Geopolitics of Energy in South Asia 9789812308276, 981230827X, 9789812308283, 9812308288

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Reproduced from The Geopolitics of Energy in South Asia edited by Marie Lall (Singapore: Institute of Southeast Asian Studies, 2009). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at

The Institute of South Asian Studies (ISAS) was established in July 2004 as an autonomous research institute within the National University of Singapore (NUS). The establishment of the Institute reflects the increasing economic and political importance of South Asia, and the strong historical links between South Asia and Southeast Asia. The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). ISEAS Publishing, an established academic press, has issued almost 2,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publishing works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world.

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ISEAS SERIES ON ENERGY

EDITED BY

MARIE LALL

INSTITUTE OF SOUTH ASIAN STUDIES Singapore

INSTITUTE OF SOUTHEAST ASIAN STUDIES Singapore

First published in Singapore in 2009 by ISEAS Publications Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace, Pasir Panjang Singapore 119614 E-mail: [email protected]

• Website: bookshop.iseas.edu.sg

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 2009 Institute of Southeast Asian Studies, Singapore The responsibility for facts and opinions in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the publisher or its supporters. ISEAS Library Cataloguing-in-Publication Data The Geopolitics of energy in South Asia / edited by Marie Lall. Papers originally presented to a Conference on Geopolitics of Energy in South Asia, Singapore, 14 August 2007, organised by Institute of South Asian Studies. 1. Power resources—South Asia—Congresses. 2. Energy policy—South Asia—Congresses I. Lall, Marie. II. National University of Singapore. Institute of South Asian Studies. III. Conference on Geopolitics of Energy in South Asia (2007 : Singapore) HD9502 S642G34 2009 ISBN 978-981-230-827-6 (hard cover) ISBN 978-981-230-828-3 (PDF) Typeset by International Typesetters Pte Ltd Printed in Singapore by Utopia Press Pte Ltd

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To Viren, my perpetual inspiration

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Contents List of Tables and Figures

ix

Foreword Director, ISAS

xii

Foreword Director, ISEAS

xiv

The Contributors

xv

Introduction by Marie Lall

1

1

Oil and Gas Pricing Policies in India by S. Narayan

14

2

India’s New Foreign Policy: The Journey from Moral Non-Alignment to the Nuclear Deal by Marie Lall

27

3

Regional Integration in South Asia and Energy Cooperation: Opportunities and Challenges by Aparna Shivpuri Singh

51

4

Pakistan’s Energy Crisis: Challenges and Opportunities by Iftikhar A. Lodhi

83

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Contents

viii

5

Energy Security and Geopolitics in South Asia: Historical Baggage, Global Powers, and Rational Choice by Iftikhar A. Lodhi

94

6

Energy Cooperation between India and Bangladesh: Economics and Geopolitics by M. Shahidul Islam

123

7

Sino-Indian Energy Politics by Mingjiang Li

152

8

Linkages in Urban and Energy Policies: An Analysis of China and India by Indu Rayadurgam

162

9

Strategic Petroleum Reserves in China and India by Elspeth Thomson

192

10

New Partnerships in Energy in Asia between India, Japan, and Singapore by Mark Hong

213

11

The Geopolitics of Energy in India: Implications for Southeast Asia by Deepak L. Waikar

223

Concluding Remarks: The Context for India’s Energy Geopolitics by Ann Florini

243

Index

247

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List of Tables and Figures TABLES Table 0.1 Table 0.2 Table 0.3 Table 3.1 Table 3.2 Table Table Table Table

3.3 3.4 3.5 3.6

Table 3.7 Table 3.8 Table 3.9 Table 3.10 Table 3.11 Table 3.12 Table 3.13 Table 3.14

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Key Economic Indicators of Selected South Asian Countries, 2005 Energy Status Indicators of India, Pakistan, and Bangladesh (mtoe), 2004 Short-to-Medium Term Forecast of Commercial Energy Demand in India, Pakistan, and Bangladesh Intra-regional Trade (as a percentage of total trade between 1980–2004) Percentage Share of SAARC Countries in India’s Total Trade Access to Electricity, 2005 Per Capita Commercial Energy Consumption Import Dependence of Energy Sector in South Asia Oil Reserves, Production, and Consumption in South Asia Natural Gas Reserves, Production, and Consumption in South Asia Coal Reserves, Production, and Consumption in South Asia Hydropower in South Asia Energy Basket of South Asia (percentage) Sales of Power from Bhutan to India (millions of Ngultrum) Revenue Generated in Nepal from Electricity Sale to India Medium-Term Forecast of Commercial Energy Demand, 2002–10 Long-Term Forecast of Commercial Energy Demand, 2010–20

3 4 7 54 55 58 60 60 61 61 62 62 63 72 73 75 76

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List of Tables andContents Figures

x

Table Table Table Table Table

3.15 4.1 4.2 4.3 4.4

Table 5.1 Table 6.1 Table 6.2 Table Table Table Table Table

6.3 6.4 6.5 6.6 8.1

Table Table Table Table Table Table

8.2 8.3 8.4 8.5 8.6 9.1

Table 9.2 Table 9.3 Table 9.4 Table 9.5 Table 9.6 Table 11.1 Table 11.2 Table 11.3 Table 11.4 Table 11.5

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Existing Regional Power Pools Pakistan Energy Mix and Demand Forecasts Pakistan Multiple Energy Scenarios (2025) Pakistan Power Generation Plans, 2006–07 Pakistan Installed Power Generation Capacity, 2006–07 Economic and Energy Indicators, 2006–07 Comparison of Empirical Results from Developing Countries Key Economic Indicators of India and Bangladesh, 2005 Key Energy Indicators of India and Bangladesh, 2004 Bangladesh’s GDP and Gas Demand Forecasts, 2025 Gas Supply-demand Summary: Scenario A Gas Supply-demand Summary: Scenario B Demand for Energy in Transport Sector: OECD and Non-OECD Countries Current Energy Situation in India China: Share of Total Primary Energy Supply China and India: Comparative Indicators Energy Saving Potential in India Energy Saving Potential in China Comparative Oil Production/Consumption and Refining Capacity (end of 2006) Comparative per Capita Oil Consumption, 2003 (barrels per day per 1,000 people) China’s Main Sources of Crude in 2006 (percentage) China’s Total Energy Breakdown, 2004 (thousand tonnes oil equivalent on a net calorific basis and percentages) Electricity Generation by Source in China and India, 2004 (Gigawatt-hours and percentages) India’s Total Energy Breakdown, 2004 (thousand tonnes oil equivalent on a net calorific basis and percentages) India’s Power Sector Indian Power Sector (Distribution by Fuel Type) Indian Power Sector (Distribution of Thermal Power by Type) International Cooperation in the Coal Sector Summary of Perceived Potential Implications

79 85 88 90 90 101 127 129 129 137 138 139 169 172 173 179 182 182 194 196 197 202 203 204 229 229 230 231 237

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Contents List of Tables and Figures

xi

FIGURES Figure 0.1 Primary Commercial Energy Use by Fuel in India, 2004 Figure 0.2 Primary Commercial Energy Use by Fuel in Bangladesh, 2004 Figure 0.3 Primary Commercial Energy Use by Fuel in Pakistan, 2005 Figure 0.4 Short-to-Medium Term Forecast of Commercial Energy Demand in India, Pakistan, and Bangladesh Figure 3.1 Intra-regional Trade as a Share of GDP, 2002 Figure 4.1 Pakistan GDP Growth and Primary Energy Consumption Figure 4.2 Pakistan Primary Energy Mix Figure 5.1 Energy Crisis in India and Pakistan Figure 5.2 India Primary Energy Mix Figure 5.3 India Gas Demand Projections Figure 5.4 India Gas Supply and Demand Gap Projections Figure 5.5 Pakistan Primary Energy Mix Figure 5.6 Pakistan Gas Demand Projections Figure 5.7 Pakistan Gas Supply and Demand Gap Projections Figure 6.1 Primary Commercial Energy Use by Fuel in Bangladesh, 2004 Figure 6.2 Primary Commercial Energy Use by Fuel in India, 2004 Figure 6.3 Energy Status Indicators of India and Bangladesh (mtoe) Figure 6.4 India’s Energy Basket in 2031–32: Coal Dominant Case Figure 6.5 India’s Energy Basket in 2031–32: Forced Renewable Case Figure 6.6 Short-to-Medium Term Forecast of Commercial Energy Demand in India and Bangladesh Figure 6.7 Bangladesh’s Proven Gas Reserves (in tcf ) Figure 6.8 Hydropower Utilization and Potential: Nepal, Bhutan, and India Figure 8.1 The Dynamics of Bilateral Relations Figure 8.2 Residential Energy Consumption Figure 8.3 Energy Consumption Patterns in China Figure 8.4 Energy Supply Patterns in China Figure 8.5 The Virtuous Cycle Figure 11.1 Per Capita Consumption of Electricity in India

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5 5 6 6 53 85 86 100 102 104 105 107 108 108 125 125 130 132 133 134 137 142 163 171 175 175 186 229

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Foreword from the Institute of South Asian Studies Energy security has become a central concern for all countries in the region and the search for sufficient sources of energy to fuel economic growth has influenced relations among South Asian countries as well as their respective relations with their neighbours: China, Myanmar, Iran, Afghanistan, and the Central Asian Republics. Whilst it is widely understood that increased development and economic growth across the world is leading to a rush on global energy resources, there is little understanding on how this is affecting the South Asian region in general, and India in particular. This volume is, thus, timely and opportune. It looks at the issue of energy security from a South Asian perspective, with a central focus on India. It addresses the key issues and developments surrounding energy security in South Asia and their wider implications on regional and international relations. The papers collected in this volume are drawn from the Conference on “Geopolitics of Energy in South Asia” held in Singapore on 14 August 2007. This conference grew out of an initiative from a few of my colleagues at the Institute of South Asian Studies. It is indicative of the desire of the Institute’s researchers, working with colleagues from other institutes in Singapore and beyond, to deepen the knowledge on South Asia, and to make this knowledge available and useful to interested stakeholders and the public at large. This publication consists of chapters by the Institute’s researchers as well as scholars from Singapore and abroad. The Institute’s expertise on South Asia allows us to look at the crucial issue of energy from a regional perspective, with our researchers focusing on key political and economic developments

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Contents from the Institute of South Asian Studies Foreword

xiii

driven by the increased need for energy and their wider impact on the regional and international sphere. The local and international scholars enable us to focus on international developments and issues relating to energy and energy security. The volume covers a range of issues, including India’s new foreign policy, regional integration in South Asia and energy diplomacy, implications of geopolitics of energy for Southeast Asia, the effects on Indo-Chinese relations, energy cooperation between India and Bangladesh, and pipeline diplomacy between India and Pakistan, among others. There are many people to thank in the production of this publication. I would first like to thank Dr Marie Lall, Visiting Research Fellow at the Institute, for putting forth the idea of the conference and agreeing to edit this volume. She worked tirelessly with the rest of the staff at the Institute and the external writers to ensure that timelines were met for every stage of this publication. I would also like to extend my appreciation to the writers for their support and time in making the conference a success, as well as for their important contribution to this volume. The Institute of Southeast Asian Studies is also gratefully acknowledged for agreeing to jointly publish this collection of papers with the Institute of South Asian Studies. Last but not least, I would like to thank my colleagues at the Institute for their support for the conference and in the production of this publication. I am confident that this volume will provide a deeper insight into the key developments on energy which has emerged to be an important strategic consideration in the relationship between nations and one which will continue to be a key issue on the agenda of the global community. Professor Tan Tai Yong Director Institute of South Asian Studies Singapore

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Foreword from the Institute of Southeast Asian Studies Energy issues are now the foremost and central issue for all governments, peoples, businesses as well as regional associations and research institutions. The South Asian and the Southeast Asian regions have been severely impacted by high oil prices. Fuel prices that were increased recently in Indonesia and in Myanmar provoked public unrest and demonstrations, reflecting the reality that energy issues impact directly on peoples’ livelihoods. Energy supplies also directly influence the development of countries and their political stability. With so many vital consequences flowing from energy issues, it was timely for two Singapore research institutes, the Institute of Southeast Asian Studies (ISEAS) and the Institute of South Asian Studies (ISAS), to join forces and organize a conference entitled “Geopolitics of Energy in South Asia” on 14 August 2007. We wish to thank Dr Marie Lall and her colleagues at ISAS for all their hard work in organizing the conference and in editing this book. We are pleased that ISEAS Publications was given the opportunity to publish this book under the ISEAS Energy Series. Mr Mark Hong, Energy Programme Coordinator for ISEAS, also contributed his fair share of effort. We look forward to more cooperation between ISEAS and ISAS, not only on energy issues, but also on attendant environmental and climate change issues, and other issues as well. Ambassador K. Kesavapany Director Institute of Southeast Asian Studies Singapore

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The Contributors Ann Florini is a Visiting Professor and Director of the Centre on Asia and Globalisation at the Lee Kuan Yew School of Public Policy at the National University of Singapore. She is also a Senior Fellow in the Foreign Policy Studies Program at the Brookings Institution in Washington, D.C. She is internationally recognized as an authority on new approaches to global governance, focusing on the roles of civil society and the private sector in addressing global issues. Currently, she is examining governance in the energy sector. Her publications include The Right to Know: Transparency for an Open World (2007); The Coming Democracy: New Rules for Running a New World (2003); and The Third Force: The Rise of Transnational Civil Society (2000). Dr Florini received her Ph.D. in Political Science from UCLA and a Masters in Public Affairs from Princeton University. Mark Hong joined the Ministry of Foreign Affairs in 1969. He served at the Singapore Embassy in Phnom Penh as Charge d’Affaires (1974–75), at the Singapore Commission in Hong Kong as First Secretary (1975–76), at the Singapore Embassy in Paris as Counsellor (1982–86), and at the Singapore Permanent Mission to United Nations in New York as Deputy Permanent Representative (1988–94). He has served in various senior capacities at the Ministry of Foreign Affairs headquarters. His last foreign posting was as Singapore Ambassador to Russia and Ukraine from November 1995 to March 2002. From May 2002 to January 2004, he was attached to the Institute of Defence and Strategic Studies, Nanyang Technological University, Singapore, as a Visiting Senior Fellow. He is currently a Vice Chairman of the International Committee of the Singapore Business Federation, and an International Advisor to the Port of Singapore Authority, and a Visiting Research Fellow at the Institute of Southeast Asian Studies (since February 2004).

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The Contributors Contents

M. Shahidul Islam is a Research Associate at the Institute of South Asian Studies at the National University of Singapore. His research focuses on India-Bangladesh economic relations, regionalism in South Asia, economics of climate change, energy and financial risk management, and globalization of services. Islam has written and published papers on global financial imbalances, outsourcing, migration and globalization, focusing on Southeast, and South Asia. Marie Lall is a South Asia expert, a lecturer at the University of London, and an Associate Fellow on the Asia Programme at Chatham House. She received her Ph.D. in International Relations from the London School of Economics and Political Science. Her research focuses on the politics of South Asia, specifically India and Pakistan, as well as, more recently, Myanmar. She has written widely on issues of political economy, foreign policy formulation, including pipeline diplomacy and Diaspora politics. She also works on education policies in India and Pakistan and the formation of a national identity in South Asia. She is currently an Honorary Research Fellow at the Institute of South Asian Studies at the National University of Singapore. Mingjiang Li is an Assistant Professor at S. Rajaratnam School of International Studies. His main research interests include the rise of China in the context of East Asian regional relations and Sino-U.S. relations, China’s diplomatic history, and domestic sources of China’s international strategies. He received his Ph.D. in Political Science from Boston University. He has also studied at the Foreign Affairs University (Beijing) and the John Hopkins-Nanjing Center. Dr Li was a diplomatic correspondent for Xinhua News Agency from 1999 to 2001. He has previously taught Comparative Politics and Chinese Politics courses at Boston University and Tufts University. He has published and presented papers and book chapters on China’s domestic politics and foreign policy. Iftikhar A. Lodhi is a Research Associate at the Institute of South Asian Studies at the National University of Singapore. He studies the intersection of political institutions, geopolitics, and economic development. His current research focuses on geopolitics in South and Central Asia and economic growth. He has written and published on political economy, governance and growth, private and public interaction in policy formulation, and Pakistan’s foreign relations.

