Understanding the inner dynamics influencing the ongoing process of economic reform in China, especially the flexibility achieved by government bureaux is important for strategic policy makers in India. The brief study seeks to determine the relationships of dominance, correspondence, and contradictions as well as the direction of influence, the sequencing between government bureaux, and the end results of their joint operations by applying the micro-macro linkage approach. The dynamics of foreign economic policy-making, are revealed by the mutual influences as well as the channels and mechanisms between and among the micro and macro-level elements.

India’s September 24 vote in the International Atomic Energy Agency (IAEA) supporting the resolution moved by Britain, France and Germany (EU-3) on Iran’s nuclear programme has a raised a significant debate within the strategic studies community on the value and wisdom of the policy stance. While some commentators have accused the government of compromising the country’s established nonaligned stance and tilting towards the Western powers, most others have seen it as a clear stance on non-proliferation at a time when India is seeking to engage the major nuclear powers on cooperation on nuclear energy and nonproliferation. The vote has inevitably been linked to the July 18 Indo-US Agreement on nuclear energy cooperation and the consequent requirement that the US Congress approve the changes in laws so that the agreement can be implemented. The question has also been raised whether India’s vote reflected a considered position on the basis of the merit of the Iranian case or was aimed at influencing US Congressional opinion.

India’s Rationale

A closer reading of the Indian vote reflects a more circumspect posture than the debate so far would suggest. While the EU-3 resolution reflects the IAEA Director General and the Secretariat’s concern that Iran is not in full compliance with the agency’s safeguards norms and that it had breached its commitments on transparency and reprocessing, as required under the Safeguards system and the Additional Protocol, the Indian position only partially shared such a view. The Indian vote was accompanied by an explanatory note that stated the resolution was “not justified in finding Iran non-compliant in the context of Article XII-C of the IAEA statute” since it recognises that “good progress has been made in Iran’s correction of the breaches and in the Agency’s ability to confirm certain aspects of Iran’s current declarations.” However, it agreed with the resolution that the matter should not be immediately referred to the United Nations Security Council, more time needs to be given for diplomacy to succeed, and that Iran and IAEA need to work together to resolve all differences regarding transparency, and compliance commitments. A key objective of the Indian effort, as repeatedly stated by the government, was to de-escalate the situation, and promote dialogue and consensus building.

In terms of diplomacy, the vote is, of course, a clear statement of the dominant view within the country on non-proliferation and the need to pursue a foreign policy based on national interest in a distinct departure from an essentially value-determined posture characteristic of its past practice and policies in such matters. While the earlier stance, rooted in basic principles of disarmament and a critique of two-layered global power system, may have to an extent suited its foreign policy interests at a time when it had serious differences with the US, Europe and Japan on arms control, technology controls and sanctions imposed on India because of its nuclear weapons programme, that situation has dramatically changed following the Indian nuclear tests of 1998 and the July 2005 Indo-US nuclear agreement. There is a realisation — reflected in the Foreign Secretary’s October 24 speech to the IDSA in New Delhi (carried in this journal)— that principles now need to be interpreted to serve practical goals. Therefore, the stress on India’s strong commitment to nonproliferation on the one hand and on the other, the simultaneous emphasis on the need to pursue an interest based foreign policy in the new historical context. As many other states have long recognised there is often a tension between value based basic principle and the practical needs of the pursuit of strategic goals and interests, and this will be reflected in the political struggles within the country. India is clearly entering a new phase when foreign policy consensus will be at times difficult to build and there will be significant divergences on interpretation of national interest within the political class.

The Indo-US agreement itself is rooted in three positions: the Indian commitment on non-proliferation reflected in its decision not to transfer reprocessing and enrichment technologies and to support international efforts to limit their spread; the US recognition of that well-established principle, and the US commitment to undertake changes in its laws and international rules to facilitate nuclear energy cooperation with India. As a result of the dialogue with the US on nonproliferation, technology controls and energy cooperation, the Indian government has strengthened its export control regulations, and announced a firm non-proliferation policy that has been pragmatically de-linked from its basic position on disarmament. The Indian vote in Vienna has to be placed in this context. India, as its explanatory note states, recognizes Iran’s right to pursue a peaceful nuclear energy programme, calls upon it to adhere to its nonproliferation commitments, and welcomes its cooperation with the IAEA. No ambiguous and confusing signals therefore have been sent to either the US or Iran. If they had been the country would have lost in terms of its ongoing dialogue on nuclear issues with the US and Europe, and would have compromised its interests with Iran.

The Indian vote in favour of the September 24 IAEA resolution was of course in keeping with the position taken by the overwhelming majority (2/3rd) of the board members. Only one country opposed the Resolution (Venezuela). The 12 countries that abstained –including Russia, China, Brazil, South Africa, Malaysia and Pakistan – have neither supported nor opposed the resolution. In so doing they have allowed the Resolution to go through. None seemed to have favoured the Iranian position, or disagreed with specific points made on Iranian noncompliance. They also allowed the point made in the resolution that the situation is serious enough to deserve a reference to the UNSC to go through. These countries opted not to be part of the controversy, and almost all of them seek a solution within the IAEA. Both China and Pakistan have officially stated that they are against referring the problem to the UNSC where it is likely to become conflictual. In fact, the Resolution too sets no deadline for a reference to the UNSC and states that the matter will be revisited in November 2005 by the IAEA.

