Chapter VIII – The Indian Energy Diplomacy: Beyond the Security Paradigm – India: The Emerging Energy Player

Chapter VIII

The Indian Energy Diplomacy: Beyond the Security Paradigm

India is emerging as a leading and dynamic player among the first five economies of the world in the next three decades.1 This inevitably has implications for its energy policy. The acceleration in the pace of the economy is bound to change its energy profile. The new energy demand is likely to be so huge that it has to engage itself at a much wider scale with the world energy market. It is precisely to meet the growing needs that today it conducts energy transactions with as many as 47 countries.2 These countries are far and near, from all the continents of Asia, Africa, Europe, South and North America.3 Its energy trade is increasingly becoming dynamic. Though a net importer of hydrocarbon, India exports petro products. It is planning to gear up its oil-refining capacity to earn from exports of petroleum products to meet its import bill. It has the refining capacity to process the range of crudes. India has doubled its refining capacity in the last six years and is expected to rise to 140 MTPA, or about 2.8 mb/d, by 2007 and to 3.6 mb/d by 2012. Consequently, its exports of petroleum products were 17.6 mt in 2004–05. In terms of value, it went up from INR 163.97 billion in 2003–04 to INR 305.18 billion in 2004–05, registering a rise of 86 per cent.4

It is developing an energy infrastructure of pipelines to link Central Asia to South-east Asia and even to China. India is planning to have five to six new LNG terminals on its western and eastern coasts over the next five years. It is expected that in the near future Indian LNG imports may touch 25 MTPA. With its huge market and geographical location, it has the entire attribute to become the energy hub between West and East Asia. Clearly, this makes the country susceptible to uncertainties and shocks, and it needs to hedge against the probable and possible risks. It is clear from the preceding pages that India is making all efforts towards that end. But the Indian energy diplomacy is still evolving. Its success-failure average is not categorically clear. It has yet to discover its comparative and competitive strength to define the trajectory.

While its large volume makes India a vital market, to play a role in the global or regional energy arena, it has to conceive a comprehensive doctrine and strategy of foreign energy policy. It is obvious that security is vital but energy relations have to grow beyond it. As outlined in Chapter I, the present discourse on hydrocarbon is still embedded in the security domain, which provides a rationale for militarization of energy-exporting regions. As an emerging player from Asia, India has to change the terms of the discourse emphasizing the need to locate it in cooperative than the energy war or conflict syndrome. The recent pronouncements from the government does indicate that India is sensitized to the concern and advocating for a Pan-Asian approach to create a niche for Asian energy identity not in exclusionary sense but to underline its desirability for a win-win situation.5 In defining a role of an energy player, India has to appreciate the fast changing dynamics of global hydrocarbon regime and its regional ramifications. The shift of hydrocarbon market from Atlantic to Asia means not only the enlargement of volume in the direction of trade flows but enhancement of Asian vulnerability and, therefore, need for a mechanism to address them. It would demand infrastructure to facilitate the incremental flows and safeguard mechanism against any interruption. With larger hydrocarbon coming from West Asia, the consumer countries of Asia including India have much larger stakes in the stability of the supplier countries. In other words, the countries like India and China are going to be more vulnerable to any war, embargo or political change in the West Asia. It means the enhanced energy engagement also requires preparation to meet contingencies either individually or collectively. It may involve building reserves, security of sea lanes and engagement with the region as troubleshooter. Certainly like America, none of the Asian countries could talk of occupying the oilfields nor can Asian forces be deployed for rapid action. The Western mode of thinking and mechanism on the subject are neither feasible nor ideologically acceptable. A more serious dilemma for the Asian consumers could be posed by the prospects of the pre-emptive intervention for regime change in oil-producing countries of West Asia leading to disruption and uncertainties. Iraq, a leading exporter, is an example and if Iran is put in a similar situation, the context could be dangerous for the Asian consumers. The US pressure for the so-called democratic changes has escalated uncertainty, which in the short run could put the region’s hydrocarbons on higher risk. Equally alarming is the way the Chinese and Indian energy growth is being projected as the possible cause of tension to the West, to be more precise the United States. The Asian endeavour to build energy ties in Central Asia, West Asia, Africa and Latin America is portrayed as new rivalry to be dealt with. The Asian countries have neither individual capacities and capabilities nor the system of collective response. In the absence of any attempt for collective endeavour, the Asian buyers including China and India are stepping into the high-risk phase. It is precisely in this context that Asian energy initiative becomes relevant.

The initiative cannot be premised as distinct Asian rhetoric of exclusiveness. Its Asian connotation lies primarily on Asia being the larger supplier and larger consumer, and hence is their growing interdependence, on the Asian market being on the margin, situated disadvantageously, to overcome the constraints of playing the second fiddle for decades, and on acquiring influence on energy logistics, either on land or in sea as a part of globalizing energy space. It needs to be emphasized that in the phase of globalization, the energy security cannot be the exclusive responsibility. From seven sisters to OPEC and from national to international companies, all have lost the leverage of their days. Globalization demands shared responsibility. The Asian initiative has to be seen as a step towards making the global oil regime as a shared endeavour. At a more pragmatic level, the need for collective initiative comes from the mutual injuries that the Asian consumer might inflict on each other unwittingly. As pointed out by an IMF study ‘a sudden burst of oil demand from Asia—in particular China—helped drive oil prices to a record high over $55 a barrel last year, a rally that may have cut India’s economic growth by one per cent.’6

