Working away the friction with oil

Jyotsna Ravishankar finds out why the energy needs of India and China are pushing them to not only compete in acquiring producing fields, but even possibly co-operate in their quest for cheap oil ‘offshore’

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By  Jyotsna Ravishankar Published  October 6, 2005

|~|India-china-200.jpg|~|India and Pakistan, historic enemies have come together to solve their energy needs. |~|India and China have become relentless in their quest for energy. The two nations are even willing to bypass traditional geo-political ties and make new oil-rich friends.

Among the producers, chiefly the Middle East, Iraq has taken a back seat and Saudi Arabia too has its limitations as a producer, so the time has come for these two Asian consumers to look for other ‘reliable’ suppliers, or better still invest in producing fields, ‘offshore’.

China, the world’s second largest consumer after the United States for the third consecutive summer, is rationing energy to industrial companies, limiting production. In little more than a decade, China has transformed from a net exporter of oil into the world’s third-largest importer (Energy Information Administration {EIA}).

Concern is mounting about future prospects for China’s domestic oil production, which supplies about two-thirds of the country’s crude oil needs. The Chinese government estimates that it will need 600 million metric tons (approx. 12 million bpd) of crude oil a year by 2020, more than triple its expected output. Worldwide, the best oil fields are already claimed.

Until recently, China seemed quite focused on the Middle East region, particularly Iraq. But, with the United States going to war in Iraq in 2003, the future of Chinese stakes in the country is doubtful.

“Iraq changed the government’s thinking,” said Pan Rui, an international relations expert at Fudan University in Shanghai. “The Middle East is China’s largest source of oil. America is now pursuing a grand strategy, the pursuit of American hegemony in the Middle East. Saudi Arabia is the number one oil producer, and Iraq is number two [in terms of reserves]. Now, the United States has direct influence in both countries.”

While China’s worries about domestic production have just cropped up, India has been unable to raise its oil production substantially since the 1990s. Rising oil demand of close to 10% per year has led to sizable oil import bills. In addition, the government subsidizes refined oil product prices, thus compounding the overall monetary loss to the government. The EIA predicts that India’s rapidly growing economy will drive energy demand growth at a projected annual rate of 4.6% through 2010, the highest incremental energy demand rate of any major country.

Now, the attention of both these emerging and desperate Asian economies has turned to Iran, much to the dismay of the US. Iran holds 125.8 billion barrels of proven oil reserves, roughly 10% of the world’s total proven oil. More significantly, the Opec member holds up to 940 trillion cubic feet (Tcf) in proven natural gas reserves — the world’s second largest, and surpassed only by those found in Russia.

Around 62% of Iranian natural gas reserves are located in non-associated fields, and have not been developed, meaning that Iran has huge potential for gas development.
So to tap those reserves, energy thirsty India has cut a US $4.2 billion gas pipeline deal with Iran, which has been termed by a US official as a big mistake. “We think it would be a mistake. It would provide oil revenue to Iran that could be the basis of funding for weapons of mass destruction,’’ said Stephen Rademaker, additional secretary of state, in charge of arms control.

Most industry analysts agree that the pipeline is bound to strengthen the South Asian nations as an energy bloc rivalling the west in its consumption.

As India’s production of crude oil has remained stagnant at 32-33 million metric tons (approx.0.64 million bpd), 70% of India’s oil requirement is met by imports. Future oil consumption in India is expected to grow rapidly, to 2.8 million bpd by 2010. China and India’s apparent urgent need for energy has also made them forge ties with nations like Sudan and Kazakhstan.

Exploration and development of Sudan’s oil resources has been highly controversial. International human rights organisations have accused the Sudanese government of financing human rights abuses with oil revenues, including the mass displacement of civilians near the oil fields.
This has not deterred China or India from investing in Sudan. Beijing has invested $13.93 billion in Sudanese oil through the China National Petroleum Company (CNPC), a state-owned monolith. The cost of Khartoum’s new refinery alone was about $609.49 million.

Though, China is secretive about its investments in Sudan, which was accused of carrying out genocide in Darfur, CNPC’s annual report discloses that about half of all its overseas oil comes from Sudan.

It deployed 10,000 Chinese workers to build a 900-mile pipeline, linking Heglig oilfield in Kordofan province with Port Sudan on the Red Sea.

India, the country, which is projected to replace South Korea by 2010 to become the fourth largest consumer of energy, is not to be left behind in these ‘profitable and controversial’ dealings.
India’s Oil and Natural Gas Company (ONGC) Videsh, has stakes (25%) in a producing oil field in Sudan called the Greater Nile oil project and has interests in two exploration blocks.

Recently, ONGC was also awarded the contract to a refinery, which will refine Nile Blend crude oil produced in south Sudan, on a build, operate and transfer (Bot) basis.

