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    Global Economy
     Mar 17, 2005
India, China locked in energy game
By Chietigj Bajpaee

HONG KONG - In the words of Indian Prime Minister Manmohan Singh, "China is ahead of us in planning for its energy security - India can no longer be complacent." These words conveyed the sense of urgency that India holds over meeting its energy needs.

India is playing catch-up with other major players in the global energy game. This realization has not come a moment too soon, given the advent of rising oil prices, India's unprecedented growth levels, lack of energy-efficient technologies and reliance on energy-heavy industries for its development.

Power shortages and blackouts continue to plague India's major cities and undermine the confidence of investors and foreign companies operating in India. These power shortages have been fueled by a combination of burgeoning growth rates, inefficiencies by the state-run power sector and power being stolen or siphoned for votes. The growing popularity of gas-guzzling sports utility vehicles and multi-purpose vehicles in India is also placing strains on its energy needs.

India, as the world's number six energy consumer, is also in a more desperate situation compared to its peers. For example, oil imports account for two-thirds of India's oil consumption, while China imports a third of its crude oil consumption. Furthermore, China's proven oil reserves stand at 18 billion barrels, compared to 5 billion barrels in India.

Indian-owned Oil and Natural Gas Company (ONGC) has invested US$3.5 billion in overseas exploration since 2000, while Chinese-owned China National Petroleum Corporation (CNPC) has made overseas investments of an estimated $40 billion.

Indian policymakers have initiated numerous policies to address the country's growing energy needs. For example, India is pushing for the creation of 15-45 days of emergency reserves in Rajkot, Mangalore and Vishakapatnam. India is also diversifying beyond oil to access other energy resources, such as nuclear power, coal, natural gas and renewable energy resources, as well as stepping up exploration activities within its borders.

Nevertheless, for the short to medium term India will have to rely on an increasing amount of imported oil and gas to meet its energy needs. As a result, India is stepping up energy diplomacy with states in the South Asia region, as well as states further afield in Central Asia, Russia and the Middle East and as far away as Latin America and Africa.

ONGC, for example, has invested in offshore gas fields in Vietnam, as well as energy projects in Algeria, Kazakhstan, Indonesia, Venezuela, Libya and Syria, while Indian Oil Corporation is looking to invest in deepwater exploration in Sri Lanka. Reliance Industries, India's largest private sector oil firm, also has stakes in an offshore field in Yemen and a liquefied natural gas project in Iran, and is in talks to acquire energy assets in Nigeria, Chad, Angola, Cameroon, Congo and Gabon in Africa, as well as in South America and the Middle East.

However, this quest for energy security is being impeded by India's sometimes tense relations with energy suppliers, energy transit countries and energy competitors. For example, just as India and China have for centuries engaged in competition for leadership in Asia, the developing world and status on the world stage, so the need for energy security has now raised the possibility of further competition and confrontation in the energy sphere.

India's tense relations with Pakistan also have an added dimension with the question of a gas pipeline from Turkmenistan or Iran to India, which will have to traverse Pakistani territory. Nationalism and oil are proving to be a volatile mix. Resolving territorial disputes and improving relations with traditional adversaries will become increasingly important for India if it is to meet its energy import needs by peaceful means.

Festering disputes
While China has either resolved or shelved its border disputes, India has active conflicts on almost all of its borders with neighboring states. Apart from India's poor relations with Pakistan on its western borders, the ongoing violence in India's northeast with sporadic attacks on pipelines and India's poor relations with natural gas-rich Bangladesh and China-friendly Myanmar have prevented it from fully exploiting its proximity to a region rich in energy resources on its eastern borders.

Frosty relations between Bangladesh and India are rooted in accusations by India that Bangladesh is fueling terrorist movements in India's northeast in the presence of rising Islamic fundamentalism and anti-India sentiment in Bangladesh under the Bangladesh National Party (BNP)-led coalition government, illegal migration between both states, and Bangladesh accusing India of rerouting the Ganges and Brahmaputra river systems that traverse both states.

These disagreements have slowed the progress for discussions on a natural gas pipeline from Myanmar to India, which will have to pass through Bangladeshi territory, forcing India to look into the expensive option of creating a deep-sea pipeline through the Bay of Bengal that would bypass Bangladesh.

Disagreements have recently given way to progress as a joint statement was issued at a meeting of the energy ministers from India, Bangladesh and Myanmar in Yangon, which agreed to the construction of a 900 kilometer gas pipeline from Myanmar's offshore Shwe field to Kolkata, passing through Myanmar's Arakan state, the Indian states of Mizoram and Tripura, and Bangladesh.

