Looking beyond the nuclear deal

The inaugural issue of TERI's new energy newsletter, Energy Security Insights has just come out. With articles by TERI Director R.K. Pachauri, the Department of Atomic Energy's Anil Kakodkar and R.B. Grover, anti-nuclear critics Suchitra Y.J. and M.V. Ramana, and TERI researcher M.P. Ram Mohan, the newsletter seeks comprehensively to tackle the recent India-U.S. nuclear agreement from the perspective of energy security, including the question of financial, environmental and political costs.

Also included is a contribution by me, 'Looking beyond the nuclear deal'. [The entire newsletter can be dowloaded in PDF here.]

March 2006, Volume 1, No. 1
Energy Security Insights

Looking beyond the nuclear deal

Siddharth Varadarajan*
The Hindu

Though there are manifest difficulties in negotiating the recent India–US agreement on the civilian nuclear cooperation through the twin thickets of the US legislative process and the NSG (Nuclear Suppliers Group), it is reasonable to assume that the Indian nuclear energy industry is likely to avail of imported fuel and equipment in the not too distant future.

That such an eventuality is at all possible is due, primarily, to three reasons. First, the growing economic and strategic significance of India in a world that is in transition from one system of order to another. For the US, which intends to weather this transition with its hegemonic power intact if not augmented,
nuclear cooperation with India forms the bedrock of a wider set of strategic interactions aimed at harnessing the Indian strategic capabilities. Indeed, strategic factors have overdetermined the American approach to the Indian nuclear question to such an extent that India’s nuclear weapons are probably considered
an asset for the US rather than a liability in the global balance. This has enabled realists in the American policy planning system to overcome the non-proliferation theologians and push for the mainstreaming of India’s nuclear capabilities even if this means accepting many conditions laid down by the Indian nuclear scientists, such
as excluding the fast breeder programme from the purview of international safeguards for the time being.

Second, the rise of India and China is exerting tremendous pressure on the
international hydrocarbon market as far as the US and western oil majors are concerned. This is not so much due to the current levels of demand – indeed, it is a fallacy that demand growth in these two countries is an important, let alone pivotal, cause of the recent upwards trend in the international oil prices – as to the hedging strategies that China and India have embarked upon. These strategies are aimed at securing a major upstream presence through equity oil acquisitions as well as establishment of new transportation infrastructure, such as transcontinental and trans-regional pipelines. India, in particular, is seriously examining prospects of a strategic natural gas pipeline from Iran via Pakistan. If completed, such a project
would fill a major gap in the emerging Asian energy architecture and open the possibility for generalized outflow of Central Asian and Caspian oil and gas southwards towards the Persian Gulf and hence to Asia, rather than exclusively westwards via the US-promoted pipelines like Baku-Tbilisi-Ceyhan.

Third, the US nuclear reactor construction industry has been in doldrums since 1976 and is looking towards China and India as a major source of new demand. Although the Indian nuclear establishment would be more comfortable sourcing reactors from Russia or France, it is highly unlikely that lifting of the embargo on civil nuclear cooperation with India at the urging and initiative of the US will not result in some contracts going to the American companies. The US would also be looking
forward to leveraging the nuclear agreement to secure a greater share of the growing Indian arms market.

The fact that none of these three reasons sound particularly appetizing – indeed all
reasons suggest that the offer of civil nuclear cooperation comes with a collateral price tag in some other area – is by itself not a sufficient ground to reject or oppose such a historic deal, which offers the Indian nuclear industry a chance to end more than 30 years of isolation. But they do suggest the policy areas where
utmost caution is required.

If unreasonable expectations of the US – on the strategic front, energy security front, and trade front – are met fully or even partially, many of the gains stemming from resumption of civil nuclear cooperation will be lost. This newsletter is perhaps
not the best forum to address the first and third fronts but energy security is a question that demands utmost clarity and it is to this subject that I will now turn.

Simply put, India must reject the notion that there can be any trade-off between the prospects of greater civil nuclear cooperation and those of cooperative hydrocarbon ventures of the kind the country is looking at with Iran, Pakistan, and even China. That the US is looking at these two as a trade-off should be amply evident both from
the timing of US Secretary of State Condoleezza Rice’s initial offer of an energy dialogue in March 2005 as well as from the pronouncements made since then by her, by the US ambassador to India David Mulford, and by the sundry officials and legislators in the US. The US president George W Bush’s remarks in Islamabad on 4 March 2006 that the US has a problem not with the Iran pipeline but with Iran’s nuclear ambitions is not a shift in line as some have suggested but a cleverer
reformulation of the same objection.

Oil and, particularly, natural gas will continue to be an important part of the Indian energy mix in the short and medium term, and nuclear power can be seen as a substitute only in the long term. Up until the middle of this century then, finding and securing new sources of hydrocarbons will have to be a key aspect of India’s quest for energy security. Given the enormous reserves of natural gas in Iran, that
country is a natural partner for India and multiple forms of transport infrastructure – including pipelines and LNG (liquefied natural gas) tankers – will be needed between the two countries. The presence of Pakistan is not a problem but an opportunity for India because involving Islamabad in a trilateral or even
multilateral energy grid is an excellent way of raising the level of economic interaction between the two neighbours who have traditionally been at loggerheads with one another. Ever since prime minister Manmohan Singh came under fire for suggesting in an interview to the Washington Post in July 2005 that the Iran
pipeline might never take off, his government has been careful to reiterate its commitment to the project, provided it is found to be financially viable. While financial viability is important, particularly when comparing alternative modes
of transportation or indeed imports, there should be no underestimation of political
benefits that the pipeline might also bring.

