|India’s youth inherit a nation with a
rich heritage of democracy and diversity
Editor’s Note: Now importing over 70% of her oil, India registered a trade deficit in 2004 for the first time in several years. In searching for more oil India must navigate global markets that point her towards an emerging energy-trading bloc comprising Russia, Iran and China. India has also forged new partnerships with Burma and Venezuela, strengthened ties with Middle Eastern nations, and explored unprecedented economic cooperation with Pakistan.
In all of this India has displayed creativity and zeal, and has realized measured success, but the potential for India to grow her economy through increasing an already fragile dependence on oil imports can only be one part of a temporary solution. Eventually the carefully constructed cooperative relationships India forges to secure oil will put her in conflict with other equally determined nations; eastern and western.
A successful long-term energy strategy for India must emphasize next-generation ways to use energy efficiently, and increase energy independence. India is too big and too late in the game to develop an oil-based energy economy, and she must leapfrog the industrial development model of the west. Lifting the huge Indian economy to higher economic standards will require creativity, vision, diplomacy, innovation.
As India competes for conventional sources of energy, she must also prioritize developing energy efficient vehicles and buildings, and direct her financial and technological prowess towards developing alternative energy: photovoltaics, solar thermal power, bio-diesel, wind-power, and green dams. All of these incremental sources of energy will help relieve India’s dependence on oil imports.
Diversity and a democratic heritage in India distinguish her from many other rapidly emerging nations, and these attributes will hopefully be a source of strength, adaptability and peaceful growth as she addresses her energy challenges for the new century. But this is not a certainty. Democracy and diversity are valuable assets only if there is a shared national will and national vision embracing inspiration over demogoguery, creativity over conformity, inclusiveness over tribalism, ecumenicalism over extremism, and participation and leadership from the grassroots to the top. – Ed “Redwood” Ring
India is very keen to secure overseas energy resources,
in order to meet its accelerating energy demands. As a result, Indian energy corporations have emerged as significant rivals to established Western multinational energy companies in the overseas oil and gas markets. However, inadequate diplomacy and weaknesses in the structure of the domestic energy industry have plagued their efforts.
While Petroleum Minister Mani Shankar Aiyar is seeking to restructure the domestic energy sector in order to boost its overseas competitiveness, this is unlikely to lead to any major privatisations. Aiyar has imparted new momentum to India’s energy diplomacy, leading to breakthroughs with energy-rich regional neighbours, such as Iran and Burma. These projects promise to boost the prospects for peace with Pakistan and ease long-standing tensions with Bangladesh. Venezuelan President Hugo Chavez’s visit to Delhi in early 2005 to sign a bilateral agreement on energy cooperation and the activities of Indian energy corporations in Kazakhstan show the growing reach of India’s energy diplomacy, which may soon involve greater cooperation with China, Russia and Iran.
Chavez’s visit follows Caracas’s offer in 2004 to India’s state-owned Oil and Natural Gas Corporation (ONGC) of a share in the production and exploitation of five Venezuelan oil fields. It also underlines the growing overseas activities of Indian energy corporations as Delhi searches for ways to meet accelerating domestic energy demands.
Over the last 20 years, India’s domestic production of oil has stagnated while its consumption of petroleum products has almost trebled. India imports 70% of their oil, which has had a significant impact on the balance-of-payments position. Indeed, last year’s rise in international oil prices has taken the current account sharply into deficit after several years in surplus.
In the next ten years, even if the latest series of domestic oil exploration discoveries (for example, by UK-based Cairns Energy in Rajasthan) are fully exploited, India will still struggle to keep its imports down at current levels. Domestic demand for petroleum products is increasing relentlessly at 5% per year.
|The Ganges delta from space
India has abundant sun, adequate water, but
scarce conventional energy resources
Meanwhile, demand for natural gas, which stood at 0.6 trillion cubic feet (tcf) in 1995 had reached 0.9 tcf by 2002 and is expected to touch 1.2 tcf by 2010 and 1.6 tcf by 2015. Domestic sources of supply met over 90% of demand as late as 2003. However, despite the increased reserves discovered by recent exploration, the country will need to import up to one-third of its projected consumption needs by 2015. Moreover, volatilities in the international gas market threaten not only India’s balance-of-payments position, but also the underlying growth rate of its industrial and agricultural sectors — where gas is a fast-rising substitute fuel and is used extensively to produce chemical fertilisers.
