Energy investments undeterred between North Korea and Russia, despite recent militarisation

When Russian Energy Minister, Alexander Novak, visited Japan, the conversation centered on deepening co-operation between two countries in the energy sector and outlining investment opportunities for Japanese companies in Russia. Many joint projects of interest lie in Russia&rsquo;s Far East and around Sakhalin Island, suggesting that the two countries do not perceive the recent escalation in North Korean militarisation as a deterrent to investments in the region. North Korea has amassed an arsenal with short-to-intermediate range capabilities, and while it has not suggested it intends to attack its immediate neighbors or to strategically target their energy infrastructure, it is important to point out that many key oil and gas facilities are located within the current range of North Korea&rsquo;s arms.From the Russian perspective, the most important asset within the 1000 km range of North Korea is the oil port Kozmino. Completed in 2009 as the receiving point for the East-Siberia-Pacific-Ocean (ESPO) trunk pipeline, the terminal moves over 600 000 bpd of crude and is supported by a number of local oil storage units. Kozmino, together with the ESPO pipelines, fostered Russia&rsquo;s strategic pivot to Asia and enabled the country to become a key supplier to the growing Asia-Pacific markets. To fill up new midstream capacity, Russia&rsquo;s upstream operators intensified development of oil fields in East Siberia. Production from these very remote fields grew in the past decade from almost zero to over 800 000 bpd currently, and is set to approach 1 million bpd by 2020. Most crude is produced by Rosneft with new partners from India, Surgutneftegas, and Irkutsk Oil Company with Japanese partners; without access to Kozmino, these operators will be hard-pressed to find access routes to other markets. The ESPO pipelines and the Kozmino port are set for expansions, while a petrochemical plant, Nakhodka, is being planned by Rosneft, who is currently courting outside investors.The main projects in Sakhalin Island and on the Okhotsk Sea shelf lie just outside the 1600 km range. Of these, Sakhalin-I and Sakhalin-II are some of the largest foreign investments into Russia&rsquo;s oil and gas sector with ExxonMobil, Shell, ONGC, Mitsui, Mitsubishi, Itochu, Inpex, and Marubeni among the participants. Both projects might be interested in a gas pipeline connecting Sakhalin to Japan&rsquo;s Hokkaido Island, as an alternative or compliment to liquefied natural gas (LNG) exports for Sakhalin vast gas reserves. Novak discussed the pipeline with projected capacity of almost 2 billion ft3/d during his visit to Japan, followed by Russia&rsquo;s president Putin and Japan&rsquo;s Prime Minster Abe continuing the discussion on 27 April. The pipeline, physically connecting the two countries for the first time, will be within a 1600 km range from North Korea, as is the current liquefaction plant processing gas from Sakhalin-2 fields and its expansion trains.South Korean upstream infrastructure is limited to two producing fields, Donghae-1 and Donghae-2, with combined output of 5700 boed and 100% owned by Korea National Oil Corporation. Trade of LNG and crude could be vulnerable as five facilities are responsible for the country&rsquo;s 4.8 trillion ft3 regasification capacity, with only two facilities accounting for 75% of that capacity. The 230 million bbls of storage is more widely distributed with 36 locations, however, the three largest is located in the southern end of the peninsula account for 60% of storage capacity. The global oil and gas industry could see some disruption if the shipbuilding yards owned by Hyundai Heavy Industries, Samsung Heavy Industries, and Daewoo Shipbuilding and Marine Engineering are impacted. These yards construct both rigs and tankers used throughout industry and a prolonged shutdown of the facilities could lead to tanker and upstream infrastructure shortages in the medium term.Roughly half of Japan lies within 1000 km of North Korea with the entire country encompassed in the 1600 km range. Upstream infrastructure in Japan is limited to 16 fields producing 40 000 boed roughly split between two companies, Japan Petroleum Exploration Co Ltd and Inpex. Similar to South Korea, oil storage and LNG are most at risk with 35 LNG facilities spread across the country, totaling almost 9.7 trillion ft3 in regasification capacity and with 43 oil storage facilities totaling 101 million bbls of storage capacity.China has the closest bilateral relations with North Korea, and also has the most within range. The country has 232 producing fields within the 1600 km radius which produce over 2.6 million boed. The production centers of Bohai Bay and Daqing are well within 1000 km radius of North Korean borders. Other notable infrastructure, including oil storage, LNG regasification and refining, ring China&rsquo;s largest cities Beijing, Shanghai and Hangzhou. Beyond this, two producing fields in Mongolia, Tamsag-21 and Toson Uul, with combined production of 22 000 boed and operated by Chinese national oil company CNPC are within 1600 km of North Korea. More notably within striking distance are the announced Dornod-Sainshand oil pipeline and planned Sainshand refinery, together represent a US$1 billion investment, which illustrate well how investors perceive North Korean posturing.