India, China: Comrades in oil

Posted in India | 19-Aug-05 | Author: Jyoti Malhotra| Source: Asia Times

NEW DELHI - Having gingerly circled around each other like two cautious pugilists for the past decades, India and China may be taking their first step in the creation of an Asian synergy that has much more to do with making real money than the rhetorical bombast of anti-imperialist morality.

Last week in Beijing, within days of China announcing that it would vote against a resolution led by India and Japan to expand the UN Security Council, vice chairman Zhang Xiaoqiang of China's National Development and Reform Commission was feting Talmiz Ahmad, an Indian diplomat seconded to the Oil and Petroleum Ministry in New Delhi with the task of creating energy partnerships abroad.

As Ahmad and his delegation were shown around Beijing, Harbin and Shanghai, a senior Chinese oil executive told him, "The possibilities of India and China cooperating in Central Asia, Russia and Africa are enormous of course, but both of us must also work together in America and the big nations of Europe."

The senior Chinese oil executive's message was clear: American oil major Unocal's recent rejection of China National Offshore Oil Cooperation (CNOOC)'s nearly US$18 billion offer to take over the US oil company had been grounded as much in American realpolitik as in the number-crunching offered by Unocal. India, on the other hand, growing at 8% per annum and hungry to elbow its way into the world's top 10, could definitely bring something to the table.

According to PetrolWorld statistics, Beijing imports one-third of its oil supplies, accounting for as much as 7% of the world demand at 5.46 million barrels a day. India, on the other hand, imports as much as two-thirds of its oil needs, consuming about 2 million barrels a day. But Indian officials say that if the Indian economy maintains its robust growth, by 2025 it could be consuming 7.4 million barrels a day.

This overpowering need for energy security is obsessing India. President Abdul Kalam referred to it in his government-cleared address to the people on the occasion of India's independence day on August 15. Prime Minister Manmohan Singh has described it as being "second only in our scheme of things to food security". And, indeed, it lies at the heart of New Delhi's ability to win American confidence that accompanied the pathbreaking nuclear energy deal between the two countries in July.

Political observers point out that China's growing interest in India also had something to do with this nuclear deal, in which Washington implicitly accorded nuclear-power status to India. "India's elevation in the eyes of the world, that too at the hands of the Americans, has concurrently given it greater respect in Chinese eyes," an observer said.

Ahmad and his delegation were given such a right royal tour of the three Chinese cities that they were thrilled. Just as the Chinese side had carefully prepared for the Indian team, the Indian delegation had brought with them power-point presentations comparing Indian and Chinese oil strategies - the latter in answer to questions posed by the Chinese delegation to the round table of Asian oil ministers in New Delhi in January.

"The visit far, far exceeded my expectations," Ahmad said, pointing out that India's Petroleum and Natural Gas Minister Mani Shankar Aiyar would visit China in November to formalize principles and understandings between both nations in the energy sector.

Working together
Far from the prickliness of mistrust and consequent competition as a result of the border war they fought in 1962, such energy cooperation has the potential to build on the recent political thaw that saw a settlement of the border issue. Indian officials now openly speak of pooling resources and jointly bidding for oil blocks and fields with China.

Two examples of India and China investing in the same hydrocarbon exploration fields are in Iran and in Sudan. In the development and exploration of Yadavaran field in Iran, India's ONGC Videsh Limited (OVL) has a 20% stake, while China holds a 50% stake. The exploration fields are estimated to have a daily production of 300,000 barrels of oil. Along with this, both India and China are investing in natural gas imports from Iran.

In Sudan's Greater Nile Oil Project, China National Petroleum Corporation (CNPC) holds a 40% stake, while India has a share of 25%.

An important aspect of cooperation in the Iranian energy sector is to work for a single transportation route for gas imports. The proposed gas pipeline to India from Iran via Pakistan could, according to Aiyar, be extended to China's Yunnan province.

Pointing to the advantages of such Sino-Indian cooperation, rather than competition, Ahmad said in an approach paper before his visit that such competition for equity "merely increases the asking price to the detriment of both sides, [while] consultations between our companies would ensure that we understand each other's requirements and attempts to develop opportunities which would be beneficial to both of us. Pre-bid dialogue will create the space for cooperation in place of competition."

One for all, all for one
Despite the examples cited above, and the bonhomie generated by Ahmad's visit to China, the two oil-guzzlers have competed - and still are - to secure their needs.

As recently as Monday, reports emerged of a bidding battle in Kazakhstan, where Indian and Chinese state-owned oil companies are trying to buy a Canadian company with oil fields in Kazakhstan.

A joint venture of CNPC, China's biggest oil company, and PetroChina, its publicly traded subsidiary, offered about $3.2 billion for PetroKazakhstan, Asia Pulse reported.

Meanwhile, India's state-owned Oil and Natural Gas Corporation (ONGC) has already reportedly submitted a bid of $3.6 billion in cooperation with the steel-maker, Mittal Group.

PetroKazakhstan, whose shares are traded in Toronto, issued a statement from its headquarters in Calgary, Alberta, after the close of trading on Monday that it had received proposals to acquire the entire company. The company announced in late June that it had been approached by suitors, and investment bankers had identified CNPC and ONGC as being interested.

While the Chinese bid is lower than the Indian bid, Chevron's successful pursuit of Unocal this summer, despite a higher bid from CNOOC, has shown that the higher bid does not always win in a politically charged industry like energy. CNPC already has substantial oil investments in Kazakhstan and has been trying to build a pipeline to carry the oil to China.

In October 2004, China outbid ONGC in an exploration deal in Angola, courtesy of Beijing tieing aid to that country.

China is buying $6 billion worth of oil from Russian company Rosfnest, while India, though OVL, has stakes in Sakhalin. According to a report in YaleGlobal Online, "Beijing has sent a $6 billion advance payment for oil supplies to Rosfnest, the Russian company that bought Yuganskneftegas (the main Yukos production unit), and is mulling a 20% equity stake offer in Yuganskneftegas".

OVL said this week that it hoped to begin earning returns on its $2.7 billion investment in the Sakhalin block in Russia with start-up gas production due to begin in October, at which time it will produce 70 million standard cubic feet per day. It will be sold on the domestic market.

Sakhalin is India's largest investment overseas in a single project. Through OVL, India has acquired oil equity and participation in 15 projects in over a dozen countries. OVL has a 20% stake in the Sakhlain-I project. ExxonMobil is the operator of the project with a 30% stake while Sodeco of Japan has a 30% interest. The remaining 20% is held by Rosfnest.

India is currently working on ways to to bring its share of gas and oil from Russia to the country. The options include swapping its share of oil and gas with Japan or China, and instead taking delivery from sources nearer to India.

India's multiple energy strategy is making observers sit up and take notice. At an Asian gas buyers' meet in New Delhi in February, Aiyar exhorted assembled nations, including China and Saudi Arabia, to build a pan-Asian gas grid and end "the wretched Western dominance".

At exactly the same time, India's Foreign Ministry was secretly pursuing the nuclear energy deal with US State Department officials.

Observers point out that for the first time since the end of the Cold War, Indian officials are perhaps learning how to conduct its own foreign policy - and they are learning from none other than the Chinese. "Look at the way Beijing has successfully leveraged its enormous trade and investment linkages with the US and simultaneously maintained an independent foreign policy," a senior Indian diplomat said, adding, "In this brave, new grey world, the color of the cat, whether it is black or white, is especially not important. What matters is whether it can catch the mice" - paraphrasing a famous saying of former Chinese leader Deng Xiaoping, who set China on its path of economic liberalization.

Jyoti Malhotra is a political analyst based in New Delhi.