As part of the deal, Bangladesh will also get access to the gas as well as $125 million in transit fees. In exchange for agreeing to the project, Bangladesh is also pushing for a trade and transport corridor linking Nepal and Bangladesh through Indian territory, as well as access to hydroelectric power generated in Bhutan and Bangladesh using India's power grid.

Nevertheless, several potential glitches remain. Given that the pipeline will be traversing insurgency-infested areas across the three states adds an element of instability to the project. Furthermore, relations between Bangladesh and India remain strained, as seen most recently with Bangladesh's disappointment to India unilaterally withdrawing from the 13th South Asian Association for Regional Cooperation (SAARC) summit, which was due to be held in Dhaka. India cited the suspension of democracy in Nepal and the deteriorating security situation in Bangladesh as its reasons for withdrawing, which ultimately resulted in the postponement of the summit.

While India's relations with Myanmar have seen considerable improvement in recent years, Myanmar clearly remains within the Chinese sphere of influence. India has moved from voicing its opposition to the military junta's crackdown on pro-democracy activists and the arrest of Aung San Suu Kyi, the leader of the National League for Democracy to a more pragmatic, non-interventionist policy. This change in policy by India has been prompted by its desire to access the region's energy resources, gain access to the vast markets of Southeast Asia, balance the influence of China and counter Indian insurgent groups operating from Myanmar.

Notably, Myanmar has helped Indian security forces to crack down on northeast Indian insurgent groups on at least three occasions over the past 10 years. India's more conciliatory approach with Myanmar's military regime was demonstrated most recently when India became the first country to host General Than Shwe, the hardline chairman of Myanmar's ruling State Peace and Development Council, since the ousting of moderate premier Khin Nyunt at the end of October.

However, India's warming relationship with Myanmar is making Myanmar a potential stage for Sino-Indian energy competition. For example, China is also in discussions with Myanmar for a 1,250 kilometer pipeline from the deepwater port of Sittwe in Myanmar on the Bay of Bengal coast to Kunming in Yunnan province.

China is also looking at the possibility of pipelines traversing Pakistani and Bangladeshi territory, as part of its "string of pearls" strategy to bypass the narrow Strait of Malacca, which experiences 40% of the world's piracy and through which 80% of China's oil imports flow. Construction has recently been completed on a deep-sea port in Gwadar in the Pakistani province of Balochistan, in which China has provided technical expertise and financing.

China's involvement has been fueled by the proximity of the port city to the Straits of Hormuz, through which 40% of the world's oil passes. The port would compete with a port facility at Chabahar in Iran, which is being jointly developed by India and Iran to access the landlocked states of Central Asia and Afghanistan. China's "string of pearls" strategy also forms part of a wider Chinese policy to encircle India.

India's plans to generate hydroelectric power through damming and rerouting several river systems have also been delayed by changes in state and central governments and disputes with upstream and downstream states such as Nepal, Bangladesh and Pakistan. Most recently, Pakistan has been pushing for international arbitration to resolve a dispute over the Baglihar dam, which India is constructing to generate power across the Chenab river running through Kashmir. Pakistan claims this project is a violation of the 1960 Indus Water Treaty. The dispute now threatens to derail the peace initiatives between India and Pakistan.

Nevertheless, India has made significant progress in tapping into energy resources within its borders, including oil discoveries in Rajasthan by UK-based Cairn Energy and gas discoveries by India's Reliance Industries off the coast of Andhra Pradesh in the Bay of Bengal. In August 2003, ONGC also announced a deep-sea project, "Sagar Samriddhi", to look for oil and gas reserves in the Arabian Sea and the Bay of Bengal. In the past two years, India has reported 21 oil and gas discoveries amounting to 800 million tons of oil and gas, although domestic oil production has still been stagnant at about 32 million tons annually for the past few years.

Indo-Iranian energy cooperation
The inability to resolve the Kashmir dispute between Pakistan and India has undermined the viability of an Iran-Pakistan-India natural gas pipeline. A memorandum of understanding was signed between Iran and India in 1993 for a $4 billion 1,700 kilometer pipeline from Iran's South Pars field with 700 kilometers passing through Pakistani territory. Pakistan stands to benefit with gas to meet its own energy needs and $500 million in transit fees.

The international community has also shown growing interest in the Iran-Pakistan-India pipeline, with the World Bank and Japan's Sumitomo Mitsui Banking Corporation willing to finance the project. Russia also supports the project, although the US opposes it, instead pushing for the competing trans-Afghan pipeline project.

However, in the presence of sporadic tensions between India and Pakistan, both states have often proposed separate pipeline projects with Iran, with India sometimes pushing for the expensive option of a deep-sea pipeline that bypasses Pakistan altogether. Rising oil prices and a recent improvement in Indo-Pakistani relations following a commitment to resume a "composite dialogue" in January 2004 has revived hopes for the "peace pipeline", which has now become one of the confidence-building measures being pursued by both states.

