part by a $70 million soft loan extended through the Korean government[3]. Currently, Jordan imports some 95 percent of its energy needs and that is why the country is keen to set up a nuclear power program to decrease relatively its significant reliance on imported energy.

South Korea has also signed a memorandum of understanding with Turkey in June to cooperate on nuclear power projects giving Seoul a big chance to win another nuclear energy contract in the Middle East. As Turkey is planning to build two nuclear power plants to reduce its dependence on imported energy, South Korea has turned out to be a potential partner in this significant project. Top leaders of both countries also agreed and vowed to expand their cooperation in the nuclear energy sector in a bilateral meeting held in Seoul after last month’s G20 summit.

South Korea has long imported a lion share of its consumed fossil energy from the Middle East. However, singing such important nuclear contracts changes the nature of its energy engagement in the region with significant implications for its overall Middle East policy and separate bilateral relations. As the main research question, this paper wants to find out why the Korean government has engaged in such a sensitive business and whether the recent nuclear energy diplomacy in the Middle East has anything to do with Korea’s serious quest for energy security in that region?

The economic and technology factor

According to the logic of economic and technical consideration, the success of Korea’s nuclear energy deals in the Middle East is attributed to some economic calculations and the technological knowhow the country possesses. Based on this argument, building nuclear power plants for the Middle East countries by the Koreans is like their long-practiced business of construction industry in the region that goes back to 1973 when Aswan Corporation participated in Saudi Arabia’s high way construction. After that project, the construction sector became an important segment of Korea’s economic activities in the Mideast.

Regarding to the logic of economic calculations, it has been speculated that the UAE’s decision of offering the contract to South Korea at the cost of France was based on strictly commercial terms because after all the Korean bid was some $16 billion lower than the French group’s bid[4]. But it is possible for counties like South Korea to sacrifice part of their economic interests for other interests particularly if they are about some long term strategic and national interests. This might be convincing in the case of the deal to build a nuclear reactor for Jordan as well when the Koreans agree to provide more than 50 percent of the costs through a government-sponsored loan.

It has also been argued that exporting nuclear energy technology or nuclear fuel materials to the Middle East is just a business like exporting Hyundai cars or Samsung computers. The reason behind this argument is that the Korean nuclear energy technology has achieved significant progress in past decades and now the nuclear energy-ambitious nations of the Middle East are willing to offer contracts to the Koreans because they have enough confidence in Korean nuclear technology and safety[5]. The East Asian country first introduced nuclear energy power in 1978 and now it has some 20 nuclear reactors in operation. These reactors help the country to rely on atomic energy for some 40 percent of its electricity needs. However, because of the Korean government’s sensitivity about the transfer of nuclear technology and materials from a volatile and problematic Korean Peninsula to yet another unstable region, it is highly unlikely that Seoul engages in nuclear energy business for pure economic purposes.

Thinking energy security in the Persian Gulf

At the signing ceremony of the Korea-UAE’s nuclear energy contract in Abu Dhabi, the capital of the United Arab Emirates, on 27^th December 2009, President Lee Myung-bak said that the deal with the Arab country bolsters energy security for Korea[6]. His counterpart, President Sheikh Khalifa bin Zayed al Nayan also stated that the deal marks a new stage of strategic partnership between the United Arab Emirates and Korea. Such clear policy statements by the top political leaders of both countries give this impression that the crucial strategic goals behind the deal are more much important than its pure economic value.

Given five decades of relationship between South Korea and the Middle East region and the dominant pattern of business and bilateral interactions, obviously the issue of energy has long played a leading role and it also continues to be regarded as the main factor behind any strategic partnership between Seoul and the energy producing countries of that region. In line with the main argument of the research, the paramount importance of the energy issue has made the Korean government to actively pursue a multifaceted diplomacy in the Middle East countries which supply a significant part of Korea’s energy needs. Therefore, a recent trend among some of these nations to embark on a nuclear energy program has provided Seoul a great opportunity to engage them and deepen its long-term interests in that oil rich region.

In the following, the research first evaluates the importance of energy for the Korean economy during its course of fast development within the past five decades. It then discusses the sensitive issue of energy security for South Korea and how some challenges in recent years have seriously made the Korean officials concerned about the prospects of a stable energy supply in long run pushing them to approach the oil producing nations in the Middle East more than before.

