Wednesday, April 20, 2011


by Anand  Kumar 
Expecting an exponential growth in its energy demands due to expanding economy India has been trying hard in recent times to secure energy supplies. The volatility in international oil prices gave a sense of urgency to this need. But unfortunately, India’s oil diplomacy has not been sufficiently geared to meet this challenge. As a result its oil companies have been outsmarted or rather outbidded by the Chinese firms in several recent deals. Most embarrassingly, India has now also lost a deal in Myanmar where no such bidding was held. This deal was lost purely because we could not respond properly to the prevailing situation in the subcontinent. 
India has been planning to import gas from Iran, Myanmar and Turkmenistan via transnational gas pipelines to meet the growing energy needs, as domestic production is unable to meet its requirement.  Seventy percent of its oil is imported, and only half its gas demand of 170 million cubic metres a day is met internally. China also meets about 40 percent of its demand from imports. The two countries account for almost 35percent of the growth in the global demand for energy. This dependence on imports has forced both countries to bid aggressively for overseas oil assets.
In this scramble for overseas oil properties, Chinese companies have been far more successful. In the last two years, India’s ONGC has been trumped by Chinese firms in Kazakhstan, Ecuador and Angola. Few days before Aiyar’s Beijing trip, top Chinese offshore producer CNOOC Ltd. announced that it has acquired a 45 per cent stake in a Nigerian oil and gas field for $2.3 billion.
ONGC was also in the race for purchasing the Nigerian block but withdrew after India’s cabinet raised concerns over unspecified risks. In Beijing, Aiyar said he had no regrets. He also pointed out that China had to pay much more than they would have liked to for the asset because they needed to match Indian bid.
But what shocked the Indian Petroleum ministry officials was the Myanmar’s decision to decline gas supply to the Myanmar-Bangladesh-India pipeline. Instead, Yangon signed an agreement with Hong Kong-listed Petrochina, under which Myanmar’s ministry of energy agreed to sell 6.5 TCF from A-1 block (Rakhine coastline) reserve through an overland pipeline to Kunming (China) for 30 years. 
India has been eying huge hydrocarbon resources of Myanmar for quite sometime. Decision of Myanmar to tie up with the Chinese firm Petro China was a definite setback for the India’s Oil diplomacy and its energy security.  What was worse, Myanmar did not even inform India about the agreement. India came to know about it when Ajay Tyagi, joint secretary (gas), ministry of petroleum and natural gas, visited Myanmar.  
Volume of Gas
The A-1 block is operated by Daewoo International Corporation with 60 percent stake. India’s ONGC Videsh Ltd (OVL) holds 20 percent stake and GAIL (India) Ltd another 10 percent participating interest in this block. Korea Gas Corporation holds the remaining 10 percent stake. The consortium is also set to start a drilling programme in Block A-3 with the first exploratory well Mya-1. OVL and GAIL together hold 30 percent stake in this block too, in the same pattern as in Block A-1.
Houston-based consulting firm Ryder Scott Company has verified between 2.88 to 3.56 trillion cubic feet (TCF) of gas in Block A-1. The gas supply from this block is important to India since Aiyar had planned to build a 290-km pipeline from Myanmar’s west coast through Bangladesh to bring the gas to India’s east coast. This Myanmar-Bangladesh-India pipeline was also expected to pool isolated gas in the northeast.
Politics Affecting Tri-nation Gas Pipeline Project
India is aware that it is politics prevailing in the reason which is halting the project despite its obvious benefit to all the three countries. The project would help Myanmar sell its gas found in Bay of Bengal while allowing Bangladesh to earn transit fee and realise value for the stranded gas in North-Eastern Bangladesh. For India, the project would help feed its growing economy while also helping tap the stranded gas in the North-Eastern states.
India wants to involve Bangladesh in the project because the shortest pipeline route passes through that country. But it appears that due to political reasons this option may have to be ruled out. In any case, a reassessment of the whole project would have to done after Myanmar’s agreement with Petrochina.
Reasons Prompting Myanmar to Opt for China
Myanmar’s decision was not completely unexpected. It could not have waited indefinitely for India and Bangladesh to resolve their mutual differences over a project based on sound economic logic but delayed because of domestic political compulsions. Yangon started looking for other markets after Bangladesh's failure to come to a quick decision over transit rights for a gas pipeline from Myanmar to India. Although India and Myanmar are exploring the alternate pipeline route bypassing Bangladesh and entering the country through the northeast, the high cost and security issues remain a concern. Further, petroleum ministry officials feel bypassing Bangladesh would be "a major setback to Indo-Bangladesh relations given that the three nations had last year agreed on making it a tri-nation project that would not only enable India to get gas supplies from Myanmar but also allow Bangladesh to transfer gas from surplus to deficit regions.