India: Energy Reserves:
OIL (billion barrels) 1983: 3.6, 1993: 5.9, 2003: 5.6
GAS (billion cubic metres) 1983: 460, 1993: 720, 2003: 850
In 1998, when the Hindu nationalist Bharatiya Janata Party-led government conducted nuclear tests, it also inaugurated a new policy of securing the country’s future energy needs. The government broadened its engagement with multi-national companies, widening opportunities for them to participate in oil and gas exploration within India and proposed building up a buffer stock of oil to protect against market volatilities.
Nevertheless, the foremost aspect of this strategy involved encouraging leading public-sector energy companies — such as ONGC — to secure energy resources overseas by participating directly in the global energy market.
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In recent years, India’s Oil and Natural Gas Corporation has bought equity stakes in oil fields in Iraq, Sudan, Libya, Angola, Burma, Sakhalin in Russia, Vietnam, Iran and Syria.
Other Indian public-sector undertakings have become involved — not only in acquiring exploration and exploitation rights, but also in establishing sales outlets for Indian petroleum products and in offering a variety of technical services.
In the gas market, the Gas Authority of India Limited (GAIL) has started to invest heavily in equity stakes in liquefied natural gas (LNG) plants in Oman and Iran, and is building port facilities and pipelines at home to handle large imports. GAIL is also pursuing plans for direct pipelines from neighbouring Bangladesh, Burma, Iran and even Pakistan.
However, the success of the new energy strategy has thus far been limited by two main factors:
In more developed oil markets, it has brought India into direct conflict with leading multinational corporations and the policies of Western governments (especially those of the United States), which support them. Thus, while Saudi Arabia is by far India’s largest supplier of crude oil, Indian companies have made little progress in acquiring rights in the Saudi oil industry.
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Instead, Indian companies have had to pursue opportunities in regions on the margins of the global energy market. This has led ONGC to pursue rights in countries such as Burma, Sudan, Libya, Russia, Iran and (pre-US invasion) Iraq — where political instabilities and other pressures have often disrupted its activities. ONGC’s investments in Iraq are now of doubtful value while cost factors have risen sharply for its investments in Sakhalin — not least because it has had to make large loans to its failing Russian partners.
Indian companies have also had to compete with other ‘late-comer’ national oil companies also seeking to improve their country’s energy security. In particular, ONGC has faced stiff direct competition with the China National Petroleum Corporation (CNPC), which is much larger and more active. Until 2003, India’s international spending on oil rights was just 3.5 billion dollars, while that of CNPC was over 40.0 billion.
Recently, in both Angola and Sudan, ONGC has lost bids for oil-prospecting rights to CNPC and, in Sakhalin, it was obliged to offer Rosneft a 2 billion-dollar ‘loan’ simply to keep its place in a market where CNPC had already offered Yukos 4 billion. These competitive pressures have pushed Indian companies ever further towards the peripheries of the global oil market — in recent months, even towards Ecuador and the Ivory Coast. Domestic problems. Three main domestic factors have constrained the oil industry’s ability to secure investments abroad:
The large amount of bureaucratic red-tape surrounding Indian PSUs has proved a significant disadvantage. One of the reasons why ONGC lost out to CNPC in both Sudan and Angola was because it had to wait to have the financing for its bids cleared by Delhi.
Successive Indian governments have exploited PSU energy companies to fulfil their political mandates and to ease their own fiscal difficulties. Until recently, the government administered petroleum and gas prices to keep them at artificially low levels — and, although these mechanisms have now been removed, pressures continue to be exerted on PSUs to hold down their prices and thus their profits.
