Oil, power and the new Silk Road in Asia

11 July 2005
The Hindu

Pipelines, power grids and the new Silk Road in Asia

Siddharth Varadarajan

India and Pakistan hold the key to unlocking multiple routes of cooperation.

WHEN INDIA's External Affairs Minister, Natwar Singh, called on Kazakh President Nursultan Nazarbayev during the Shanghai Cooperation Organisation summit in Astana last week, his host made a proposal which could — if implemented fully — alter the dynamics of the international market for oil and gas. "Now that the prospects for peace between India and Pakistan are so bright," Indian officials recounted Mr. Nazarbayev as saying, "why can't Kazakhstan think of supplying you oil via the Caspian Sea and Iran?"

Kazakhstan is not the only resource-rich Central Asian country to see the collateral benefits the India-Pakistan peace process can bring to the region.

Tajikistan President Emomali Rakhmanov, also in Astana for the SCO meet, told Mr. Singh he wanted India to invest in his country's power sector. If an Indian company were to set up a hydroelectric power plant in Tajikistan, Mr. Rakhmonov said, the electricity generated could be moved to India via the Wakhan Corridor in Afghanistan and Pakistan. Though the terrain is mountainous, the technology for erecting High Voltage Direct Current transmission lines in a cost-effective manner already exists. Tajikistan, with an abundance of fast moving rivers, is the world's third largest producer of hydroelectric power after the U.S. and Russia. Last month, Iran signed an MoU to start work on the 220 MW Sangtudin-2 project on the Vakhsh river in Nurek in western Tajikistan while the Russian utility company, UES, will build Sangtudin-1. Kyrgyzstan is another country with excellent prospects for hydel generation.

Since any Central Asian power lines passing through the Wakhan corridor would likely enter Pakistan in the `Northern Areas' of undivided Jammu and Kashmir before moving across to the Indian side of the State, such a project could also help fuel the proposal to make the Line of Control "irrelevant."

As with the Iran-Pakistan-India pipeline, which has now come on to the agenda after years of resistance from New Delhi, the principal bottleneck in both the Kazakh and Tajik projects is likely to be trust, not technology or finance. But if India has the political will and strategic gumption to see them through, these proposals could lay the foundations for a Pan-Asian energy grid linking the two energy surplus regions of West and Central Asia to the two energy-deficient ones of South and East Asia. In his speech to the Afro-Asian conference in Jakarta in April, Prime Minister Manmohan Singh spoke of the need for such cooperation: "While our continents include both major producers and consumers of energy, the framework within which we produce and consume energy is determined elsewhere."

Even without the involvement of Iran, the United States is likely to oppose the emergence of any alternative energy framework in which producers and consumers from the continent trade directly with each other and use land routes — directly from Central Asia into China, and also southwards from Iran, Pakistan and India going eastwards into southern China — rather than the sea for transportation.

U.S. pre-eminence & energy

U.S. pre-eminence in the world is linked to energy in three inter-related ways: first, through its direct and indirect control of the world's hydrocarbon trade, second, through the seignorage it derives from the `petro-dollar' and third, from its ability, as the world's only major maritime power, to "secure" (or block) sea lanes of communication vital to the energy imports of other countries. An Asian energy grid would, however, reduce the U.S. strategic thrust in the region along all three vectors. More so if some of the dire predictions about Saudi supplies tapering off — made most recently and effectively by energy analyst Matthew R. Simmons in Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy (Wiley, 2005) — prove to be correct.

By 2015, Kazakhstan's oil output is likely to be 3.5 million barrels a day. Though the Iranian option has long been seen in Astana as the shortest and most cost-effective route for exporting the region's hydrocarbons to the wider world, political pressure from the U.S. has so far blocked all consideration of this alternative. Not anymore. In the face of improving prospects for peace between India and Pakistan, Kazakhstan is looking anew at Iran.

Apart from its desire to isolate the Teheran Government, Washington has put all its political and financial muscle behind the Baku-Tbilisi-Ceyhan (BTC) pipeline, which will funnel Caspian oil down to Turkey's Mediterranean coast for onward export through tankers. After years in the making, the BTC pipeline finally became operational last month, though with a limited throughput. A small amount of Kazakh oil is being moved through this route, with the bulk still going through the Russian pipeline network to the Black Sea port of Novorossiysk. Once the ambitious new 960-km West-East pipeline from Atasu to Alashankou in north-western Xinjiang is complete, Kazakhstan will have yet another export route. Last week, Chinese President Hu Jintao also reached an agreement with Mr. Nazarbayev for a feasibility study on a natural gas pipeline to China as well.

Currently, Kazakhstan sells some oil via swap arrangements with Teheran. Kazakh oil is shipped by barge to the Iranian Caspian port of Neka for onward distribution. In exchange, the Iranians supply an equal amount of oil to Kazakhstan's actual customer at their Persian Gulf terminal in Bandar Abbas. The Chinese had once made a proposal for constructing a pipeline to Neka from the Kazakh Caspian port of Aktau but legal disputes over the demarcation of the Caspian have put a halt to all under-sea projects. One idea is to build an overland pipeline through Turkmenistan into Iran or Afghanistan. In the interim, the barge-to-pipeline route will help prospective Kazakh customers like India source oil more cheaply than other routes.

After having earlier missed the bus, ONGC Videsh Ltd appears fully committed to working in Kazakhstan. The Indian `mini-major' is now looking seriously at two offshore Kazakh blocks — Satpaev and Makhambet — and is finally opening a representative office in Astana. ONGC is also looking at buying whole or part of the $2.4 billion Canadian-owned PetroKazakhstan, with a view to feeding the Alashankou pipeline.

With the Kazakhs looking at India as a regional balance to China and the Chinese worried about western pressure on Kazakhstan, the involvement of Indian companies would make for a more stable and cooperative environment. China plans to take the Kazakh pipeline all the way up to Lanzhou in Gansu province but is wary of making the requisite investment until it is assured of the stability of oil supplies.

Later this year, India's dynamic oil minister, Mani Shankar Aiyar, will play host to a Round Table of major energy producers and consumers from North, South, and Central Asia. Among the consumers will be India, China, Japan, and South Korea, while among the producers will be Iran, Kazakhstan and Turkmenistan.

One of India's aims is to see what can be done to eliminate the `Asian premium' paid by most Asian importers of crude oil but the one big idea that must also be explored is an Asian energy grid. Pakistan has not yet been invited since it is not one of Asia's "largest" consumers of oil and gas.

However, given the vital role Pakistan plays as the bridge connecting India to Iran and Central Asia, New Delhi would likely benefit by including Islamabad in the process right from the outset.

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