Russia and China are both members of the UNSC and by abstaining they made a political statement of not being in agreement with the EU and the US. Both have large interests in Iran. Russia is constructing a one billion dollar nuclear power plant in Bushehr and has long opposed any escalation of the standoff over Iran’s nuclear programme. However, its abstention on a resolution that it has not opposed and which is in tune with its basic position that consensus should be built and the issue should not be transferred to the UNSC at this point results from a ‘wait and see’ approach. By abstaining they avoided taking a position on the need for greater Iranian transparency than required under the IAEA safeguards system and Additional Protocol to the NPT. Both the countries also sent an unclear message to the 24 countries that supported the resolution (including the EU-3 and the US) about how the global system should deal with the issue of nonproliferation. The serious crisis over the North Korean nuclear issue–often threatening the outbreak of a war on the Korean Peninsula that would have dragged all major powers into a general war – cannot be allowed to be repeated in the Iranian and Gulf context. The costs to the world, including India, would be unsustainable. From this perspective, the abstention by Russia and China has not helped build confidence and consensus.

From an Indian perspective, the Iran vote cannot be seen in terms of a new global divide between the West and the Nonaligned. The nonaligned cannot be deemed to be a new pole – a clear contradiction in term. As indicated by the vote the developing countries are divided on the matter between support and abstention. Barring Venezuela, no other country supported Iran or opposed the IAEA resolution. There is no unified nonaligned position either. Malaysia –which heads the current nonaligned secretariat – does not speak on behalf of all the others in the absence of a unified Non-aligned resolution. Moreover, Iranian or North Korean noncompliance with their commitments under the IAEA or the NPT cannot be made a cause celebre by the Non-aligned states, all of whom, barring India and Pakistan, are part of the NPT system.

The Resolution accepts the Iranian position – and has the support of India and several other developing countries – that countries must have access to nuclear technology for peaceful purposes such as power generation. However, it also says that this has to be married to Article 1 and 2 of the NPT, or the compliance requirements under the treaty and the IAEA arrangements. Iran cannot expect to get such international cooperation without compliance, and is entitled to receive such technical help under safeguards once these concerns have been satisfactorily dealt with. In effect, the international system needs a new deal on the nuclear issue – something that has become evident from the problems and divergences that have crippled NPT Review conferences for some time now. It is a deal that would have to bring together satisfactorily the urge among some of the NPT members of the developing world to have international cooperation in nuclear energy and the security issues of nonproliferation that is the major concern for others within the NPT system, especially the United States.

The Role of Pakistan and China

Pakistan and China of course have been for many years involved in helping Iran with both its nuclear and missile programmes. There are extensive reports of the involvement of the A Q Khan clandestine network in illegal nuclear transfers to Iran that involved critical blueprints, technology and components for Iran’s centrifuges. Before the IAEA probe began in 2003, Iran conceded to the agency that it had received “crucial help from Pakistan.” Iran told IAEA inspectors once the investigation began that it received design plans for centrifuges in 1987 from Pakistan, and the transfer of technology appears to have continued for several years. The A Q Khan transfers continued between 1989 and the late 1990s.

As for China, it had through the 1980s and 1990s not only “helped Iran move towards becoming self-sufficient in production of ballistic missiles,” but had also supplied it materials for its nuclear programme. A US State Department report— corroborated later by Iranian officials— said that China supplied Iran one tonne of UF6 (uranium hexafluoride— meant for enrichment of uranium for centrifuges), 400kg of UO2 (Uranium Dioxide) in 1991. While enriched uranium can be used for both peaceful and weapon purposes, the supplies were not declared to the IAEA at that time, creating doubts about Iran’s aims. The Chinese supplies of nuclear reactors, nuclear and ballistic missile technologies had to be officially cut off following a US-China agreement in the mid-1990s under which the US promised not to supply certain categories of weapons to Taiwan in return.

China and Pakistan therefore have invested in their relations with Tehran and have high stakes in it. The Iranians see the Chinese relationship as a major factor of their strategy for dealing with the US pressures and sanctions. China is poised to replace Japan as Iran’s biggest customer of oil, and currently imports 14 per cent of its oil from Iran. In 2004 China signed a multi-billion dollar deal for LNG supplies over a 30-year period. The state-owned Sinopec oil company has acquired a 50 per cent stake in Yadavaran oil field. Much like India, China has also simultaneously developed strong ties with Saudi Arabia— its other major oil supplier in the Gulf. However, a consequence of China’s growing stakes in Iran would be a posture that seeks to protect Iran from the increased diplomatic pressures that may be generated if the issue is referred to the UNSC. China is not keen to make hard choices between Iran and the United States both within the IAEA and the UNSC and therefore is likely to abstain as it did on the Iraq issue. Most countries within the IAEA — Europe, India, Russia, China — are likely to oppose any generalized UN sanctions on Iran as it would hit their interest.

A China-Pakistan-Iran nexus however is not in India’s interest and it would have to take appropriate steps to neutralise it. Clearly, India needs to continue to engage Iran as well as initiate an active regional diplomacy that builds ties across West Asia, and with the US, Europe, Russia and Japan – major powers that have large stakes in the stability and security of the region— to preserve India’s long term regional security and energy interests. Current Indian trade with Iran is around $ 3.5 billion – a little lower than the Iran-China trade ($ 5 billion) and nine times higher than that between Iran and Pakistan. It is therefore not as if India does not have economic leverages.

The Political Challenges

The domestic critics of the Indian vote have argued that India’s stance is a reflection of its growing ties with the United States, and marks a fundamental shift in its nonaligned foreign policy. India’s IAEA vote however must not be made – as the critics have sought to do — a litmus test for India’s ‘independent foreign policy’. Nor must the pursuit of interests with the US be pitted against India’s interests with Iran. A specific policy posture in response to a well-considered position is as much a reflection of independence, as in opposing a position. The political divisions are inherent as mentioned earlier in India’s attempt to pursue an interest based foreign policy tied to certain specific needs – technology, energy cooperation, stronger ties with US, Europe, Russia and Japan; greater involvement in nonproliferation efforts, entry into the UNSC as a permanent member — that others believe contradicts their notions of ‘nonaligned’ principles and interests. There is clearly an ideological divide between the mainstream and the ‘left’ in India on this issue that has not gone away despite the government’s efforts to bridge the gap.