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Even where PSUs make significant profits, they can rarely be kept for corporate investment strategies. In recent years ONGC and the Indian Oil Corporation (IOC) have had to declare very high dividends which — because the Government of India holds more than 80% of their stock — have disappeared into the public treasury.
The public-energy sector is plagued by a lack of organisation and coordination. This has largely been because the government has encouraged energy companies to operate independently. Thus, they rarely cooperate and frequently compete against each other. For example, ONGC has recently been seeking to enter the domestic market for processed petroleum products, while IOC — most of whose business is based in that market — has started prospecting for oil rights overseas. This has led to duplication of functions and effort. Nevertheless, to a degree this may prove advantageous because success in the international market for oil rights can depend on offering diversified services. This may explain why IOC has been successful at acquiring exploration rights in countries where it also provides petroleum products and distribution services, while ONGC has been unable to do the same.
In response to this last problem, Aiyar has called for a restructuring of the industry through the creation of one or two petroleum ‘giants’ out of the dozen or so PSUs that currently occupy different segments of the market. However, his proposals contradict the government’s policies of pursuing economic liberalisation and increasing the influence of market forces over corporate performance.
|India’s Petroleum Minister
Mani Shankar Aiyar
The implications of Aiyar’s position came out most clearly at recent meetings with the Iranian authorities during which he convinced the latter to grant exploration rights to ONGC in return for signing a large LNG import contract, which will be administered by GAIL. Aiyar has now become central in coordinating policy among the supposedly autonomous corporations that make up India’s oil and gas industry. In this respect, liberalisation and privatisation in the industry remain distant prospects.
In contrast, the gas sector has attracted significant private and foreign investment. This has largely been because its late development has meant that the state has struggled to retain its authority over the internal structure of the gas industry. Reliance Industries — India’s largest industrial conglomerate — has made major gas discoveries, especially in the Krishna-Godavari basin. Furthermore, Shell has become an important player in the LNG market and British Gas in the supply of intra-state pipelines. These private interests have started to challenge the control of PSUs in several areas.
For example: Reliance is threatening not to develop its holdings in the Krishna-Godavari basin unless GAIL concedes its current statutory monopoly on inter-state pipeline connections; while Tata Industries and GAIL are in open competition for access to neighbouring Bangladesh’s gas supplies.
However, as the competition between Tata and GAIL suggests, private-sector interests will have to find a means of compromise with the public sector. This is because the solution to India’s energy problems lies overseas and thus can only be tackled through diplomacy — a prerogative of the state. In this respect, India’s neighbouring countries possess the resources to meet its energy shortages. However, Delhi’s diplomatic relations with them have traditionally been difficult:
For more than a decade, Iran and India have agreed in principle to the construction of a pipeline bringing natural gas to India. However, the pipeline has never gone beyond the planning stages, largely because it has to pass through Pakistan, whose hostility to India has precluded construction. Dhaka doubts. Bangladesh has been prepared to frustrate the development of its own gas industry rather than agree to selling gas to India, which is essential to justifying investment costs. Instead, India has been obliged to pursue an import strategy based on LNG, whose costs per unit of gas are at least 60% higher.
Nevertheless, over the last year, there have been breakthroughs on several fronts:
With strong government support, GAIL has brokered agreement with Burma for a gas pipeline to India — which Bangladesh has finally agreed to join, largely for fear of being left out. A network of pipelines around the northern Bay of Bengal is now in prospect. Iran. More significantly, the new climate of negotiation between India and Pakistan has promoted the revival of the Iran-Pakistan-India pipeline. While India remains cautious — and thus far has pledged no active investment — Aiyar has agreed (on behalf of GAIL) to take the gas on a cash-on-delivery basis, which will improve the prospects of financing the project.