Notably, Pakistan has offered security guarantees for the pipeline, vowing that gas flow will not be "switched off", even during periods of Indo-Pak tensions or hostilities. However, the future of the pipeline project is once again in doubt due to periodic violence across the Line of Control in Kashmir and rising tensions in Pakistan's Balochistan province, with attacks by the Baloch Liberation Front on energy infrastructure.

At the beginning of 2005, India also completed a $40 billion deal with Iran to import 7.5 million tons of liquefied natural gas annually over a 25-year period, as well as obtaining stakes in the development of Iran's largest onshore oilfield, Yadavaran, as well the Jufeir oilfield. The Yahavaran oilfield is a Sino-Indian-Iranian collaboration with India holding a 20% stake, China 50% and 30% with Iran. In exchange for Iranian gas, India is investing in Iran's ports and energy infrastructure. Iran and India have agreed to jointly develop the Iranian port at Chabahar as well as the road linking the port to Afghanistan and Central Asia, and grant India exclusive rights to the port.

Cooperation in the energy arena is mirroring relations in other arenas, including trade and military cooperation. Bilateral exchanges of defense and intelligence officials are routine and in 2003 both states conducted joint naval exercises. These developments have not only concerned India's traditional adversaries, China and Pakistan, but also its newly found allies, Israel and the United States, who fear that military technology supplied to India could be diverted to Iran.

Central Asia
India is at a geographic disadvantage in Central Asia when compared to China. While China shares borders with Kazakhstan, Kyrgyzstan and Tajikistan, as well as Russia, India does not share a land border with any of the Central Asian states. That being said, however, India's warm relations with the Soviet Union during the Cold War have provided it with influence in Central Asia. Further, India also has its soft power to exercise, with historical links that go beyond the Indo-Soviet Treaty of Friendship to the Mughal period and Silk Road, as well as the popularity of Indian mass culture in the region, such as Bollywood films and music.

However, the presence of two unfriendly regimes standing between India and Central Asia has slowed the progress of Indo-Central Asian cooperation in the economic, transportation and energy spheres. For example, progress on the $3.3 billion US-backed Turkmenistan-Afghanistan-Pakistan (TAP) or Trans-Afghan pipeline that is to supply gas from the Daulatabad fields in southeast Turkmenistan has been delayed by instabilities in Afghanistan and poor Indo-Pak relations. With the ousting of the Taliban regime in Afghanistan, the installment of a pro-US regime and improving Indo-Pak relations, the TAP project is back on the table.

Nevertheless, progress has been impeded by the competing Iran-Pakistan-India pipeline, sporadic violence in Afghanistan, Turkmenistan's isolationism and questions over whether Turkmenistan has sufficient gas to meet India's and Pakistan's needs, given its competing energy agreements with Ukraine, Russia, Iran and its own domestic consumption needs.

India's increasing interest in Central Asia's energy resources has been accompanied by a growing involvement in the region's security. India has expanded military contacts in Central Asia, allegedly establishing a military and medical facility in Tajikistan. Other major world powers have followed similar trends. Since September 11, 2001, the US has forged closer relations with Central Asia and established a military presence in Afghanistan, Tajikistan, Kyrgyzstan and Uzbekistan. China has led in the creation of the Shanghai Cooperation Organization, which is fighting the "three evils" of extremism, terrorism and fundamentalism and promoting greater economic integration and development in Central Asia and China's West.

Meanwhile, Russia has reasserted its presence in Central Asia under President Vladimir Putin, as seen most recently with Russia becoming a member of the Central Asian Cooperation Organization. Russia has also established a permanent military presence in Tajikistan, replacing its 201st division and border guards, who had been in the region since the 1992-1997 Tajik civil war, as well as maintaining a military presence at Kant airbase in Kyrgyzstan.

Numerous formal and informal overlapping power blocs are emerging in the region, which spillover into the energy arena. For example, Iran, Russia and India are pushing for a north-south oil and gas pipeline and transportation corridor to link Asia with Europe, which is in competition with a US-led initiative to create an east-west corridor on the historic Silk Road through Baku, Tbilisi and Ceyhan. A growing military presence in the region coupled with increasing desperation to access the region's energy resources makes Central Asia a stage for potential great power conflicts.

Revival of the 'strategic triangle'
India has recently stepped up efforts to access energy resources in Russia, the world's second largest oil producer and leading gas producer. India's ONGC Videsh Ltd (OVL) holds a 20% stake in Sakhalin-1 of $1.7 billion, which is set to begin production this year eventually generating 2.3 billion barrels of oil and 17.3 trillion cubic feet of gas. India is also looking to invest in the Sakhalin-3 project, which is estimated to hold 4.6 billion barrels of oil and 770 billion cubic meters of gas as well as investing in the joint Russian-Kazakh Kurmangazy oilfield in the Caspian Sea.