These benefits will accrue in three distinct and mutually reinforcing ways. First, India and Pakistan will experience the burden of mutual dependency for the first time in decades. Second, Iran will get to develop a stable and secure export market for its natural gas. Third, the Iran–Pakistan–India pipeline might become a
catalyst for a wider network of pipelines criss-crossing the Asian heartland and connecting areas of supply with areas of demand in a manner unmediated by the outside influence.

Though a recent convert to the cause of pipelines, India has begun to compensate for its earlier lack of interest with an ambitious proposal for an Asian gas grid that would take these two connections – Iran–India and Kazakhstan–China – and extend them in a way that links Asia’s major energy-producing and -consuming regions to one another. At the meeting in New Delhi in November 2005 of principal north and central Asian energy producing and consuming countries, India unveiled an ambitious 22.4-billion-dollar pan-Asian gas grid and oil-security pipeline system. The grid has four principal elements.

The first would extend the existing Baku–Tbilisi–Ceyhan pipeline system – originally
conceived by the US as a means of shipping central Asian hydrocarbons westwards – down to the Red Sea via Syria, Jordan, and Saudi Arabia, allowing Caspian crudes to be exported easily to the Indian Ocean littoral. Second is the famous Iran–Pakistan–India pipeline, with the possibility of two additional sourcing spurs, one from the Caspian–Turkmenistan region to Iran, the other from Turkmenistan via Afghanistan.
The third element would be a pipeline system connecting eastern India to Myanmar and
south-western China with one connection running from Sittwe on the Burmese Bay of
Bengal coast to Mizoram, Manipur, and Assam into China, eventually connecting up to the West–East China gas pipeline near Shaanxi, the other from Yangon to Kunming. The fourth element would involve the laying of pipelines that would connect the Sakhalin deposits in Russia to Japan, China, and South Korea.

Pipelines aim to deliver gas, crude, or products between discrete points but this does not mean they have to be a zero-sum game. The underlying economic logic of a grid is that capital costs can be more easily absorbed and amortized and energy supplies calibrated to match demand variations in the consuming countries without too much effort. But there is a political logic as well. As the Asian grid will
create mutual dependencies, giving countries a stake in the political and economic stability of one another, it will hasten the process of regional integration. If at all Asia is to make progress towards creating an Asian counterpart to the IEA (International Energy Agency) and developing a regional market for energy with its
own price markers, construction of physical infrastructure such as pipelines is essential.

While the Iran–India energy link is crucial to the emergence of any Asian gas grid, Sino-Indian collaboration will likely be the platform on which any wider energy architecture in Asia will emerge. The two countries have travelled some distance in reaching an agreement in January 2006 for the joint bidding of oil and gas assets in third-world countries but there are many more areas for cooperation that can and
should be explored. India, in particular, must not lose interest in this aspect of energy security now that the nuclear deal with the US looks increasingly likely to come through.

Above all, India and China need to keep in mind the big picture: evolution of an Asian market for crude and products with long-term supply contracts and stable prices, and, eventually, an Asian Energy Union. As Mani Shankar Aiyar, who was India’s petroleum and natural gas minister until 30 January 2006, pointed out in a recent lecture to the Chinese energy specialists in Beijing, the European Union started life as a coal and steel union before growing eventually into a full-fledged
economic and political community. Could energy play the same role in Asia, with India and China serving as sheet anchors in the way France and Germany did in Europe? With India and China committed to building strategic petroleum reserves, South Korea offering to work on an ‘Inter-Asia Oil and Gas Transportation System’, and Iran planning its own hydrocarbon bourse, such an idea is no longer far-fetched.
Linked to an Asian oil market is the billion euro question of non-dollar denominated energy trade. Asian countries collectively hold more than two trillion dollars worth of foreign reserves, the overwhelming share of which is in dollar-denominated instruments. Prudential norms suggest that diversification of the Asian Insights
reserve portfolio is overdue. In China, the SAFE (State Administration of Foreign Exchange) has signalled its intention to explore the more ‘efficient use’ of the country’s forex reserves and in India, commentators like S Venkitramanan have suggested the Reserve Bank of India start thinking along similar lines. One way to sustain this shift would be to consider yen- or eurobased trading in energy. The economic dynamism of Asia for the foreseeable future suggests that what is needed is a strategic rather than a tactical change in composition of reserves. Huge and unsustainable deficits being run by the US are undermining the ‘oil standard’ that has been central to the hegemony of both the dollar and Washington for more than
three decades. Relying exclusively on the dollar for energy trade will hurt Asia’s producers and consumers alike in the long run and there is need for a shift in some other direction.

To conclude, India’s quest for energy security cannot be considered in a unidimensional manner in which sectors and timeframes are collapsed in an unrealistic manner. The Indian economy will require both hydrocarbons as well
as nuclear power, not to speak of other sources of conventional and non-conventional energy. The biggest mistake that policy planners can commit is to consider one source as a trade-off for another, especially given the differing timeframes. As a stand-alone deal, the nuclear cooperation agreement with the US has much to
commend it. But its costs will start adding up if, as a consequence, we turn away from the Iran pipeline and from the wider agenda of an Asian energy grid and energy market.