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Contents The Contributors

xvii

S. Narayan is a Visiting Senior Research Fellow and Head of Research at the Institute of South Asian Studies at the National University of Singapore. Dr Narayan has nearly four decades of public service in development administration in state and the central governments, starting in 1965. His last appointment was as Economic Adviser to the Prime Minister (2003–04). Prior to his appointment as Adviser, he was the Finance and Economic Affairs Secretary, and Secretary in the Departments of Revenue, Petroleum, Industrial Development and Coal since 1997. He contributes regularly to newspapers and journals. He has written books and journals on India’s economic reforms, trade related issues, and Indian states. Indu Rayadurgam is a Research Associate at the Institute of South Asian Studies, working on India’s urban policy and public finance issues. She completed her Masters in International Studies at the National University of Singapore. She has worked on a wide variety of political economy issues in the context of India. Her publications include a state report on Tamil Nadu, a book chapter on India’s Regional Trade Agreements (with Dr S. Narayan), and Urban Policy Framework in various Regional Cooperation Initiatives. Rayadurgam has also actively pursued research on Sino-Indian relations at the graduate level. She is planning to specialize in urban economics with reference to India. Aparna Shivpuri Singh is currently pursuing her Masters in International Law and Economics. She was a Research Associate at the Institute of South Asian Studies at the National University of Singapore. Her research focused on trade and development issues and regional integration in South Asia. Prior to joining the Institute, Shivpuri worked as a Research Associate with the Centre for International Trade, Economics and Environment, India, at CUTS International. She has written and published papers on trade and regionalism in South Asia, Millennium Development Goals, Trade in Services, and her papers have appeared in reputed journals such as the Economic and Political Weekly and the Indian Journal of International Law. Elspeth Thomson is a Senior Fellow at the Energy Studies Institute, National University of Singapore. She received her Ph.D. from the School of Oriental and African Studies, University of London. Her main research interests are Asian energy economics and security, and Asian transport. She authored The Chinese Coal Industry: An Economic History (2003) and an edited volume, China’s Science and Technology Sector and the Forces of Globalisation (2008).

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The Contributors Contents

Another volume Energy Conservation in East Asia: Towards Greater Energy Security will also be published in 2008. She has written articles concerning various aspects of Asia’s energy sector in The China Quarterly, Pacific and Asian Journal of Energy, Journal of Applied Statistics, China Review, East Asia: An International Quarterly, and Perspectives. She has co-edited the East Asian Institute’s internationally refereed journal (IRJ), China: An International Journal since 2003 and will also edit the ESI’s planned IRJ. Throughout the 1990s, she taught at the Simon Fraser University in Vancouver and the Lingnan University in Hong Kong. Deepak L. Waikar has more than twenty years of professional experience in education, training, research, and management in an international environment. He has been a faculty member at the Singapore Polytechnic for about fifteen years. Dr Waikar has prepared and presented several policy and research papers on power, energy, and education related topics. Previously, he worked as Assistant Director of Power Engineers’ Training Institute in India for about five years. He has served on various committees in professional bodies such as the Chairman of the Institute of Electrical and Electronic Engineers (IEEE) Inc., the United States, Power Engineering Chapter (Singapore Section). He is a recipient of the IEEE PES Outstanding Power Engineers’ Award 2003 for Singapore and SP Green Buddy Award 2004. He is the organizing Chair for the International Energy Conference — Energex2007, organized by the Sustainable Energy Association of Singapore, in collaboration with the International Energy Foundation, Canada, that was held for the first time in Singapore from 26–30 November 2007.

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Reproduced from The Geopolitics of Energy in South Asia edited by Marie Lall (Singapore: Institute of Southeast Asian Studies, 2009). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at

Introduction Marie Lall

This book was resulted out of the conference, “Geopolitics of Energy in South Asia”, organized by the Institute of South Asian Studies (ISAS) and supported by the Institute of Southeast Asian Studies (ISEAS), which was held in Singapore on 14 August 2007. The aim of this edited volume is to analyse how the geopolitics of energy in South Asia has affected foreign policy and relations between states in the wider region, as well as the global implications emanating from this. The search for regional and global power status today is no longer linked to economic self-sufficiency, but rather to economic growth rates. Economic growth, however, can only be maintained with sufficient energy sources, hence the global drive for “energy security”. Whilst securing energy sources such as oil and gas in the Middle East has been a known parameter in western foreign policy-making since the end of the Second World War, it is only more recently that countries in Asia started to operate like their western counterparts. In part this development is linked to a move away from ideological politics and an embracing of a new form of interdependent Realpolitik, which consequently changes the global chess game radically. Over the last decade energy security has, in fact, become a central concern for all countries in the South and Southeast Asian region. Although the issue of energy security is primarily a domestic concern, the search for further sources of energy has dramatically changed the construction of foreign policy. This is particularly but not exclusively the case for India. Recent political and economic developments have, in turn, altered relations between South Asian countries and their neighbours — China, Myanmar, Iran, Afghanistan, and the Central Asian Republics. The recent nuclear deal between India

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2

Marie Lall

and the United States is also indicative of how energy and power politics are linked, and how it is these new inter-linkages which underlie relations between states today. Whilst it is widely understood that increased development and economic growth across the world is leading to a rush on global energy resources, there is little understanding on how this is affecting the South Asian region, and India, in particular. This book aims to look at the issue of energy security from a South Asian perspective, with a central focus on India. The chapters address how India’s global and regional foreign policy-making has changed in light of India’s search for energy and how this is affecting the relationship on a global level between India and the United States, as well as on a regional level between India and other Asian countries. In light of India’s changed priorities, the book also offers views from Pakistan and Bangladesh, as well as how this shifting reality is affecting relations between India and Southeast Asia. Table 0.1, which gives a brief overview of the key economic indicators of the South Asian countries, shows that these countries are overpopulated and have high population growth rates. Whilst economic growth is largely seen as the only driver which can bring large poor populations in developing countries out of stagnating poverty, it is good to be reminded that high population growth negates economic growth and that the human development index ranks shown here put these countries at the lower end of the list of developing countries. It is, therefore, essential for these countries — if they wish to reduce the high percentage of their poor — to maintain high and stable growth rates so as to allow for the advent of a slow trickle down effect to the poorer, largely rural popluation. Whilst India has been globally seen as a beacon in terms of economic growth, having large number of graduates, and the IT revolution, the county still has tremendous problems with regard to universal access to education and health care, a high child mortality rate, and an incredible rate of un- and underemployment. It is worth remembering that of India’s population of a billion alone, over 75 per cent live in extreme poverty — on less than a few dollars a day. This is aside from the lack of infrastructure and other problems the average developing country faces. The situation in the other South Asian countries is similar and sometimes worse. In order to lift South Asia’s poor out of a chronic condition, the governments of these countries have turned away from socialist redistribution methods and pinned their hopes on increased economic growth. In light of the population growth discussed above as well as increased urbanization, industrialization, and a growing service industry after the economic reforms, an increased level of energy resources is desperately needed. Table 0.2 gives

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1095 1.5 805713 588 9 126

Million % Million US$ $/Year/Per person % Rank

Population Population growth GDP (current) Per capita GDP GDP growth rate HDI

155 2 110732 596 8 134

Pakistan 141 2 60033 433 6 137

Bangladesh

19 1 23478 1002 5 93

Sri Lanka

Source: World Development Indicators online database, World Bank, United Nations Human Development Report, 2006.

India

Unit

Item

Table 0.1 Key Economic Indicators of Selected South Asian Countries, 2005

27 2 7390 234 3 138

Nepal

0.63 3 843 1003 6 135

Bhutan

Introduction 3

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Marie Lall

4

Table 0.2 Energy Status Indicators of India, Pakistan, and Bangladesh (mtoe), 2004 Item Traditional fuel Biomass Commercial fuels Coal Oil Natural gas Hydroelectricity Nuclear and other renewable Total commercial energy Total Biomass + commercial energy Import dependence as % of commercial energy

India

Pakistan

Bangladesh

106.00

23.36

16.64

171 124 28 18 8.50 349.50 455.50

3.30 15.21 27.39 6.47 0.42 52.79 76.15

– 3.71 8.29 0.23 0 12.23 28.87

30%

26%

29%

Source: Regional Energy Security for South Asia, Regional Report, SARI .

an overview of the high level of energy resources used in India, Pakistan, and Bangladesh as well as the level of import dependency these countries faced in 2004. With further population and economic growth, this import dependency figure will increase as well. The primary commercial energy baskets of the three main South Asian countries are as shown in Figures 0.1, 0.2, and 0.3. It is clear that the various uses of commercial energy depend largely on their domestic reserves. This means that India uses more coal, and both Bangladesh and Pakistan use more natural gas as these are the fuels they happen to have larger reserves of. However, despite such reserves, there is a need to import what the country does not produce and this is the case especially for oil. Figure 0.4 and Table 0.3 show what the short-to-medium term increase in commercial energy demand will be in the three countries. The percentage increase for oil alone will be 29.4 per cent in India, 29.7 per cent in Pakistan, and 54 per cent in Bangladesh by 2010. Gas consumption for the same period will rise by 58.7 per cent, 43.2 per cent, and 87 per cent respectively. By 2020 the scenario is even bleaker. It is in light of this background that the book offers an analytical vision of the geopolitics of energy in the region. Each chapter will add to the analysis

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Introduction

5

Figure 0.1 Primary Commercial Energy Use by Fuel in India, 2004

Coal 51%

Natural gas 9%

Nuclear energy Hydroelectricity 2% 2%

Oil 36% Source: Planning Commission, Government of India, 2006.

Figure 0.2 Primary Commercial Energy Use by Fuel in Bangladesh, 2004

Oil 30%

Natural gas 68%

Hydroelectricity 2% Source: Based on Data from Regional Energy Security for South Asia, Regional Report, SARI 2006.

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Marie Lall

6

Figure 0.3 Primary Commercial Energy Use by Fuel in Pakistan, 2005 Natural gas 51%

Coal 8% Hydroelectricity 11%

Nuclear energy 1%

Oil 29%

Source: Based on data from Pakistan Energy Year Book, 2006.

Figure 0.4 Short-to-Medium Term Forecast of Commercial Energy Demand in India, Pakistan, and Bangladesh 500 450 400 350 300 250 200 150 100 50 0

Oil IN Oil PK Oil BD Gas IN Gas PK Gas BD Coal IN Coal PK 15.2 3.71 29.74 27.29 8.29 169.9 3.3 2003–04 116 150.2 19.72 47.19 39.21 15.51 248.7 4.71 5.7 2010 246.9 30.94 11.6 101.88 72.75 44.03 447.6 13.9 2020

Coal BD 0 0.5 0.9

Source: Based on data from Regional Energy Security for South Asia, Regional Report, SARI 2006.

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2003–04 2010 2020 2002 2010 2020 2003–04 2010 2020

mtoe mtoe mtoe mtoe mtoe mtoe mtoe mtoe mtoe

Unit 116.0 150.2 (29.4%) 246.9 (112%) 29.74 47.19 (58.7%) 101.88 (243%) 169.9 248.7 (46.4%) 447.6 (163%)

India (percentage increase) 15.20 19.72 (29.7%) 30.94 (103%) 27.39 39.21 (43.2%) 72.75 (165%) 3.30 4.71 (42.7%) 13.9 (278%)

Pakistan (percentage increase)

3.71 5.70 (54%) 11.6 (212%) 8.29 15.51 (87%) 44.03 (430%) – 0.5 0.9 (80%)

Bangladesh (percentage increase)

Source: Regional Energy Security for South Asia, Regional Report, SARI .

Coal Consumption Coal Demand Forecast

Gas Consumption Gas Demand Forecast

Oil Consumption Oil Demand Forecast

Demand forecast of commercial energy and electricity

Table 0.3 Short-to-Medium Term Forecast of Commercial Energy Demand in India, Pakistan, and Bangladesh

Introduction 7

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Marie Lall

of increased energy demand, but will avoid reiterating the figures presented here in the introductory chapter. The increased need for energy is seen as a given and contributors have focused their analysis on how these energy indicators have altered relations on a global and regional level. The book is divided into eight chapters and four commentaries covering the global and regional issues with regard to energy security. The first chapter gives details on India’s oil and gas pricing politics, allowing an insight into the domestic issues regarding India’s energy politics. This is followed by an analysis of the Indo-U.S. nuclear deal that aims to give the background to India’s global power ambitions. Energy cooperation and regional integration in the South Asian Association for Regional Cooperation (SAARC) gives an insight into relations between the South Asian neighbours. The next section covers relations between India and Pakistan with regard to the Iran-PakistanIndia (IPI) pipeline as well as the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, and relations between India and Bangladesh with regard to gas imports from Myanmar, and the energy corridor between Nepal, Bhutan, and Bangladesh. There are furthermore two papers covering India-China relations and one looking at possible energy cooperation between South and Southeast Asia. Two shorter commentaries, one on Indo-Chinese relations and one on Indo-South East Asia relations, are interspersed between the chapters. The following section will give a more detailed overview of what the individual chapters address. In the first chapter, S. Narayan traces the evolution of the regulatory framework in the petroleum sector in India, describing the development of state monopoly over this sector in the 1960s and 1970s. He analyses how the control over production, refining, as well as marketing by state owned companies enabled the government to intervene in all commercial decisions in this sector, including pricing. Attempts were made in 1997, in the wake of economic reforms that were happening elsewhere in the economy, to liberate this sector from governmental controls. This attempt resulted in the freeing up of exploration and refining, but efforts to move prices of products towards market determined rates suffered a setback after the prices of oil started rising in 2004. The paper describes the distortions in the pricing mechanisms of oil, its products, and natural gas and concludes that political ad-hocism has been responsible for the continuation of controls and regulations. Given the uncertainties of coalition governments in India, it is unlikely that this sector would be opened up for free market forces to operate. The paper concludes that the distortions cause aberrations in pricing in consuming sectors, distorting these as well, but appear to be an unavoidable political economy cost of democracy. This domestic view allows for a greater understanding of

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India’s oil and gas politics that is driving the new foreign policy of energy, which the following chapters focus on. In chapter 2, Marie Lall explains how India’s foreign policy evolved as a “dual” pattern since independence, encompassing a global as well as a regional role. The two roles have often run on a very different basis, as relations with India’s neighbours have to be conducted on a much more realistic policy course as opposed to the moralistic international policy. India’s main foreign policy ambition was to be recognized not only as the regional hegemon, but also as a global power. The main changes in the construction of Indian foreign policy happened under the Bharatiya Janata Party-led National Democratic Alliance (BJP-led NDA) Government as India shed its moralistic rhetoric and adopted economic growth oriented priorities. The BJP’s vision was one of a multi-polar world in which economic relations were going to be crucial. The regional policy became of prime importance, especially with regard to improving trade and the situation in India’s border states. This was largely driven by India’s search for alternative energy sources — and India’s pipeline diplomacy evolved out of these new priorities. The chapter focuses the effects of the Indo-U.S. nuclear deal and how this has allowed India to be recognized as a nuclear weapons state, giving India the kind of global recognition it has been seeking. Indo-U.S. relations have never been so good; yet they have to be analysed in light of the tightrope India needs to walk — trying to balance its regional priorities with its global ambitions. The chapter sets out the growing difficulties India is facing in light of the negotiations of the IPI pipeline with Iran, as well as the reinvigorated relations with Myanmar despite U.S. disapproval. Following from the global perspective, in chapter 3, Aparna Shivpuri Singh looks at the process of regional integration in South Asia with regard to energy diplomacy and cooperation. This chapter looks at SAARC as well as bilateral relations between India and her neighbours, allowing for a regional perspective on the subject. The relevance of SAARC as an organization promoting intra-regional trade and cooperation is analysed in light of the sluggish pace of regional integration in the region. The chapter discusses how the region has never been able to put economic benefits accruing from cooperating with neighbours above political tensions. India, the largest member of the bloc in terms of trade, Gross Domestic Product (GDP), and population, has political tensions with almost all its neighbours, due largely to its hegemonic desires. However, the chapter discusses how there is now a shift in India’s regional outlook and the main determinant/catalyst for this change is its need to secure energy supply for its growing economy and population. Energy is, in fact, one issue which could override the political tensions that