Iran does not represent an opposite pole to the US or the West, around which India has to rally. It is a regional power in the context of the Gulf with which India has interests but these interests are not in any manner more important than India’s extensive and growing interests with the US or Europe, or in working with global institutions, and in strengthening norms that enhance peace, security and conflict resolution. In criticizing the Indian vote as a sell out to the US, the critics make a case that would be unacceptable to any responsible government in New Delhi—treat the US as ‘imperialist’, do not build strategic ties with it, do not have nuclear and technology cooperation, do not agree with it on cooperation on regional and global security, or on energy. This is politically, economically and in security terms unacceptable and would be detrimental to the country’s interests.

The current Iranian nuclear posture is quite hazy. It has on the one hand stated that it does not want to build nuclear weapons. On the other its search for reprocessing and enrichment capabilities and technologies, and its lack of transparency in this regard for several years has led to questions regarding its intentions. A potentially nuclear Iran is likely to seriously complicate the security environment in West Asia and is unlikely to be in the security interest of the region. Such a development can heighten tension not only between the US and Iran, but also between Iran and the Arab world—especially Saudi Arabia, and between Iran and Israel. The effect would be severely felt on the stability, security and price of energy supplies, on global trade, and on the region’s states and peoples already hit hard by terrorism, conflicts and wars in Iraq and Palestine, and the large international community living in the Gulf and West Asia, with Indians being by far the largest. In short, India has reasons to be disturbed about such an outcome.

India’s stance therefore is not going to be unpopular in West Asia and Central Asia whose security would be affected if Iran were to either withdraw from the NPT or renege on its safeguards obligations under the IAEA. In other words, there is no single developing world perspective on the Iranian nuclear stance — positions vary across regions depending on the ties with Iran and the security consequences of its nuclear posture.

Prospects

Iran is not a strategic ally of India. It has not been really supportive of India on two of its core national security issues that have politically and diplomatically been so demanding: Kashmir and the nuclear question. Yet, India has had deep civilisational ties with Persia and has strong geopolitical, energy, security interests in modern Iran. It is keen to enhance these ties. Iran is also India’s bridge to Central Asia with projects planned to enhance port, trade and railway links. In June 2005, before the present government led by Mahmoud Ahmadinejad took over in Iran, New Delhi had signed an agreement to import 5 million tonnes of LNG per annum beginning 2009. The agreement is yet to be ratified by the board of National Iranian Oil Co, the firm that will execute it. But the Indian Petroleum Minister does not anticipate a problem on that front. He has been negotiating the price for a further 2.5 million tonnes of LNG supplies. Iran, Pakistan and India are continuing negotiations on the proposed 2,400-km pipeline and hope to finalise a tripartite agreement by the year-end for the project to take-off. Also, India has just acquired a 20 per cent stake in the Yadavaran field, which will be impacted if sanctions are imposed (as in the case of India’s stakes in Iraq oil fields after sanctions were imposed on Iraq).

Would the Indian vote have an impact on economic and other ties with Tehran? It will be difficult for Iran to withdraw from LNG and gas pipeline commitments once they are in place. Gas related investments are tied with the consumer and cannot be switched around. Also, the gas market unlike the oil market is not tight and there are others potential suppliers such as Australia for LNG to India. In any case India needs to seriously pursue gas supplies from Myanmar, Australia and possibly Indonesia. Disruption in oil supplies from Iran could also be met through diversification —from Africa, Latin America, Australia and other West Asian countries. But there could be an initial adverse price impact on the economy.

India’s vote for the IAEA resolution initially touched a raw nerve among some of the conservative politicians in Tehran. The knee jerk reaction by the Foreign Ministry spokesman Hamid-Reza Assefi too was critical of India and provocatively threatened to link Iran’s economic ties with voting behaviour. But Iran’s chief nuclear negotiator Ali Larijani cooled down the threats to drop all international nuclear commitments as well as the economic gesticulations. “India is our friend and we are therefore especially disappointed. But one incident should be no criterion to judge our friends,” Larijani said. Iran has major energy and petrochemical interests with India, and also needs to maintain strong and friendly ties with this major Asian power that has strong ties with the West Asian region.

Having taken a considered position in Vienna on Iran’s nuclear obligations, it would be a diplomatic folly if India were to back track because of pressures from Iran or domestic constituencies that take a highly ideological view of foreign policy. The onus is on Iran to sort out all misgivings with the IAEA over the next few months constructively, and on the US and the EU to respond positively. While India’s ties with Iran are important, its nuclear nonproliferation stance as well as its emerging ties with Europe, US, Japan in the areas of nuclear and defence cooperation, technology controls are far more significant and on the anvil of a qualitative change. The Indian position on all foreign policy issues therefore has to be based on merit and assessment of specific goals and interests. It cannot be made a prisoner of its Iran policy or the domestic ideological debate if all issues between IAEA and Iran are not resolved by November.

India nonetheless has high diplomatic stakes in preventing a breakdown of diplomacy between Iran and the EU-3. It is not in India’s or anyone else’s interest to have UN sanctions on Iran that will destabilize oil prices and severely hit the country’s energy interests. Sanctions any way are unlikely to work and will only worsen the tensions. The fall out of a military conflict too would be disastrous and uncontrollable as the Iraq case reveals. The US clearly understands the consequences. Secretary of State Condoleesa Rice in her joint interview with British Foreign Secretary Jack Straw told the BBC on October 23, 2005 that military action against Iran was not on the US agenda though President Bush has not ruled out any option. Therefore, a solution lies through negotiations and a diplomatic deal that meets core interests of all sides.

