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Wednesday, June 14, 2006

India’s slippery oil diplomacy

By P R Kumaraswamy for ISN Security Watch (14/06/06)

The most significant fallout from India’s galloping economic growth is its increasing dependency on imports to meet its hydro-carbon demands. Unlike China, it is yet to emerge as a major player in the global energy market. But three developments are bound to alter this situation for ever: India’s growing demands for hydrocarbon; its dwindling domestic supplies; and the increasing globalization of Indian oil companies. These will shape and influence how India views its energy security and guide its long-term desire of stable sources of energy supplies.

The petroleum bill constitutes the bulk of India’s total imports and accounts for most of its trade deficit with the Middle East and elsewhere. For example, last year India's trade deficit stood at about US$29 billion, while its oil bill alone was over US$34 billion. Economists have universally agreed that by 2020, nearly 80 per cent of India’s hydrocarbon needs would have to be met by imports.

In the 1990s, India imported large quantities of refined products but the entry of private sector into the market has drastically increased India’s refining capacity. As a result, since 2001, India has emerged a net exporter of petroleum products. This will further increase demands for oil and gas resources.

Even without the current high oil prices, securing stable supplies at affordable prices has been high on the Indian agenda. The economic reforms and the bourgeoning financial resources of the state-owned oil companies have led India to pursue an aggressive oil policy.

This policy operates at two levels. In the first place, India is slowly moving away from its erstwhile practice of spot purchases and short-term contracts. These measures were unavoidable in the past, but stable and assured sources of supplies are essential if India is to push forward its economic growth. Moreover, some of the massive petrochemical plants in the country could not depend upon such ad hoc arrangements.

One such successful arrangement was the supply of 7.5 million metric tonnes (mmt) of liquefied natural gas (LNG) annually from Qatar. Under this arrangement, the Gulf state agreed to supply India with LNG for 25 years, with the first shipment delivered in March 2004. A similar arrangement with Iran for the supply for five million metric tonnes of gas through pipelines has hit a few rough spots largely due to the ongoing tensions between the US and Iran over Tehran’s suspected nuclear ambitions.

The second strategy has been in the realm of upstream markets whereby Indian companies invest in the exploration, production, and export of oil and gas in foreign fields. During the past few years, Indian companies have been actively involved in a host of countries. The OVL, the export arms of the state-owned Oil and Natural Gas Commission, alone plans to acquire overseas oil and gas equity of 20 million tonnes by 2010. The company is active in 14 countries and has acquired 23 projects. Among others, it is operating in Vietnam, Russia, Sudan, Iraq, Iran, Libya, Syria, Myanmar, Australia, and the Ivory Coast and is exploring avenues in Algeria, Indonesia, Nepal, Iran, Russia, the United Arab Emirates, and Venezuela. In January 2005, the Indian company Reliance secured exploration rights in Oman. The largest Indian activity is in the Sakhalin oil fields in the Russia, where India has invested a whopping US$ 1.7 billion.

Such a strategy underscores India's determination to aggressively pursue an energy security policy and to minimize if not escape from disruption or fluctuation of supplies due to conflicts, natural calamities, or other unforeseen developments.

This strategy, however, comes with a price tag. Because India is new to this highly charged and competitive market, it faces a number of difficulties.
Questionable markets

In some cases, India entered into the oil market in countries at the receiving end of international criticism and sometimes even isolation. Sudan is a classic example of one such country that has become a major market for Indian investment and exploration. India already has invested over US$700 million in the GNOP oil fields in Sudan, and is currently working on a major pipeline project there. But India's entry into Sudan coincided with the civil war there and the departure of Western oil companies.

The same is true of Burma (Myanmar). In addition to its reservations about the policies of the military junta, Indian nationalists have had close ties with the father of the country's imprisoned pro-democracy leader, Aung San Suu Kyi. Its eagerness to explore Burma's energy potentials, as well as its desire to minimize Chinese influence there compelled India to sidestep the democracy issue.