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exist in the region. India has a major role to play here and while it has already initiated cross-border power trade with Nepal and Bhutan, it now has to handle the situation with Pakistan and Bangladesh strategically. Besides the regional players, India, it is argued, also needs to be mindful of the other giant in the Asian region, whose needs are also going to force it to lay claim on the same territory as India. China has already made its presence felt in Pakistan and Bangladesh and is a competitor for ensuring energy supply for its billion plus population. The chapter concludes that in light of the issues discussed, the importance of energy cooperation as a determinant for promoting regional cooperation cannot be undermined. Chapters 4 and 5 by Iftikhar A. Lodhi discuss Pakistan’s energy crisis and India’s pipeline diplomacy. First, the backdrop of energy security and how it affects Indo-Pakistani relations is discussed. The chapter then analyses in detail the political economy of multiple gas pipeline projects in the region, focusing in particular on the Iran-Pakistan-India (IPI), as well as the Turkmenistan Afghanistan Pakistan India (TAPI) pipelines. Particular attention is given to the recent improvement in the relationship between the two countries and the role the negotiations around energy have had to play. The politics of growing regional pipeline diplomacy, it is argued, will shape the future of geopolitics not only in South Asia, but also in West and Central Asia. Chapter 5 discusses other international players on the scene such as the United States, China, and Russia, and aims to take the discussion to a higher level often referred to as “the new great game”. It concludes that the ever-increasing presence of U.S. and North Atlantic Treaty Organization (NATO) forces in the region, and the emerging competition and cooperation among stakeholders have dramatic implications for South Asian countries. This is followed by an analysis of Indo-Bangladesh relations in chapter 6 by M. Shahidul Islam. The chapter argues that both India and Bangladesh have been experiencing acute power shortages and both are expecting a skyrocketing demand for power and hydrocarbon resources in the near future. Bangladesh however sits on a sizeable amount of natural gas and this meets 73 per cent of the country’s primary energy needs. Coal feeds 55 per cent of India’s current energy demand. Besides fossil fuels, the region has a huge potential in hydropower generation, a renewable and clean form of energy. Based on the current and potential energy resources of India and Bangladesh, this chapter provides an economic analysis and depicts the geopolitics pertaining to energy cooperation between these neighbours. It also explores how the geographical proximity between Northeast India and Bangladesh could give New Delhi strategic access to Myanmar’s huge hydrocarbon resources through a tripartite gas pipeline. It then revisits the

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proposition that India is also in a position to mitigate Bangladesh’s chronic power dearth by harnessing the available and potential hydropower resources in its Northeast region as well as in Nepal and Bhutan. It argues that difficult relations between Dhaka and New Delhi are threatening both nations’ energy security critically. This chapter argues that a close Indo-Bangla energy cooperation could bring a win-win situation for both sides by maximizing their respective energy complementarities as well as exploiting the gains from available regional hydrocarbon and hydropower resources. The section on China is introduced in a short commentary by Mingjiang Li in chapter 7. It is followed by two chapters giving different perspectives on India and China. In chapter 8, Indu Rayadurgam argues that India and China, as the world’s fastest growing economies, are faced with the dual prospects of conflict or cooperation, in terms of energy demand and supply. At the diplomatic level, China and India have identified many possible areas of mutualism. The chapter describes how a Joint Study Group (JSG) of the ChinaIndia working committee has recommended various levels of cooperation, particularly for hydrocarbon-based resources, development of advanced technology for electricity production through nuclear energy, exploration of oil and natural gas resources in other countries, development of renewable resources, and most importantly, the setting up of a joint institutional mechanism for efficient energy management. Despite these initiatives, it is an open secret that these energy-voracious nations are going to encounter many conflict zones in the process of their economic development. This analysis provides a fresh perspective on this well researched issue by analysing the growing energy needs of both countries vis-à-vis the domestic scenario. Industrialization and urbanization are the two important resource hungry facets of any growing economy and the concept of urbanization is becoming important as the growth of cities will lead to a rise in energy demand. It is argued that more similarities at the level of domestic policies can lead to similar hunting grounds and can thus lead to an aggressive contest at the international level. Therefore, it is very important to analyse the energy requirements of the domestic individual sectors of these Asian giants and their impact on foreign policy and diplomacy. The chapter seeks to address the following questions: How do the domestic needs of urbanization affect energy policy at the national levels? How different are the approaches of both these countries? How can they cooperate to accommodate growing domestic needs? In chapter 9, Elspeth Thomson gives another view on the issues of India and China with regard to energy security. The chapter explains why the utility

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of maintaining strategic petroleum reserves (SPRs) is controversial. Some industry specialists believe they are indispensable — that governments can and should establish these — to protect civilians and key industries from external oil supply/price disruptions. Others contend that their practicality is limited — that oil is a fungible commodity, that SPRs are enormously expensive to build and maintain, and that they would be useless in the event of a disruption that lasted several months or longer. She describes how the Chinese government has begun to fill its SPRs and plans to amass the equivalent of ninety days’ worth of consumption. India, in turn, is in the process of constructing its first SPRs and appears also to aspire to holding about three months’ worth. A recent study suggests that the growth in ownership of automobiles in China and India will be the fastest in the world up to 2030. Thus, the chapter argues, the projected quantities of oil to be imported over the next decades are staggering. This chapter examines these countries’ current and changing procurement and use of oil, and discusses the global implications of their stockpiling large quantities of oil. A short commentary by Mark Hong in chapter 10 introduces how India’s search for energy impacts on its relations with Southeast Asia, and focusing in particular on relations between India, Singapore, and Japan. This theme is explored further by Deepak L. Waikar in chapter 11 on the implications of the energy scenario in India for Southeast Asia. He identifies areas of competition and cooperation. The chapter also discusses opportunities and challenges in energy cooperation between India and the Association of Southeast Asian Nations (ASEAN). Ann Florini offers a few concluding comments with a view from the United States, pulling together the main issues Asia is facing today with regard to energy security. Energy security,1 in one way or another, is interlinked with other global issues such as climate change, development, and most importantly, armed conflict. Energy security not only affects economic and foreign policies of countries, but also shapes the geopolitics of the day. No matter what alternative energy sources are developed in the future, hydrocarbons (oil and gas) will remain the core of energy sources throughout the coming decades. The already eccentric distribution of supply and demand of hydrocarbons in the world,2 along with an unprecedented increase in demand from China and India’s rising economies, will have repercussions, not only for the hydrocarbon markets, but also for the geopolitics of the South Asian region and the wider world. This book aims to contribute to the debate from a South Asian perspective, allowing for an analysis from a different vantage point.

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NOTES 1

2

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Sustainable and uninterrupted supply and demand at all times at affordable prices. About 70 per cent of the world’s oil and gas reserves are concentrated in a belt stretching from Russia to Nigeria centring on Iraq, Iran, and the Saudi kingdom, while about 60 per cent of demand comes from OECD countries, and 10 per cent from non-OECD Asia, including India and China.

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Reproduced from The Geopolitics of Energy in South Asia edited by Marie Lall (Singapore: Institute of Southeast Asian Studies, 2009). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at

1

Oil and Gas Pricing Policies in India S. Narayan

Introduction India is the sixth largest energy consumer in the world and oil and gas represent over forty per cent of the total energy consumption in India.1 Oil production in India has stagnated at around 30 million tonnes of crude oil per annum since 2000 and the growing consumption has been met by increased quantity of imports, estimated at around 100 million tonnes currently.2 Demand for natural gas is expected3 to grow from around 77 to 87 million standard cubic metres per day (mmscmd) currently to over 225 mmscmd by 2025, again signifying a high dependence on imports of gas. The issue of energy security and the heavy dependence on oil and gas has been emerging as a matter of concern at policy levels. The policy of state ownership of major mineral resources in the early years after independence led to the establishment of the Oil and Natural Gas Commission (ONGC) that developed capabilities for exploration and production with Russian assistance in the early 1950s. The most significant discovery was the Bombay High property, off the coast of Mumbai, in the early 1970s. Other discoveries in Assam, Gujarat, and Rajasthan marked initial successes until the mid-1980s. In the downstream sector, the refining and marketing segments were operating as a free market with many of

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the multinational oil companies such as Caltex, Esso, and others, having a significant presence. The first oil shock in 1973 and the reluctance of the multinationals to adhere to guidelines in prices set by the government persuaded a strong left-of-centre inclined government to nationalize the industry by taking over the assets of the private players, including refineries and retail outlets. From the mid-1970s, the sector remained tightly regulated. All the upstream activities, including geological drilling, exploration, and production were entrusted to the Oil and Natural Gas Commission. The Director General of Hydrocarbons, a government directorate, served as a regulator for this sector. Refining capacity, as well as retail marketing, was in the hands of Public Sector Undertakings that included Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL) that were the successor entities for the Shell and Caltex assets that had been taken over. Establishment of new refining capacity was licensed and could be done only by the public sector. Apart from expansions of existing capacity, new refineries under the aegis of the public sector, were set up in the next two decades in Kochi, Chennai, Bongaigaon (in the Northeast), and more recently, in Numaligarh (Northeast). In the Northeast, Oil India Limited (OIL) managed the production, refining, and retailing operations, expanding on the activities of the erstwhile Assam Oil Company. Finally, the retail outlets of Indo Burma Petroleum, a Burma-Shell entity, were taken over in a later stage of nationalization. Development of policy in the oil and natural gas sector in the 1970s and 1980s was thus oriented towards strengthening and maintenance of the monopolies of the public sector undertakings. The companies themselves operated under the strict control of the Ministry of Petroleum — representatives of the ministry were (and continue to be) on the board of directors of the companies, and all capital expenditure above a certain limit (initially Rs. 10 crores, increased progressively to Rs. 25 and then to Rs. 50 crores) required a complex process of government approvals. Purchase of crude, product prices, retailing margins, and even expansion of retail outlets, were governed by complex guidelines from the ministry. Rent seeking in the form of access to retail outlet concessions, and to the contracts of the undertakings, created a distorted market wherein the Ministry of Petroleum had the final say. These policies spilled over to the management of natural gas resources. The Gas Authority of India Ltd. (GAIL) was established in the early 1980s to set up a gas pipeline grid and manage the retailing of natural gas for industrial purposes. The pipeline orientation was decided by the government, based on considerations of political economy, and the two pipelines on the western coast

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distributed gas primarily to Maharashtra, Gujarat, Delhi, and Uttar Pradesh. Gas prices were regulated and allocations to industry strictly controlled by the Ministry of Petroleum. Distribution of domestic gas, liquefied petroleum gas (LPG), continued to be with the retailing (“marketing”) companies. Prices of domestic fuels, kerosene, and LPG were kept at heavily subsidized levels to appeal to the poorer and middle-class electorates. The policies of subsidies led to a complicated structure of pricing of products until the late 1980s. Subsidies payable to the marketing companies for kerosene and LPG were realized through higher than international pricing for petrol and diesel. The crude producers were compensated at lower than international prices in this mechanism. The trend towards pricing petrol (“luxury” fuels) higher than diesel (“common man’s” fuel) led to a dieselization of the entire industry. Transportation (both trucks and railway) as well as power generation and agricultural pump sets, increasingly developed into diesel-based machines. The consumption of diesel in the country is over five times the consumption of petrol, a skewing brought about by the administered and political pricing policies of different regimes in the first three-and-half decades after independence. A complex “Administered Price Mechanism” (APM) regime served as a clearing house of claims between the different public sector undertakings. These claims, apart from the subsidies, included claims for transportation, irrecoverable taxes from the states, and a host of other major and minor issues arising from the fact that there was a system of complicated product exchanges between the different marketing companies. This was necessitated by the geographical location of the refineries and the product sharing arrangements that the marketing companies had to resort to in order to meet the demands at different regional centres. The APM operated an “Oil Pool Account” that put together the under recoveries and the contributions into a balance sheet and ordered redistribution to ensure the health of the public sector oil companies. The mechanism did not always work. During periods when international oil prices were high, the inability to pass on these prices to consumers resulted in serious deficits on the Oil Pool Account; at times when crude prices were low, the benefits were not passed on to the consumers, resulting in substantial surpluses on the account. The distortions caused by APM were further exacerbated by the high fiscal levies that this sector attracted over the years, both from the central, as well as the state, governments. Customs duties at times favoured producers and refiners, and at other times, the retailers. Excise duties on the products have remained a major source of indirect tax revenue. State sales tax on petroleum products remains, up to today, a major source of revenue for state governments. As a result, the retail prices of petrol and diesel are among the

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highest in the world, and are made up, to a significant proportion, of state and central taxes. Policies in the oil sector were marked by some specific points of inflection that changed the direction of activities in the industry. In the oil sector, a first major point occurred in 1977 with the establishment of the Administered Pricing Mechanism (APM). Until this time, product prices were fixed based on BICP (Bureau of Industrial Costs and Prices) formulae, which provided for a reasonable return on capital employed. With the nationalization of Caltex and Esso assets, the entire oil sector became a government-owned monopoly. Exploration, production, refining, marketing, and distribution were in the hands of the public sector. At this time natural gas had not become an important fuel (the Bombay High discovery occurred only in the 1980s). Given the political need to provide for subsidies in the pricing of kerosene and LPG, the structure of pricing required that there should be explicit subsidies for these products. The country’s development was at that stage when automobile manufacturing was under industrial licensing, cars were generally considered luxury goods, and as a consequence, the pricing of petrol was kept at a level higher than that warranted by costs plus return considerations. Petrol and aviation fuel became bearers of the burden of subsidies kerosene and LPG. High speed diesel became the intermediate fuel that was used for transportation, agriculture (tractors, pump sets, and other implements), and for captive power generation. This pricing formula resulted in a form of dieselization of the economy, where heavy vehicle manufacture, diesel generating sets, diesel pump sets, and diesel run tractors increasingly occupied manufacturing space in the country. In no other country, whether Europe, the United States, or Japan, was the difference in diesel and petrol prices so high as to orient manufacturing increasingly towards diesel consuming engines. It must be recalled that diesel technology of that time was substantially poorer than petrol-based energy technology because, even in the developed countries, there was more research and development (R&D) for petroldriven engines. As a result, the diesel engines that came under the umbrella of license-permit raj in the country were below optimum efficiency. This is a legacy that we live with even today. Our trucks and lorries continue to use technologies that may be considered obsolete in developed countries. Another consequence of the APM was that public sector companies engaged in product exchanges at different geographical locations in the country. The Mumbai refinery of BPCL may be supplying products to IOC and to HPCL in the entire Mumbai region. The Chennai refinery

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may be supplying products to all the three marketing companies. These product exchanges were made necessary in order to reduce transportation and distribution costs. Storage tanks and pipelines were laid by different marketing companies to make the system work. As a result, over the next two decades, a very large network of pipelines, depots, and other storage and distribution facilities came up in different locations in the country. The costs for these distributions were factored into the prices within the APM. The APM created an Oil Pool Account into which recoveries from petrol and diesel, as well as from other fuels such as aviation fuel, lubricants, went. Oil companies made claims for the costs incurred in subsidizing kerosene and LPG, as well as for their distribution and marketing expenses. The system was working reasonably well up to about 1994–95 as oil prices were reasonably stable and increases were gradual. The second oil crisis in the early 1990s threw this mechanism out of gear and by 1995–96 there was a huge deficit in the Oil Pool Account. The mechanism could not handle the volatility in oil prices because of the time lag in reconciliations, as well as controls over increase in prices of some products. PRICING OF PETROLEUM PRODUCTS After 1991, the economic reforms in the economy impacted this sector as well. The agenda for reforms focused on making the pricing of fuels more market based and allowing the public sector companies greater freedom in their operations. Opening up the exploration, refining, and marketing sectors to private players and arriving at a path for privatization was also on the agenda. The first of the issues to be tackled was product pricing and marketing. In 1995, the Ministry of Petroleum and Natural Gas (MOP&NG) set up the Oil Industry Restructuring Group (“R” Group) to come up with a time-bound programme for reforms in the petroleum sector. The phasing of reforms as envisaged by the R Group was as follows: •

•

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Phase I (1996–98): rationalization of retention margins; deregulation of natural gas pricing; deregulation of furnace oil and bitumen; partial deregulation of the marketing sector with freedom to appoint dealers and distributors; removal of the subsidy on high speed diesel (HSD), and reduction of the subsidies on kerosene, LPG, and inputs for fertilizers. Phase II (1998–2000): pricing of indigenous crude on the basis of average free on board (FOB) price of imported crude; rationalization of royalty and cess; further deregulation of the marketing sector; further reduction of subsidies on kerosene, LPG, and inputs for fertilizers.

