Russian President Dmitry Medvedev and North Korean leader Kim Jong-il in a meeting Wednesday apparently agreed in principle to lay a gas pipeline through North Korea to South Korea. Pundits say the project is a tactical move by Russia, which finds itself in fierce competition with China.
Russia has bickered with China over the export price of Siberian gas since 2008, but their negotiations have reached a stalemate due to Chinese demands for a drastic price cut.
Russia could now be attempting to pressure China by tapping South Korea and Japan as alternative markets for its natural gas, observers in China say.
In 2006, Russia signed an agreement with China to export its Siberia natural gas to the neighboring country, and in 2008 Chinese Premier Wen Jiabao in a meeting with his Russian counterpart Vladimir Putin gave the nod to imports of 68 billion cubic meters of gas per year for 30 years via a pipeline. They began price negotiations soon afterwards.
Russia proposed US$400 per 1,000 cubic meters based on international oil prices, but China offered $200 based on global coal prices. In the eighth round of price talks in mid-August, Russia went down to $250, with $40 billion payable in advance, but China still refused.
China has been telling Russia that it would be better to secure a single large consumer of natural gas even at a lower price because demand has been dwindling since the global financial crisis.
The quantity of gas China originally agreed to import is one-third the amount Russia exports to Europe. Beijing is now hinting that it would increase its own natural gas production and import more from Central Asia and the Middle East if the price negotiations fail.
But Russia believes the price will rise because there is higher demand in Japan for natural gas due to the disruption of nuclear power after the meltdown at the Fukushima Daiichi nuclear power plant.
One part of this strategy to tap the Japanese market is the pipeline to South Korea. An energy expert in Beijing said, "Both Russia and China are holding out as long as they can because of the sheer size of the gas deal."