Asian Energy Initiatives: Towards an Energy Market

With a view to creating an atmosphere in favour of the Asian market, India with Kuwait as a co-host and in association with the Secretariat of the International Energy Forum organized a meeting of Asian producers and consumers in January 2005 at New Delhi.7 It was attended by countries from the Gulf, namely Saudi Arabia, Iran, Kuwait, the United Arab Emirates, Qatar and Oman, and from South-east Asia, Indonesia and Malaysia. The focus of the meet was on promoting regional understanding among the buyers and sellers of energy from Asia. The importance of the meet can be appreciated by the fact that the eight oil producers participating in the meet produce more than 20 mb/d, almost a quarter of world output, and control nearly half of all exports. The aim of the meet was spelled out by the Indian minister of petroleum and natural gas, ‘it is essential we develop a sophisticated Asian market for petroleum and its products to ensure supply stability and reduce price volatility.’8 The thrust of the meet was to explore investment from importing countries in the upstream sector in West Asia and from suppliers in refineries in the importing countries. This would ensure security of demand and supply of crude oil and also take care of price volatility. An Asian market is expected to ensure stability in trade in petroleum and petroleum products and could contribute in making the contracts longer, more transparent and integrating derivatives with the market.9 The oil refiners and suppliers are making efforts to ensure their mutual interest by moving to longterm contracts, say for 10 years, in place of annual contracts, as done by Kuwait and South Korea.10

Creation of an Asian market is a natural progression when Asia consumes 40 per cent of the world oil production of 82 mb/d. The projection says that oil demand will grow by nearly 50 per cent by 2010 and more than double by 2020. Four out of every five barrels of oil imported by East and South Asia is said to have come from West Asia and the latter sends two out of every three barrels of their oil exports eastwards in Asia. This interdependence could eventually lead to an Asian marker, or benchmark, to negotiate prices. It would promote transparency in pricing, trading in derivative. Iran supported the move by stating, ‘An Asian crude market could be formed through sustained dialogues. Asian countries, especially rapidly growing economies of the region, need long-term energy supply security. Oil-producing countries are concerned about demand security. This is where Asian interdependence may best serve the interests of all parties.’ It was further suggested that the Asian nations should seek to establish a structure in which the Asian producers would charge less to countries in the region. On proposed investment, the exporting countries (the UAE) observed that the ‘producing countries would like to ensure availability of demand for their oil before embarking on major investment projects to expand oil production capacity.’11 Saudi Arabia underlined that though so far it has been supplying 60 per cent (4.5 mb/d) of its total export of 9.5 mb/d to Asia, it could provide more if the need arises. Qatar even suggested setting up an oil product chain with reciprocal investments by consumers and producers, saying it could promote trust needed for long-term agreements.

The growing volume of trade has necessitated addressing the issue of Asian premium. The Asian countries pay $1–1.5 per barrel extra for the same oil compared to the West. The Indian minister raised the issue with OPEC in the meeting held at Vienna, in September 2004, for the pricing system that penalises poorer importers while offering huge discounts to the United States and Europe. China, Japan and South Korea have been raising concern about it. It is time that this anomaly is corrected. Asia has a market clout, which could be exercised by a collective action. This requires a forum to provide the strength of collective bargain. ‘Such an Asian entity will not only help in price negotiations with OPEC but will encourage investments too. Investments will bring about oil security, and the Asian consumers will have to pay much less than what they are paying currently.’12 Japan vocally supported the issue of Asian premium. ‘The Asian premium is an issue where we need to make efforts together to resolve the issue,’ said Shoichi Nakagawa, Japan’s minister for industry. The need for long-term contract was also underlined.13 Estimates are that the Asian premium costs Asian countries more than US$10 billion a year. What clearly emerged from the meet that there is strong recognition among the producers and consumers that absence of partnership is detrimental to mutual interest, in fact, it has added to their vulnerability. As the Indian minister observed rightly, ‘with a view to bringing about greater stability in Asian trade in petroleum and petroleum products, where can we think of an Asian market where long-term contracts become longer, where price discovery through the market is more transparent, where such transparency facilitates greater stability in formulae for pricing in long term contract, where spot purchases occupy a progressively larger share of market transaction, where petroleum exchanges are established and used, where derivatives are integrated into market practices, and where, in short, an Asian market emerges?’14

Apparently, while there is a need to push for an Asian market, it cannot be overlooked that market is fairly diverse in its make-up to be called a singular entity. It is rightly observed that Asia is one region with many markets.15 ‘The political and economic systems vary a lot among Asian countries. But energy cooperation can be a breakthrough to integrate the countries together, economically and politically.’16 This would require some major initiatives like acceleration in the ongoing processes of deregulation, deepening of financial sector, future oil market and so on. Significantly, Asian countries are not only convinced of the need for it but are keenly exploring to move towards it. A regional framework with public-private partnership is under exploration which may include an integrated regional oil market as well as emergency mechanism for sharing strategic oil stockpiles among the countries. Besides, it would also call for long-term oil supply deals, cross-border oil, gas pipeline projects, and above all joint investment in oil and gas exploration, production, refining and marketing. While the meeting at New Delhi was the demonstration of the resolve from the governments, major oil companies from China, Japan and Korea too have been exploring the possibilities of establishing oil exchange centers in North-east Asia to share infrastructure facilities.17