In other moves, Pakistan — which faces its own energy problems — has opened its domestic petroleum product market to international investors, including, in principle, Indian investors. Both Reliance and Indian Oil are considering bids in Pakistan’s market.
Besides helping to solve India’s energy shortages, if these projects come to fruition, they could significantly diminish tensions between the countries of the region. For example:
Pakistan may hesitate to promote hostilities against India, which could see it lose potential revenues in excess of 1 billion dollars — earned from transit duties from the Iran to India pipeline — and, in turn, harm its own domestic petroleum market; while Bangladesh’s traditional suspicion towards India could evaporate if Dhaka were to gain from several billion dollars per year in gas revenues through its cooperation over the pipeline from Burma.
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Energy projects have the capacity to exert much wider influence. While China and India have been in open competition for energy resources, there are signs that they are beginning to appreciate how far they share common interests against the multinational corporations and Western governments, who currently dominate the field.
Russia, Iran & China
Furthermore, leading energy suppliers, such as Russia and Iran, are also encountering deepening difficulties with the same multinational corporations and governments. An energy axis between Iran, Russia and China is already starting to form — centred on the Caspian region. India’s energy diplomacy is beginning to draw it towards this new axis where its PSUs have also been active in seeking investments in the Kazakhstan oil and gas industries. To this extent, India’s quest to secure overseas energy resources could lead its future diplomatic trajectory even further afield.
India’s energy diplomacy is promoting a restructuring of its domestic oil and gas industry, though public-sector interests are likely to remain dominant. This is largely because of the growing importance attached by the government — especially under Aiyar’s guidance — to energy diplomacy as means to promote regional stability. Nevertheless, tough overseas competition has obliged Indian energy diplomacy to concentrate on the newer energy markets of the Caspian and Central Asian regions.
About the Author:
Gordon Feller is the CEO of Urban Age Institute (www.UrbanAge.org). During the past twenty years he has authored more than 500 magazine articles, journal articles or newspaper articles on the profound changes underway in politics, economics, and ecology – with a special emphasis on sustainable development. Gordon is the editor of Urban Age Magazine, a unique quarterly which serves as a global resource and which was founded in 1990. He can be reached at GordonFeller@UrbanAge.org and he is available for speaking to your organization about the issues raised in this and his other numerous articles published in EcoWorld.
EMAILS TO THE EDITOR
From: Laxman Behera – Jawaharlal Nehru University
Sent: Friday, November 18, 2005 4:05 AM
Subject: India Energy Update – Lessons from PetroKazakhstan Deal
The “unconditional” final order of October 26 by the Alberta Court of Queen’s Bench, Canada, in favour of China’s China National Petroleum Corporation (CNPC) has dealt a severe blow to the last Indian hope of getting PetroKazakhstan from the Chinese hands. The defeat in securing an important energy deal does not auger well for India’s energy security concerns considering its growing energy needs. The event reminds how vulnerable India is in competing and securing depleting international energy sources. At the same time it opens up for a greater debate on Indian energy minister’s fervent argument that Asia’s two emerging economic giants should co-operate rather than compete in securing international energy deals. The event also reinvigorates the debate on reevaluating India’s energy policies that are being pursued over a long period of time.
Kazakhstan’s importance to world energy markets is growing because of the changing geopolitical factors in the international scene. Apart from this, its oil and gas sector is in seventh place in the world in terms of explored hydrocarbon reserves. According to latest EIA (USA) estimates, Kazakhstan’s estimated proven and probable oil reserves stood at approximately 29 billion barrels and about 70 trillion cubic feet (TCF) of proven gas reserves. Oil and gas being the prime movers in Kazakhstan’s foreign revenue sources, it depends heavily on external finances to develop its resource bases. This provides much needed opportunities to countries like India and China, who are desperately trying to diversify their sources and enlarge their supply bases for their energy security, to step into this land-locked Central Asian country.