Energy and the Korean economy

The Korean Peninsula is not really endowed with sufficient natural resources and ironically the north part of the peninsula is far richer in natural resources than the south part. For this reason, even during the Japanese colonial rule from 1910 to 1945 the north was turned into the center for mining and industry while the south, for its warmer climate and a better rate of rainfall, had to serve as an agricultural center dominated by the production of rice. Contrary to this odd background, however, the political establishment in Seoul embarked on an ambitious program of industrialization and economic development in the early 1960s making it unavoidable to look somewhere out of the peninsula for necessary raw materials, among them fossil fuels.

As a country with no considerable energy resources, South Korea had to rely on imported resources to fuel its fast developing economy. Since the transformation of the country from an agrarian economy to an industrialized one had to be based almost entirely on imported energy resources, South Korea’s energy imports gradually increased from about 10 percent in 1964 to more than 90 percent by 1991[7]. Only in the period between 1987 and 1995, Korea’s oil demand increased by 20 percent annually. South Korea became the world’s tenth biggest energy consumer by 2007 and the country became the fifth largest importer of crude oil and the second biggest importer of both coal and liquefied natural gas (LNG) by last October[8]. Part of this huge energy dependency stems from the fact that the Korean economy is significantly more energy intensive than any other country in the Organization for Economic Cooperation and Development (OECD). As the South Korean economy concentrated on rapid growth, its energy-intensive industries such as shipbuilding, petrochemicals, cement and auto consume a bulk of the energy the country imports. For instance, South Korea requires almost twice as much as energy as Japan for every $1 million of manufacturing output[9]. One crucial characteristic of Korea’s energy import is that the country has long relied on the petroleum exported from the Middle East. The country’s dependence on crude oil imports from the region was as high as 99 percent in 1980 and despite serious steps to diversify its sources of supply the amount of such dependency was still as about 74 percent in 1992[10] and nearly 75 percent in 2009. Last year, the top three oil exporters to South Korea were Saudi Arabia, United Arab Emirates and Kuwait supplying 27 percent, 14 percent and 13 percent of the country’s oil imports, respectively.

Compared to petroleum, Korea’s pattern of gas import is more dramatic as the country stands right behind Japan as the second biggest importer of LNG in the world. Domestic gas production in South Korean accounts for something less than two percent of total consumption and the East Asian country imports more than 98 percent of its natural gas needs which has almost doubled over the past decade from about 600 billion cubic feet in 1999 to more than 1,200 billion cubic feet in 2009. Here the Middle East also plays an important role because it provides a big part of Korea’s natural gas imports with Qatar and Oman supplying 32 percent and 17 percent of its natural gas consumption, respectively[11].

Just like its low share of gas resources, South Korea has some 150 million short tons (MMst) of recoverable coal reserves and there for it stands as the second biggest importer of coal in the world after Japan, but the majority of its imported coal is supplied by Australia and Indonesian. However, South Korea has come a long way to hold the world’s sixth-highest nuclear generation capacity since its first nuclear plant was completed in 1978 and the country is now aiming to produce nearly half of its power supply from nuclear sources by 2020. The emerging status of South Korea for being a global leader in the field of nuclear technology has encouraged the officials in Seoul to use their technical knowhow as an effective instrument for achieving energy security particularly in the region where a bulk of the country’s energy needs is imported from. Korea’s recent nuclear energy deal with the United Arab Emirates could not get anywhere without such considerations.

The challenge of energy security

In a country with poor energy resources, the issue of energy security has long been a primary concern for the Korean government. More importantly, the country’s over dependency on a single region (the Middle East) for crude oil imports made Korean policy makers more much concerned forcing them to explore alternatives to reduce such dependency. Diversification of import sources was one of the early solutions and Seoul sought to increase imports from Southeast Asia, Africa and Latin America. However, such step only provided a small portion of Korea’s total energy consumption and the country still had to import more than two-third of its crude imports from the Middle East[12]. Furthermore, building up its own strategic oil reserve and struggling to obtain equity stakes in foreign energy exploration and production were among other measures Seoul took to overcome its sense of energy insecurity. In addition to importing more natural gas at the cost of petroleum, enhancing the country’s capabilities to produce energy from nuclear technology became a pillar of Korean efforts to achieve energy security. But all these measures were short of giving enough assurance for energy security in long run particularly because there were some important matters influencing Korea’s energy security to a great deal that the country had actually no control upon them.

Basically, oil and gas are not merely economic products to be governed only by the market principle of supply and demand. Instead, they are among few strategic commodities which involve political and security issues in addition to economic considerations. That is why in the decades following the Second World War, global competition for energy resources in different regions has often led to very important international events including military conflicts.