ONGC bought the stake from Canada’s Talisman in the multinational consortium after the latter had to pull out following criticism from church groups and human rights organisations, which accused it of supporting Sudan’s genocidal government in the decades old civil war that claimed two million lives. The company was also accused of such crimes as ethnic cleansing, killings, war crimes, property confiscation, enslavement, kidnapping and rape in Sudan.
Though India’s investment in Sudan was not favoured even on its home turf by the ministers of the ruling party, the Sudanese said that reputed international oil companies were queuing up to invest in the growing Sudanese oil sector, whose reserve levels were ‘second only to those of Saudi Arabia’. Sudanese law provides unprecedented guarantees and privileges to foreign investors.

A clause in the agreement between the Indian and Sudanese governments gives a commitment that the investments of foreign companies will not be nationalised or expropriated. Khartoum has assured India adequate compensation in the unlikely event of civil disturbances or a war that would adversely impact a joint venture.

Though the growing affinity between the Asian consumer and the African producer created a few ripples, it is the burgeoning Iranian tie that is gnawing the United States, the most.

||**|||~|iran-india200.jpg|~|India to go ahead with the Iran gas pipeline, despite pressure from the US|~|The Indo-Iran pipeline is a very ambitious project considering that the pipeline was to traverse volatile regions of Pakistan before entering India. Also, this pipeline encouraged foes India and Pakistan to an energy reconciliation for the greater good of their two nations.

The Iran-India pipeline scheme is a 2775-kilometre natural gas pipeline starting from Assaluyah, South Pars stretching over 1100 kilometres in Iran alone. After entering Pakistan, it will pass through provinces of Baluchistan and Sind from where two possible routes have been suggested, tapping into the mid-section of the pipeline or feeding New Delhi directly.

The Pars gas field in Iran is being developed by Russian energy major Gazprom, Total of France and Petronas of Malaysia. The US, which labelled Iran as one of the ‘three axis of evil’ (pre-war Iraq and North Korea are the others), is unhappy since it does not have control over the project.
US ally, Pakistan, which could earn transit fees that some estimates put as high as a half billion dollars a year, has been a resolute defender of the plan, with Prime Minister Shaukat Aziz saying it would “create linkages and interdependencies for establishing an enduring relationship between the two countries.”

Both Pakistan and India also understand that pipeline project is in violation of the US’s Iran and Libya Sanctions Act (ILSA) of 1996, which forbids any foreign company to invest more than $20 million in one year in Iran’s energy sector. Negotiations over the pipeline began in 1994 but made little headway because of tensions between Pakistan and India, which until recently refused to cooperate on any economic or political transaction.

But, subsequently, there were even talks of the pipeline being extended to China. The Chinese government seemed all for it.

India also recently finalised a $22 billion deal with Iran, where Iran would supply five million tonnes of liquefied natural gas (LNG) annually over a 25-year period from 2009.
Interestingly, China and India are not only competing with each other for hydrocarbons, but also seem be signalling possible cooperation.

Earlier this year, Indian Petroleum Minister Mani Shankar Aiyar hosted oil ministers from China, Japan, and South Korea - as well as eight Opec producers - to discuss creating a loosely named ‘Organization for Oil Importing Countries’ to ensure a stable, equitably priced energy supply for Asia. By teaming up, Aiyar figures, China, India, South Korea, and Japan can cut a better price deal from Opec producers.
India and China are already collaborating in the development of the Yahavaran oil field in Iran and India’s Gail has acquired a 10% stake in China Gas Holdings.

The Indian oil minister, Mani Shankar Aiyar is also scheduled to visit Beijing in November to draft a Memorandum of Understanding (MoU) for a joint working group on ‘hydrocarbon cooperation’.

Aiyar has previously in a meeting said: “India and China don’t have to go through fratricide in order to arrive at the conclusion that it is better to cooperate on energy security. Of course there will be competition where the market dictates.”

Of course, despite the apparent bonhomie between the two countries, as recent as last month there was a bidding battle in Kazakhstan, where Indian and Chinese state-owned oil companies tried to buy a Canadian company with oil fields in Kazakhstan. CNPC, fresh its government’s failure to buy US firm Unocal, emerged victorious with a $4.18 billion bid.
“The first test case (for cooperation) is right before our eyes: PetroKazakhstan,” said Ng Weng Hoong, editor of Singapore-based industry publication, Energy Asia. “Chinese media has been celebrating the catch... I haven’t seen a story or commentary from anyone in Chinese oil circles saying, ‘Let’s see if we can share this bounty with the Indians’.” Also, the Sino - Indian relationship has a deep undercurrent of distrust, according to analysts like Brahma Chellaney of the New Delhi’s Centre for Policy Research.

But, experts like Rajendra Pachauri of the Tata Energy Research Institute (Teri) in India, who originally proposed the Iran-India, pipeline via Pakistan, to the two governments in 1990, believe, “India-China collaboration in the field of energy would necessarily be based on creating a win-win situation, whereby both parties realise that co-operation would benefit them individually.

“There is really no issue of underlying mistrust, but the fact that when two parties are working towards the same goal, an element of competition is inevitable” he says.

Mistrust or otherwise, energy needs of the two countries is an inevitable reality and the two consumers at this stage will only look to alleviate their energy needs rather than foster age-old rivalries.

If they cannot, then the nuclear-powered Asian countries may just head for a show down, in a bid to claim the dwindling oil reserves.||**||

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