The EU-3 Resolution by not setting a deadline for reference to the UNSC gives the IAEA and Iran time to resolve issues. Iran, if it wants, can address all of them by enhancing transparency, ratifying the Additional Protocol, which it has signed, and fully cooperating with the Agency to remove misperceptions and concerns. Consensus building benefits Iran as well as the other states with large stakes in ties with Teheran – India, Russia, Japan, Europe, South Korea and China. It would also enable the US and Iran to avoid confrontation and conflict. Since it is an EU-3 resolution, it has the principal responsibility to engage Iran constructively. India needs to persuade EU-3 to re-examine their “package”, taking into account Iran’s proposal for joint ventures in civilian nuclear energy.

However, the crux of the problem lies between the United States and Iran, and the roots go back to the rise of the Islamic Republic in 1979, its visceral hatred of the ‘great Satan’ the US for its support for the Shah’s rule, and the taking of US hostages that has left a deep scar on America’s soul. The US in return has frozen Iranian dollar assets in US banks, and imposed several sanctions, and has targeted it as ‘rogue state’. The two countries have not had a normal diplomatic relationship for over two decades and have been hostile towards each other. Iran clearly suffers from a serious insecurity, while the US worries about Iran’s involvement with fundamentalist groups such as the Hezbollah and its nuclear programme. In such a situation, Iran may not be willing to give up its right to have an independent fuel cycle without significant dialogue with the United States and concessions on three issues: a security guarantee, an unfreezing of Iranian financial assets in the US, and access to secure assurance to aid for nuclear power generation. The US and Iran therefore would have to engage in diplomacy and negotiations sooner than later. In the North Korean case this was enabled by China through the six-party talks. In the Iranian case the EU and India can play such a role.

• The author gratefully acknowledges the valuable inputs and insights offered by Shebonti Ray Dadwal, Rajesh Mishra, Shah Alam and Sumita Kumar.

The massive destruction caused by the earthquake in India and Pakistan has thrown up huge challenges of rescue, relief and rehabilitation. The magnitude of the destruction means that reconstruction and rehabilitation in the affected areas is going to be a long process. There are reports that the death toll in Pakistan Occupied Kashmir (PoK) and Northern Territories could cross 50,000. The losses in India have been comparatively less, and despite the huge difficulties of terrain authorities have effectively engaged in overcoming the effects of the tragedy. The conditions in PoK however, have become unmanageable for the Pakistani state and have led to a desperate appeal for massive international aid. Even as it geared to meet the huge challenges of rescue, relief and rehabilitation in Jammu and Kashmir, India was quick to offer all help and assistance to Pakistan, and relief has already been rushed to Islamabad. The Indian offer to open three relief and medical centres along the Line of Control (LoC) in the Uri, Tangdhar and the Poonch sectors for the victims on the Pakistani side, if accepted by Pakistan, will be a big boon to the people and follows appeals by Indian Kashmiris to help divided families and the suffering people on the other side. The disaster could have significant implications for future politics on both sides of Kashmir, internal politics in Pakistan, and possibly Indo-Pak relations.

Dealing with disasters of this magnitude is never easy and though the relief and rescue operations led by the armed forces took off quickly there were a few initial reports of resentment against the Jammu and Kashmir authorities for not responding promptly with relief supplies. While the Central and state governments have announced large amounts of aid for the affected families, there were the inevitable fears about proper disbursement of relief and funds. The economy of the state has suffered enormously, and the population is going to need both material and psychological support. The rugged terrain, limited communication network, and the onset of winter have accentuated the existing problems. At another level, some sections of the separatists like the Hurriyat have tried to take advantage of this disaster to malign the Indian government and gain political mileage. The separatist Hurriyat leader Mirwaiz Umar Farooq on October 11, 2005 criticised the lack of response from civil society including corporate houses—though funds have not been a problem. Ironically, these very leaders have for years tried to keep Kashmir isolated from the Indian mainstream and corporate investments. Since then of course even the corporate sector has announced aid and help for reconstruction.

The devastated region in PoK has been for over a decade the epicentre of terrorism directed against India. Through the relief and rescue, India has had to be prepared to meet the threats from cross-LoC terrorism. Opinion is divided over how the earthquake affected the terrorists. Initial reports about the number of militants killed due to the destruction of their camps in the earthquake, the specific militant outfits affected, as well as the extent of damage to terrorist infrastructure in PoK led to assessments that there could be a decline in terrorist activity. Some feel that greater international and Pakistani civilian pressure would be brought upon militant activity leading to closure of camps, which in turn could help the peace process with India.

However, despite the terrible nature of the disaster on both sides of the LoC, a series of terrorist attacks have been cynically unleashed on Jammu and Kashmir since October 8, 2005. The most shocking of these was the attack on October 18, 2005 in Srinagar, in which the Minister of State for Education, Ghulam Nabi Lone was killed and the CPI (M) leader, Yusuf Ali Tarigami narrowly escaped. There are reports that terrorists are trying to obstruct relief activities being carried out by the security and paramilitary forces in far-flung areas of the state. It has been reported that militant groups like the Lashkar-e-Toiba, and the Jaish-e-Mohammad have launched relief and rehabilitation programmes in Muzaffarabad and adjoining areas in PoK, with the aim of expanding and consolidating their influence and presence. Therefore, despite the ceasefire announced by Hizbul Mujahideen leader Syed Salahuddin soon after the earthquake, no fundamental change in the attitude of the terrorist outfits has been witnessed or can be expected.

