14 April 2005

Fuel enough for dragon and elephant

Date:14/04/2005 http://www.thehindu.com/2005/04/14/stories/2005041401251000.htm

Opinion - Leader Page Articles

Fuel enough for dragon and elephant

Siddharth Varadarajan

India and China can be partners, not rivals, in the quest for energy security.

A RECURRING theme in most writings on the emerging international energy scenario is the pressure that rising Chinese and Indian demand for oil and gas is exerting on world prices. Though oil prices have risen and fallen through the better part of the past two decades and cyclical movement still exists, there is little doubt that we are entering a period of a secular upward trend in the price level. The reasons for this are not hard to find. On the supply side, despite the many great discoveries of the past 10 years, most oil majors like Shell and Chevron-Texaco are having difficulty finding fresh reserves to replace those they extract in any given year. And on the demand side, despite the sluggishness still evident in Japan and Western Europe, the rapid economic growth witnessed across most of Asia is leading to a rapid surge in net imports of oil into the region.

Rising demand and dwindling supply

China alone accounts for 40 per cent of the growth in world oil demand since 2000. Asian gas imports too are rising, though the scale of the new discoveries in Iran, the Persian Gulf, Central Asia and other smaller fields in Myanmar, Bangladesh and India means landed prices will depend less on rising demand than on any economies of scale effected in the mode of transportation, such as multi-destination pipelines.

Against such a background of rising demand and dwindling supply, it is tempting to assume India and China are rivals in the quest for new — but eventually finite — sources of oil. Even if the possibilities for cooperation are substantial, it is a fact that China has been much more focussed than India on the hydrocarbons front. At the Asian energy conference in New Delhi this January, Prime Minister Manmohan Singh sounded a warning: "China is ahead of us in planning for its energy security." "India can no longer be complacent," he said. Despite generating substantial internal production, China has been a net importer of oil since 1993. According to reliable estimates, its internal reserves at Daqing and elsewhere are likely to run out by 2020. Though there is some possibility of exploiting oil in the Tarim basin, the costs involved are substantial. With the Chinese economy continuing to grow, its need for imported oil will only go up.

Chinese response

The Chinese response to this scenario has been multi-pronged. First, it is building U.S.-style strategic petroleum reserves at four locations in Zhejiang, Shandong, and Liaoning provinces with the aim of having at hand 30-75 days consumption as reserve. Alongside this, it is paying closer attention to security issues along its vital sea lines of communication (SLOCs). Beijing's areas of concern are the Straits of Hormuz and Malacca (where 80 per cent of Chinese imports pass through), Luzon, and Taiwan. The Chinese presence in Gwadar in Pakistan and the Myanmar coast is linked more to energy security concerns than to any threat from — or challenge to — India. China today is extracting oil in more than 12 countries around the world. In addition, it recently entered into a $100 billion 25-year agreement for supply of LNG from Iran. When Canadian Prime Minister Paul Martin went to China in January 2005, the two countries agreed on an energy partnership for the 21st century that might give China access to the Athabasca tar sands. Also in January, following Chinese Vice-President Zeng Qinghong's visit to Caracas, Chinese firms signed a $400 million investment deal involving as many as 15 Venezuelan oil fields. The last two deals have sent alarm bells ringing in Washington, which fears losing its power as a monopsonist: More than 95 per cent of Canadian oil exports today go to the U.S., which is also Venezuela's single largest customer.

As for land-based supply routes, work has already started on a 1,000 km pipeline from Atasu in Kazakhstan to Alataw in Xinjiang. When completed, China can bring in as much as 10 million tonnes of oil annually through this route. The Chinese side was also keen on a 2,400 km pipeline from Angarsk in eastern Siberia to Daqing. But the Japanese, who have their own energy needs to worry about, want the Siberian pipeline to go to Nakhodka on the Sea of Japan. For the moment, Tokyo appears to have convinced Moscow about the viability of this route, though Beijing has also mooted a cooperative plan that would help both countries. It stands to reason that energy figures prominently amongst all the issues underlying the recent increase in tension between China and Japan.

Given China's large global footprint in the energy sector, what kind of policy should India have? ONGC Videsh Ltd (OVL) faces strong competition from Chinese firms in most territories and lost out the chance to buy Shell's 50 per cent share in Angola's lucrative Block 18 when the Angolan state company, Sonagol, exercised its pre-emption rights to hand the stake over to CNPC. In pursuing this deal, the Chinese Government backed up CNPC's bid with an offer of $2 billion worth of development assistance. All India could offer was concessional funding for a $200 million rail deal. While the Indian side laments the lack of transparent audit procedures in China — which enables Beijing to be more `flexible' in sealing up contracts outside — it is also true that Indian companies are not aggressive enough. Despite India wanting a share of Kazakhstan's booming energy sector, for example, no Indian energy sector company has seen fit to open an office in Almaty or Astana to scout for opportunities.

Focussed partnership

But if India and China have squared off in Angola and also Indonesia and Sudan, there are also examples of cooperation. Both countries have a partnership in the Yahavaran oil field in Iran, as well as the Greater Nile oil project in Sudan. There is also talk of collaboration in Russian projects where India could take an equity stake with a view to supplying not its own but Chinese markets.

Going beyond specific corporate tie-ups, there is tremendous strategic sense in India and China evolving a focussed partnership on the energy security front. Indeed, one may argue that as far as Central Asian energy resources are concerned, India and China are natural allies because both share an interest in ensuring that the battle over export routes is settled in favour of Asia rather than Europe or the United States. When Central Asia has an energy surplus and South and East Asia have energy deficits, it is logical that transportation routes be established between these two regions over the shortest possible distance.

If the U.S. has its way, oil and gas from Turkmenistan, Uzbekistan and Kazakhstan will travel westward through the Caspian Sea, Georgia and Turkey. And India and China, which currently pay an `Asian premium' for oil from West Asia, will find themselves paying more for Central Asian resources. Thus the two countries have a stake in ensuring that the energy resources of Asia are used within the continent. Specifically, this means working together to ensure that the U.S. effort to isolate Iran is frustrated. No doubt there are other mutually beneficial routes.

When Xinjiang Autonomous Region chairman Ismail Tiliwandi visited New Delhi last year, he broached the subject of a direct gas pipeline from China to India. And there is also a suggestion, made recently by Sudha Mahalingam of TERI, for the export of hydro-electricity from Kyrgyzstan to India via High-Voltage Direct Current (HVDC) lines through Xinjiang. But a pipeline through Iran remains the best bet for India, not just because it will eventually let us tap into Central Asian gas but also because of the positive geopolitical spin-offs.

Proposed pipeline

Most tantalising of all is the proposal floated by India's Petroleum Minister, Mani Shankar Aiyar, for the Iran-Pakistan-India gas pipeline to be extended across north India, Assam and upper Myanmar all the way into China's southern Yunnan province. Because it is equidistant from Central Asia and China's eastern seaboard, Yunnan is perhaps the region hardest for Beijing to supply. For the Chinese side, such a pipeline would be a good alternative to the proposed pipeline from Sittwe on the Myanmar coast to Kunming in Yunnan. And for India, having China as an end user for Iranian or Central Asian gas would lessen the chances of Pakistan ever turning off the tap.

The 21st century will not be an `Asian century' unless the two biggest countries in the continent work as partners. And what better place to start than energy, the control of which helped the U.S. establish the previous century as an American one?

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