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India-China Energy Cooperation: Attaining New Heights

J. Nandakumar was Research Assistant at the Institute for Defence Studies and Analyses, New Delhi
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  • November 28, 2005

    Last week witnessed a major development on the India-China energy front with the joint bidding plan for Petro-Canada's Syrian assets by India’s Oil and Natural Gas Corporation (ONGC) and the China National Petroleum Corporation (CNPC). In September this year Petro-Canada expressed interest to sell off its 38 per cent stake in the Al Furat field, which produces about 70,000 barrels of oil daily accounting for 50 per cent of Syria's total output. This is the first time that Indian and Chinese firms have joined together to secure stakes in an overseas energy facility. In overseas bidding efforts since 2004, Indian firms have faced competition from Chinese firms and in three different instances India lost to China in the race to secure overseas hydrocarbon assets. Angola was the first instance, where India bid for 50 per cent stake of Shell in Angola's Block 18 field. In the $600 million offer, India had promised to include $200 million to support Angola's ongoing railway construction project. This was outbid by China with a $2 billion offer. The bidding competition again surfaced when India wanted to buy the stake of Petrokazakhstan — a Canadian oil firm operating in Kazakhstan. In this case as well, China won the deal by offering $4.2 billion to Petrokhazakhstan against India's offer of $3.9 billion. The third incident was in the case of India's energy interest in Ecuador, where India and China competed for Encana's stakes. China proved to be the winner in this race as well.

    Different perceptions exist regarding India-China bilateral relations, but most analysts overwhelmingly reject any scope for cooperation between the two countries on the energy front. Many scholars see energy resources as a common interest of both the countries and contend that the search for energy would lead to competition and eventually to conflict. But these perceptions have to be studied in a broader framework to understand the possibility of any such unhealthy competition. First, most such conclusions are made on the basis of the historical experience of the 1962 conflict as well as China's military inclination towards Pakistan. These perceptions play a major role while defining and dealing with any major issue between the two countries. However, the bidding and outbidding instances have to be seen purely in a commercial sense and not as political competition between the two countries.

    After the Angola incident itself both sides realized that there is a greater scope and necessity for cooperation in their future search for overseas energy. This thought has crystallized into bilateral meetings and exchanges of visits. In August 2005, a high level team led by Mr Talmiz Ahmed visited China, and another high-level visit is expected to happen in mid-January 2006 primarily to study the scope for cooperation. Cooperation between the two countries would have far reaching implications on the global energy market. First, by pooling financial and technological resources, such a joint venture would become one of the largest state-owned bilateral joint energy efforts to address the energy security issues of two major energy consumers of the world. Secondly, in the coming years, more joint ventures may emerge from other import dependent countries or an Asian regional effort may form under the leadership of India and China. Third, this might adversely affect energy producers who are waiting to encash on the competition between India and China. Many energy watchers have pointed out that Russia and Bangladesh have been trying to gain advantage from India-China competition. Both India and China have shown interest in buying a 20 per cent share in Yuganskneftgaz (a Yukos subsidiary expropriated by the Russian government). Bangladesh is also angling to benefit from the India-China competition for natural gas. Although India is geographically closer, Bangladesh has been showing interest in exporting natural gas to China, in an attempt to increase its bargaining value. These kinds of producer politics would be hard to play if India and China decide to go ahead with their joint search for energy. Fourth, joint efforts would also help to bring down the stake values, as it has been seen that in the name of competition China has paid considerably higher value for its overseas equity purchases.

    Taking the relevance of energy security in the current global sense and the growing energy demand of India and China, it would be mutually beneficial for the two countries to cooperate and work together in their quest for energy. The primary areas of possible cooperation are:

    • Most energy exploration and development projects around the world require large-scale investment and technology. Joint efforts by the two countries in pooling their investments and technology would yield better resource outputs.
    • Hydrocarbon transportation route — oil and gas pipelines — is another area of possible cooperation, where they can bring energy through the shortest possible routes with minimum investment cost.
    • As China gets most of its hydrocarbon supply through the Indian Ocean SLOCs, it would give considerable importance to cooperating with India to ensure the security of is supplies.
    • India's Sakhalin gas production shares can be swapped with Chinese supplies from the Middle East, which would enable both countries to reduce the transportation distance and cost.
    • India and China would be able to bring together other imported energy dependent Asia-Pacific countries, which can act as a peer group to harness the growing energy price, and demand the removal of Asian Premium charged on every barrel of oil exported to the Asia-Pacific.
    • As suggested by India's Petroleum Minister, Mani Shankar Aiyar, cooperation between India and China would be able to bring in a pipeline network to tap the Russian, Central Asian and Middle Eastern energy sources. In future this pipeline network can form a hub of energy supply to the other Asia-Pacific countries.
    • As investments in renewable and nuclear energy in the region are expected to increase in the coming years, efforts to build up an 'Asia-Pacific cooperation' in this regard would help member countries address their growing energy demand.
    • India and China can consider cooperating in the field of 'tar sand' exploration or gas hydrate exploration, as these would gain considerable importance as tomorrow’s major energy sources.

    The scope for cooperation between India and China has to be explored further as there would be more mutually beneficial areas. The perceived competition between the two countries would not take off for many reasons. They have been working together for many decades to eliminate their past differences on political and territorial issues. Hence, neither side can afford to encourage the emergence of further differences or the persistence of extant irritants in the coming years. Moreover there are other challenges like the threat of US sanctions — regarding investments in Iran, where it is essential for both countries to cooperate politically and economically to ensure energy supply. The benefits that would accrue as a result of cooperation on the energy front between the two Asian giants are much larger than that of competition.

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