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Phase III (2000–02): deregulation of aviation turbine fuel (ATF), high speed diesel (HSD), and motor spirit (MS).

An Expert Technical Group (ETG) constituted by the ministry recommended a time-bound programme of reforms for moving towards a market-driven pricing mechanism for petroleum products in the country. Following the ETG’s recommendations, the government 4 decided to withdraw the cost plus formula for the pricing of indigenous crude by linking the price receivable by oil producers to a phased import parity scheme. The retention pricing system for refineries was also abolished and refinery gate prices were linked to import parity except for controlled products, namely, motor sprit (MS), high speed diesel (HSD), LPG, and aviation turbine fuel (ATF). Refinery gate prices for controlled products were fixed on an adjusted parity basis. Furthermore, ex-storage point prices of HSD were fixed at import parity with immediate effect, while consumer prices of other controlled products were linked to phased import parity. Prices of other petroleum products were decontrolled, and a phased rationalization of duties on crude and petroleum products was announced. As a measure for opening up the sector, imports and exports of all petroleum products except crude, natural gas liquids (NGLs), ATF, MS, and HSD were decanalized. Sourcing and imports of crude by private and joint sector refineries was allowed. Conditional marketing rights for transportation fuels, namely MS, HSD, and ATF, subject to investments of Rs. 2,000 crores in refining, or a minimum crude production of 3 million tonnes per annum, were announced, thus effectively delicensing the refining sector. For the full implementation of the above, the government announced in 2001 the road map for the dismantling of the APM, with effect from 1 April 2002. The decision stated: •

•

•

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Consumer prices of motor spirit (MS) and high speed diesel (HSD) will be market determined with effect from 1 April 2002. Consequently, the pricing of petroleum products, except for PDS kerosene and domestic LPG, will be market determined with effect from 1 April 2002. The subsidies on PDS kerosene and domestic LPG will be borne by the Consolidated Fund of India from 1 April 2002. These subsidies will be on a specified flat rate basis, the scheme for which will be notified separately. These subsidies will be phased out in the next three to five years. Freight subsidy will continue to be provided for supplies of PDS kerosene and domestic LPG to far flung areas, the scheme for which will be

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• •

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notified separately. The freight subsidy will be borne by the Consolidated Fund of India with effect from 1 April 2002. The price of indigenous crude oil of Oil and Natural Gas Corporation Ltd. and Oil India Ltd. will be market determined with effect from 1 April 2002. The Oil Pool Account will be wound up with effect from 1 April 2002.

In the post-APM era starting from 1 April 2002, the oil companies were allowed to fix the prices of petroleum products except for PDS kerosene and domestic LPG (which are subsidized), based on the Import Parity Pricing mechanism. This freedom was, unfortunately, short-lived. Prices of HSD and MS were synchronized with crude price increases and falls until late 2003 when the crude prices began going up significantly. The companies could not immediately pass on these increases due to the impending general elections in 2004, and the freedom of market determined prices was lost. Although the oil marketing companies were granted freedom to fix retail selling prices of MS and HSD on a fortnightly basis, in reality, the prices were revised after informal clearance from the ministry. Hence, there was no price revision of petrol and diesel from 1 January to 15 June 2004, although the ruling prices in the international market were abnormally high during this period. Moderate increases to the extent of Rs. 2 per litre on petrol and Rs. 1 per litre on diesel were announced from 16 June 2004, with excise duty reductions at 3 per cent on petrol and diesel. Subsequent increases have become issues of politics, and the oil companies are complaining that these guidelines from the ministries do not compensate for the increases in crude. During 2004–05, the average price of crude bought by the oil companies rose by over 50 per cent, but this could not be passed on to the consumers. Presently, products other than petrol, diesel, PDS kerosene and domestic LPG have marketdetermined prices based on import parity, determined by the respective companies. The prices of petrol and diesel are partially market-determined, subject to modulation by the government in view of the high and volatile international crude prices. The United Progressive Alliance (UPA) Government came to power in May 2004, and the revision of petroleum product prices was among the first issues they had to tackle. On 19 August 2004, the government further reduced customs and excise duties on petrol and diesel by 5 and 3 per cent respectively. However, international prices went up further during the month of October 2004. With the under-recoveries on petrol and diesel estimated to be around Rs. 3,000 crores for the period April to October 2004,

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further increases were announced effective 5 November 2004. Retail selling price of petrol was fixed in line with the import parity price. The retail price of petrol was further revised downwards in line with international prices, effective 16 November 2004. However, the increase in diesel retail price was pegged at 50 per cent of the level of increase required on the basis of import parity, and no further increase was made in the diesel price on 16 November 2004. The ad hoc approaches to adjustments of fuel prices have continued throughout 2006 and 2007, with price increases expected to be announced in September 2007. In the case of PDS kerosene and domestic LPG, the government had decided that the subsidies on PDS kerosene and domestic LPG will be on a specified flat rate basis for each depot/bottling plant, and will be met from the fiscal budget. After providing for this, the retail prices would then vary as per changes in the international oil prices. These subsidies would be phased out in three to five years. However, the basic prices of PDS kerosene and domestic LPG have not been revised during the periods 2002–03 and 2003–04 in line with the government policy. The retail selling price of domestic LPG was revised by the oil marketing companies on 16 June 2004, and again on 5 November 2004, by Rs. 20 per cylinder in view of the abnormally high prices of crude oil and petroleum products in the international market. The government also reduced excise duty on domestic LPG from 16 June 2004 by 8 per cent. Furthermore, on 19 August 2004, customs duty on SKO (PDS) and LPG was reduced by 5 per cent and excise duty on SKO (PDS) was reduced by 4 per cent. There has been no hike in retail selling price of PDS kerosene since April 2002. The estimated under-recoveries of oil companies on account of kerosene and LPG subsidies during the period March to April 2007 are estimated to be around Rs. 65,000 crores. There have been suggestions for pricing reforms in the petroleum sector. The Planning Commission had suggested that: •

•

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the sector is devoid of any real competition among the public sector oil companies, except in certain products such as lubricating oils that account for only about 1.2 per cent of the total petroleum products on account of import parity pricing. Duty protection and normalization of transportation costs increase the margins of refiners. Therefore there should be price competition at the refinery gate and retail end. The current pricing methodology on an import parity basis provides higher margins to the refiners, and large profits. Trade parity norm is an option for pricing.

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On the other hand, the margins of refiners are substantially offset by the under-recoveries of Oil Marketing Companies (OMCs). It may be noted that the oil companies have stabilized and, in fact, moderated the unprecedented increase in international oil prices of petrol and diesel after 2004–05, and maintained a lower price level even though taxes have been increased in the recent budget, by bearing huge under-recoveries on petrol and diesel. Oil Public Sector Undertakings (PSUs) also continue to subsidize petrol and diesel in the current year. Government policies on pricing have alternated between the need to secure a reasonable return on investments made by the public sector, and the need to cushion the consumers (the electorate) against sharp increases in prices. The instruments used to achieve this balance have included, at various times, reduction in customs and excise duties, use of debt instrument that provide cash flows to the companies in the short term, and are, in turn, guaranteed by the government, and periodic price rises. It is apparent that the coalition government, which includes the Left parties to support it, has had considerable difficulties in managing pricing policies in this sector. There are distortions in the pricing of gas as well. GAS PRICING India is one of the largest emerging gas markets in the Asia Pacific, mainly because of large capacities required in power and fertilizer sectors. The fertilizer sector consumes about 41 per cent of the total gas supply whereas the power sector consumes about 39 per cent. Until recently gas production in India was the preserve of national oil companies. However after the opening of the oil and gas sector, there are private sector companies — joint ventures with ONGC — that are also engaged in exploration and production under production-sharing contracts signed with the government of India. Currently more than 4,000 km of gas pipeline infrastructure is in place and the marketing of nearly all the gas is being done by the national gas company, Gas Authority of India Ltd. (GAIL). The gas production during the year 2005–06 was 31.95 billion metric cubic (bmc) from ONGC, OIL, and private/JV companies. At the same time, Indian consumption of natural gas has risen faster than any other fuel in recent years. From 0.6 trillion cubic feet (tcf ) per year in 1995, natural gas use was nearly 0.9 tcf in 2002, and is projected to reach 1.2 tcf in 2010 and 1.6 tcf in 2015. Natural gas has been utilized in Assam and Gujarat since the 1960s. With the development of Bombay High fields, its production and utilization have increased. Most of the production of gas comes from the western offshore

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area. Assam, Andhra Pradesh, and Gujarat are the other producers of gas. Sixty per cent of the natural gas is produced along with crude oil as associated gas. The rest is produced as free gas. The South Bassein and Tapti fields in the western offshore area, and the gas fields in Tripura and Andhra Pradesh, are important sources of free gas. The NELP (New Exploration Licence Policy), started in 1999, enabled open access to a number of fields that had been with ONGC. Among these were the deep sea fields, off the coast of Andhra Pradesh, named the Krishna Godavari (KG) Basin. Parts of these fields were tendered out in 2000 and 2001. Reliance Industries, a private sector company that has a large refinery in Gujarat, has been successful in discovering substantial quantities of gas in the KG Basin, and estimated reserves of this find are around 20 tcf. The company proposes to pump around 80 mmscmd from the end of 2008. This would double current availability of gas in the country, and these fields are likely to be active for at least fifteen years. Other finds in the area include those reported by ONGC and Gujarat State Petroleum Corporation, though the size of the reserves has still to be firmed up. There are opportunities for more discoveries in the region, including the off shore basins further south, called the Cauvery Basin. Even with new reserves, the natural gas supply in India is not likely to keep pace with its demand. Imports of natural gas would be necessary through pipelines or as Liquefied Natural Gas (LNG). The International Energy outlook 2004 predicts a 4.8 per cent annual growth rate in natural gas consumption. Consumption of natural gas has risen faster than any other fuel in recent years. The government of India has taken various steps to manage the emerging demand-supply gap. The government has put LNG and gas import under “open general license”. In order to give a thrust and support to the development of LNG trade in India, the government has also set up a joint venture company — Petronet LNG Limited. Natural gas prices were last revised in September 1997, linking them to the prices of international fuel oils (FOs) with the linkage progressively increasing to 55 per cent, 65 per cent, and 75 per cent during the years 1997–98, 1998–99, and 1999–2000 respectively for general consumers. Similarly, for northeast consumers, the linkage was 35 per cent, 40 per cent, and 45 per cent during the years 1997–98, 1998–99, and 1999–2000 respectively. The consumer price of gas varies between a floor price of Rs. 2,150/mscm (thousand standard cubic metres) and a ceiling of Rs. 2,850/ mscm for general consumers, and between Rs. 1,200/mscm and Rs. 1,700/ mscm in the case of northeast consumers. The prices were to be reviewed before the end of the third year, that is, April 2000, with a view to achieve 100 per cent parity with FO by the year 2001–02. However, natural gas prices

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could not be revised and the same price regime is continuing. Since October 1999, the consumer prices of natural gas have remained at Rs. 2,850/mscm as against the market price of Rs. 5,800/mscm. The Ministry of Petroleum and Natural Gas has been pursuing the issue of revision of gas prices since early 2000 and has circulated a Cabinet Note to take gas prices to 100 per cent of FOB parity so as to facilitate the deregulation and development of the gas market in the country. A Group of Ministers (GOM) considered all the issues and made the following major recommendations: • •

•

•

The determination of producer price of gas for ONGC and OIL and the increase in the transportation tariff of GAIL will be referred to the Tariff Commission for report within six months. Gas prices to be revised on a provisional basis from Rs. 2,850/mcm to Rs. 3,200/mcm and transportation tariff to be increased by Rs. 10/mcm till the government takes a decision on the recommendation of the Tariff Commission. The decision of the government, based on the Tariff Commission’s report, will continue till a regulatory mechanism is put in place. Gas produced by joint ventures will be sold at market-determined prices. However, one million standard cubic meters per day (mmscmd) of gas from Rava JV field in the KG Basin will continue to be supplied by GAIL under the existing arrangement. Supply of non-JV gas from ONGC/OIL to the priority sectors of power and fertilizers will be maximized. The Gas Pool Account will be limited to Rs. 100 crore per annum against the present quantum of Rs. 250 crore.

None of these suggestions has been accepted yet. Problems have arisen due to the fact that there are, in fact, several different prices for gas. At one end are the subsidized prices for public sector gas that have traditionally helped to keep fuel prices of the power and fertilizer sectors at below market levels. There are also smaller private players, which have been permitted to charge market rates for sales to industry, and which include some small to middle size fields. The pricing of LNG gas from the Petronet facility is determined by contractual prices for the imports of the gas from Qatar, and are currently at rates above the other two, and likely to go up further. The distortions are likely to get exacerbated by the arrival of 40 to 80 mmscmd gas from the Reliance Industries Ltd. (RIL) fields in the KG Basin. Current availability of less than 80 mmscmd, including LNG, is likely to be doubled by this availability, and the pricing of this product has been a matter of considerable debate. At the core of this is the contractual obligation

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inherent in the exploration contract that allows explorers and investors free market pricing. Against this, is the fact that anchor consuming sectors such as power and fertilizer have long enjoyed subsidized gas prices and are sectors that are tightly price regulated, as well as dependant on governmental subsidies. The issue of market-determined pricing of inputs, while outputs are tightly controlled and price regulated, has been a knotty one to resolve, and it is only most recently that a group of ministers of the cabinet constituted for the purpose has resolved in favour of open market pricing for the gas. This is likely to impact on the price of fuel for the fertilizer and power sectors, and raise the subsidy bills for these two sectors. In conclusion, the pricing of oil and gas and of petroleum products in India has been characterized by executive interventions at different periods. These interventions have often attempted to find ad hoc solutions to immediate problems, without the strategy or vision to take care of the long-term interest of producers or consumers. Over the last three decades, the sector has been characterized by tight controls over exploration, refining, marketing, and pricing, and public sector companies have functioned as extended arms of state intervention in the energy sector. After the 1990s, there have been reforms in the sector, but these have neither been comprehensive, nor extended to all parts of the sector. Thus, while there is some degree of openness in the upstream sectors, including exploration and refining, downstream sectors like marketing are still subject to price and distribution controls. This has stunted the development of private sector initiatives, and private sector companies like RIL are developing export markets for their products, which are more open, rather than catering to the Indian market. It is hoped that in future, there will be more openness in the oil and gas markets. The growing energy demand in India is a natural corollary of the GDP growth. With local production of oil and gas limited, and restrictions in place in marketing and pricing, there is little international investment happening in this sector. The burden of energy security, through finding reliable and long-term sources of supply of both oil and gas, has fallen on the shoulders of government-owned companies, a role that they are not fully equipped to play. Having been nurtured in a protected environment, they find the competitive environment of international bidding new, and their forays into Central Asia, Myanmar, and Africa to look for equity oil and gas, have met with only limited success. Most recently, Indian companies lost out to Chinese companies in the development of a major gas field in Myanmar. The concerns for new energy sources and for the developing competition with China over access to energy are likely to be more pronounced in the

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next few years as oil prices rise. Several initiatives, including gas pipelines with Iran, access to gas from Bangladesh and Myanmar, and looking at oil in Sudan, Angola, and other parts of Africa, stem partly from these concerns. The coming years will see more such initiatives as India seeks energy security, and indeed, the Indo-U.S. nuclear deal is part of this strategy. NOTES 1

2

3 4

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Draft Report of the Expert Committee on Integrated Energy Policy, Planning Commission, India, December 2005. The above report envisages oil imports to increase to over 200 million tonnes by 2024–25. Ibid., p. 33. Ministry of Petroleum and Natural Gas, Resolution dated 21 November 1997.

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Reproduced from The Geopolitics of Energy in South Asia edited by Marie Lall (Singapore: Institute of Southeast Asian Studies, 2009). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at

2

India’s New Foreign Policy: The Journey from Moral Non-Alignment to the Nuclear Deal Marie Lall

Introduction For 20 years no one called me. I had to make all the calls. Since we started talking about a nuclear deal, I have not had to make any calls. Everyone wants to speak to us because Bush wants to do a deal. India has become important. (Ministry of External Affairs (MEA), India, official speaking about his postings abroad, anonymous interview, New Delhi, 4 August 2007.)