The Pakistani military regime has been entirely unprepared for handling such disasters and is desperately trying to meet the devastating impact of the earthquake. According to the initial estimates by the United Nations over two million people in PoK and northern parts of the North West Frontier Province (NWFP) have been affected by the earthquake. There is widespread destruction as concrete structures have been reduced to rubble. Trapped in collapsing school buildings, a large number of children died. According to one report, at least 7,000 school buildings in the public sector and 1,000 in the private sector have either collapsed or been damaged in five districts of the NWFP. Many areas became inaccessible due to massive landslides. The initial delay in relief assistance can be attributed to factors like lack of realization regarding the magnitude of the disaster, communication breakdown in the worst affected areas, lack of adequate logistic infrastructure, the absence of a disaster management mechanism, coupled with inclement weather. Prime Minister Shaukat Aziz explaining government’s delayed response said that the local government system had completely collapsed due to the quake. While monetary and technical assistance and relief supplies are flowing in, the efficient distribution of these remains a problem. In the absence of a stable economy in PoK there is apprehension, as to what the future holds for the populace. In the meantime, the Pakistan government is addressing what has perforce become a security agenda for the long term. An ‘Earthquake Reconstruction and Rehabilitation Authority’ has been established which will rebuild infrastructure in the affected areas. The UN has given a 10-year timeline for completing the reconstruction process, while Prime Minister Shaukat Aziz estimates that reconstruction of damaged areas may take five years. Reports also suggest that the Planning Commission is preparing a ‘massive reconstruction plan’ which will focus not just on the rehabilitation of affected areas, but also on developing tourism on modern lines.

The Pakistan government has had to face intense anger from those affected, the civil society, as well as from the political opposition for its weak rescue efforts. The unforeseen calamity has the potential to create ripples in Pakistan’s polity. The government has been criticised for sending helicopters to attack South Waziristan rather than to help in relief efforts. It has been said that the Pakistan army has no moral ground for continuing military operations in the tribal areas of South and North Waziristan. As Pakistan gets more involved with re-building activities, there is a possibility that the Afghan resistance would benefit. Also, existing resentment in the Northern Areas could receive a boost in the wake of the earthquake, creating problems for the Federal government. The seriousness of the situation in these areas can be gauged from a press note by the Northern Areas Home Department, claiming that the situation in Northern Areas, especially in Gilgit, had worsened in the last 18 months due to the uncompromising attitude of the Ulema of both sects. The differences culminated in violence, leading to a curfew adding to the people’s woes. Dissatisfaction with Pakistan Army led-relief efforts could give a fillip to the mainstream political parties in the long term.

It should have been natural – if there were close political and normal ties – for India and Pakistan to work together in rescue and rehabilitation efforts in Kashmir. But there are suspicions and security concerns that prevent full cooperation. The Indian Prime Minister Manmohan Singh had of course spoken to Pakistan’s President Pervez Musharraf on October 8, 2005 to condole the devastation caused by the earthquake. He offered any rescue or relief measures “deemed appropriate” by the Pakistani leadership. The Indian armed forces too offered to undertake rescue missions. Yet, it is obvious that the political and security sensitivities weigh heavily on the minds of the Pakistani leadership. This is evident in the denial by Pakistan’s Director-General of Inter-Services Public Relations, Shaukat Sultan, that Indian soldiers had crossed the LoC to help repair one of its army bunkers. The Indian army too later stated that the Indian soldiers crossed the LoC to hand over tools for rescue as a humanitarian gesture. India has provided relief material including tents, blankets, food items and medicines to Pakistan by air and train. The Pakistan government has reportedly taken a decision to import around 50,000 tents from India. It has however rejected taking the offer of helicopters from India, badly needed for rescue and relief operations in Pakistan. President Musharraf said that they were welcome but without the Indian pilots, because of certain “sensitivities.” India did not pursue the matter further, and Pakistan had to finally depend on US helicopters and NATO forces for rescue work.

However, it is obvious that the level of understanding between the two countries during this exacting time has reached a very different plane. India allowed Pakistani nationals possessing LoC entry permits to return to Pakistan via Wagah due to the suspension of the Srinagar-Muzaffarabad bus service. And on a request made by the Indian side, Pakistan agreed to overlook the movement of Indian army helicopters in the border areas of Uri and Tangdhar for rescuing its troops and civilians. The existing Agreement on Prevention of Air Space Violations and for Permitting Overflights and Landings by Military Aircrafts between India and Pakistan signed on April 6, 1991, was activated, and according to a statement by the Indian External Affairs Ministry, on October 15, 2005 India was willing to permit Pakistan’s helicopters to fly in the no fly zone, (one km along the LoC) provided information concerning the proposed sorties was communicated as early as possible to the Director-General Military Operations (DGMO) on the Indian side. In keeping with the spirit of cooperation, President Musharraf agreed to allow the movement of people across the LoC, just as the Indian government re-activated the dormant telecommunication links between two sides of the LoC.

A mature and enlightened approach in providing help to the quakeaffected people across the LoC, motivated by genuinely humanitarian considerations, is likely to lead to greater goodwill for the Government and the people of India. Any unrealistic offers however generous, could be perceived as efforts of ‘diplomatic one-upmanship’. It is obvious that Pakistan’s resources are insufficient to meet the long-term requirements of reconstruction and rehabilitation, and agreeing to assistance from India could reflect positively in the two countries attitudes towards each other. This is evident in the sentiments expressed in an editorial in the leading Pakistani daily The Dawn dated October 16, 2005, which expressed appreciation of India’s help. It states that, “India’s offer to send relief goods this time has been timely not just for the earthquake affected people but also for the confidence building process between the two countries.”

