India casting a wide net in its hunt for energy

But tactic calls for political dexterity.

[A story I wrote on the request of the International Herald Tribune about the emerging tension between India's quest for nuclear energy cooperation from the United States and its plans for an Asian energy grid involving, besides others, Iran.]

25 January 2006
International Herald Tribune, p. 12

India casting a wide net in its hunt for energy
But tactic calls for political dexterity

By Siddharth Varadarajan
WEDNESDAY, JANUARY 25, 2006

DAGANG, China: On a wintry January afternoon, India's oil minister, Mani Shankar Aiyar, toured the latest frontier in his country's search for energy security: an aging oil field near Tianjin that pumps out as much crude today as it did in the 1960s.

Indian fields of similar vintage are only half as productive. People in the Indian oil industry say Chinese technologies for improved and enhanced oil recovery could raise their output and help reduce the country's import burden.

A landmark agreement, signed in Beijing on Jan. 12, has cleared the way for India and China to collaborate not only in technology but also in hydrocarbon exploration and production, a partnership that eventually could alter fundamental equations in the world's oil and natural gas sector.

Last year, India lost to China in a costly and bitter battle for PetroKazakhstan, a Canadian company that produces oil in the former Soviet republic of Kazakhstan. But, confounding international predictions of an escalating rivalry, Indian and Chinese oil companies have agreed to place joint bids for energy assets in other countries.

In December the state-controlled oil companies China National Petroleum and Oil & Natural Gas, of India, jointly bid for Petro-Canada's interest in Al Furat Petroleum, a joint venture with Syrian Petroleum and Syria Shell Petroleum Development.

If successful, the China-India alliance could pose a challenge to hydrocarbon-producing countries and rival corporate contenders alike.

"When companies from the two sides submit a joint bid, no project would be beyond our reach, " Aiyar told Ma Kai, chairman of China's National Development and Reforms Commission, shortly before the two men signed the memorandum of understanding on Jan. 12.

Not only the Indians, undoubtedly junior players in any head-to-head clash with the Chinese, see benefits in cooperation.

For India, the agreement with China capped an extraordinary year on the energy front. In the past 12 months, it reversed a longstanding policy and opened negotiations with Iran and Pakistan on a natural gas pipeline, and it reached a preliminary agreement with the United States to resume civilian nuclear cooperation after a hiatus of more than 30 years.

And the international unit of Oil & Natural Gas, called ONGC Videsh, or OVL, plans to build on its presence in Russia's Sakhalin-1 oil field, India's largest overseas investment. OVL now wants to buy into the more lucrative Sakhalin-3.

With Iran and Pakistan as transit routes, Central Asian oil and natural gas suddenly seem more accessible too. The government of Prime Minister Manmohan Singh of India has begun to talk of an Asian gas grid and oil market, and its proposals are finding traction both with major oil importers like China and South Korea and with producers.

An ambitious $22.5 billion project, introduced in New Delhi in November at an Asian energy ministers' round table, would call for the construction of five separate pipelines.

"Asian energy architecture will generate greater stability and predictability in the market", says Talmiz Ahmed, a senior diplomat seconded to India's oil ministry. "And that's good for both buyers and sellers".

Most audacious of all is a proposal to convert the Baku-Tbilisi-Ceyhan pipeline, which Washington intends to deliver Caspian resources to the West, into a feeder for Asia. The idea is to extend it to Eilat, Israel, where the oil would be loaded onto tankers for shipment through the Red Sea.

But as New Delhi moves to consolidate its gains on diverse energy fronts, it is being forced to confront the challenges of political reality.

Major Western oil companies have commercial concerns, and the United States has geopolitical ones, especially because Iran would be a vital part of an Asian energy network.

In a world where control over energy sources and transportation serves as a proxy for strategic power, the Indian government has begun asking itself a basic question: Is it possible to deal with both Washington and Tehran?

For the Bush administration, at least, the answer seems to be no. For example, the U.S. offer of civilian nuclear cooperation last year was largely intended to help wean India from a growing fixation on Iranian gas.

It may have been a coincidence that Secretary of State Condoleezza Rice first publicly expressed interest in nuclear cooperation with India during a press conference in Delhi last February, at the same time that she made U.S. opposition to the Iran-India pipeline known. But Rice recently reaffirmed the U.S. stand.

"We can't say to the Indians, on the one hand, you can't - we'd rather you weren't - engaged in energy relations with, for instance, Iran," she told reporters in Washington on Jan. 5, "but by the way, civil nuclear is closed off to you."

For some U.S. and Indian analysts, the Bush administration's stand is troubling and even irrational, despite the challenge posed to U.S. national interests by Iran.

"It is odd to suggest that it's O.K. for India to import Iranian natural gas by tanker but not by pipeline," said Michael Krepon, president emeritus of the Henry L. Stimson Center in Washington, which studies security issues.

In India, the pipeline has the enthusiastic backing of the Oil Ministry. It also has generated positive expressions of interest from Gazprom of Russia and South Korean companies.

At the same time, its detractors are growing, as is the pressure from the United States to isolate Iran. Law and order is deteriorating in Pakistan's troubled Baluchistan Province, where the pipeline would run.

Officially, the Indian government is still committed to the project if it is financially viable. But officials fear that going ahead would have negative consequences for civil nuclear cooperation with the United States.

Negotiations with Washington on the nuclear front are delicately poised over New Delhi's proposals for the separation of its civilian and military nuclear facilities. This separation is a requirement of the agreement last summer between Bush and Singh and a key condition before the United States will change its domestic laws to allow nuclear commerce with India.

For the Chinese, who generally are not enthusiastic about the prospects of growing cooperation between the United States and India on the nuclear or any other front, New Delhi would be making a major strategic mistake if it were tempted by the nuclear offer into walking away from Iran and the proposed Asian pipeline grid.

"If India can make a deal with the United States on nuclear energy, this would not be a bad outcome for it, since it could at least get something it needs," Liu Xuecheng, a senior research fellow at the China Institute of International Studies, said in an interview in Beijing this month. "But this should not be at the cost of pipelines."

Pointing to the uncertainties of American policies, Liu said that if India gave up on Iran in the hope of securing a U.S. nuclear deal, it might end up with nothing.

"It would lose its strategic pipeline, and the U.S. could also abandon the nuclear deal at some point in the future," he said. "Pipelines from Iran and Central Asia are a strategic lifeline for Indian energy security. There is no other alternative."

Siddharth Varadarajan is deputy editor of The Hindu in India