India is showing a new image of itself to the world and the world is recognizing that today, India is indeed a country to be reckoned with. Sixty years on, Jawaharlal Nehru’s dream of India being recognized as a global power has never been closer. India has always aspired to global recognition; however for almost half a century, India was seen as overpopulated, poor,

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and irrelevant. Although it is the hegemon in the South Asian region and a leader within the Non-Aligned Movement (NAM), this hardly mattered on the wider world stage. India’s foreign policy in the first forty-five years after independence was very flexible and reactive in nature. The global vision engendered by Nehru was based on moral supremacy and leadership of the developing world, as well as economic self-sufficiency at home. These moral principles focused largely on issues of superpower domination and anti-imperialism and were passed on from government to government till the late 1980s. However as the world around India changed, these principles slowly became obsolete. India’s foreign policy formulation changed, first under the United Front Governments in the mid-1990s, and then more radically, under the Bharatiya Janata Party-led National Democratic Alliance (BJP-led NDA) in 1998. The backdrop to the changes was the economic reforms which had been started in 1991. India was opening up to the world and economic growth rather than self-sufficiency became the major driver for international relations. The realisation that foreign relations, energy policy, and economic growth are linked has let to a new foreign policy formulation. New Delhi’s priority today to protect India’s economic growth and foreign policy has been harnessed to create linkages with those countries that could provide energy security. This is because India sees that the only way it can maintain its current position on the global scale is through its growth. But India’s new foreign policy formulation goes beyond securing oil and gas resources. Over the last few years, India has been negotiating a nuclear deal with the United States. This deal’s main objectives are to help India’s civilian nuclear power expansion, as well as increase business between the United States and India. However this agreement goes well beyond energy security and economic growth. The most pertinent result of these negotiations is India’s recognition as a nuclear-weapon state. With this recognition, India achieves a large milestone towards global power status and fulfils Nehru’s vision, albeit in a manner which could never have been imagined by India’s first prime minister. This chapter aims to draw together the nexus of energy, economic growth, and the quest for global power status. It will give a brief background to India’s foreign policy formulation before the economic reforms, as well as to how matters changed with the United Front (UF) and the NDA Governments. It will then analyse the role of energy in India’s new foreign policy formulation, touching briefly on pipeline diplomacy before analysing the current negotiations around the nuclear deal.

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THE CONSTRUCTION OF INDIA’S FOREIGN POLICY — GLOBAL POWER STATUS ON THE BASIS OF MORAL STANDING India’s foreign policy evolved as a “dual” pattern, encompassing a global as well as a regional role. The two roles were run on a very different basis, as relations with India’s neighbours were conducted on a much more realistic policy course as opposed to its moralistic international policy. The regional dimension was based on the fact that India was the hegemon in the region and would do everything to remain so. The Non-Aligned Movement (NAM) was created out of the desire to orient India’s foreign policy towards the group of newly decolonized states, in the hope of creating a larger area of peace by fighting common dangers of imperialism and racialism together.1 Nehru wanted India to be the leader of the developing world, in this way carving out a global role for the country. The principle of India’s leadership was to be based on moral rather than economic power. India’s relations with the superpowers during the Cold War were difficult as its non-aligned status was never really accepted by the United States who saw India as being in the Soviet camp. India’s desire for economic self-sufficiency also went against the grain of the concept of free market economy, which was being pushed by the Western powers. On the other hand, relations with the Soviet Union were cordial, with substantial trade and barter trade underlying the relationship. However India never subscribed to the communist world’s ideology, and tried instead to combine a socialist economy with a democratic system at home. India refused to be a part of any defence pact, or to take sides against either the Western powers or the communist bloc. Nehru believed that these idealistic broad concepts used in global policy formulation could also be used at the “micro-level”, subject to some minor adjustments. Later, after Nehru’s death, this was dropped, making place for a more regional, realistic, and forceful policy, first under Indira Gandhi, and later under Rajiv Gandhi, especially with regard to the South Asian region. The main incident which established India as a regional power was the creation of Bangladesh. 1971 was crucial for India’s position in the region. The flood of refugees that poured into India had severe effects on the economy and on India’s social structure. Out of economic and strategic necessity, India trained, armed, and then gave combat support to the Bangladeshi refugees.2 India’s regional priority has been to disallow the destabilization of any neighbouring states by any internal or external forces. This includes the monitoring of ethnic conflicts on the borders in the Northeast, Bhutan, or

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Sri Lanka, and the promotion of regional cooperation. There are, of course, many obstacles to regional cooperation, paramount being India’s size and position as a hegemon, but it is also understood to be the only possibility for political and economic stability in the region. Nevertheless the regional part of the policy formulation was always rather ill-defined and generally “reactive” in nature. The main emphasis was on establishing a security zone against possible threats from China. The Chinese factor has been a sore point in India’s foreign relations. Although China is a neighbour, it cannot be counted as part of the South Asian region, geographically set apart as it is by the Himalayan mountain range. India and China are natural rivals and the relationship has been problematic over the years, with border issues in Kashmir, India’s Northeast, the status of Tibet, and Sikkim. Nehru’s political understanding involved advocating a policy of friendship, avoiding the isolation of newly communist China.3 In this way he hoped to establish a “normal” world order where Indo-Chinese cooperation would lead the newly independent countries of the Third World.4 Throughout this time, India upheld China’s issues at the United Nations and recognized Taiwan as part of China. When in 1950 China asserted its authority in Tibet, Nehru exercised restraint. In 1954, the two countries signed an agreement on Tibet which proclaimed the “Panchsheel” doctrine, the five principles of peaceful coexistence.5 The Indian humiliation of October/November 1962 at the hands of the Chinese armed forces made the nation realize that its relatively unarmed foreign policy towards China had failed to provide the necessary security and that idealism was no substitute for realism.6 India felt it was threatened by both its immediate neighbours, Pakistan and China, neither of which subscribed to non-alignment, and therefore a modern defence force had become necessary. This section serves as a reminder of how India’s global and regional foreign policies were formulated prior to the economic reforms, and underlines how until the early 1990s, India’s international foreign policy was idealistically oriented. India’s national interest was seen both regionally and globally solely in political and ideological terms, with hardly any economic component. THE CHANGES AFTER THE ECONOMIC REFORMS AND UNDER THE BHARATIYA JANATA PARTY (BJP): GLOBAL POWER STATUS — THE REALIST WAY The 1991 economic reforms saw the birth of a new role for international economic and trade relations. India suddenly had to engage with the post-

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Cold War world and reassess its foreign policy priorities. The opening up of the economy to international players also meant that foreign relations had an economic dimension and trade became a foreign policy tool. Leaving swadeshi or economic self-sufficiency behind, and engaging in international trade was India’s new way forward. The Congress Government under Narasimha Rao initiated economic reforms. However, it was worried that the economic pain of free trade and privatization would hit the poorer section of India’s society and increase the already large disparities. After the Congress lost power, the United Front Government under Deve Gowda, and I.K. Gujaral started to focus more on foreign policy and foreign relations. In part this was due to India coming to terms with its first coalition government where consensus on domestic affairs was not always forthcoming. The I.K. Gujaral peace moves towards Pakistan were a direct result of this — as were Deve Gowda’s economic interest in Southeast Asia and the “Look East” policy with a clear vision for India’s northeastern states. The “Look East” policy was part of India’s reassessment of its role in the wider region, and for the first time, it looked at Southeast Asia as a neighbour that mattered politically and economically. As India’s search for new markets and relations with the United States had still not warmed up, a strategic decision to focus on Southeast Asia was taken. Closer cooperation with ASEAN was seen as a new priority as it became increasingly clear that due to frosty relations with the neighbouring countries, South Asian Association for Regional Cooperation (SAARC) was not going to be a huge success in terms of multilateral trade. The BJP’s vision was one of a multi-polar world7 in which economic relations were going to be crucial. Regional policy became of prime importance, especially with regard to improving trade and the situation in India’s border states. In part the BJP’s moves towards Pakistan have to be seen in this light, but even more so, its increased interest in the Northeast,8 which included starting a peace process with various insurgency groups, as well as improving relations with Myanmar. There seems to have been an inherent understanding that the region could not be developed without international cooperation across the border. The BJP’s foreign policy priorities have not been that different to that of Congress — that is, to be and remain the regional hegemon with global power aspirations. However the BJP realized that the post-Cold War world needed a different approach, based on trade and not on Nehruvian morality and righteousness. The BJP, unlike previous Congress Governments, also saw that there are direct links between foreign policy formulation and domestic policy, especially in the economic realm.

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Despite the fact that the BJP had campaigned on an anti-economic reforms ticket, they continued and intensified the reforms after forming their coalition government called the National Democratic Alliance (NDA). India’s opening up saw the rise of multinational corporations, which resulted in high growth with limited infrastructural development. The businesses — mainly multinationals, but also some large Indian firms — gained better access to the Indian government in the 1990s. Their agenda was focused on increased open markets and more trade, internationally, as well as regionally. Indian businesses have always been aware that Indo-Pakistani and Indo-Chinese trade could be huge. As a result, trade lobbies formed and have become more powerful in the political realm in Delhi in order to influence the decisionmaking process. During the Kargil War, there were reports that businesses in India and beyond were lobbying for a quick solution so as not to lose the multinationals and so that trade would not be lost either. Consequently, since the economic reforms, businesses have become a new type of political actors, or are, at the very least, influencing political decisions. As a part of this new strategy, relations with the United States, Israel, and Myanmar were all revived. These were countries India had aspired to keep away from for various reasons: the United States for its imperialistic global bullying strategy, Israel for its war against the Palestinians, and Myanmar for its undemocratic government in light of the 1990 elections. The 9/11 war on terror changed relations with the United States for good. India saw this as an opportunity to ally itself with the United States and portray the Kashmir problem as a part of the war on terror. The United States was seen as a powerful economic ally holding the purse strings of various international funds. An agreement with Israel on the same basis meant that India could buy arms it would never have had access to before. Peace or a dialogue about peace with Pakistan was seen as essential. Peace meant that India would finally be seen as an economically safe region for international investment. It also meant that the BJP would then be able to focus on internal changes. The government finally decided to tackle the China factor for the first time. India has for decades seen itself threatened militarily and economically by China. Disputed border issues have not been tackled as successive governments feared opening up a “Pandora’s box”. However with China’s increasing economic might in the region, India needed to improve relations and increase trade quickly. Finally the recognition of Tibet was exchanged against the recognition of Sikkim, a significant step in the move away from moralistic foreign policy vis-à-vis a neighbour. These changes have “[…] to be understood as a larger reorientation that has taken place since the end of the Cold War”9 where the United States has

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come to dominate international politics. The nuclear threshold was crossed by the BJP with tests in May 1998 which showed the world that India would take on a more realist and pragmatic orientation. It was defended to Parliament with the statement: “it is India’s due, the right of one sixth of human kind”.10 The gamble paid off as it brought a closer engagement with the United States.11 What this section wants to emphasize is that the aims of all Indian governments, including that of the BJP,12 have been the same as Nehru’s — to make India a major world power. India has always been suspicious of U.S. neo-imperialist designs; however engagement with the United States was seen as a key element in defining India’s future. The NDA was able to make the link between improved economic growth, willingness to reform, and improved international standing. Consequently since the 1991 reforms, but especially under the NDA government, India’s foreign policy formulation has been conducted on the basis of trade and power priorities as a mechanism to hegemony. At a larger level, this move fits in with globalization and the increasing power of business in government policy formulation, not only in Asia, but in the world at large. The Current United Democratic Alliance (UDA) Government — Borrowing from the BJP In May 2005, the BJP-led NDA alliance lost the elections to the Congressled UDA coalition. Immediately after the elections, the Indian stock markets dipped. There was a general sense of unease with regard to India’s new government’s external support by the communist party and the fear that both domestic and foreign economic policies would change. However, within a few months, it became clear that not only general economic policy would remain very much on the same track as the BJP had chartered, but also that the new government would further build on the new foreign policy relations which had been developed. This was particularly, but not exclusively, the case for relations with the United States and Myanmar. Energy security soon became a key government concept with a visionary Mani Shankar Ayiar at the helm of the Petroleum Ministry. THE ISSUE OF ENERGY AS A PIVOTAL POINT: PIPELINE DIPLOMACY The geopolitics of energy has become of increasing importance as developing countries need to secure energy supplies in order to maintain economic

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growth rates. The volatility of the oil market has had severe repercussions on developing countries as price hikes lead to less competitive productivity and an increase in trade deficits. This is particularly a risk for India and China which do not meet their own needs with either domestic oil or gas supplies. As a result, relations with states that can provide the well-needed gas and oil are seen as central to India’s new foreign policy. But it is not only the hydrocarbon rich states which are of importance, as any pipeline would have to cross India’s immediate neighbours with whom relations have been at best cordial, and often quite, a lot worse. On India’s eastern flank, relations with Bangladesh need to be improved, and on the western border, peace with Pakistan needs to be secured in order for the energy supply to be secure and uninterrupted. So the issue of energy goes beyond traditional trade and economic relations and has wide-ranging effects on economic growth, peace negotiations, and regional power status. The need for energy also ties in closely with the issues linked with the globalization of these countries as multinational energy corporations become the true players on the Asian markets with economic and political consequences that cannot be entirely foreseen at this stage. India’s Current Energy Needs As mentioned above, India’s current energy needs are largely dictated by the rise in economic growth. To sustain such growth (estimated at between seven and eight per cent per annum and targeted to increase to ten per cent per annum), India has to secure energy resources quickly. The energy needs are also linked to India’s population explosion.13 India’s growing population is expected to reach 1,180 million by 2010, 1,362 million by 2020, and 1,573 million by 2030 — that is, a more than fifty per cent increase in fewer than thirty years. The introductory chapter has given an overview of India’s projected energy needs. India has stepped up the exploration for natural gas within its own borders; however it is becoming increasingly clear that large amounts of gas will need to be imported from abroad.14 In February 2005, the Indian government approved plans for talks with six countries on the construction of gas pipelines that would pass through Iran, Afghanistan, Pakistan, Myanmar, Bangladesh, and Turkmenistan. This new “pipeline diplomacy” was seen as a key foreign policy priority as India’s energy requirements are rising quickly. The Petroleum and Natural Gas Ministry was permitted to hold talks with the above mentioned countries to secure natural gas supplies. India produces only half the natural gas it uses and it imports 70 per cent of its crude oil.15 Then Minister for Petroleum and

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Natural Gas, Mani Shankar Aiyar, confirmed that three pipeline projects were being discussed, including a pipeline running from Iran through Pakistan, one from Turkmenistan through Pakistan and Afghanistan, and a third from Myanmar (originally planned through Bangladesh). All transit countries would be paid high transit fees, making the projects worthwhile for them. As will be discussed in the other chapters of this book, the pipeline projects have met with some difficulties. Currently only the Iran-PakistanIndia (IPI) pipeline remains a realistic option, as Myanmar has signed a pipeline deal with China and the security situation makes TurkmenistanAfghanistan-Pakistan-India (TAPI) pipeline rather unrealistic. But it is important to note that due to these pipeline negotiations, India’s relations with the concerned countries have improved dramatically. The peace negotiations with Pakistan are seen as being strengthened by the IPI talks; relations with Bangladesh, strained for decades, are better with the interim government than they have been for decades; relations with Iran, Myanmar, and Central Asia are stronger than before. The Issue of Energy as a Pivotal Point: The Nuclear Deal However oil and gas are not the only energy priorities India is focusing on. The Kirit Parikh report focusing on energy security and completed at the end of 2005 emphasized the need for India to diversify its energy resources and to focus on development in all fields, including the nuclear field. At present, the Atomic Energy Commission (AEC) in India is only producing about 3,000 MWs of energy. Despite toiling with this effort for almost fifty years, this current output still only represents less than three per cent of its total power.16 Although the AEC does estimate that nuclear sources would generate some 63,000 MWs by 2032, a study of the organization’s past record shows that this target is unreliable and unrealistic. Nevertheless, nuclear energy provided a source of clean energy for heavily-polluted India. In fact, India was no stranger to nuclear facilities. In 1956, it had the first nuclear reactor in Asia outside the USSR.17 However, with three decades of sanctions against it, India lost out on key developments in the international nuclear industry. The nuclear energy option is seen by India as a long-term option as the high technological development will take years to expand. India also realized that its indigenous programme would need western technology and more fissile materials to be able to grow at a reasonable rate. Today the expectation is that at current growth rates, and if the private sector is involved, nuclear

