India's Energy Diplomacy

 October 15, 2010

If compared to China, India’s energy strategy is far less successful to date. Although it closely matches China’s (investing in oil assets worldwide, developing oil & gas fields in Iran, joining transnational pipeline projects, signing bilateral supply contracts or developing special relationships with countries such as Saudi Arabia), India’s efforts to diversify its energy supplies away from coal run into strong opposition from the United States and major logistical problems.

India’s energy needs

According to the researchers of the Council on Foreign Relations and India’s Planning Commission, the country faces formidable hurdles in meeting its current and future energy needs, if it wants to maintain its current 8 percent per year economic growth rate.

Over the next 25 years, the Indian government’s priority is the eradication of poverty. To get there, however, India will need to keep growing by 8 percent a year for the full quarter-century. Indian officials, however, fear that this noble goal is going to generate huge energy shortages, as Indiahas been less suceessful in securing energy supplies from its neighbours or from Central Asia than China has been.

The troubles of the energy sector in India are compounded by state control over the import, production and distribution of oil and gas products, which are coordinated by 4 different ministries. More than half of India’s electricity is generated by burning poor-quality domestic coal, which is expected to run out in about 40 years. Furthermore, a third of India’s oil is imported from countries the US is at odds with, such as Sudan, Syria or Iran, whilst the gas is imported mainly from Iran, Bangladesh or Burma. India’s dependence on imported oil, which currently stands at 60 percent, is expected to grow to 90 percent by 2030. That lifts energy diplomacy to the top of India’s agenda, when it comes to dealing with countries from Central Asia, Middle East, Africa or Latin America.

India’s pipeline projects

To date, India has tried to emulate China and build gas pipelines that are needed by its electricity generation sector in order to diversify away from coal. Its two projects are the IPI (Iran-Pakistan-India) pipeline, also dubbed “the peace pipeline”, and the TAPI (Turkmenistan-Afghanistan-Pakistan-India) pipeline.

First discussions concerning the IPI project started during the Clinton administration in 1993, when the so-called moderates where apparently coming to power in Iran. It involved the construction of a 2,700-km pipeline from the South Pars field in Iran, through Pakistan to India’s border, at an estimated cost of some 8 billion dollars. Beside international sanctions and US opposition which affected the project, the Iranian and Indian officials could not lock in the price for the gas to be transported, and could not agree at which border the gas supplies were going to be paid for.

Whilst the Indians insisted they were only going to pay for the gas when it reached the India-Pakistan border, the Iranians asked to be paid when the gas reached the Iran-Pakistan border. As the projected pipeline was due to pass through Beluchistan (Pakistan), home to some of the most radical Islamic tribes, India wanted to make the Pakistani government responsible for the gas’s transit through its territory, in exchange for the $1.2 per mmBtu in transit fees. Thus, practical difficulties and US opposition to the project determined India to recently abandon IPI, of which only the Iran-Pakistan stretch, or about 1,100 km, is going ahead with construction.

The failure of the IPI project has recently determined India to enter fresh negotiations with the Teheran regime for the construction of an undersea gas pipeline, which could cost 9 billion dollars. This would have the advantage of bypassing Pakistan and doing away with transit fees. Again, the project’s chances of success are slight, given the US’ opposition to investments in developing Iran’s energy sector.

In 2008, India initiated the TAPI project to bring gas from Dauletabad (Turkmenistan) to the India-Pakistan border, with a construction price tag of 3.5 billion dollars. This project is favoured by the US, but is quietly opposed by Russia, which needs the Turkmen gas for its European customers.

India, the 5th largest consumer of energy in the world, desperately needs to exponentially increase its imports of oil and gas. Consequently, it has taken an option to develop, at an estimated cost of 8 billion dollars, the Farzad-B area of the Pars gas field at the Persian Gulf, again running into some opposition from the US. Already, the Iran Sanctions Act (ISA) which slaps fines on foreign companies that invest in Iran’s energy sector, has been invoked by American officials against Indian companies. As Indian companies are the biggest foreign subcontractors of IT services to US corporations, India stands to lose vital data processing business, as well as foreign currency earnings. Meanwhile, much better capitalised Chinese state oil and gas companies are aggressively investing some 20 billion dollars in the development of the South Pars gas block.

For the time being, India is being encouraged by the US to convert its gas in LNG form and transport it by tanker. It is also currently being advised by the US to develop oil and gas fields recently found on its own territory and to invest in shale deposits in the US. With so many logistical restrictions and the threat of US sanctions looming, India’s energy diplomacy agenda is becoming ever more complex. (sources: Times of India, FNA, Iran Daily, Heritage Foundation Brief, Council on Foreign Relations Backgrounder, Hindustan Times, Financial Express, Asia Sentinel)