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October 4, 2011

Khabarovsk Forum 2011. Can gas in RFE flow through pipeline across the inter-Korean border? (progress, implications and challenges). October 4, 2011. Chang Seon LEE General Director Kogas Vostok LLC. Disclaimer.

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October 4, 2011

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  1. Khabarovsk Forum 2011 Can gas in RFE flow through pipeline across the inter-Korean border? (progress, implications and challenges) October 4, 2011 Chang Seon LEE General Director Kogas Vostok LLC

  2. Disclaimer The views expressed in this presentation are those of the individuals and do not represent the Company’s stance. No representation, express or implied is or will be made, neither is nor will any responsibility or liability be accepted by the Company or any of its officers or employees in relation to the accuracy or completeness of this document. Any liability is therefore expressly disclaimed. Kogas Vostok LLC (KOVOS)

  3. Contents 1. Core and New Biz of Korea Gas Corporation ▪ Biz Model, LNG Sources and E&P ▪ Kogas Vostok LLC (KOVOS) 2. Cross-border gas pipeline in the Korean Peninsula ▪ Overview and progress ▪ Implications of commerce and geopolitics ▪ Challenges Kogas Vostok LLC (KOVOS)

  4. 1. Core and New Biz of KOGAS Kogas Vostok LLC (KOVOS)

  5. Core and New Biz of KOGAS Brief Government-owned Company of NG founded in1983, listed on KSE in1999 World’s biggest LNG Importer with 31,202 Ton (2010) Revenue (2010) : U$21billion Kogas Vostok LLC (KOVOS)

  6. Core and New Biz of KOGAS LNG Sources Diversified sources : Russia, South Asia, Middle East, Australia and Africa Kogas Vostok LLC (KOVOS)

  7. 17 Projects Core and New Biz of KOGAS E&P Business Kogas Vostok LLC (KOVOS)

  8. Core and New Biz of KOGAS Pursuing Sustainable Growth Kogas Vostok LLC (KOVOS)

  9. Core and New Biz of KOGAS Kogas Vostok LLC OOO Когаз Восток Kogas’ 100% subsidiary(June 2009) Gas related businesses in the far east in Russia (Primorskiy, Khabarovsk, Sakhalin and Republic of Sakha) • Location : Khabarovsk, Russia Kogas Vostok LLC (KOVOS)

  10. 2. Cross-border gas pipeline in the Korean Peninsula Kogas Vostok LLC (KOVOS)

  11. Cross-border gas pipeline in the Korean Peninsula Overview Three options to supply Russian gas to Korea: PNG is considered first Kogas Vostok LLC (KOVOS)

  12. Cross-border gas pipeline in the Korean Peninsula Overview • Length of line: about1,100km • in case of the shortest route • Vladivostok~NK eastern side • ~Inchon of S,Korea • Time of supply : later than 2017 • over 30 year. • Expected gas sources: • Sakhalin3, Yakutsk(Chayanda) Kogas Vostok LLC (KOVOS)

  13. Cross-border gas pipeline in the Korean Peninsula Progress • Sep. 2008 : MOU on NG supply between KOGAS and Gazprom Joint study on pipeline route through DPRK, LNG liquefaction plant & Gas chemical complex project (2015~17 year, at least 10 Bcm/year) • Sep. 2010 : completion of joint study between KOGAS and Gazprom Joint study on importing gas from RFE to S. Korea through 3 options such as PNG, LNG and CNG. Despite of less-costly PNG option, concerned parties seemed to be more interested in LNG as a realizable project because of political risks of PNG. Kogas Vostok LLC (KOVOS)

  14. Cross-border gas pipeline in the Korean Peninsula Progress • June~July 2011 : exchange visit between DPRK and Gazprom Gazprom officially proposed an ambitious project to build a gas pipeline. • Early Aug.2011 : CEO-level meeting between KOGAS and Gazprom Discussion on a roadmap of importing natural gas through PNG • Late Aug. 2011 : Russia-N.Korea summit in Ulanude, Russia Top agenda on gas pipeline project connecting the 3 countries-Russia, N.Korea and S.Korea Kogas Vostok LLC (KOVOS)

  15. Cross-border gas pipeline in the Korean Peninsula Progress • Sep. 2011 : significant agreement among 3 countries Road map between KOGAS and Gazprom, MOU between Gazprom and N.Korea. Kogas Vostok LLC (KOVOS)

  16. Cross-border gas pipeline in the Korean Peninsula Implications Commercial ・RFE, greatest gas supplier to S.Korea ・Economical than such options as LNG and CNG ・Price reduction of natural gas for S.Korea ・Considerable cash revenue to N.Korea ・Diversifying gas energy exporting market Geopolitical ・Catalyst of regional integration and peace ・Role in shifting N.Korea away from its traditional economy ・Possible concern on the West side (diplomatic leverage) ・Stable energy security for S.Korea Kogas Vostok LLC (KOVOS)