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energy could possibly provide six per cent of India’s energy consumption. This very low rate and the high expense beg the question as to why India would want to spend time, money, and energy to develop this sector. The role of “the nuclear” in global power status, however, is central to being recognized as a power to be reckoned with. Despite India’s nuclear tests in 1974 and 1998, such recognition had always eluded India. Since India was not a signatory to the Non-Proliteration Treaty (NPT), it was in effect, seen as a nuclear pariah who suffered sanctions in retaliation for its “unauthorized” and unilateral actions. In fact Indo-U.S. relations suffered tremendously after the 1998 tests. Manmohan Singh has claimed that “this political impasse proved to be a thorn stuck in the throat of the relationship of both countries”.18 In order to gain global recognition, India needed to be recognized as a legitimate nuclear weapons state and in order to do this, relations with the United States had to be mended. India’s quest for a civilian nuclear cooperation agreement with the United States has to be seen in light of India’s quest, not so much for energy and economic development, but a recognized role on the global stage of politics. This does not necessarily gel with the United States’ priorities or its reasoning on the deal, which hopes to bring most of India’s nuclear facilities under international control in as short a time as possible. Nicholas Burns, U.S. Undersecretary of State for political, clearly stated at the end of July 2007 that he expected 95 per cent of India’s nuclear facilities to be inspected by the International Energy Agency (IAE) within twenty-five years.19 There is a feeling that India needs to be controlled and reigned in. The discrepancy of understanding between the two countries could, in the long run, lead to major problems. Background Besides the obvious benefits to their energy and nuclear industries, India also saw the civilian nuclear agreement as an opportunity to develop close ties with United States. To India, closer ties with the United States suited its changing strategic security policies, given the rapidly changing geopolitical situation in the region and China’s economic rise. Furthermore, cooperation with the United States promised access to nuclear fuel, and would place it among the elite group of recognized nuclear weapons states. A series of talks in 2000 between then U.S. Deputy Secretary of State Strobe Talbott and then Indian Foreign Minister Jaswant Singh focused on a series of issues. However, any discussions about the nuclear issues between both countries faced a stalemate as the United States insisted on a cap on India’s fissile nuclear programme.20

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It was thus left to a shift in U.S. foreign policy to make the breakthrough. Attempts by the first Bush administration to achieve any significant progress proved futile. The problem lay in the presence of South Asian experts in this administration who had a fixed mindset towards the region. In the nuclear cooperation context, these officials argued that any exception made for India had to be granted to Pakistan also. Given the proliferation controversy surrounding A.Q. Khan, the father of Pakistan’s nuclear bomb, and his proliferation network, any consideration of encouraging nuclear activity in Pakistan was immediately ruled out. Moreover, the administration was also littered with non-proliferation experts and advocates of the NPT. Even with such opposition, the strongest advocacy for any such cooperation between the two countries still came from within the United States. This illustrated list of supporters included Stephen Cohen, Joseph Nye, Henry Kissinger, and William Perry.21 It was the arrival of the second Bush administration in 2004 that brought along with it a new foreign policy team that looked at Asia more imaginatively.22 This team recognized the emerging prowess of China’s economic and strategic strengths. It also recognized that India had become too important a player in the Asian region and on the global stage for the United States to continue to ignore it. India, it thought, could be a counter to the growing Chinese threat in Asia. After all, it made perfect ideological sense for the United States as the oldest democracy in the world, to partner India, the world’s largest democracy. Besides pitting it as an Asian balance of power counterweight, the United States was also cautious of the growing relations between India, and Iran, especially in light of closer cooperation between Russia, China, India, and Iran between the late 1990s and 2005. The pipeline project proved to be a warning signal to U.S. foreign policy officials. They knew that if they did not get involved, relations between New Delhi and Tehran would deepen and this would be a threat to U.S. security interests. The United States also saw India’s presence outside the global non-proliferation architecture as a potential threat to its strategic interests, given India’s vast and growing indigenous capabilities. This is despite the fact that the Indian government had established a rigorous export controls system and possessed an exemplary record of non-proliferation even though it was not a part of the international regime. The United States did not feel that there were any assurances that these measures would be enforced consistently or effectively in perpetuity. From the Pakistani examples, the United States had learnt that non-proliferation ultimately derives from inequalities between private and collective costs and benefits. Thus, in the event of high direct costs, the Bush administration felt that India could default.23 Indeed, economics did

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play a considerable part in the formulation of foreign policy in this case. Perhaps the least publicized benefit to the United States deriving from the deal would be the direct access to the Indian civilian nuclear market for its nuclear technology companies. The promise of a large portion of the billion-dollar pie enticed the Bush administration and its political donors, many of whom were energy companies. This would also help rectify the balance of trade deficit between the United States and India. Knowing full well that the improvement of Indo-U.S. relations would be the defining success of the Bush term in office, the administration pursued achieving this objective aggressively. Washington also expected transformed bilateral relations to facilitate the expansion of Indian power in a manner that will ultimately advance America’s own global interests with respect to defeating terrorism, promoting democracy worldwide, contributing towards counter proliferation activities in the Indian Ocean, and preserving a stable balance of power in Asia over the long term.24 The nuclear deal has raised much controversy within both the United States and India, and also in international circles. This is mainly owing to the fact that India is not a signatory to the Non-Proliferation Treaty (NPT) and should not be allowed access to sources of nuclear fuel. However, under the agreement made two years ago, President Bush made a commitment to Prime Minister Manmohan Singh that the United States would favour India in changing its non-proliferation and export control laws and policies, and also to garner their own domestic support in Washington. In return, the United States wanted India to prove and to be accepted globally as a responsible owner of nuclear weapons — this despite India being a non-signatory to the NPT.25 In order to achieve this, India was asked to separate its civilian and military nuclear programmes. In addition, it also agreed to place its civilian nuclear programme under an international safeguards system, as well as to support a variety of global non-proliferation initiatives.26 Furthermore, India also agreed to extend its moratorium on nuclear testing. In committing itself to all of the above, India would assume the same responsibilities and practices as the acknowledged nuclear weapons states. The Difference between the Indian and the U.S. Perception The biggest problem with the nuclear deal is the differences between the Indian and the U.S. perception of what the deal means and what it aims to achieve. The following two lists show how both India and the United States come from very different, possibly irreconcilable, vantage points:

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The United States wants to • bring India into the NPT framework. • increase trade: the balance of trade deficit. • use India as a counterweight to China’s rise (Asian balance of power). • get Indian support for increased democratization of the Middle East. • get Indian support in the anti-Iran campaign. The United States will also get access to the Indian nuclear market which will help revive the U.S. nuclear industry which has been dormant since the three-mile accident in 1979. “The U.S. will also use the Indian human resource and India’s scientific reactors and recycle them back to India.”27 Prasad in this article also believes that the United States feels that sanctions did not work as India continued with the fast breeder reactor programme. The deal is a way of controlling, regulating, and harnessing India. India on the other hand wants: • recognition as a responsible nuclear weapons state. • access to fissile material and latest nuclear technology. • U.S. support with regard to Pakistan and the China-Pakistan nexus (Asian balance of power). • to maintain its sovereignty in all aspects of domestic and foreign policy formulation. The meetings between the U.S. administration and the Indian government did not centre only on the actual deal, such as the one between Dick Cheney and M.K. Narayan on 22 July 2007. This points to the fact that the nuclear deal is part of a much larger agreement framework. The Indian press has been speculating about a security partnership, which possibly contravenes the sovereignty issue listed above.28 Current Standing On 3 August 2007, the United States and India unveiled the much awaited text of their agreed nuclear deal. The details of the 123 Agreement, however, revealed the extent of India’s compromise with U.S. laws in exchange for nuclear energy for civilian purposes. Both sides had reached an historic milestone in finalizing terms of the nuclear deal on 20 July 2007, marking the culmination of their two years of negotiation. Talks began in Washington on 17 July and were supposed to have lasted only two days, but were extended for another day after failing to finalize some technical aspects of the operational deal.29 The agreement is to be valid for

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forty years and will stay in force for two additional periods of ten years each. Each side can end the deal with six months’ notice at the end of forty years or any subsequent ten-year period. Either side can terminate the deal mid term by giving a year’s notice. As a next step, India and United States would have to woo the Nuclear Suppliers Group to change their guidelines and to reach an agreement with International Atomic Energy Agency (IAEA) on their safeguards. If these difficult obstacles are overcome, then President Bush has to ensure that Congress rule in favour of the deal before any implementation can be carried out. Terms of Negotiation The United States has agreed in principle to provide nuclear technology and fuel to India for civilian use. In December 2006, the U.S. Congress had approved a landmark ruling, the Hyde Act, which allowed U.S. export of civilian nuclear fuel and technology for the first time in thirty years. India gets to have a civilian and military nuclear programme without being a signatory to the NPT agreement, thus ending the “nuclear apartheid” against India.30 The details revealed by the 123 Agreement on 3 July include the following points:31 • • • •

• • • •

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The agreement will not hinder or interfere with India’s nuclear programme for military purposes. The United States will help India negotiate with the IAEA for an Indiaspecific fuel supply agreement. Washington will support New Delhi to develop strategic reserves of nuclear fuel to guard against future disruptions of supply. In case of disruption, the United States and India will jointly convene a group of friendly supplier countries to include nations like Russia, France, and the United Kingdom to pursue such measures to restore fuel supply. Both the countries agree to facilitate nuclear trade between them in the interest of their respective industries and consumers. India and the United States agree to transfer nuclear material, non-nuclear material, equipment, and components. Any special fissionable material transferred under the agreement shall be low enriched uranium. Low enriched uranium can be transferred for use as fuel in reactor experiments and in reactors for conversion or fabrication.

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• • • • •

• • • • • • •

41

The ambit of the deal includes research, development, design, construction, operation, maintenance and use of nuclear reactors, reactor experiments, and decommissioning. India can develop strategic reserves of nuclear fuel to guard against any disruption of supply over the lifetime of its reactors. The agreement provides for consultations on the circumstances, including changed security environment, before termination of the nuclear cooperation. Provision for a one-year notice period before termination of the agreement. The United States to engage the Nuclear Suppliers Group to help India obtain full access to the international fuel market, including reliable, uninterrupted, and continual access to fuel supplies from firms in several nations. The United States will have the right to seek a return of nuclear fuel and technology. In case of return, Washington will compensate New Delhi promptly for the “fair market value thereof” and the costs incurred as a consequence of such removal. Both the countries are to set up a Joint Committee for implementation of the civil nuclear agreement and development of further cooperation in this field. The agreement grants prior consent to reprocess spent fuel. Sensitive nuclear technology, nuclear facilities, and major critical components can be transferred after amendment to the agreement. India will establish a new national facility dedicated to reprocessing safeguarded nuclear material under IAEA safeguards. Nuclear material and equipment transferred to India by the United States would be subject to safeguards in perpetuity.

The Issues During the past two years, the deal was heavily scrutinized by all quarters. As a result, many issues — both major and trivial — concerning aspects of the deal, were raised. One source of agitation for critics of the deal has been its financing. There has been no mention yet of any details of proposed financing for the project. The government has also failed to address the concerns about reactor safety and waste disposal.

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The greatest cause of concern to Indian policy-makers, however, is the effect this deal would have on the country’s existing regime. Problems which remain are the fact that the agreement is governed by U.S. law, and the right of return of all materials. Article 2.1 makes it clear that the Hyde Act and other U.S. laws, not international law, will prevail: “Each party shall implement this agreement in accordance with its respective applicable treaties, national laws, regulations, and licence requirements concerning the use of nuclear energy for peaceful purposes.” National security remains a priority of the Indian government and to commit to a moratorium on conducting further nuclear tests is seen as a compromise of their national sovereignty and national security. Since it is unlikely that the United States will make an exception for India, New Delhi could face another round of sanctions, in accordance with U.S. laws, should they conduct further testing. Although there was no clear mention of consequences of an Indian nuclear test, the agreement does indicate that either party could choose to terminate the deal, prior to its expiration, as a result of either party’s serious concern about a changed security environment, or as a response to similar actions by other states which could impact national security. Critics argue that directly or otherwise, this clause effectively ends India’s nuclear testing possibilities if it wants to avoid termination of the pact. Opposition party BJP, led by senior leader Yashwant Sinha, has illustrated the main flaw of the agreement. According to him, the text of the agreement does state that issues not covered in it will be subject to national laws. This, he adds, refers to the Hyde Act, which was passed in December 2006. The Act provides the U.S. President with the discretionary powers to terminate the civil nuclear cooperation if India conducts a nuclear test.32 In fact, the United States can scrap the agreement at will (Article 14(2)) in an unequal deal as India’s international safeguards are in perpetuity: “The party seeking termination has the right to cease further cooperation under this agreement if it determines that a mutually acceptable resolution of outstanding issues has not been possible or cannot be achieved through consultations.” This puts India at the mercy of the supplier who has all the leverage.33 Sinha concludes that the fundamental flaw lies in the fact that the United States has provided unenforceable commitments in lieu of enforceable commitments from India. In addition to this, many in India saw the condition that the United States will continue to support their country’s sourcing for fuel even after the deal is concluded as a continuous support from the Americans. However, the agreement provided a clause that allows the party seeking termination of the deal to cease further cooperation under

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the agreement if it deems that a mutually acceptable resolution of outstanding issues cannot be achieved. The expectation that India should join in international efforts to sanction and contain Iran’s search for uranium enrichment technology is also a difficult diplomatic and economic decision for New Delhi to make. Although not mentioned explicitly, Nicholas Burns and others from the U.S. team have clearly stated that they are “counselling India” not to engage with Iran.34 India did join the UN Security Council’s resolutions to constrain Iran’s nuclear quest, but the country is still dependent on the Iranians for oil and gas. However, the reality of an Iran-Pakistan-India (IPI) oil pipeline could be affected by the U.S. anti-Iran policy. In relation to the requirement of reaching an agreement with the IAEA in perpetuity, India has been reluctant unless it is assured access to nuclear materials in perpetuity. However, India’s attempts at negotiating this clause with the IAEA seem to be futile as the IAEA is a regulatory and not a policymaking body. The obligation of the U.S. President to certify annually that India is conforming to the needs of the U.S. legislation is viewed by many as an intrusion to its sovereignty. This again is specified under the Hyde Act. Furthermore, with the issue of continuity of the American leadership comes the question of consistency of its policy towards India. Adding to that, the subjectivity of such an assessment, built individual judgement, makes the uncertainty of the outcome even more obvious. Nevertheless, such concerns may be exaggerated. As President Bush has already proven through alternate language by agreeing to an “annual assessment” rather than a “certification”, the U.S. government can innovatively work their way around such small obstacles. The question however remains what future administrations would do. Although Manmohan Singh’s administration heralded the deal as a negotiation victory for New Delhi, this was a rather premature analysis. Upon closer evaluation, terms of the agreement show that the United States has very cleverly hidden key clauses in it that places India in an unfavourable position. The general sense of satisfaction in India surrounding the text of the 123 is derived from the agreement to petty details that New Delhi had been pushing for. The major component of the deal that has been much the cause of a triumphant mood in New Delhi has to do with the reprocessing of spent fuel. Quoted in the Asian Age, A.N Prasad, a former director of the Bhabha Atominc Reseach Centre, said that “India’s three stage nuclear programme, which is geared towards harnessing thorium, is a prized jewel that cannot

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be sacrificed at the altar of politics.” As mentioned earlier, New Delhi had been pushing for an allowance for transfer of reprocessing or enrichment technology. Initial concerns from Washington were that this would allow India to divert nuclear material to its military programme. However, under the condition that India’s reprocessing facility be placed under special IAEA safeguards, the allowance has been given in the 123 for her to reprocess spent fuel.35 But Prasad makes the point that setting up a dedicated reprocessing plant will not make matters any better for the fast breed reactor.36 Given the reality of the agreement on the ground and the different priorities of both governments, New Delhi needs to remember that this is not a two-way deal: “India is not selling something of critical interest to America in return for nuclear fuel or nuclear technology. India is a buyer. It is a one way transaction.”37 This, of course, makes the situation an unequal one, one which is heavily contested both by the opposition and the government supporting left parties. The Opposition and the Left Parties The BJP has argued that the 123 agreement compromises India’s nuclear weapons programme and asked the government to put the next steps of the deal on hold. “The BJP is of the clear view that this agreement is an assault on our nuclear sovereignty and our foreign policy options. We are therefore, unable to accept this agreement as finalized.”38 The controversy rages principally around the lack of definition of the word “action” which the BJP feels could be interpreted widely by the United States to include anything it perceives not to be in its national interest, including, for example, India’s ties with Iran. The Left parties initially decided to consult scientists first and come back with a decision a few days later. They have now publicly demanded that the deal be rejected and that it be brought to parliament for review. They have also demanded that the constitution be altered to allow international deals to be reviewed in parliament so that every MP can vote for it and suggest amendments. Manmohan Singh has rejected these calls saying that the deal has been agreed and it will not be brought back to the study table.39 Reaction in the United States Despite the overwhelming political support the nuclear deal has had in Washington, a large segment of the U.S. press has been critical. The main argument lies in the fact that India is not a signatory to the NPT and is being