During Putin's visit to India in December, the two countries also signed a memorandum of understanding for joint exploration and distribution of natural gas from the Caspian basin as well as building underground gas storage facilities in India.

The controversy over the sale of the Yugansk, which produces 60% of Yukos' oil output and pumps 11% of Russia's oil, has also highlighted India's growing interest in Russian energy assets. While the mysterious buyer, Baikal Finance Group, ended up selling its stake in Yugansk to Rosneft in December, which has been acquired by Russian state-owned Gazprom, this does not preclude the possibility of Yukos' assets being acquired by India's ONGC. ONGC has been considering a $2 billion investment for a 10-15% stake in Yugansk.

Indo-Russian energy cooperation is being further cemented by political and military cooperation. Just as India increasingly relies on Russian energy resources, so it also constitutes one of the biggest buyers of Russian military hardware. During Indian Petroleum Minister Mani Shankar Aiyar's visit to Moscow in October 2004, he voiced similar sentiments stating that "in the first half-century of Indian independence, Russia has guaranteed our territorial integrity, and in the second half it may be able to guarantee our energy security".

In fact, growing Indo-Russian energy cooperation resurrects former Russian prime minister Yevgeny Primakov's idea for a strategic triangle between Russia, India and China. These states are bound together by their shared interests in the fight against terrorism, the push for a multipolar world, and respect for the principles of state sovereignty and non-intervention with regards to their respective separatist movements in Chechnya, Kashmir and Taiwan.

Now the energy sector can be added to this list of shared interests. India and China are already collaborating in the development of the Yahavaran oil field in Iran and India's leading state-owned gas company, Gas Authority of India Limited (GAIL), has acquired a 10% stake in China Gas Holdings. With India and China vying for assets in Yukos, Sino-Indian-Russian collaboration in the energy sphere could be further cemented. On December 3, during Putin's meeting with Indian Prime Minister Manmohan Singh in New Delhi, a joint statement was released which included a proposal for greater cooperation with China, stating that "the sides express their conviction in favor of a progressive increase in trilateral cooperation, which also leads to social and economic development amongst the three countries".

As India has made limited progress in accessing energy resources on its doorsteps due to poor relations with neighboring states, it has shown a growing interest in accessing energy resources further afield, including in Africa and Latin America. In many cases, India is vying for energy resources in some of the most unstable parts of the world, such as Sudan, where India has invested $1.5 billion.

In July 2004, India's OVL signed a $194 million contract with the Sudanese government for the construction of a 741 kilometer petroleum product pipeline from Khartoum refinery to Port Sudan. Khartoum refinery is currently owned by the Sudanese government and China's CNPC. While India has made nowhere near the progress of China on the international energy stage, it is conceivable that India could become a major player in the near future, thus bringing it into competition with other major energy consuming countries.

Furthermore, India's and China's attempts to engage "rogue states" such as Myanmar, Iran and Sudan in order to access their energy resources is undermining attempts by the West to isolate these regimes. The quest for energy resources on the world stage could eventually be added to the outsourcing debate as an area of contention between India and the West.

However, conflict over increasing energy needs is not inevitable. The need to access energy resources on the world stage can be as much a catalyst for cooperation as it can for conflict. For example, the Iran-Pakistan-India and Myanmar-Bangladesh-India natural gas pipelines raise the stakes for regional states to resolve their differences.

Conversely, India's plans for generating hydroelectric power through rerouting several river systems adds an additional element of instability in relations between India and downstream and upstream states such as Bangladesh, Nepal and Pakistan.

Furthermore, the increasing interdependence between China and India as a result of their burgeoning trade relationship reduces the possibility of conflict over energy resources. Sino-Indian bilateral trade reached $13.6 billion in 2004, making China India's second-largest trading partner. It should be noted, however, that expanding trade relations do not necessarily preclude the possibility of conflict, as seen by the fact that China is Japan's largest trading partner, with trade up 26% in 2004, while relations in the political and security arena have continued to plummet over historical animosities and territorial disputes rooted in nationalism and energy resources.

India faces this same volatile combination in many of its disputes with neighboring countries. Thus, the jury is still out over whether India's quest for energy security will undermine international security.

Chietigj Bajpaee is Hong Kong-based energy analyst.

Published with permission of the Power and Interest News Report, an analysis-based publication that seeks to provide insight into various conflicts, regions and points of interest around the globe. All comments should be directed to content@pinr.com

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