However, most of these external events did little to harm an enough supply of energy to South Korea and even the two oil shocks of 1973 and 1980 had a short term impact on the performance of the Korean economy. Generally, from the end of the World War II until the Asian financial crisis in the late 1990 the world oil market was more or less favorable to the Korean economy in one way to another. With the Asian financial crisis not only Seoul’s demand for energy imports decreases, at least temporarily, more attentions are diverted to the rise of new global powerhouses with huge energy demands. In short, in the post Asian financial crisis period the subject of energy security for Korean officials is mainly obsessed with three key issues including the emergence of new giant energy consumers, Sino-Japanese duopoly in the Middle East and its impact on the fate of energy tankers exported from that region, and the energy cost of an eminent unified Korea. These issues are discussed further in the subsequent sections.

The emergence of new energy consumers

Over the past decade, the world has witnessed the rise of particularly three fast developing countries including China, India and Brazil which their combined populations account for more than one third of the world’s citizens. A serious commitment to industrialization and economic development in these countries has raised this question for many small to middle sized energy-dependent powers like South Korea on how to cope with the outcome of these giants’ ever increasing thirst for the world’s energy resources. Because of the geographical proximity, the size of population and territory and the pattern of energy imports, the rise of China and India and its implications on the world’s energy equations have made the matter of energy security more critical for the officials in Seoul.

According to the calculations made by the Asian Development Bank, the income elasticity of oil consumption has historically been about 0.5, so that each one percent economic growth translates into 0.5 percent growth in oil consumption[13]. It is estimated that under the current trends of economic growth, China and India combined will account for more than one-third of world GDP and about one quarter of the globe’s total energy consumption by 2020[14]. Moreover, since the increasing demand for oil is mainly stemming from the expansion of the transportation sector, the popularity of car ownership and the rise of motor vehicles on the road in both China and India, as it has been the case over the past decade, will dramatically complicate the picture of oil demands in coming years.

In the period between 1992 and 2005, China went from oil self-sufficiency to dependence on petroleum imports for more than one-third of its consumption. China also surpassed Japan in 2004 as the world’s number two oil importer and it is now the second largest energy consumer in the globe as well[15]. The same as China, India has limited reserves and relatively flat domestic production and therefore it has to rely on foreign imports for roughly 70 percent of its total oil consumption. Although India’s dependence on petroleum imports will grow in a slower pace compared to China, New Delhi like China will still grow more dependent on foreign oil in coming years.

The Middle East remains the top provider of China’s crude oil imports. For instance, China imported some 4 million bpd of crude oil in 2009, of which approximately 50 percent supplied from the Middle East region. China also imported the first shipment of LNG in 2006 and Beijing has quickly ramped up its gas imports since then. In the case of India, the country imports nearly 70 percent of its crude oil from the Middle East, primarily from Saudi Arabia followed by Iran, and the government in New Delhi expects that this geographical oil dependency to rise because of limited prospects for domestic production. In 2009, India was the sixth largest net importer of oil in the world, importing nearly 2.1 million bpd or about 70 percent of its oil consumption. It is predicted that India’s demand for natural gas will go up in coming years too.

Sino-Japanese duopoly in the Persian Gulf

The nature and scope of both Japan and China’s relationship with the Middle East has truly been transformed in recent years. Although trade in energy resources has been the backbone of Sino-Japanese relations with the Mideast, over the past decade their presence in the region has increasingly become multi-faceted involving crucial diplomatic initiatives, significant economic ties and even certain military contacts. Today, Japanese and Chinese companies are engaged in a web of economic activities in the Middle East ranging from trade to real estate and from finance to tourism.

On one side, governments in both Tokyo and Beijing have seriously sponsored and supported key projects and lucrative commercial deals in the Middle East and they have also encouraged the private sector of their countries to actively participate in such economic activities there. On the other side, governments in the Middle East particularly the oil producing countries of the Persian Gulf awash with cash have vowed in recent years to diversify their petroleum-based economies and invest abundant oil incomes in infrastructure, IT, finance and education. Such new directions in the economies of these countries have further created opportunities for Chinese and Japanese companies to increase their presence and activities in that region.