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rewarded for bad behaviour and that this is bad news when dealing with countries such as Iran or North Korea.40 The Economist argues that although China’s increasing strength is at the heart of the deal, it will be decades before China represents a threat big enough for the United States to make such a concession to India and that breaking the non-proliferation regime is both dangerous and unnecessary.41 The press does admit that the United States will gain economically as India engages in military equipment and possibly nuclear trade, but it also warns that the United States should not expect to buy India’s undivided loyalty. Reaction in Pakistan Relations between India and Pakistan could be profoundly altered as India is seen as being given preferential treatment, despite Pakistan’s cooperation with the United States in the war on terror. In fact, Pakistan’s first reaction to the announcement was to warn the United States of a potential arms race.42 Strategic stability is threatened as India will be able through the nuclear deal to develop larger amounts of fissile material for nuclear weapons. The Bush administration has dismissed Pakistan’s claims as India’s reprocessing of U.S. nuclear fuel would take place in a separate facility under IAEA safeguards. It is possible that the deal will help Pakistan to seek a closer alliance with China to balance the new geopolitical reality in South Asia. Effect on China There has been a hardening on the border dispute in Arunachal Pradesh. China is a major player in the nuclear suppliers group and is worried about how the deal will impact on them.43 China is further worried by the quadrilateral for democracy, which includes India, the United States, Australia, and Japan, and which it sees as anti-Chinese. The quadrilateral held naval exercises in the Bay of Bengal in the first week of September 2007 with Singapore. Nuclear submarines, aircraft carriers, destroyers, and frigates participated and it was coined the largest exercise since the end of the Cold War.44 Conclusion As the quote at the beginning of the chapter illustrates, the nuclear deal is a central facet in India’s new foreign policy formulation. Officials from various ministries in Delhi who were interviewed explained that the administration

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is aware of both the advantages and the drawbacks of the agreement. Greater cooperation with the United States will not only bring in big business, it will also change the geopolitical balance in Asia. India will have to be watched so as not to do the United States’ bidding in the region and to retain an independent foreign policy. In fact, the discrepancy between U.S. and India with regard to the aims of the deal, and any further cooperation, is bound to bring diplomatic conflict in the not too distant future. The U.S. press already is heralding the deal as one-sided, whereby the United States is portrayed as not receiving anything in return. The Indian left and opposition on their part are arguing that India is signing away sovereign rights. The argument is far from being settled. Even if the actual text is not finally agreed on by either the U.S. Congress or the Indian Lok Sabha (lower house of Parliament), the major aim of the deal will have been achieved: India will have been internationally recognized as a responsible nuclear weapons state, and with it, receive the global acknowledgement it has always sought. In essence, the nexus of energy, economic growth, and global power status are now at the heart of India’s foreign policy. This troika has changed foreign policy formulation, however, maintaining the same goal Jawaharlal Nehru set out sixty years ago today. ANNEX Timeline of the Nuclear Deal • • • •

•

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September 2004 — Bush and Singh Meet: Both leaders discussed bilateral issues and between them initiated an energy dialogue between both countries. 16 March 2005 — Talks in New Delhi: Secretary of State Condoleezza Rice met P.M. Singh to build upon the previously announced Next Steps in Strategic Partnership. 25 March 2005 — Sale of weapons to Pakistan: President Bush informed P.M. Singh that the United States would resume sale of F-16 combat aircraft to Pakistan. May 2005 — Launch of Energy Dialogue: Secretary of Energy Samuel Bodman and India Deputy Chairman of Planning Commission Dr Montek Singh Ahluwalia launched this joint energy workshop between both countries. 18 July 2005 — Announcement of a Proposed Civilian Nuclear Agreement: Both governments announced the proposed nuclear deal to aid the energy deficiency in India.

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• • • • • • • • • • • •

47

12 January 2006 — Workshop of the Civilian Nuclear Working Group: This four-day workshop building on the U.S.-India Energy Dialogue initiated by U.S. President Bush and Indian P.M. Singh. 2 March 2006 — India and the United States signed a nuclear agreement on 20 April 2006 — Rice said that deal must be seen as part of growing ties. 28 June 2006 — U.S. House of Representatives, International Relations Committee passed Bill to implement the deal by 37–5 majority. 29 June 2006 — U.S. Senate’s Foreign Relations Committee gave nod to the deal. 26 July 2006 — Manmohan Singh said that India will not accept any new conditions in the deal. 27 July 2006 — U.S. House passed Indo-U.S. Nuclear Bill. 16 November 2006 — U.S. Senate passed Nuclear Deal by 85–12 margin. 8–9 December 2006 — Both Houses of Congress passed final version on Nuclear Deal. The Senate passed it by voice vote and the House passed it by a vote of 330 yes to 59 nays. 18 December 2006 — Henry Hyde Act (U.S.-India Peaceful Atomic Energy Cooperation Act): Landmark legislation passed in the United States allowing U.S. nuclear technology to be transferred to India. 17 July 2007 — Final Rounds of Talks: Both sides meet in Washington to discuss issues and to overcome technicalities that emerged in the deal. 20 July 2007 — Deal Concluded: Negotiations ended in Washington as the deal was said to be concluded. Both sides announced that implementation was the next step. 3 August 2007 — 123 Agreement: The full text of the deal was released with the proposed deal to last forty years if approved.

NOTES 1 2 3 4 5

6

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J. Bandyopadyaya, The Making of India’s Foreign Policy, p. 108. J. Bandyopadyaya, The Making of India’s Foreign Policy, p. 334. V.P. Dutt, India’s Foreign Policy, p. 278. B.R. Nanda, ed., Indian Foreign Policy: The Nehru Years, p. 16. Mutual respect for each other’s integrity and sovereignty, non-aggression, noninterference in each other’s national affairs, equality and mutual benefit, peaceful coexistence. S. Chopra, ed., Studies in India’s Foreign Policy, p. 26. It is important to note that India concentrated its defence efforts solely towards Pakistan in the first

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7

8

9

10 11 12

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decade after independence as Nehru believed that China was a friend and not a foe. The NDA government envisions a future that rests on a cooperative multipolar world order, with India as one of the poles. India’s aim in foreign policy has always been to secure for itself a steadily broadening role in international affairs, so that we can contribute meaningfully to the global community’s collective ability to deal with the challenges of today and tomorrow. The NDA Government is proud of its foreign policy achievements in the last five years. We will build on these successes to focus on the following objectives in the coming five years: further strengthen our “Look East” Policy to deepen the India-ASEAN relationship; initiate the BIMST-EC process; activate the MekongGanga cooperation initiative; deepen our economic cooperation with Koreas; and enrich our strategic partnership with Japan (BJP manifesto 2004 ). Northeast priorities The NDA Government has given unprecedented attention to the development of the Northeastern States in the last five years. These gains will be consolidated and placed on a stable footing. Our priorities in the coming five years would be: (1) Restoration of peace and normalcy in all the disturbed regions by dialogues with all groups who are willing to give up the path of violence, and by dealing firmly with those who continue on this path. (2) Ensuring that the ethnic identities of all the people in the Northeast are protected. (3) Repeal of the IMDT Act for putting an end to infiltration from Bangladesh. (4) Accelerating economic development that provides growth opportunities to all. (5) Development of the communication infrastructure to overcome the constraints of physical distance. (6) Making all Indians more aware of the rich history and cultural heritage of our Northeastern States, including Sikkim. (7) Expanding regional economic cooperation with countries in our eastern neighbourhood and in Southeast Asia (BJP manifesto 2004 ). J. Chiriyankandath and A. Wyatt, “The NDA and Indian Foreign Policy”, in Coalition Politics and Hindu Nationalism, edited by Adeney and Saez (London, Routledge, 2005), pp. 193–211. Ibid., p. 202. Ibid., pp. 207–09. But BJP was more on grounds of superiority of the Hindu culture. J. Harris, India: The Biter Fruits of Grandiose Ambition, DESTIN Working Paper 03–45, 2003, p. 7.

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14

15

16

17 18

19

20

21 22 23

24 25

26

27 28

29

30

31 32

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As was duly noted by Subir Raha, chairman and managing director of Oil and Natural Gas Commission (ONGC) Videsh, at the RIIA hosted conference “India: The Next Decade” in June 2005, India today constituted 15 per cent of the human population, but only consumes 3.5 per cent of the global energy consumption. This mismatch will not be sustainable in the long term. India’s energy demand has risen by 4.5 per cent between 1993 and 2003. Total local hydrocarbon resources, inclusive of deep waters, are estimated at around twenty-eight billion tonnes of oil and oil-equivalent of gas (O+OEG). The prognostic availability of oil and gas reserves are located in twenty-six sedimentary basins covering three million square kilometres. Production comes from less than twenty per cent of this area (according to India’s Energy and Power Sectors, Subir Raha, chairman and managing director of ONGC Videsh at the RIIA hosted conference “India “The Next Decade” in June 2005). Report of the Working Group on Petroleum and Natural Gas for the XI Plan, 2007–12, p. 69. P.R. Chari, “Indo-U.S. Nuclear Deal Unending Drama in Many Acts”, IPCS Issue, Brief no. 42, January 2007. See . Dr H.E. Jaishankar, “The Political Significance of the Indo-U.S. Nuclear Agreement”, ISAS Closed Door Session, 3 August 2007. “123 Text and Context, Pact Unequal, U.S. Can Scrap It At Will”, Asian Age, 4 August 2007, p. 1. Dr H.E. Jaishankar, “The Political Significance of the Indo-U.S. Nuclear Agreement”, ISAS Closed Door Session, 3 August 2007. Ibid. Ibid. Ashley J. Tellis, India as a New Global Power, Carnegie Endowment for International Peace, 2005. Ibid. George Perkovich, “Faulty Promises: The U.S.-India Nuclear Deal”, Policy Outlook, September 2005. Professor C. Raja Mohan, “China’s Stand on Indo-U.S. N-Deal”, Straits Times, 27 July 2007. “India Will Lose Most With U.S. Nuke Deal”, Asian Age, 19 July 2007, p. 4. “Cheney, Narayan Stars of N-Deal, Talks between Duo Point to a Deeper Strategic Engagement”, Times of India, 22 July 2007, p. 16. “Channel News Asia Online, “U.S., India Extend Talks in Bid to Salvage Nuclear Deal”, 19 July 2007. “End of Nuke Apartheid Against India”, Times of India, 4 August 2007, p. 12. Express India.com, “Highlights of Indo-U.S. Nuclear Deal”, 3 August 2007. Express India.com, “123 Deal Will Impact Future Nuke Testing: BJP”, 3 August 2007.

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34 35

36 37 38

39

40

41 42 43 44

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“123 Text and Context, Pact Unequal, U.S. Can Scrap It At Will”, Asian Age, 4 August 2007, p. 1. Indian press in the last few days. Channel News Asia Online, “India and U.S. Unveil Landmark Nuclear Deal, 3 August 2007. “India Will Lose Most With U.S. Nuke Deal”, Asian Age, 19 July 2007, p. 4. M.J. Akbar, “A Good Deal Walks on Two Legs”, Asian Age, 5 August 2007. Yashwant Sinha, preliminary comments released by the BJP on 4 August 2007, cited in “BJP Rejects Nuke Deal, Wants JPC”, Asian Age, 5 August 2007, p. 1. The Hindu, “LF Rejects 123 Agreement, Demands Discussion”, 9 August 2007. “The US’s Catastrophic Nuclear Deal with India: Power Failure”, New Republic Online, 3 August 2007. “A Price Too High”, The Economist, 2 August 2007. “Pakistan Warns U.S. of Asia Arms Race”, Financial Times, 2 August 2007. “BJP Rejects Nuke Deal, Wants JPC”, Asian Age, 5 August 2007, p. 1. “China Hardens Border Dispute”, Asian Age, 5 August 2007, pp. 1–2.

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Reproduced from The Geopolitics of Energy in South Asia edited by Marie Lall (Singapore: Institute of Southeast Asian Studies, 2009). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at

3

Regional Integration in South Asia and Energy Cooperation: Opportunities and Challenges Aparna Shivpuri Singh

Introduction South Asia accounts for twenty-two per cent of the world’s population, two per cent of the world’s Gross National Product (GNP), and is home to about forty per cent of the world’s poor. However, the region’s seven countries contribute only about one per cent to world trade. Combining this low level of economic development with political and ethnic disparities makes this region economically and politically very sensitive. With the ratification of the South Asian Free Trade Agreement (SAFTA) in March 2006 by all member states, the process of liberalizing trade and investment was set in motion. The process of regional integration has gone hand in hand with multilateralism for several decades. The European Union, North American Free Trade Agreement (NAFTA), ASEAN Free Trade Agreement (AFTA), and Southern Common Market (MERCOSUR) are examples of this process.

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Now, with the collapse of the Doha Round, developing countries have started pursuing regional and bilateral agreements with a new vigour. South Asia has not been a forerunner in the movement of regional integration and remained untouched by the initial wind of regional integration that swept through different sub-regions of Africa and Latin America in the early 1960s. This was in part due to the fact that the region has been embroiled in geopolitical tensions leading to distrust, which has been reflected in the hurdles that it has faced with every step towards regional integration and its integration with the rest of the world. This chapter puts forth the argument that even though the process of regional integration has been sluggish in the region, it has not died down. The chapter also provides an overview of the energy scenario in South Asia. In this era of globalization, if there is one important variable that can foster this process, it is energy cooperation. South Asian countries have the potential of pooling indigenous resources and ensuring energy security, and at the same time, reducing the dependence on external sources coming from areas such as the Middle East. The focus in this chapter will be on the commercial indigenous energy resources — coal, natural gas, oil, and hydropower. INTRA-REGIONAL TRADE The trade performance of South Asia has been dismal in comparison to other regions. The levels of inter- and intra-regional trade in South Asia has remained extremely low — intra-regional trade as a percentage of total trade volume has hovered below five per cent since 1980. Among all the regions, South Asia is the least integrated when measured as a share of Gross Domestic Product (GDP) (see Figure 3.1). Intra-regional trade in South Asia is only 0.8 per cent of GDP, a fraction of East Asia’s nearly 27 per cent of GDP, and is even behind sub-Saharan Africa. The reasons for the low level of intra-regional trade are evident. Firstly, there is lack of trade complementarity. Most of the South Asian countries have expertise in the production and export of the same primary products in agriculture, as well as in textile, clothing, and other labour-intensive goods. For instance, both India and Sri Lanka export tea and compete to secure overseas markets. Secondly, there is a prevalence of informal trade in the region. High tariff and non-tariff barriers, coupled with weak transportation links, are responsible for the informal/unaccounted trade that takes place among South Asian countries. The cost and time of transportation, along with security issues,

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Figure 3.1 Intra-regional Trade as a Share of GDP, 2002

30 25

%

20 15 10

subSaharan Africa

South Asia

Middle East

Latin America

Europe

0

East Asia

5

Source: “Taking Advantage of Regional Trade: Review of SAFTA and Bilateral FTAs”, Zaidi Sattar, World Bank.

hamper cross-border trade. For instance, all Nepalese export/import trade is routed through the port of Kolkata in India and the absence of a direct rail link between Kolkata and Nepal has been a major impediment to trade.1 Countries in South Asia tend to impose the highest tariff on the most traded commodities; thus, they elude the benefits of trade liberalization.2 Thirdly, the region is bedevilled by intra-state conflicts and border disputes — notably the intractable dispute between India and Pakistan over Kashmir — which goes to show that politics dominate economics in this region. This is in contrast with Southeast Asia, which has largely succeeded in transforming its region from a battlefield to a market place. These political tensions have also led to the re-routing of trading between the South Asian Association for Regional Cooperation (SAARC) nations. Of the US$2 billion informal trade of India with Pakistan, almost half was traded through third countries such as Afghanistan and Dubai, consequently increasing transportation costs tremendously. Political differences between neighbours can often create inefficiencies in the trading system. Pakistan, for example, imports tea from Kenya at a much higher price than what it can secure from within the region. Given

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61 5 12 34 17 5

Exp

54 9 8 33 14 2

Imp 59 6 6 44 19 4

Exp

1985

58 5 9 34 17 2

Imp 67 8 9 41 19 3

Exp

1990

64 6 14 34 15 2

Imp 66 12 20 46 25 4

Exp

Source: UNCATD handbook of statistics (accessed 26 January 2007).