India’s diplomacy towards Pakistan following the October 8 tragedy has been marked by a desire to help, and to be seen as being helpful, cooperative and generous. In the coming days the three proposed Indian relief and medical centers could make a real difference to reduce the suffering of Kashmiris across the LoC. As per rough estimates, 10,792 quake-hit families on the Indian side living in Poonch, Uri, Tangdhar and Teetwal have close relatives across the line in PoK. If Pakistan agrees it should be possible for some Indian voluntary organizations to help with relief work further inside PoK.

However, while India has provided and will continue to provide significant amounts of assistance for disaster relief requested by Pakistan, would it lead to a long-term change in Islamabad’s India policy? It is difficult to foresee a basic change in Pakistan’s attitude on Kashmir and Siachen soon. At the popular level, however, one can imagine a more favourable image of India resulting from the very willing and spontaneous help made available to the hapless people of Kashmir across the LoC. The ineffective handling of the disaster’s effects by the large Pakistani military deployed in PoK may also have an impact on Pakistan’s legitimacy and standing among the people of the area and its claims to represent the Kashmiri ‘cause’.

On its side, India has declined international aid as it had done earlier for the post-Tsunami relief and rehabilitation. In both instances the Indian state, the armed forces, the local government and the civil society have shown a remarkable sense of confidence and ability to deal with disasters. However, in disasters of such magnitude the relief and rescue needs are large. It may be useful for India to allow selected international aid agencies to visit the affected areas, see for themselves the relief and rehabilitation work, and provide certain specialised kinds of technical help and equipment that may be short in supply. If such aid is properly regulated and managed India can benefit from the international goodwill and deal even more effectively with the challenges, and plug some of the weaknesses.

While the efforts of ONGC-Videsh and Indian Oil Corporation are laudable, there is still some distance our firms have to travel to catch up with global competition. I urge our oil and gas PSUs to think big, think creatively and think boldly in this context…They have to be more fleet-footed in making use of global opportunities, both on the supply and demand side, I find China ahead of us in planning for the future in the field of energy security. We can no longer be complacent and must learn to think strategically, to think ahead and to act swiftly and decisively.

Prime Minister Manmohan Singh’s speech at Petrotech India 2005 on January 16, 2005

It’s not that the PM’s speech galvanised the Indian oil companies into hunting for overseas energy assets. The policy for acquisition of overseas assets was launched in the 1990s, in a bid to minimise India’s burgeoning oil imports even as domestic crude production continued to stagnate at around 32-33 million tonnes per annum, against a demand of 108 million tones, thereby meeting only 30 per cent of demand. The report of the Group on India Hydrocarbon Vision 2025, a ministerial group set up by the Prime Minister to focus on long-term energy security, had suggested, amongst others, that India’s energy policy should have a focused approach to get equity oil and gas, besides building relationships with international oil companies.

According to Indian oil officials, by 2025, with the demand for oil projected to touch 370 million tonnes, India should produce at least 110 million tonnes per year. “Hence to maintain this level, we need to add 60 million tonnes of oil every year. We thought the only way to get this was to get it from outside India as equity oil. Our mission, therefore, is to get this 60 million tonnes every year by 2025,” said Atul Chandra, who was the managing director of ONGC Videsh Limited (OVL), the overseas exploration arm of ONGC, in 2003.1

Where’s the Competitive Edge?

Although Indian oil companies have notched up some successes over the last few years in buying equity stakes in foreign oil and gas blocks, the most notable being the Sakhalin-1 (offshore) project in Russia and the Greater Nile project in Sudan where the Chinese also have a major interest, it has failed in many more or managed to acquire marginal stakes in others. For instance, it lost a bid to acquire Royal Dutch/Shell’s 50 per cent interest in Block 18 offshore Angola, which includes the Greater Plutonia development, with reserves of one billion barrels, after the Chinese government offered the Angolan government a 17-year, $2 billion loan at a low (1.5 per cent) interest rate along with the offer to build hospitals, and electronics manufacturing factories. The Indian government was also prepared to support ONGC by offering $200 million to help build a railway, but this was dwarfed by the Chinese package.

India’s overseas energy policy came into the limelight recently when it entered – and lost – to Chinese national oil companies in their bid to acquire a foreign oil company to China National Petroleum Company (CNPC). PetroKazakhstan is a $3.3 billion Canada-based firm with all its assets in Central Asia. This was followed by another acquisition by CNPC to purchase oil and pipeline interests in Ecuador from EnCana, a Canadian natural gas giant. The $1.42 billion deal marked the second time in a month that the Chinese outbid ONGC in the competition for overseas asset acquisitions.

The recent losses would warrant a rethinking on India’s overseas acquisition policies and the strategy pursued by its national oil companies. According to Mr Chandra, although acquiring overseas assets helps lock the ceiling prices for future supplies, this depends on the long-term assumption of oil prices being built into the acquisition cost. For instance, the Sakhalin crude would have a ceiling price of about $25-30 a barrel for the next 10-years while in the case of Sudan, it will be significantly lower. However, he adds that it is important that the assumed oil price for acquisition is reasonable and is lower than the market price on the longterm basis and warns that in the current environment, when the international price of oil is high, there is no incentive for the countries that own the oil to sell the asset unless a very high premium is paid. The danger is that the high premium would take away the entire value from the asset leaving almost nothing for the buyer barring some risks.

In such cases, geographical contiguity plays a major role. Therefore, despite the high price paid for the PetroKazakh deal ($4.18 billion), it is a valuable asset for the Chinese. Not only do they have their own pipeline from Kazakhstan which would allow them to reduce the transportation cost by $2-3 a barrel, by sourcing Chinese goods and services to develop the field, their rate of return may well exceed 12 per cent. In addition, they would ensure supply security even in the event of a war. But for a company that does not have a strategic advantage, such a high cost of acquisition may not make sense.