One of the largest foreign energy companies operating in Kazakhstan, PetroKazakhstan, a Canadian oil company with all its assets in the Central Asian State and with proved and probable oil equivalent reserves at approximately 550m barrels, accounts for about 12 percent of oil production in the country. PetroKazakhstan produces 150,000 barrels per day and importantly, owns the best (Shymkent refinery) of only three oil refineries in Kazakhstan. In June 2005 PetroKazakhstan announced it had been approached for a possible takeover or merger, sending stock prices up significantly. The most frequently mentioned possible suitor was India’s ONGC with its partner, steel mogul, Mr. L. N. Mittal who offered around $3.9 bilion against China National Petroleum Corporation’s (CNPC) $3.6 billion. However, on August 22, 2005 the company declared that it has reached an “agreement whereby a wholly-owned subsidiary of CNPC will offer US$55.00 per share in cash for all outstanding common shares of PetroKazakhstan. The aggregate value of this transaction is approximately US$4.18 billion.”
The fact of the matter remains is that India was not outbid by the CNPC in a ‘fair auction’ as “rules were changed mid-way through the bidding for the Canadian-based company, which helped China National Petroleum Corp (CNPC) win control of the group.” More importantly, China won despite initial Kazakh inhibitions of a Chinese takeover. What clearly underlined the whole Kazakhstan event is that Indian diplomacy failed to its Chinese counterpart in clinching this important deal. The failure came at a time when India and its partner have significant presence in Kazakhstan. China went ahead with the deal after signing with Kazakhstan government an agreement whereby some equity of around 30-33 per cent would be transferred to the state-owned KazMunaiGas after the sale is completed by the end of October. The last Indian aspirations of reversing the company’s decision bit dust when the Canadian court approved CNPC’s acquisition agreement.
India’s failure at the hands of China has clearly marked a ‘low point’ for Mr. Mani Shankar Aiyar who, for some time now, has been strongly advocating closer cooperation between India and China in securing energy supplies in international markets. Kazakhstan is not the first instance where India was defeated to China. It had also lost oil bids in Sudan, Angola, Indonesia and Ecuador to China. The minister should know that in international deals, especially the energy deals, which are now closely associated with national security, are purely guided by self interest. Besides, Mr. Aiyar is among few who believe that Chinese companies would share their real business plans with their rival Indian counterparts. It is worthwhile to mention that China’s desire to acquire foreign resources – a recent example being China National Offshore Oil Corporation’s (CNOOC) exorbitant bid for Unocal – is something that is beyond the issue of only energy security. Besides, even if India cooperates with China the former has always to play a second fiddle to the latter in securing outside energy sources. More importantly, despite Indian cooperation there are possibilities of competing against China in some cases. So, why can not India build partnerships with other countries for bidding foreign sources to ward off such possibilities? In this regard, India has an energy partnership with Japan which needs to be strengthened.
Of course, what clearly lacked in the Kazakhstan episode was that India’s energy policy was not fully backed by an adequate dose of foreign policy. When securing international energy sources has become a part of the national security the government needs to be proactively involved. Besides, India has to do a lot more in the domestic front. It has to scrupulously accept that there have been severe bottlenecks in the structure of the domestic energy sector and these needs to be sorted out. Similarly, India’s bidding capacity is very poor compared to that of China or other countries. Until 2003, its international spending on oil rights was mere $3.5 billion against over $40.0 billion by CNPC of China. To improve the bidding capacities several energy entities, both private and public, have to come together to form a large-equity based company to compete in international markets.
CNPC won PetroKazakhstan right from under the nose of Indian company despite its initially higher first round bid. The defeat is not about the cooperation/competition but about the problem in Indian policies. The concerned minister should understand this very clearly and while dealing with Chinese authorities next month in China, he should act wisely. If these problems are not sorted out first, then many PetroKazakhstans will follow. Unfortunately, oil reserves are finite and India and China being energy-hungry neighbours will have to compete against each other for dwindling resources.
Laxman Kumar Behera
Senior Research Scholar
Center for West Asian and African Studies
Jawaharlal Nehru University, New Delhi