By Pierre Noel, IISS Senior Fellow for Economic and Energy Security
In the wake of North Korea’s latest provocations, some politicians have called for an oil embargo on the country to bring it to heel. The sticking point has been whether China, Pyongyang’s sole oil supplier, would refuse to cut off supplies.
Even if China agreed to implement such an oil embargo, however, it would be very unlikely to cause sufficient pain to change North Korea’s attitude, let alone trigger the collapse of the country. The implicit reasoning behind the oil embargo proposal is: North Korea consumes oil; it produces none and imports it all from China; and it would therefore collapse – or yield to international demands regarding its nuclear and missile programme, for fear of collapsing – if China stopped supplying oil. In the parlance of the security literature, North Korea is dependent on oil from China and this dependence gives China leverage – which, unfortunately, China is not willing to use.
The trouble is that North Korea does not, strictly speaking, need oil from China. It gets its liquid hydrocarbons from China out of convenience, not necessity. If China ceased supply, it would manufacture them out of solid hydrocarbons, of which it has plenty.
According to the US Energy Information Administration (EIA), North Korea imported 15,000 barrels per day of crude oil from China in 2016, plus 6,000 bpd of refined products. (By way of comparison, that is about 1% of UK oil consumption.) The EIA mentions that some trade may go unreported and therefore, the actual figures may be higher. The real question, in order to assess North Korea’s oil vulnerability and China’s leverage, is not how much North Korea consumes but how much of that consumption it could replace.
The basic fact to understand is that hydrocarbons, which come naturally in different forms – mainly oil, natural gas and coal, but also wood, grass, sugar and so on – can be chemically reconfigured from one form to the other. There are several processes available, but the basic engineering is a hundred years old.
In the commercial world, reconfiguring hydrocarbons is a way to arbitrage structural (expected) price differences between different hydrocarbon forms. In Qatar, Shell has built a very large plant that turns natural gas into high-quality petroleum products. In the US and China, among other countries, there are several plants turning coal into various liquid fuels, natural gas and other petrochemical feedstocks.
The other use of the technology is for purposes of self-sufficiency. If one is cut off from the oil market but has access to coal, one can manufacture oil products. Both Nazi Germany and Japan covered a significant share of their liquid-fuel consumption during the Second World War through coal liquefaction; in the case of Japan, the coal mines and liquefaction plants were located in Indonesia and northern Korea. This is also how South Africa coped with the 1980s oil embargo. Sasol, a South African company, is still a world leader in the technology.
A rough calculation from the input/output ratios of US and Chinese coal-liquefaction plants suggests that North Korea would need to liquefy about six million tonnes of coal to cover all of its 2015 reported oil imports. North Korea produces more than enough coal to do this; its total anthracite-coal exports, mostly to China, were reported to be 25 million tons in 2015, making North Korea the largest anthracite exporter in the world. (Since the passage of UN Security Council Resolution 2321, in 2016, international coal trade with North Korea has been limited to 7.5 million tonnes per year.) Even if North Korea’s true oil consumption is higher than reported, it has ample margin to work with.
It is not clear whether North Korea already has the necessary facilities to begin liquefying coal immediately, and thus to replace its oil imports overnight. There is evidence, however, that North Korea has mastered the basic technology and deployed it at industrial scale. Beginning in 2006, North Korea carried out major building and upgrading work at the Namhung Youth Chemical Complex. Part of this work consisted of building, and then expanding, a major coal-gasification plant (to generate petrochemical feedstock from anthracite coal). This is significant: coal liquefaction amounts to coal gasification plus an added step. It is the very same technology. And given North Korea’s precarious liquid-fuel procurement situation, and the standoff over its nuclear programme, it would be very surprising if the country had not worked on a backup plan along these lines. Given that it has mastered the technology, the country is surely scrambling to expand whatever liquefaction capacity it already has. The partial coal export ban pushes it in this direction anyway, as it creates a glut of coal and deprives North Korea of the cash needed to pay for oil imports.
Moreover, North Korea, like any other country, could surely reduce its oil consumption if it needed to. It could certainly produce more coal if required – which is unlikely, given that sanctions will have created surplus production capacity. It also could turn some crops into diesel or ethanol.
North Korea imports Chinese oil for the same reason that Germany imports Russian gas: because it is convenient (that is, economical) to do so. Would it be good news for North Korea if the oil stopped flowing? No. Is it likely to cripple the economy and force the government to change course on their foremost strategic priority? No. There are ample hydrocarbons in North Korea to substitute for those it imports from China, though maybe not 100% overnight. Overcoming Chinese opposition to an oil embargo, in other words, is unlikely to solve the larger problem.