ASEAN and the three countries—China, Japan and Korea—held a meeting during the Eighth International Energy Forum in September 2002 in Japan, identifying five priority areas for Asian energy cooperation, namely, oil stockpiling, energy security network, studies on the oil market, promotion of natural gas usage and renewable energy. Subsequently, two forums were established, namely, ASEAN + 3 Oil Market Forum and ASEAN + 3 Oil Stockpiling Forum. The first meeting of ASEAN + 3 Oil Market Forum was held in November 2003 in Thailand. Korea and Thailand were the coordinators. In the meeting, three technical papers were presented, covering subjects like ‘The Future Prospect of the Oil Market in Asia,’ ‘Asian Premium of Crude Oil: Causes and Countermeasures’ and ‘Development in the Asian Oil Industry : A Private Sector Perspective.’ The forum recommended the following:18

  • Search for alternative oil import sources, for example, in Russia, Africa and the South and Central Asian countries
  • Develop Asian-wide oil market and encourage oil products trade within Asia
  • Promote energy diverse - strengthen private sector participation in future meetings. The ASEAN + 3 countries must promote the use of natural gas
  • Further discussion on oil stockpiling
  • Intensify exploration and production activities for new oil supply sources in the ASEAN + 3 countries
  • enhance appropriate dialogue between ASEAN+3 countries and the Middle East oil-producing countries
  • Strengthen private sector participation in future meetings

ASEAN + 3 Oil Stockpiling Forum met in February 2004 in the Philippines with Japan and Philippines as its coordinators. Its recommendations included work on goals and objectives of the stockpile programme, search for most appropriate role of government and industry, and promoting dialogue and cooperating among the ASEAN+3.19 The third ASEAN +3 Oil Market Forum and the third ASEAN + 3 Oil Stockpiling were scheduled for 14 March 2005 in Hanoi. The latter was to discuss ‘joint activities towards setting up an oil stockpiling programme for the 13 countries, and developing an Asian oil market in a prosperous and sustainable way.’ Each country would be contributing according to its specific capacity, both crude and refined oil, but mainly crude, to the future programme to provide safeguard against fluctuations in world oil prices.20 In the second ASEAN+3 Oil Market Forum, issues on agenda included ‘improvements in exploration and production activities, expansion in oil stockpiling, development of alternative supply sources outside the Middle East and enhancement of dialogues between ASEAN+3 and oil producers in the Middle East.’21 The proceedings of these meetings have brought the following points on the action agenda:22

  • Oil market issues: The Asian premium is recognized as a matter of common concern to the Asian consuming countries; a joint effort in addressing the issue is important; strengthening of oil market functions, notably of reasonable and fair price announcing function, in the Asian market is essential as is reduced dependency on Middle Eastern supplies.
  • Energy security issues: Information sharing provided on a timely basis is crucial; further studies to be expedited towards establishing a system to attain such quality.
  • Oil stockpiling issues: The importance of oil stockpiling as measures against oil security is reconfirmed; the Chinese stockpiling programme is welcomed and encouraged; the possibility of improved emergency-coping capability enabled by the amendment of the ASEAN oil security agreement is welcomed; technical support and other assistance provided by Japan and Korea are welcomed and encouraged.
  • Natural gas issues: The importance of natural gas development as well as use expansion is recognized; investments, infrastructure development and expanded flexibility in natural gas trading among others are identified as critical factors to that end.

With a view to expanding the Asian canvas of energy cooperation, India also explored the possibilities of organizing a meet of four major Eurasian energy producers—Russia, Kazakhstan, Azerbaijan and Turkmenistan, and the four major Asian energy importers—China, Japan, South Korea and India. Apparently, Asian countries are looking for a strategy of convergence. Central Asia needs to rescue its hydrocarbon resources from the politics of great game. In the new context, the Silk Route could play a vital role in bringing the landlocked energy of the region to the Asian market. The stakeholders are keen. China observes that ‘rebuilding the Silk Road from Xi’an to Rotterdam is a demand of both the East and the West.’23 The ambitious plan has caught the attention of 12 countries, including China and South Korea. It is not simply a highway connecting China and the industrial centres of Western Europe, but a network of roads facilitating trade and commerce.24 It is expected that the four Asian consumers would like to work on a regime of cooperation than competition. The Indian petroleum and natural gas minister did not mince words when he said that ‘we are always pitted against each other to the advantage, almost always, of the third country. Perhaps, we could set up some form of a mechanism of mutual consultation regarding third-country properties, and thereafter, in some cases bid against each other, in some cases bid together.’25

Natural Gas: Asian Energy Bridge

The pace of Asian energy market is being set by the growing consumption of gas, which eventually will enhance the volume of trade in Asia. In a sense, imperatives of gas trade are going to define intra-Asian relations in the coming times. Historically, LNG has been the principal mode of gas transportation in Asia. It continues to dominate the natural gas trade in Asia. This is born by the fact that in 2003, of the total natural gas trade in Asia estimated at 125.67 bcm, LNG imports were of 113.4 bcm. Japan and Korea are the two principal importers and the Asian suppliers to them are Oman, Qatar, the UAE, Brunei, Indonesia and Malaysia. The pipeline trade between the Asian countries as Table 8.1 below shows has been 12.19 bcm.