Many in the oil industry agree that the most pragmatic acquisition strategy would be to look for good exploration blocks. But this is predicated on having a corporate team capable of evaluating possible exploration acreages in the world, which the big international oil companies have. Unfortunately, however, most of the Indian oil companies do not have a comprehensive set-up or database to follow this strategy, with the result that India ends up acquiring blocks that are in the “very high risk” category. Neither are the exploration blocks acquired in the bidding round examined in depth due to shortage of time available thanks to lack of adequate research of the area.2

China Looms Large

Both, the Chinese and Indian energy companies seem to be chasing the same assets. Consequently, the competitive bidding is pushing up the price of assets. This is likely to hurt the Indians more than their Chinese counterparts, which are bigger. Observers also say that the aggressive bids by the Indian and, particularly the Chinese, companies in exploration auctions reflect a readiness to accept a lower rate of return than western companies in order to secure a strategic asset. As a result, the Chinese seem to have succeeded in clinching some major successes over a relatively short period of time, despite their entry into the overseas acquisition game as late as 1997 and over the last few years, Chinese firms have acquired many exploration and production assets in several countries and regions.

Besides the PetroKazakhstan deal, CNCP has several other projects in Kazakhstan. It owns 85.42 per cent of Aktobemunaigas Corporation (now CNPC Aktobe), 100 per cent of the Bars exploration and development block formerly owned by Nimir Petroleum Bars Holding BV of Great Britain, and 50 per cent of the North Buzachi oil and gas field located in northwest Kazakhstan, also formerly of Nimir and Chevron Texaco.

Additionally, CNPC is a joint, 50 per cent investor in the Atasu- Alashankou pipeline with KazMunaiGaz, Kazakhstan’s state oil company, which runs from a production facility in Atasu, in central Kazakhstan, to a railroad station in Alashankou in China. It will have an immediate 200,000 barrels-a-day capacity, and a peak capacity of 400,000 barrels a day. Completion is scheduled for December 2005 with commissioning in 2006. CNPC is augmenting the Atasu-Alashankou with a wholly domestic pipeline, a 246-km line that runs from Alashankou to a refinery in Dushanzi.

In West Asia too, where China is strengthening its relations with regional producers, Sinopec signed an exploration agreement for Iran’s Zavareh-Kashan block in 2001. Moreover, China and Saudi Arabia have an agreement on petroleum cooperation since 1999 and CNPC’s engineering division helped build several oil processing facilities in Kuwait. The scale of Chinese involvement in the region grew sharply in January. Sinopec and Saudi Aramco signed an agreement for gas exploration and development in South Ghawar region, while Sinopec agreed to a deal with Iran, in which it will buy 250 million tonnes of LNG over 30 years. Sinopec will also become the operator with a 50 per cent stake of Yadavaran oil fields, which are expected to produce 300,000 barrels per day.

In Africa, China is emerging as a serious rival for other oil companies. CNPC was awarded a major stake in the 320,000 barrels a day Greater Nile Oil project (GNOP) in Sudan. In 2003 and 2004, it signed exploration deals in several African countries including Chad, and during Premier Hu Jintao visit to Algeria, Egypt and Gabon in early 2004, an exploration deal was signed between Sinopec and Gabon and a cooperation agreement with Algeria.

CNOOC has also secured equity in Indonesia’s Tangguh and Australia’s North West Shelf projects, and is negotiating for a 12.5 per cent stake in Gorgon (Australia). CNOOC is the largest oil producer offshore Indonesia after its bought oil and gas assets from Repsol YPF in 2002. Moreover, both Sinopec and CNPC are driving major investments in Canada’s oil sands and several Chinese and Latin American energy accords were signed in early 2005 including with Venezuela, Argentina, Brazil and Peru in 2003.3

India’s Limited Success

In contrast, India’s successes have been more modest. Selecting target countries on the basis of a nine-block matrix with the emphasis on the “prospectivity” of the country or region and OVL’s ability to compete there, the projects that came under OVL’s consideration included those in Vietnam, Russia, Iraq, Iran, Libya, Sudan, Indonesia, and the US.

In order to leverage India’s buying power OVL had teamed with other domestic oil companies like IOC, OIL and GAIL as well as multinational companies such as British Petroleum, Exxon-Mobil, British Gas, and Sodeco of Japan in overseas projects. A consortium comprising OVL, IOC and OIL signed a contract in 2002 with Iran’s National Petroleum Company (NIOC) for the exploration of the Farsi block in the Persian Gulf while in the Myanmar block, it had entered into a partnership with GAIL.

However, so far, it can count only a few. Among its projects, the most notable one is Sakhalin-1 (offshore) in Russia, where OVL has acquired a 20 per cent participating interest in the project. It is involved in the project through a consortium arrangement with Exxon-Mobil, Sodeco and the Russian companies RN Astra and SMNG. Exxon-Mobil is the operator. At $1.7 billion, this is the largest single investment ever made by an Indian corporate. Production will commence in 2005. India’s share in the first six or seven years is about 5 million tonnes a year, which includes Russia’s share as part of the repayment for a loan to the Russian government. After the loan is repaid, India’s share tapers off to 2.5 million tonnes a year. Gas production is scheduled to commence in 2008.

OVL also has three major stakes in Sudan – including in the GNOP project in partnership with CNPC and Malaysia’s Petronas. Besides the company also has a stake in an offshore gas project in Vietnam along with British Petroleum and PetroVietnam and another in the Myanmar offshore, where OVL is participating in the exploration along with Daewoo International Corporation, GAIL and Korea Gas Corporation (KOGAS) of South Korea.