  17. Cross-border gas pipeline in the Korean Peninsula Commercial implications • Russia (solely RFE) could be the largest gas supplier to S.Korea • Diversifying gas exporting market for Russia Globalization of gas exports through pipeline other than Europe (besides exporting from Sakhalin 2) Kogas Vostok LLC (KOVOS)

  18. Cross-border gas pipeline in the Korean Peninsula Commercial implications • PNG is more economical option than LNG and CNG. PNG < CNG < LNG Expected budget of PNG is known to be much more economical than that LNG. (Source: Institute Francais Du Petrole) Kogas Vostok LLC (KOVOS)

  19. Cross-border gas pipeline in the Korean Peninsula Commercial implications • Price reduction of natural gas for S.Korea. ・To a certain extent, natural gas through pipeline will be cheaper than by ship. ・Stronger buying power and dominant position in purchasing new LNG. • Considerable cash revenue to N.Korea ・Transit charge as cash cow to N.Korea Transit charge > Revenue of Kaesong Industrial Complex (Cash from PNG could be more than that of KIC) OR Equivalent power station and fertilizer plant with gas supply? Kogas Vostok LLC (KOVOS)

  20. Traditional • ・Exports of military hardware • and illicit goods ・Provocative behaviors ・Nuclear actions Cross-border gas pipeline in the Korean Peninsula Geopolitical implications • Catalyst of regional integration and peace ・RFE as an integral part of East Asia ・Gas as innovative and pragmatic tool for cooperation and integration ・Ease the high tension between two Koreas • Role in shifting N.Korea from its traditional economy and behaviors New • ・Easy money from transit fees • ・Cooperative behaviors • ・Alternative fuels such as gas Kogas Vostok LLC (KOVOS)

  21. Cross-border gas pipeline in the Korean Peninsula Geopolitical implications • Stable energy security for S.Korea S.Korea is an island country in terms of energy. • Import dependence of energy : over 95% • All Oil, gas and coal to S.Korea by ship After PNG, small diversion from ship, especially the Malacca Strait, as a big relief for S.Korea. Kogas Vostok LLC (KOVOS)

  22. Cross-border gas pipeline in the Korean Peninsula Geopolitical implications • Possible concern on the West side (diplomatic leverage) China plays a key role in regional stability and security Russia using gas pipeline, an new important broker in the region Undermining of the West influences in Northeast Asia Kogas Vostok LLC (KOVOS)

  23. Cross-border gas pipeline in the Korean Peninsula Challenges ・Uncertainties of resource supply and market risks ・Political risks ・Difficulties in finance Kogas Vostok LLC (KOVOS)

  24. Cross-border gas pipeline in the Korean Peninsula Challenges • Uncertainties of resource supply and market risks ・Evidence of the proven gas resources in Sakhalin and East Siberia but, doubt about timely supply to S.Korea ・Where and when will gas quantity for S.Korea come from? <Expected production year> Sakhalin 3 : 2014~17 (Kirinsky 2014 with 4bcm/y) Chayanda : 2016~18 ・PNG competing with LNG ・Shortage of gas in S.Korea in 2017 forecasted over 10 million ton. ・Without guarantee of resources, KOGAS will take LNG. Kogas Vostok LLC (KOVOS)

  25. Cross-border gas pipeline in the Korean Peninsula Challenges • Unavoidable political risks The ever-present North Korea Risk ・Two Koreas technically at war, with no peace treaty after 1953. ・N.Korea’s nuclear program and attacks on S.Korea keep relations tense. Similar to the IPI project S.Korea would be positive only when Russia can be held accountable for the risk on gas imports through N.Korea with state-to-state level agreements such as IGA and HGA. Despite of Russia’s assurance and IGA and HGA, N.Korea has plenty of chances to use the pipeline in inter-Korean relations. Kogas Vostok LLC (KOVOS)

  26. Cross-border gas pipeline in the Korean Peninsula Challenges • Difficulties in finance on territory of N.Korea ・Financial requirements for pipeline construction is huge. Length of pipeline in N.Korea : about 700km out of 1,100km Who is willing to fund the construction of gas pipeline in N.Korea? < Aug. 2011> A joint tourism resort in the North was blocked where S.Korean companies invested over USD120million. < May, 2006> KEDO consisting of 13 nations terminated the project of light-water reactor in N.Korea which cost 1.6billion. Kogas Vostok LLC (KOVOS)

  27. Conclusion Economic advantages of the pipeline may outweigh political obstacles. I believe that the singularly charming gas project from Russia to S.Korea via N.Korea will make those related countries busy to be cooperative than to confront. Kogas Vostok LLC (KOVOS)

  28. Спасибо за внимание!(감사합니다) Kogas Vostok LLC (KOVOS)

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