Of late, pipeline options are being examined. Iran-Pakistan-India or India-Bangladesh-Myanmar and Turkmenistan-Afghanistan-Pakistan Natural Gas Pipeline Project are just a beginning in that direction. As pointed out in Chapter 7, these two projects when fructified would remap not only the energy scenario of the region but change the political dynamics as well. It can be a safe prognosis that with a number of projects in which both pipeline gas and LNG are being actively pursued, the energy trade pattern in Asia is going to be transformed. Major pipeline grids linking much of South-east Asia are explored, and plans are considered by Qatar, Oman, Malaysia and Indonesia to supply pipelines to India. The $2 billion proposal by the Gulf Cooperation Council to establish a gas grid from Oman to Sharjah and eventually to all of the GCC nations will impact the volume and profile of gas available for export from the West Asia. With a view to develop the natural gas into regional projects, the Dolphin project was conceived which involves the production and processing of natural gas from Qatar’s North Field, and transportation of the dry gas by pipeline to the UAE by the beginning of 2006. It is the single largest energy initiative ever undertaken in the region. Through its supply of natural gas from Qatar, it will also bring together three GCC nations; the UAE, Qatar and Oman in a regional energy network and will support the development of substantial, long-term new industries throughout the region.26

 

Table 8.1 Natural Gas Trade Movement in Asia by Pipelines in 2005 (In bcm)

  To
From Singapore Thailand
Indonesia
4.83
 
Malaysia
1.78
 
Myanmar  
8.9
Total Imports
6.61
8.9

Source: BP Statistical Review of World Energy 2006.

 

However, transporting gas either by pipeline or tanker is a complex process with diverse parameters influencing the cost and security dimensions. The relative inflexibility of a gas project, compared to crude oil, makes long-term price and demand critical. Asian economies are recognizing the integrative nature of gas trade, hence, trying to develop the regional infrastructure, thereby promoting cooperation. It is found that the high cost nature of LNG ships dedicated to specific projects is being changed and are designed to suite the trading needs. According to Petronas, Malaysia, Indonesia and Brunei have agreed to pool their shipping resources in order to sell their excess LNG into the spot market. As the off-take patterns become less predictable, some of the big producers are moving to take more control of the means of delivery. BP, for example, is commissioning between three and five LNG vessels from Korean yards, and Shell has ordered four vessels. These vessels are generally not tied to any particular projects. Significantly, this pattern is not reserved for only the sell-side. ‘Tokyo Gas is commissioning two LNG tankers, which it has stated it wishes to utilize in the spot LNG market. It seems very likely that Tokyo Gas sees an opportunity to purchase cheaper LNG on the spot market and so lessen its dependence on long-term contracts with their tough take-or-pay obligations and usually locked-in price formulae.’27

The integrative nature of gas was rightly commented upon by the CEO of Chevron Texaco Corporation—natural gas ‘proposals such as the trans-Asian gas pipeline and an “Asian gas grid” reflect the utter logic of linking natural gas production centres with neighbouring countries’ markets.’28 China plans to build 31,000 miles (50,000 km) of gas pipelines and LNG infrastructure as part of a strategy to increase by fivefold natural gas’s contribution to energy consumption. India, Indonesia, Malaysia, Thailand and Singapore are also pursuing major natural gas projects. Elaborating on conditions required for building regional energy bridges, the CEO argued for a framework with four elements, namely open markets, leadership by national oil companies, adequate infrastructure and sanctity of contracts.

Reduced trade barriers, price deregulation, market-driven public investing—all are requisites of a transparent business environment. Asia’s NOCs are key pillars of economic growth. Asian NOCs are stepping out internationally, operating more like private companies, especially because an increasing portion of Asia’s energy needs must be met by imports. But as they stride confidently across our new global energy bridge, NOCs must recognize that they are no longer accountable solely to local or national interests. Like international oil companies, they have become citizens of the world. And as such, they must recognize and accept the social, ethical, legal and environmental responsibilities that go with that global citizenship. A strong framework for business simply cannot exist without adequate infrastructure, portrayed by the drill-bit-to-light-bulb value chain needed especially for electricity. Governments need to unwind the spools of red tape, regulations and antiquated policies that have choked off power development to hundreds of millions of their citizens. Both parties must be confident that they are sharing the same truth and that as it is written or said, so will it be performed. Contracts are the keystones that hold Asia’s energy bridge together. And the sanctity of contracts is especially important to Asia’s newest energy business, LNG.29

The integrative role was appreciated by ASEAN when it mooted the idea of the trans-ASEAN gas pipeline (TAGP) in December 1997. ASEAN ministers on energy endorsed the 2001 master plan for the TAGP. The master plan includes commissioning of seven new gas pipeline interconnections from 2005 to 2016. These are as follows30:

  • The Duri-Melaka pipeline
  • West Natuna-Duyong
  • East Natuna-Joint Development Area (JDA)-Erawan
  • East Natuna-West Natuna-Kerteh-Singapore
  • East Natuna-Sabah-Palawan-Luzon
  • JDA-Block B of the Malaysia-Thai border
  • Pauh-Arun in Indonesia

It is expected that ‘on completion of the TAGP project, the region’s dependence on imported energy can be reduced substantially, and a shift from coal and petroleum will serve to avoid emission problems.’31 Despite obvious advantages, these projects face a number of hurdles due to their cross-border nature and require harmonization of policy regime including common technical standards for design and construction, operation and maintenance, safety, and so on. Similarly, gas distribution is a state monopoly, governments need to move towards a market-based pricing system.32