Considering Sino-Middle East partnership, it is worth to note that until the early 1990s China did not actually seek any serious involvement in the region’s political or economic affairs. It started to craft an aggressive Middle East policy when became a net oil importer in 1993, and since then its expanding multidimensional engagement in the region has been remarkable indeed. Chin is now the largest exporter to the members of the Gulf Cooperation Council (GCC) and it has also made securing a free trade agreement (FTA) with the GCC a high priority as Beijing’s demand for energy and row material imports is growing quickly. The volume of trade between China and the GCC has been increased more than 10-fold to about $60 billion in the past decade and their bilateral trade is expected to more than triple to at least $350 billion over the next decade[16]. Where it comes to Iran, the engagement of more than 100 Chinese companies has touched almost every single aspect of the country’s economy from infrastructure projects such as constructing airport, dam and subway to trade and tourism.

Chinese companies have aggressively grabbed any single opportunity to expand their market presence and investment opportunities throughout the Middle East, particularly the Persian Gulf region. Chinese firms have been able to win the bids for several mega projects in oil and gas development in Saudi Arabia, Iran and Iraq. China’s significant investments in some of these projects have been guided by some geopolitical motivations and strategic calculations. It has also enjoyed from been considered a favored destination for strategic investments by petroleum exporting countries in the Middle East either as a safe place to invest their sovereign wealth funds in Chinese banks or just to build refineries on Chinese soil[17].

Contrary to China’s late engagement in the Middle East affairs, Japan made some attempts to develop its Middle East foreign policy after the first oil shock of 1973. However, Japan still kept a low profile presence in the region for another two more decades, though the characteristic and extent of its interactions with the Middle East was no longer the same as the pre 1973 oil shock period. But the post-Cold War political developments in the Persian Gulf and more importantly the rising Chinese stakes in the region made the Japanese policy makers to seriously worry about a stable supply of energy from the region in the long run and they were consequently forced to seriously review Tokyo’s Middle East policy.

Over the past decade, the level of Japanese involvement in the Middle East affairs including economic relations, active political involvement and cultural exchanges has been unprecedented. To deepen its engagement with the region, Tokyo has also held several rounds of negotiations with GCC countries over a FTA since 2006. Currently, GCC is Japan’s fourth largest trading partner by region. Japan not only has encouraged the flowing of a significant portion of the Arabs’ oil money into Tokyo, it has even gone far to offer them to freely use the far eastern country’s oil reserve bases to store their oil either to cut the cost of shipping petroleum to Asia or simply to have enough oil in time of emergency[18].

In short, the growing interests of both China and Japan in the Middle East over the past two decades has in fact flamed serious rivalry among them in that region. Such rivalry was quite obvious when they sought to outbid each other to secure the outstanding contract to develop the Azadegan oil field in Iran. In fact, the Chinese political-military power and the Japanese financial-technological muscle left other new comers to the Middle East like South Korea very vulnerable to guard against their vested interests in the region. However, Korea’s nuclear energy contract with the UAE last year could be considered as a crack in the Sino-Japanese duopoly in the Mideast. Moreover, new some directions of the oil producing countries in the Persian Gulf region towards India and members of ASEAN particularly Malaysia and Indonesia is expected to further widen the crack in coming years.

The energy cost of a unified Korea

The International Energy Agency (IEA) has predicted that Korea’s total primary energy supply requirement is expected to increase by some 37 percent during the period between 2006 and 2020. However, an imminent Korean unification scenario would further complicate Korea’s quest for necessary energy needs because the peninsula’s energy demand will increase dramatically then[19]. Therefore, predicting the approximate energy needs and drafting the related plans to assure a stable supply of enough energy remains one of Korea’s most important strategic calculations for a unified peninsula in the future.

A unified Korea’s dramatic energy rise could be attributed mainly to two factors. First, reunification means the implementation of a serious economic development in the north part of the peninsula through pouring considerable financial and technological resources. In fact, any committed development and reconstruction plan extending to every aspect of the economy from carrying out infrastructure projects to producing manufacturing goods will not get anywhere quickly without consuming significant amount of energy resources. According to some views, unification and the following economic reconstruction program will certainly ramp up the peninsula’s energy demand to level similar to those the south experienced during the 1980s[20]. In this line of argument, the very optimistic prediction of a unified Korea as the world’s second largest economy in 2050 right behind China will not be realized without an expensive energy bill[21].

Second, though North Korea possesses some natural resources, mines in particular, it doesn’t have any oil or considerable gas fields. The country has experienced a severe energy crisis since the early 1990s forcing the country’s factories to work much below their average capacity. During the past two decades, a bulk of North Korea’s energy needs including crude oil has been supplied by China but it will no longer be the case under a unified Korea, making the provision of basic energy requirements for the northern part of the peninsula an additional burden to Seoul when it will start to transform the economic situation and life style there.