Things are not likely to improve in the tri-nation gas pipeline project any time soon. Given that general elections are likely to be held in Bangladesh early next year, it seems unlikely that any early decision on the pipeline would be forthcoming. Ruling coalition in Bangladesh would like to go slow over this issue fearing its political fallout.
Myanmar, however says it is still willing to supply gas to the proposed tri-nation gas pipeline from other gas blocks if Bangladesh and India were successful in ironing out their differences, despite its deal with the Chinese company for sale of gas from its A-1 block. The Myanmar authorities have conveyed this message to Mohona Holdings Limited, a Bangladeshi company that initiated the project in 1997 to carry natural gas from Myanmar through Bangladesh to India. But, now even if the project fructifies its cost will increase due to the signing of memorandum of understanding (MoU) with PetroChina. Now the available block close to Bangladesh bordering area is A-2 and if the Myanmar authorities want to sell gas to India, at least 150 km additional pipeline will have to be built to reach out gas to India. The earlier project was mainly designed to bring gas to India from Myanmar's A-1 block, which is near to Teknaf of Bangladesh.
By signing the agreement with Petrochina, Myanmar has also served a notice to India that in case of any further delay it might finalize similar deals with South Korea, Thailand or even Japan. China in any case is ever willing to buy more if no other importer is available.
Aiyer Proposes Sino-India Cooperation in Energy
To improve the situation for Indian oil companies, Aiyar has now proposed Sino-India cooperation. During his recent Beijing visit, India and China signed a slew of MoUs on energy cooperation, including between ONGC Videsh Ltd, India's flagship firm for overseas oil and gas field acquisitions, and China National Petroleum Corporation (CNPC). According to Aiyar, cooperative relationship between India and China is not only desirable but also eminently feasible to avoid costly competition for energy assets abroad.
China Not Totally Averse to Cooperate with India
China is also not completely averse to cooperate with India in the area of energy security. China realises that it needs to devise a new strategy to deal with India as a rising power. Beijing is also apprehensive about India’s newfound alliance with the US particularly in the wake of American support for India’s civilian nuclear energy development. Energy cooperation with India is thus seen as a way of bringing New Delhi closer to Beijing.
There are also plain commercial reasons for cooperation between the two Asian giants. Though Chinese Oil majors have been winning oil assets abroad, they have also been overpaying for them. As a result these assets have not been very profitable. Competition between India and China invariably pushes up the prices. Thus in August last year, China National Petroleum Corp (CNPC) paid $4.18 billion to acquire Canadian oil company PetroKazakhstan. India’s ONGC had bid $3.9 billion. It is generally believed that the Chinese firm overpaid for the asset.
China is aware that as its need for oil imports grow, clashes with other countries also looking to ensure energy supplies will become increasingly common. In such a situation, an unbridled competition will be harmful to all concerned and so the necessity of cooperating to share risks and reduce costs, in a multilateral way is gaining currency there. Aiyar says that there will be times when the market dictates that companies submit competing bids but if there is sufficient exchange of information along with the building of trust and confidence there will be more occasions they can work together.
Definitely, there is some improvement in Sino-India relations in recent times. But has it become strong enough to build a close energy partnership is the important question. Years of mutual distrust and divergent strategic interests will create hurdles for cooperation in the area of energy. The Chinese state which runs the energy policy of the country is unlikely to trust India with a very close partnership unless India becomes strategically much closer to China. China is also likely to be lukewarm in its response as its firms have relatively little to fear from Delhi in bidding wars.
Although Aiyar says that India does not look at China "as a strategic competitor but a strategic partner" in hydrocarbon sector, the fact is that Indian companies have been consistently beaten by Chinese firms in securing oil and gas reserves overseas. The cash-rich Chinese firms are favourably placed as they can dispense government aid to secure deals as well as draw on hefty credit lines from Chinese financial institutions.
The success of Aiyer’s strategy of cooperating with the Chinese in the area of energy security remains to be seen. It will not be easy for Oil companies of both countries to cooperate in a major way in near future as till very recently they have been fiercely competing with each other. If India wants to be successful then it will have to tie the loose ends in its oil diplomacy and bring a better coordination in Oil ministry.  China has linked energy to its foreign policy far longer than India and has been more successful in diversifying its energy resources, developing a varied network of oil suppliers from Africa to South America. India will also have to integrate its Oil diplomacy with its foreign policy. India has also made another mistake of waiting for too long for Bangladesh to join the project. Given the kind of prevailing geopolitics in south Asia Bangladesh is unlikely to join the project any time soon. India can still go ahead with the project bypassing Bangladesh if it is viable and sufficient amount of gas is available for transportation. The cost of earlier project is bound to go up after the Myanmar-China agreement. In such a situation, if India incurs some extra cost and is able to construct a pipeline through northeast then it should go ahead with it. Economic projects if they bring political benefits too are welcome, but they should also be pursued for pure economic reasons even if no such political benefit is available. China has managed to strike a balance between its politics and economics which is lacking in case of Indian foreign policy. 
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