India-China Partnership: Setting the Trend

The prospects of Asian energy market critically hinge upon the dynamics of the evolving energy relations between China and India, the two largest energy markets of Asia. It is acknowledged that these two are going to be among the six key global energy players to influence the world energy scene. Saudi Arabia, Russia and Iraq are identified on supply side as ‘givers’ to the market, and the United States, China and India as major consumers or ‘takers’.33 The growing reach of the Asian importers is impinging upon the monopoly of the United States not as much as by posing competitive pressure as by providing second option. It could even be seen as undermining the US foreign policy objectives. ‘Growing Sino-Iranian relations are undermining US sanctions against Iran. The Bush administration has sanctioned Chinese companies 62 times for violating US or international controls on the transfer of weapons technology to Iran and other states.’34 The United States does perceive their presence in energy cold war perspective. ‘The US faces intense competition for influence in key energy-exporting areas. China, Japan, South Korea and increasingly India are frantically boosting economic and diplomatic ties and aggressively buying up stakes in oil and gas fields across the Persian Gulf and Central Asian regions.’35 The United States also apprehends escalation of conflict due to Chinese energy presence in the region. ‘China is vying for energy resources in some of the most unstable parts of the world. Its involvement in regions with raging conflicts could potentially draw it into the disputes, escalating a regional conflict into an international conflict.’36

It cannot be ignored that the pressure for energy is triggering the old differences into tensions and sometimes conflict as well. The Japanese move to initiate natural gas production in a disputed area of the East China Sea led massive anti-Japanese protests in China on 16 April 2005. It was said to be ‘the worst outpouring of such animosities in over 30 years. Although leaders of both countries sought to diffuse the crisis by promising fresh efforts at reconciliation, neither side has backed off its claims to the offshore territories.’37 Indonesia and Malaysia have been contesting for claim over Ambalat, richly endowed with hydrocarbon. Both nations claim sovereignty over that area in Sulawest Sea near the border. In February 2005, Petronas of Malaysia awarded oil exploration rights to Shell, but Indonesia awarded the rights to Unocol min 2004. Similar dispute is between Malaysia and Brunei. ‘The scattered islands of South-east Asia have become the hotbed of territorial busts-up, especially as the search for oil has moved offshore involving heavy weights China, Australia and most countries in between.’38

However, it is important to notice that as buyers while China and India are crucially dependent on import of energy from the Asian sources, the same is not true for the United States. In fact, the view is gaining currency in the United States that high-cost presence in the West Asian and Central Asian region is not worth the returns. ‘So when the United States sends its military into the Gulf to protect all that oil, it’s clearly America’s blood but is it really their oil?’39 Yet it will be naive to assume that America would be vacating the area for narrow cost calculations. In fact, in the emerging equation the United States would like to use its energy leverage to define its relations with China, possibly with India too. A more plausible situation could be that America promotes the doctrine of shared responsibility. China and India have been locked in competition despite the fact that there is asymmetry in their profile. China has the comparative advantage in its favour. In Angola, India lost due to Chinese leverage.40 China is the second largest energy consumer in the world after the United States and by 2020, its energy consumption will equal to that of all the OECD countries combined. India currently depends for more than 70 per cent on imports, and China needs only 30 per cent. China is better endowed with 18 billion barrels of reserves; Indian reserves are 5 billion barrels. CNPC has invested more than $40 billion; Indian company ONGC has invested about $3.5 billion. Besides geography too is more favourable to China than India in accessing the regional energy. Though the Chinese have been able to build on their comparative advantage, yet the gains have not been commensurate with their growing needs. Moreover, the Chinese would not like that India empowered by American support toughens the competition. It is well recognized that in emerging Sino-US global diplomacy, India is seen as a ‘positive’ factor by the United States. Thus, for China, a better strategy would be to have the energy engagement than competition. India too is aware, as pointed by the prime minister, that China is ahead of us in planning for its energy security—India can no longer be complacent. ‘Thus, gradually, the two have been sensing the advantage of converging their energy stakes. This was evident when India decided to have equity stakes in Kazakhstan with the prospects of exports to China and other Asian countries.’41 From the various initiatives, it appears that the two countries are showing inclinations in favour of partnership than competition. A concept paper from the Indian government argues a case for cooperation between the two largest oil importers in place of competition so that the two could take advantage of pooling their sources and maximizing the gain. It further observes that mutual competition for equity leads to escalation of the bidding price detrimental to their interest. ‘Consultations between our companies would ensure that we understand each other’s requirements and attempt to develop opportunities, that would be beneficial to both of us.’42

While forging energy alliance for bidding could be problematic, initiatives towards cooperative framework could always be explored that contributes to strengthening energy infrastructure as well. It is observed that a critical area of Sino-Indian energy cooperation could be Myanmar, ‘where this convergence of interests may be demonstrated. China’s oil and gas from Arabia can come through the Andaman Sea to Kyaukpyu and Dawei, reducing traffic that otherwise must go through the Malacca Strait. Besides the jamming of tankers in the Malacca Strait, which would delay passage of ships and create environmental hazards, the Indian Ocean port-highway connection to China would preclude the use of the strait as a choke point to teach China a lesson. India’s contribution to minimize the threat to China’s oil imports could be a foundation stone on which trust between these two nations can be built.’43