Nuclear energy diplomacy for energy security

Korea’s recent energy security policy has been based on this assumption that old notions of energy security and conventional methods to achieve them may no longer apply in today’s growing global competition for energy. Although securing a stable and steady access to and supply of necessary row materials particularly oil has long been a pillar of the country’s foreign policy, the present Korean administration has made energy security a primary national agenda in recent years and it has also drafted new action plans under the guise of energy diplomacy. The seriousness of this energy diplomacy was tested when the government used political persuasion to lock the nuclear energy deal with the United Arab Emirates. During the tough negotiation process, the Korean president, Lee Myung-bak, personally supervised the project and he even travelled all the way to Abu Dhabi to finally attend the signing ceremony of the deal he later called the “heaven-sent national fortune”[22].

In line with the county’s new energy policy, the Korean government has tried in recent years to cultivate a multilayered presence in the Middle East, a region with plenty of petroleum and gas resources. It has persuaded a policy of changing the nature of some bilateral ties in the region from a short-term economic relationship to a sort of long-term strategic partnership. For instance, in the following months after signing the nuclear deal with the UAE, the Korean government decided to dispatch a contingent of some 150 combat troops to the Arab country for a period of two years insisting that the mission will promote national interests and expand military and economic ties with the third largest oil exporter in the world. However, many observers, among them the main opposition party in the Korean parliament, connect the mission to the country’s nuclear deal with the UAE[23].

Signing nuclear energy contracts with the Middle East countries could have significant implications for South Korea’s foreign policy towards the region and separate bilateral ties. Engaging in such a sensitive business changes the nature of the East Asian nation’s interactions with the region from a pure importer of hydrocarbon energies to an exporter of nuclear energy and the related technologies. Unlike many of Korea’s previous construction projects in the Mideast, nuclear energy projects are relatively a long-term contract. In the case of UAE’s nuclear deal, the joint cooperation to operate and maintain the reactors will last for 60 years and such a time may provide enough opportunities to cement the foundation of a multifaceted relationship with a top oil exporter.

Finally, going nuclear for the oil rich countries in the Middle East is obviously about strategic energy positioning as its application for electricity and other peaceful purposes will free more petroleum and gas to export particularly in a time when the demand for energy keeps soaring and the price even more. Helping nuclear energy projects in the Middle East by energy dependent countries such as South Korea is actually a wise long-term investment to assure the supply of enough energy resources from the region.

Conclusion

This paper has attempted to study the relationship between South Korea’s recent nuclear energy diplomacy in the Middle East and the country’s quest for energy security in that region. It was argued that pure economic motivations or possessing technical knowhow cannot alone justify Seoul’s engagement in the sensitive business of transferring nuclear technology to the volatile region of the Middle East. The main argument of this research was that South Korea’s recent energy deals in the Mideast are closely connected to the long-term strategic goal of achieving energy security. This is because Seoul feels queasy about some explicit challenges to its prospects of energy security which are mainly related to the emergence of new energy hungry powers particularly China and India, Sino-Japanese duopoly in the oil rich Middle East and the energy cost of an imminent unified Korea. Appreciating the repercussions of these challenges on the county’s energy security in the future has actually forced political officials in Seoul to implement a new Mideast policy in order to develop a multifaceted relationship with the countries of the region to better assure the nation’s long-term supply of energy. Nuclear energy deals as they require a long-term bilateral commitment for construction, operation and subsequent technical support can better assure South Korea’s long-term interests in the region than traditional short-term economic contracts.

The research also highlights the increasing importance of nuclear energy in both developed and developing countries. Many advanced countries have already applied nuclear technology partially as an alternative and cost-effective energy to fossil fuels and consequently have decreased their imported energy bill and reduced damages to the environment. The successful application of nuclear energy technology in developed countries has also tempted some developing countries, even the oil rich countries of the Persian Gulf region, to seek for this technology particularly to meet their rising electricity needs. In the case of oil producing countries, the use of nuclear energy leaves more petroleum and gas for export especially in a time when the global demand for energy is high and the prices of energy are soaring as well.

The research also shows that the nuclear technology in developed countries may serve them both as a short-term fuel for domestic needs and an effective export item to assure energy security in the long run. This is obviously the main goal of Seoul’s nuclear energy diplomacy as the county has tried to use its nuclear technology knowhow as a tool to guarantee a better and reliable supply of enough energy from the Middle East.