In Libya, OVL signed an agreement in August 22, 2002 with the Turkish Petroleum Overseas Company to acquire 49 per cent stake in two onland oil and gas exploration blocks. In the US, OVL has started exploring in the shallow waters of the Gulf of Mexico; Sakhalin India Limited has signed an agreement with McAlester Fuel Company of the US to take a 10 per cent stake in an offshore gas exploration block on the Louisiana coast.

The Downsides

The overseas acquisitions game has its fallouts. Many countries are aware that they can derive benefits by forcing Chinese and Indian companies to compete. For example, Russia is playing ONGC and CNPC off against each other for a 15-20 per cent interest in the re-nationalised Yuganskneftegaz, a subsidiary of Yukos. CNPC is said to be offering a $6 billion advance payment on future oil sales, while ONGC proposed a $2 billion investment and a $4 billion loan.

Realising the problems Indian oil companies are facing and in a bid to end this damaging competition, Indian Petroleum Minister Mani Shankar Aiyar said that “China and India need to adopt a collaborative approach in bidding, whenever possible”, and added that energy companies from the two countries will “cooperate” and “compete”, depending on the situation. Not surprisingly, Mr Aiyar intends to visit China by the end of the year and at this time there are expectations that oil giants from the two countries will draft an agreement in order to foster relations between them.

ONGC chief Subir Raha has also argued for more collaboration with China because “the current situation is unfeasible - we can’t keep fighting”. He favours an Indo-Chinese agreement on where to bid, with the winner swapping or sharing recoverable reserves. “There are many permutations but agreement will cap spiralling prices, which only benefit sellers.” He says he has won over Indian officials, whose suspicion about China had once ruled out any accommodation and said that the Chinese are open to such cooperation. Some observers are, however, sceptical and say that while it is in the Indian companies’ interests to seek cooperation, the cashrich Chinese can afford not to.

In the meantime, Indian companies are also trying to get its act together to increase their leverage. For instance, several Indian firms are pooling their assets to increase their kitty in the bidding game, with some success. IOC and OIL joined forces without ONGC to win an exploration block in Libya. They plan to do the same in the second round of bidding due soon. Earlier, there was also a proposal to build a company with genuine overseas clout as part of a merger of the five national oil companies, which, however is still under consideration.

This strategy of intensified acquisition of equity oil has also met with considerable scepticism from international oil market analysts. They argue that overseas investments are unlikely to shelter countries from oil market volatility. They argue that equity investments by China (or India) in distant producing fields in Africa, Latin America, or West Asia are not likely to improve the physical security of its energy supply. Whether purchased on the open market, or produced by its national oil companies, they will have to effectively pay the world market price either directly or in foregone revenues if China were to ship every barrel of equity oil back home. In fact, according to industry press reports, most of the oil currently produced by Chinese oil companies abroad is not shipped back to China, but instead is sold on markets closer to production.

Crude oil is fungible and the market for this commodity is globally integrated. Due to the laws of supply and demand, any oil that is pumped from the earth and added to the world market will increase supply relative to demand and tend to have a downward effect on price. Any increase in demand relative to supply would tend to push prices upward. Even if national oil companies continue their acquisition strategy, it is very unlikely that they would be successful in satisfying demand or insulate its economy through their acquisitions and will continue to be affected by the world market like other countries.

They also argue that in their rush to stake claims around the world, Chinese and Indian companies accept terms that would often not be considered commercially viable for the oil majors, who base their investment criteria assuming a long-term average price of oil at between $20-30 per barrel. If oil continues selling for $50-60 per barrel, the assets may be an advantage, but if prices drop considerably, the results could be quite painful.

Renewed Thinking

It is noticable from the above observation that India doesn’t necessarily have to play the punishing game of last man standing with China on the overseas equity oil. The ability to forge long-term supply contracts is critically important as much as is the capability to enhance energy security through discoveries within the country. It is also true that a surging Indian economy would require abundant energy, at the cheapest price. However, it is detrimental to reason that because the cheapest and most efficient way to produce energy is through oil, therefore it does not make economic sense to pursue other alternative sources. After all global oil production is reaching its peak; this is to say that production will only fall. Therefore, in midst of spiralling oil prices and global demand that is projected to grow faster than production capacity, a larger question remains: how to find a path that lessens our dependence on oil. The ‘powerdown’ approach based on cooperation, conservation and sharing as well as aggressively pursuing alternative energy keeps haunting us whenever there is an oil crisis and this needs to be revitalised.

The recent India-US agreement on civil nuclear cooperation, which also commits the Bush Administration to press its allies to let India into future-oriented nuclear ventures, is part of a larger energy dialogue that provide oversight of not only oil and gas but also coal and renewable sources. This is indeed significant. India is probably the only country that has a full-fledged ministry dedicated to renewable energy (Ministry of Non-conventional Energy Sources) and this needs to be effectively strengthened with incentive driven commercialisation. Almost immediately after Dr Manmohan Singh’s visit to Washington in July, India along with US, China, Australia, South Korea agreed to the Asia-Pacific Partnership on Clean Development and Climate. The pact “seeks to use scientific innovation and technology transfers to reduce carbon dioxide emissions, in contrast to the binding emissions targets of the Kyoto Protocol.”4 If followed in the right direction, this pact should act as a catalyst for converting - through proven clean development mechanism - indigenous coal supplies into methanol, which is not only a high performance motor fuel but can also be stored in tanks and transported by pipeline and tankers. Clearly such initiatives will help energy-driven India to minimise the impact of global oil price fluctuations and relatively free itself from being a captive to oil.

References/End Notes

• 1. “The Global Player”, Frontline, 20, January 18-31, 2003.
• 2. Financial Express, August 30, 2005.
• 3. Petroleum Economist, March 2005.
• 4. http://www.eia.doe.gov/emeu/cabs/MEC_Current/July.htm