The strategic choice to go for cooperative approach can be appreciated by the fact that the energy relations despite moving to the market are still beyond its domain. The global energy space is still dominated by the United States. Besides a leading market, the United States is the only country to have the capabilities to mobilize wherewithal to hedge against risks associated with energy transactions, be it safety of the trade route or checkmating the terrorist attacks. Thus, the clout that the United States enjoys could impinge upon both the Chinese and Indian interests. While the two Asians have been the beneficiaries of American security network, but in the changed context where the pressure is building on the American government to reassess the loss-gain matrix, the two Asians have to take care of their interest. It can also be argued that by depending on the US security, the two Asians are incurring the risk of mortgaging autonomy of their energy policy, which might not necessarily be compatible to their national interest. The hostile reaction of the United States on India-Iran gas pipeline project is indicative of possible divergence and potential disagreement between the two. American efforts to retain control over Asian energy oil supplies might not be seen as a threat but certainly does make India uncomfortable. The United States is also experiencing the impact of Asian demand on its price structure. The administration is worried about it and looking for the energy engagement with Asia. ‘Bush administration is “very seriously worried” about the shifting energy balance and wants to “fix it” before it goes out of hand. Washington is engaging New Delhi in an energy dialogue at levels far higher than ever before because it is concerned about growing consumption by India and China, and what it could do to overall energy balance.’44

India—China—Russia Energy Axis

A few initiatives towards cooperative framework being explored include India, China and Russia. It seems to have received wider attention. The complementarity among the three as energy consumer and supplier is enforced by their geographical proximity. The possible areas of energy cooperation are spelled out as follows:

  1. Four oil pipelines from Russia passing through China-India could be conceived. The first, a pipeline from Siberia, cutting through the Ertai mountains and the Tianshan mountains, then going across the Karakoram, covers a distance of 1,800 km. Through this route, Russia’s Siberian oil can be transported through China to India. The second is for Russian pipelines to pass through Kazakhstan and enter China and again crossing Tianshan and the Karakorams to transport Siberian oil to India. This scheme avoids having to dig through the Ertai mountains. But the distance becomes a little longer. The third possibility is to bring Siberian oil into north Xinjiang in China. An exchange oil from Xinjiang’s southern Tarim Basin oilfields could be transported to India via the Karakorams. This scheme would eliminate the need to dig through the Tianshan mountains and save the engineering investment required. The fourth scheme would be to set up an exchange of oil from different regions in China and Russia. This means that oil from eastern Siberia (Sakhalin) would be sent to China’s east, while oil from China’s Tarim Basin region could be transported to India via the Karakorams. This plan obviates the need to negotiate the Ertai and the Tianshan mountain ranges, and in terms of economics it would be the most sensible. All four schemes require further discussion. It is also possible to come up with other schemes. For example, since the downfall of the Taliban government in Afghanistan, Indo-Pak relations have improved. It is, hence, possible to link Russia, China, Central Asia, Afghanistan, Pakistan and India by an oil transportation web.
  2. Cooperation is a real possibility for the three countries in the fields of exploration, development and petroleum refining. Russia and India have already started cooperating on the Sakhalin oilfields, and a Russian company is participating in engineering projects for gas in China’s southern region. China, Russia and India can also cooperate within their respective territories and exclusive maritime zones, and promote cooperation in offshore oil exploration, development and refinement.
  3. The three countries can also cooperate with a fourth country in terms of exploration, development and refining, for example, South Africa and Central Asia. The three countries have cooperation programmes with Kazakhstan.45

Clearly, implementation of these projects demands not only more serious and rigorous investigation but a fairly high degree of trust and confidence. In fact, the transaction cost could be reduced dramatically if the partners display the required understanding based on the following46:

  • This cooperation is mutually beneficial and a win-win situation for all. All the three participating in the alliance gain mutually.
  • This cooperation is not closed or exclusive. On the contrary, this alliance can work with every country or with foreign companies and encourage them to work in cooperation with these three countries.
  • The project of energy resource collaboration requires huge investments and the risks are high. Therefore, it must be carefully thought of and only then must this important decision be made.

The foreign ministers of the three countries in their meeting held at Vladivostok on 2 June 2005 underlined the need for trilateral cooperation in the field of energy. Though the three countries have had tripartite talks on two previous occasions—in New York on the fringes of the UN General Assembly’s autumn session, and in October 2004 in Almaty, Kazakhstan during the conference on Confidence Building Measures in Asia, the importance of it lies in giving a profile to these meets as ‘a strategic partnership or strategic triangle in Asia’.47 Energy was one of the central issues of mutual concern. Apparently, a kind of understanding is developing among the trio as they realize that ‘the gains to be had from cooperation outweigh the spoils of a competitive approach. While energy needs of India and China are expected to grow exponentially in the years to come, Russia is assured of two long-term buyers. Strategic concerns over the oil-rich Central Asian region are not divorced from this reality.’48 The joint communiqué issued stressed ‘that it is in the interests of the three countries to strengthen trilateral partnership, and that the mutually beneficial cooperation will contribute to the consolidation of peace and stability in Asia and the world at large.’49

Asian Energy Community: The Strategic Necessity

The implication of a shift in hydrocarbon trade to Asia when examined in the global power matrix suggests that the transition would be resisted, and the Asian consumers would not be able to make a better deal unless they forge collective linkages. A mechanism like Asian Energy Charter could be conceived to promote a coordinated response to the challenges posed by the growing energy needs. The charter could as well be innovative in looking at the challenges as opportunities of promoting collective interest without antagonistic projection. Taking a cue from IEA, the charter could initiate a coordinated regional profile in the following three areas:

  • Asian Strategic Petroleum Reserve
  • Asian Emergency Response System
  • Asian Energy Infrastructure

Strategic Petroleum Reserve: SPR was conceived by IEA to safeguard the energy interest of its members in the moment of crisis posed by disruption in supply. Of late, some Asian countries are also building such reserves but SPR is a high-cost project. It is more a strategic than economic option. Hence, it can be argued that Asian countries could have a few such locations spread across the region to meet the contingent situation.

