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Transporting Overseas Energy Resources: A Pressing Need but is it a Feasible Prospect?

Dnyanada Palkar is Research Intern at the Institute for Defence Studies and Analyses, New Delhi.
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  • June 07, 2012

    India has a growing energy demand owing to the increase in industry, economic activity and, most importantly, the second largest population in the world. It is well-known among intellectual and policymaking circles that there is a significant gap in the energy demand and supply for a while now and that the government and energy industry heads are taking note of the same. This was evident at a recent conference organised by the Confederation of Indian Industries (CII) that discussed the prospects and challenges of acquiring overseas coal assets.1 The greater concern for all those involved is securing the supply of energy resources, most significantly coal and natural gas. India’s proven domestic reserves of coal, as of April 2011, stood at 114,001.60 million tonnes (MT),2 while those of natural gas were 1,101 Mtoe.3 While these reserves can last for approximately 100 years,4 increasing commercial and non-commercial consumption may see this timeframe reduced considerably. The need for overseas coal assets is even more pronounced in light of the fact that India’s coal production (despite its proven reserves) is far less when compared to countries that have smaller reserves.5 Even if technology and innovation help bring India’s production levels up to the mark, one can only speculate on how long the reserves will last. Moreover, The Energy and Resources Institute (TERI) experts are of the opinion that India’s coal reserves have been made out to be larger than the amount that is actually extractable.6 This makes the ever growing demand-supply gap seem quite daunting.

    All of the above contribute towards making overseas coal acquisition a priority for both the government and private players in the field. However, an important issue confronting both the government and private companies alike—unlike the acquisition of mines or resources—is the transportation of the acquired resources back to the domestic market. Transporting energy resources is usually carried out via sea routes, a time-consuming and expensive task. Russia and Mongolia (along with South Africa and USA) have been prioritised as potential vendors for energy resources like coal and natural gas. India may acquire coal assets from any of these countries; however, it will be the transportation of the coal that will be the test.

    Transporting coal from Russia and Mongolia will incur higher costs simply because of circuitous sea routes, for example, from St. Petersburg via Kotka/Rotterdam,7 that must be used. Transport over land will be out of the question unless China agrees to allow the use of the third envisioned Eurasian land link8 for ferrying coal to India. The current Eurasian land links include rail routes running from Lianyungong and Shenzhen in China to Rotterdam in Europe. The third land link, currently being developed, is to run from Shenzhen in China through Myanmar, Bangladesh, India, Pakistan, Iran and Turkey, from where it will continue into Europe. The reason this route is not a viable option is because it would require the passage of coal from Russia or Mongolia through China, the prospects of which are unclear at present. Mongolia, landlocked between Russia to the north and China to the south, is affected by what goes on in both countries. Mongolia is therefore hesitant regarding the transport of goods to other countries such as India, via China. Not to mention the other obstacles that multi-border and multi-gauge rail networks face. An example of such obstacles is the necessity of changing bogies or wheelsets at border points where a change of gauge takes place. The process requires heavy equipment and is time-intensive.9 These factors add to the aversion that the producers and sellers have in using these routes.

    A better alternative would be the International North-South Transport Corridor (INSTC) that Russia, India and Iran have agreed to develop.10 The INSTC, when developed and functional, would have Mumbai as the receiving port in India to where cargo would travel via sea from the port of Bandar Abbas in Iran. Within Iran, railway networks would be used to transport freight overland towards the Caspian Sea and beyond to Astrakhan in Russia. It is estimated that the corridor, when developed, will reduce transport time from the usual 45–60 days to 25–30 days.11

    There was an issue initially with a 500 km missing link over land in Iran: Iranian officials have assured their Indian counterparts that 372 km of the Quazvin-Rasht-Astra route is complete while the rest is under development.12 Despite the time that will be required to make these routes functional, the North-South transport corridor will be the better option for India to go with. India’s relations with Iran and Russia have been steady for the most part. The trade route will not only help increase cooperation between the three countries but also, when fully functional, open up opportunities for India to trade with Central Asian nations. Kazakhstan, Armenia, Azerbaijan, Turkmenistan, Turkey, Ukraine, Oman and Syria have recently become members of the INSTC international transit agreement,13 implying their interest in this trade route and improving commercial relations with all involved countries.

    The railway link from China to Europe is still in the development phase and as such cannot be counted upon as a viable option until its completion. The North-South Transport Corridor, on the other hand, has already been approved for dry runs, scheduled to begin some time next year.14 This leads us back to the question: will it be feasible to transport overseas coal via sea routes until alternative routes are available? The answer might lie in public-private partnerships, which will be key to the acquisition and transport of coal and other energy resources. Besides, the government has shown willingness to consider setting up a sovereign wealth fund for the acquisition of overseas coal.15 The transport of the resources back to India will remain an area of concern for the immediate future. If no other solution is forthcoming, India may have to turn to swap deals or bite the bullet and pay for freight costs of coal transport. Alternatives like the North-South Transport Corridor provide the hope of viable solutions to feasibility woes in the long term.

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