India's problem with Bangladesh is somewhat different. Though geographically closer, gas supplies have been bogged down by periodic tensions and differences between the two. Despite its mounting trade deficit of over US$1 billion, Dhaka has been reluctant to contemplate gas exports to India, and the question has become a politically sensitive one in Bangladesh. As a result, bilateral differences over trade concessions prevented Dhaka from participating in the Indo-Burma gas pipeline, which would have benefited Bangladesh.

There are also cases in which Indian interests have come into direct conflict with the policies of the US. During much of the 1980s, Iraq not only supplied large quantities of oil but also provided political support to India on key issues such as disputed Kashmir. As such, Iraq could have been the ideal candidate for India’s oil diplomacy. But with the Kuwait crisis of 1990 and the subsequent UN sanctions, Iraq was rendered off limits to India. The post-Saddam Hussein political reality in Iraq is too fragile and unstable for India to consider any long-term investment in the oil sector. Similarly, the US-led oil embargo against Libya following the Lockerbie bombing affected Indian interests.

In recent years, Washington's policy vis-à-vis Iran over the nuclear question and its opposition to the construction of a pipeline between Iran and India via Pakistan practically stalled the estimated US$40 billion gas deal. In the end, India's desire for a civilian nuclear energy deal with Washington dictated.

The Iran-Libya Sanctions Act (ILSA) passed by US Congress in 1995 explicitly called for sanctions against any oil major that made an “investment” of more than US$20 million in one year in Iran. While India has so far avoided any oil-related sanctions, it remains vulnerable to US pressures. A recent report for the Congress suggested that while the overall India-Iran gas deal “would not appear to constitute an ‘investment’ in Iran’s energy sector, as defined by ILSA,” it hinted that that construction of LNG pipeline would be problematic.

The proposed Iranian pipeline as well as the extension of Turkmenistan-Afghanistan-Pakistan pipeline to India also have security dimension. For long, Indian security establishments have expressed reservations about having its strategic energy supplies pass through Pakistani territory. Furthermore, in recent years, pipelines in the Pakistani province of Balochistan have often been sabotaged, thereby raising pipeline safety concerns.

Syria is another country where India is actively pursuing the oil exploration – a fact that pits New Delhi against Washington, which considers Damascus part of the "axis of evil". The same is true of the Indian interests in Venezuela, whose President Hugo Chavez portrays himself as the new crusader against US imperialism.

This energy drive has resulted in India evolving a mixed policy vis-à-vis China. At one level, geo-strategic realities compel New Delhi to seek friendlier ties with Beijing. Wherever possible it takes that extra step to ward off any impression that New Delhi has been working in tandem with Washington in containing Beijing. At the same time, however, their growing energy needs intensifies Sino-Indian competitions in third countries. Last year, India lost energy deals in Kazakhstan and Nigeria to Chinese oil companies. Indian officials cried foul when China eventually won the Kazak deal. Similarly, belated Indian interests and involvement in Burmese oil fields were partly spurred by its concerns over China and its strategic presence in that country.

At the same time, the Sino-Indian energy search is not always competitive. Wherever a country in question has controversial relations vis-à-vis Washington, China finds India to be a useful partner. Both are cooperating in the development of the Yadavaran oil fields in Iran, and under the preliminary agreement negotiated in October 2004, the state-owned Chinese oil giant SINOPEC would obtain a 51 per cent stake in Yadavaran, while the ONCG would get a 20 per cent stake. Likewise, Chinese and Indian state-owned oil companies have been collaborating in Sudan and Syria.
Macro energy picture bleak

The macro energy picture, however, is rather bleak, as India’s dependency on imports for its hydrocarbon needs would only increase as its economy grows. Indeed, domestic supplies account for just 30 per cent of India’s crude oil demands, and the government admits that “India’s oil import dependency is likely to grow beyond the current level of 70 per cent.”

The entry of India signals a departure from the past, and its oil companies are willing and able to actively pursue the overseas oil market, including exploration and production. At the same time, as new comers, they are yet to appreciate the competitive nature of the market or the high political cost involved in oil deals. Some of India’s foreign policy choices often impinge upon its energy requirements and vice versa. Oil diplomacy will thus be a slow but slippery learning curve for India.

P R Kumaraswamy teaches contemporary Middle East at Jawaharlal Nehru University, New Delhi.
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