Asian Emergency Response System: The IEA has also developed Emergency Response System that covers the following50:

  • The maintenance and monitoring of emergency reserves
  • Other national measures, including demand restraint, fuel switching and surge oil production
  • Operation of effective national emergency organizations
  • A mechanism for industry advice and operational assistance (through the industry advisory board and the industry supply advisory group)
  • A system for re-allocating oil, if necessary

Asian Energy Infrastructure: It needs no elaboration that Asian energy infrastructure still needs to be developed to provide the volume of trade likely to grow in the coming times. It is observed that ‘energy infrastructure requirements could easily top $1 trillion by 2020, according to many estimates. Such numbers will overwhelm the region’s ability to self-finance, and that means Asia will have to open up its energy generation and distribution markets to far more joint or foreign ownership.’51

The Maritime Dimensions

As the energy trade is moving to Asia, its maritime implications are also unfolding. With growing dependence on imports, Asian countries like China and India apparently need to be more concerned about the safety and security of the sea lanes through which their energy carriers are passing. India and China ought to assess and examine the implications of their limited presence, and the intensity and nature of vulnerability accruing from the control exercised by other countries on these routes. Their concern could reflect in their efforts to build relations with the countries on these routes as well as to acquire a degree of strength to protect their interest. It could also make them augment their fleet that is already at about 40 per cent of the merchant fleets among the top 20 owners in the world and 41 per cent by tonnage in 2003. China is constructing the world’s largest shipyard with a frontage of eight kilometres being underway, in Shanghai. This will make East Asia ‘the world’s largest shipbuilder with Chinese, South Korean and Japanese shipbuilders already accounting for 12.8 per cent, 36.2 per cent and 28.8 per cent, respectively, of the global order book in terms of tonnage.’52 It is argued that the enhanced economic interaction among the Asians necessitates building their maritime power.53 Certainly, as these countries make some endeavour and move to the space, others are bound to feel uneasy and even uncomfortable. So, the United States as the report ‘Energy Futures in Asia’ by Booz Allen Hamilton suggests, is suspicious of the Chinese move.54 As reported in Washington Times,‘it highlighted the Chinese attempt to build strategic maritime infrastructure to safeguard against growing piracy, maritime terrorism and safety of vast amount of oil shipments through the sea lanes, and to build up naval power at “choke points” along the sea routes from the Persian Gulf to the South China Sea.’ ‘China … is looking not only to build a blue-water navy to control the sea lanes, but also to develop undersea mines and missile capabilities to deter the potential disruption of its energy supplies from potential threats, including the US Navy, especially in the case of a conflict with Taiwan.’55 China, according to the report, believes that the US military will disrupt China’s energy imports in any conflict over Taiwan, and sees the United States as an unpredictable country that violates others’ sovereignty and wants to ‘encircle’ China. Called as a ‘string of pearls’ strategy, it is based on the premise of having bases and diplomatic ties stretching from the Middle East to southern China that includes a new naval base under construction at the Pakistani port of Gwadar. The ‘pearls’ in the sea-lane strategy include Bangladesh, Burma, and Cambodia. The strait of Malacca is crucial for China as 80 per cent of its imported oil passes through it, and China believes that it is controlled by the United States. Thus, it is examining construction of a $20 billion canal across the Kra Isthmus that would allow ships to bypass the strait of Malacca. The canal project would give China port facilities, warehouses and other infrastructure in Thailand aimed at enhancing the Chinese influence in the region, the report said. It also looks at the Chinese preparation as a threat to American influence in the region. The newspaper quotes from the Pentagon stating that China, by militarily controlling oil-shipping sea lanes, could threaten ships, ‘thereby creating a climate of uncertainty about the safety of all ships on the high seas’.56 It is argued that there is a kind of race going on among the littoral states to have bases in the Indian Ocean.57 These bases could even become a component of Asian military power, diminuting the hegemony of external actors relatively.

The changing matrix has its implications for India as well. India too needs to be concerned about the demands of the expansion of energy trade and the coming of the new players in the maritime arena. Apparently, without a corresponding maritime wherewithal, India would not be able to protect its energy interest and the terms of transaction to its advantages besides the clout that it might need to protect against the strategic interference. The Indian Navy is one of the largest maritime forces in the region. It conducts regular joint naval exercises with countries belonging to the Indian Ocean Rim and South-east Asia. With the Chinese People’s Liberation Army Navy, it held second joint exercise in 2004. It has been engaged in surveillance of its large maritime zones—the Palk Straits and the Gulf of Mannar. Besides, India has been spearheading a multilateral naval exercise, designated MILAN, ‘with the objective of achieving inter-operability with ASEAN navies, allaying fears about the Indian Navy’s growing influence in the Andaman Sea and promoting goodwill between India and ASEAN countries. MILAN 2003, held in February, further highlighted India’s commitment to this end. The exercise now includes navies from Myanmar (Burma), Singapore, Indonesia, Vietnam, Thailand, Malaysia and Australia.’58 It is also suggested that to ensure the free flow of traffic through sea lanes of communication (SLOC) and choke points, Indian Navy and other capable navies of IOR and South-east Asia could lead to SLOC patrols. The move that India provides SLOC protection in the Malacca region in partnership with the US Navy was opposed by Malaysia and Indonesia as an affront to their sovereignty. Even other smaller nations viewed the issue with milder apprehension.59

In the emerging global and Asian energy map, India energy security requires a vibrant maritime strategy premised on cooperative frame, but with necessary striking capacity to defend the risk associated with the expanding profile of maritime trade in the sector.

Geography has provided India the advantageous location to act as energy lifelines passing from the Indian Ocean to South-east Asia. But this adds on it the burden to be sensitized to the need of ensuring the security of the maritime routes between the straits of Malacca and Hormuz. Clearly, Indian strategy has to be multifold ranging from developing indigenous capabilities and capacities to building dynamic bilateral and regional partnership. From the perspective of energy security, the Indian navy has to reorient its profile not by abandoning its traditional role but dovetailing the cooperative framework of ‘building bridges’.60 The Indian strategy should be to moderate the conflict potentials of energy trade by promoting a collective approach of conflict management and resolution by evolving the doctrine of shared responsibility.

Some Asian countries are exploring the feasibility of developing a regional maritime security initiative which aims ‘to develop a partnership of willing regional nations with varying capabilities and capacities to identify, monitor and intercept transnational maritime threats under existing international and domestic laws. This collective effort will empower each participating nation with the timely information and capabilities it needs to act against maritime threats in its own territorial seas. As always, each nation will have to decide for itself what response, if any, it will take in its own waters.’61 Its present focus is straits of Malacca and Singapore. Clearly this needs strong naval forces, but countries facing maritime terror do not have adequate navy. ‘The Indonesian navy, which faces the biggest challenge in terms of maritime terrorism, is aging and has few warships and resources to patrol the vast coastline and periphery of its 17,000 islands. Only 30 per cent of its 117 ships are seaworthy. The situation in Malaysia is not much better. With such insufficient maritime power, the two countries in charge of securing the passage to Asia are clearly incapable of doing it alone.’62 Despite these limitations, the navies of Indonesia, Malaysia and Singapore have agreed for Operation Malindo, which provides a year-round anti-piracy and anti-terrorism protection in the strait of Malacca on 20 July 2004. Each participating navy is to provide five to seven warships. For rapid communications, provision was made to have a hotline, particularly when a warship of one nation is in hot pursuit into waters of another partner.63

In the emerging context, it is becoming necessary that regional initiatives be attempted because externally dependent approach could have destabilizing bearings. It is argued that initiatives like ‘the establishment of Joint Maritime Centres (JMCs) and Oil Spill Response Centres’ need to be undertaken.64 In other words, the regional navies have to gear up for the new responsibilities thrust upon them by the globalization process in general and the energy trade in particular. However, a search for regional capabilities should not necessarily be seen as hostility towards Western and American interests because transnational threats cannot be addressed without the global support. ‘It may be prudent to include the powerful US Navy in any arrangement that seeks to ensure maritime order in the region. This would not only lower the vulnerability threshold of the SLOCs and the choke points, but also ensure that they remain stable and free from threat of closure.’65

The maritime obligation for Indian Navy is too obvious. The expanding profile of intra-Asian hydrocarbon trade poses the possibility of new tensions as well as opportunities. In either case its role gets expanded. Further, if the regional thrust has to be maintained then the task before the Indian Navy goes beyond the national concern. It has to be responsive to regional demand. This means a reorientation of the approach and augmentation of capabilities. It is rightly observed that ‘for India to achieve a world-class navy, its leaders have to move beyond viewing the fleet as a supplemental tool in New Delhi’s long-standing rivalries with its neighbours towards an expansive security vision that takes into account the nation’s global economic status as an emerging information technology superpower.’66 The expanded maritime engagement triggered by the energy trade and its infrastructure is bound to promote interaction among the distant neighbours as next-door members of the emerging energy community. In fact, it will reconfigure the regional spatial dimension undermining the territorialities; ‘the energy trade is no longer confined to the sort of strategic bilateral relationships of the Cold War era, so the new rules of energy are nothing more than that sector’s joining up with the global marketplace and losing its special status as a strategic asset.’67 The globalization of hydrocarbon industry further facilitates it.

From the preceding account, it is clear that India has made up its mind to play a proactive role in the Asian energy arena. This is illustrated by the calculated decision of promoting the Iran-Pakistan- India pipeline project. It reflects the boldness to overcome the security fixation due to the Pakistan factor, it also shows the desire to bargain a deal that could provide strategic salience even in negotiating with those not happy with the deal. Last but not the least, it underlines the resolve to defend its national interest in the wider Asian context. Clearly, its foreign policy and diplomacy have started reflecting the expanding profile of India’s hydrocarbon sector both in engaging the external stakeholders in the Indian market and in defending the stakes in the overseas energy sites besides evolving a doctrine that emphasizes cooperation over conflict.