EU-25 CARICOM MERCOSUR NAFTA ASEAN SAARC

Regional Bloc

1980

1995

64 8 18 38 18 4

Imp 67 14 20 56 23 4

Exp

2000

Table 3.1 Intra-regional Trade (as a percentage of total trade between 1980–2004)

62 8 20 41 22 3

Imp

67 13 12 55 23 5

Exp

2004

64 9 18 36 22 4

Imp

54

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the prominence of the two in South Asia, Indo-Pakistan relations will mould the progress of regional cooperation in the future. Their relations have been volatile, though there has been a resumption in economic ties of late.3 India is the largest player in the region in terms of size, GDP, and trade capacity. Table 3.2 shows the percentage share of other South Asian countries in India’s total trade. All South Asian countries contribute less than one per cent to India’s foreign trade, except for Sri Lanka. According to a study by the Associated Chambers of Commerce and Industry of India (ASSOCHAM), India’s trade with SAARC countries has declined from 3.39 per cent in 2003, to 2.84 per cent in 2006.4 Due to the landlocked nature of Bhutan and Nepal, trade for these countries takes place primarily with India. While Nepal has consciously tried to reduce its trade dependence on India, Bhutan remains dependent on India both as a supply source and an export destination. India and Bhutan signed a ten-year agreement in July 2006, and under this agreement, Bhutan will get four more entry and exit points into India. The pact also simplifies import and export procedures between the two countries. Until 2004–05, Bangladesh was the largest trading partner of India in the region. Major items of exports from India to Bangladesh are cotton yarn, fabrics, machinery, instruments, glass/glassware, ceramics, and coal. India imports raw jute, jamdani saris, inorganic chemicals, leather, etc. from Bangladesh. Since 1996/97, Indian exports to Bangladesh (in nominal U.S. dollars) have been growing at 9.1 per cent annually, just slightly above the general rate of growth of its total merchandise exports (8.4 per cent), but India’s imports from Bangladesh over the same period have grown on average at only 3 per cent annually, compared with an average growth of Table 3.2 Percentage Share of SAARC Countries in India’s Total Trade Country

2001–02

2002–03

2003–04

2004–05

2005–06

Bangladesh Bhutan Sri Lanka Nepal Pakistan Maldives

1.11 0.03 0.73 0.60 0.22 0.03

1.08 0.06 0.89 0.55 0.22 0.03

1.28 0.10 1.07 0.67 0.24 0.03

0.87 0.08 0.92 0.56 0.32 0.02

0.71 0.07 1.03 0.49 0.34 0.03

Source: .

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its total imports of 9.2 per cent. Consequently Bangladesh’s bilateral trade deficit with India has been increasing rapidly, on average at about 9.5 per cent annually, leading to increasing political tensions between the two countries, which have repercussions in other areas.5 Sri Lanka overtook Bangladesh in 2004–05 as India’s largest trading partner. The rise in bilateral trade between India and Sri Lanka in 2007 can also be attributed to the recent tariff cuts by Sri Lanka on major imports from India, such as cement. Sri Lanka’s bilateral trade deal with India requires tariffs to be phased out over an eight-year period for goods that are not in the sensitive list. THE CREATION OF SAARC — A STORY OF MILESTONES First Milestone These ethnic, geopolitical, and economic disparities were the very reasons that the then Bangladesh President Zia-Ur-Rehman took the initiative to establish a regional cooperation forum in South Asia in 1983. This decision was, to a certain extent, also influenced by the formation of the Association of Southeast Asian Nations (ASEAN) and to enable the states of South Asia to consider and react collectively to international events. The Soviet attack on Afghanistan and the United States’ direct military links with Pakistan to counter the Soviet Union hastened the pace of the formation of this regional bloc. Initially, India and Pakistan did not take easily to the idea. India originally thought that it was an attempt by the smaller nations to gang up and put collective pressure on it regarding matters that affected them. Pakistan thought that it would deepen the hegemonic powers of India and simultaneously hamper Pakistan’s integration with West Asia. Nevertheless, in spite of these misgivings, the South Asian Association for Regional Cooperation (SAARC) came into existence in 1985 when its charter was officially adopted with the aim to promote political stability and deal with external developments. Second Milestone Cooperation under SAARC did not extend to hard-core economic areas of trade, manufacturing, and finance for nearly ten years after the establishment of the association. Trade was brought under the ambit of SAARC in 1991 with the signing of the South Asian Preferential Trade Agreement (SAPTA),

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which was operationalized in 1995 when the outcome of the first round of trade negotiations was notified. In 1998, SAARC also put in place SAARCFINANCE with the aim to propose harmonization of banking legislations and practices within the region, monitor global financial developments, and promote research on economic and financial issues. However, the achievements of this body have not been as expected. SAPTA (South Asian Preferential Trading Agreement) did not achieve much either in terms of increasing intra-regional trade in South Asia. IntraSAARC trade, as a percentage of South Asia’s world trade, increased from 2.42 per cent (US$1.59 billion) in 1990 to 4.56 per cent (US$6.53 billion) in 2001, and marginally improved to 4.7 per cent by 2003.6 This slight increase has been mostly attributed to rapid liberalization under bilateral trade agreements and the WTO regimes, rather than to SAPTA. Third Milestone The idea for SAFTA (South Asian Free Trade Agreement) was first brought to the discussion table in 2002 and culminated in an agreement in 2004. SAFTA came into effect in January 2006 and was ratified by all member states by March 2006. The agreement lists additional measures not included under SAPTA, such as the harmonization of standards, reciprocal recognition of tests and accreditation of testing laboratories, simplification and harmonization of customs clearance, import licensing, registration and banking procedures, removal of barriers to intra-SAARC investment, etc. Under SAFTA, the various members have been provided with different timelines for reducing tariffs and liberalizing their economies. However, Pakistan has refused to grant MFN (Most Favoured Nation) status to India, which goes against Article I of General Agreement on Tariffs and Trade (GATT).7 Keeping in view the above mentioned history of regional integration, it is evident that politics has dominated economics most of the time. But in the contemporary world, with the onset of urbanization, growing population, and external strategic issues, it is essential to cooperate to secure the basic needs of our people. And one such need is energy security. As countries progress to become rising powers in the international order, it is essential for them to have a peaceful periphery also. The countries in South Asia, India, in particular, need good relations with their neighbours. In the long run, energy cooperation could bring about peace dividends.

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58

Energy Scenario in South Asia South Asia is not only one of the fastest growing regions, but also one of the poorest, which puts energy at the very core of the process of socio-economic development. Economic and population growth in South Asia has resulted in a rapid increase in energy consumption in recent years. According to the International Energy Agency (IEA), this region will have the highest growth rate of energy consumption by 2010. At present, the situation is quite grim as far as access to electricity is concerned. As we can see from Table 3.3, the electrification rate in most South Asian countries is quite dismal. As far as the rural and urban electrification rate is concerned, South Asia again lags behind China and East Asia. The urban and rural electrification rate in China and East Asia is 94.9 and 84.0 per cent respectively, while for South Asia the figure stands at 69.7 and 44.7 per cent respectively.8 All countries in South Asia rely heavily on non-commercial energy, primarily, biomass. The region’s per capita commercial energy consumption Table 3.3 Access to Electricity, 2005 Country/region ASEAN Brunei Cambodia Indonesia Malaysia Myanmar Philippines Singapore Thailand Vietnam SOUTH ASIA Bangladesh India Nepal Pakistan Sri Lanka CHINA

Population without electricity (million)

Population with electricity

Electrification rate

0.0 10.9 101.2 0.6 45.1 16.2 0.0 0.6 13.2

0.4 2.7 118.8 24.7 5.7 66.8 4.3 64.1 70.3

99.2 20.1 54.0 97.8 11.3 80.5 100.0 99.0 84.2

96.2 487.2 18.1 71.1 6.7 8.5

45.3 607.6 8.9 83.5 13.0 1302.1

32.0 55.5 33.0 54.0 66.0 99.4

Source: World Energy Outlook, 2006.

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is approximately 300 kilograms of oil equivalent (kgoe). Traditional fuels meet 87 per cent of the energy demand in Nepal and between 30 to 80 per cent in the other countries in the region. Regional energy trade is almost non-existent, and this comes as no surprise due to the geopolitical concerns and mistrust among the various countries. However, there exists a lot of complementarities between the nations and, therefore, there is scope for capitalizing on this opportunity. While the region depends mainly on biomass as the main fuel, with the advent of urbanization, there has been an increase in the demand for commercial fuels such as oil and gas. South Asia contains reserves of only 6.2 billion barrels of oil and around 0.5 per cent of world reserves. In 2005 South Asia consumed around 3.09 million barrels per day (b/d) of oil and produced approximately 0.93 million b/d making the region a net importer of around 2.2 million b/d. South Asian oil consumption grew by 111 per cent between 1990 and 2005.9 In January 2006, South Asia’s proven natural gas reserves were estimated at 62.1 trillion cubic feet (tcf ), approximately one per cent of the world’s total. South Asia accounts for 11 per cent of the world’s total coal reserves. Although coal accounts for 44 per cent of South Asia’s energy consumption, nearly all of the coal in the region is consumed and produced by India. Energy consumption also varies tremendously between countries. The per capita commercial energy (coal, gas, oil, and hydro) consumption is as low as 44 in Nepal for example (see Tables 3.4). The average world per capita total commercial energy consumption stands at 1,674 kgoe. If we look at the commercial energy consumption of South Asian countries (excluding the traditional fuel — biomass) then the import dependence as a percentage of commercial energy is very high. South Asian countries like Nepal and Sri Lanka have very high import dependence for commercial energy resources. Nepal does not produce oil, coal (minimal), and natural gas and thus has to rely extensively on imports (see Table 3.5). Energy cooperation among South Asian countries is essential because: • • • • • •

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Of the rapid urbanization taking place in these countries. It is a means of reducing dependence on the Middle East. It would improve ability to weather external shocks and price volatility. Access to electricity is low in the region. There is a market for smaller countries such as Bhutan and Nepal with excess supply of hydropower. Most importantly, it might bring with it some peace dividends for the region by promoting economic interdependence. See Tables 3.6–3.10.

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243

89

Per capita commercial energy consumption, kgoe

335

India 759

Maldives

13 30

%

%

Import dependence as a percentage of total energy Import dependence as a percentage of commercial energy 24

9

Bhutan

29

22.0

India

100

59

Maldives

Source: Regional Energy Security for South Asia, Regional Report, SARI/Energy Programme, 2006.

Bangladesh

Unit

Item

87

11

Nepal

44

Nepal

Table 3.5 Import Dependence of Energy Sector in South Asia

Source: Regional Energy Security for South Asia, Regional Report, SARI/Energy Programme, 2006.

Bhutan

Bangladesh

Item

Table 3.4 Per Capita Commercial Energy Consumption

26

18

Pakistan

355

Pakistan

78

41

Sri Lanka

200

Sri Lanka

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India 5.6bn 846,000 2.63mn

Maldives

00 — 7,200

28mn 4,000 91,000

Bangladesh 300mn 60,000 350,000

Pakistan 00 — 82,000

Sri Lanka

38 996 1,089

Proven Reserves (tcf) Production (bcf) Consumption (bcf)

Notes: tcf = trillion cubic feet. bcf = billion cubic feet.

India

Natural Gas 5 463 511

Bangladesh

Bhutan — — —

Nepal — — —

Country

28 968 968

Pakistan

Table 3.7 Natural Gas Reserves, Production, and Consumption in South Asia

00 — 11,500

Nepal

— — —

Sri Lanka

Note: b/d = barrels per day. Sources: World Energy Council, CIA , Energy Information Administration, Planning Commission of India.

Proven Reserves Production (bb/d) Consumption (bb/d)

Oil

Country

Table 3.6 Oil Reserves, Production, and Consumption in South Asia

— — —

Maldives

00 — 1,160

Bhutan

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11.9 bn tonnes 443.72 mn tonnes 478.16 mn tonnes

Reserves Production Consumption

Pakistan 3.4 bn tonnes 3.5 mn tonnes 5.2 mn tonnes

Bangladesh — — 0.77

— — 0.065 mn tonnes

Sri Lanka

775 230 29.67

150,000 32,326 21.55

Economically viable hydropower potential (MW) Installed capacity Percentage harnessed 6,500 16.25

40,000

Pakistan

590 1.37

42,915

Nepal

Country

—

—

Maldives

— — 0.07 mn tonnes

Bhutan

1,250 62.50

2,000

Sri Lanka

— — —

Maldives

1,488 6.26

23,760

Bhutan

— — 0.32

Nepal

Sources: “Economic Reforms and Power Sector in South Asia: Scope and Challenges for Cross-Border Trade”, Professor Mahendra Lama, Centre for South Asian Studies, Jawaharlal Nehru University, New Delhi, India, Regional Energy Security for South Asia, Regional Report, SARI/Energy Programme, 2006.

Bangladesh

India

Hydro

Resource

Table 3.9 Hydropower in South Asia

Sources: Regional Energy Security for South Asia, Regional Report, SARI/Energy Programme, 2006.

India

Coal

Country

Table 3.8 Coal Reserves, Production, and Consumption in South Asia 62

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Table 3.10 Energy Basket of South Asia (percentage)

Pakistan India Bangladesh Bhutan Nepal Maldives Sri Lanka

Gas

Coal

Hydro

Oil

Other

50 7 68 0 0 0 0

7 54 1 7 15 0 0

13 5 2 80 31 0 17

28 32 30 13 55 100 82

1

Source: Regional Energy Security for South Asia, Regional Report, SARI/Energy Programme, 2006.

Bangladesh While demand for energy grows at a rate of roughly 10 per cent per year, access to electricity in Bangladesh is low, at around 30 per cent of the population. Rural areas, where 76 per cent of the population live, are severely deprived of electricity facilities. Around 68 per cent of total commercial energy consumption is natural gas, with oil, limited amounts of hydropower, and coal, satisfying the remainder. Access to energy among the population is low, at 18 per cent, and per capita commercial energy consumption is among the lowest in the world. Demand for natural gas is projected to grow by roughly 6 per cent per annum over the next two decades. Bangladesh has yet to make a final decision on whether to allow exports of natural gas. Varied projections have been made by different agencies regarding the natural gas reserves in Bangladesh. For instance, Petrobangla claims that there are reserves of 15.3 trillion cubic feet (tcf ), while the Ministry of Finance puts it at 28.4 tcf. At the same time, the U.S. geological survey claims that Bangladesh has reserves of 32.1 tcf. With these varied figures, it becomes difficult to assess how much the country actually possesses and, therefore, the government is worried whether it has enough reserves for future domestic consumption. Bangladesh has the potential to become a major gas supplier to the vast potential market in neighbouring India. Many in Bangladesh argue that natural gas resources should be used to satisfy domestic purposes first before exportation is considered. Both major political parties advocate delaying a decision regarding exportation until Bangladesh has proven it has reserves sufficient to cover fifty years of

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domestic demand. In addition to exporting its own resources, Bangladesh also has the potential to become a transit point for natural gas from the Tripura state in Eastern India to the heavily populated West Bengal. This potential is being left untapped though, due to government inactivity. Recently there has been much talk about the coal reserves in Bangladesh. The Indian company Tata wanted to set up a coal-based power plant in Barapukuria, which it wanted to develop by open-pit mining, and export the excess coal, since the production capacity of the mine would be far more than Bangladesh could consume. According to contested estimates, there are some 2,700 million tonnes of coal deposits in Bangladesh.10 The first draft of the coal policy, prepared by the Infrastructure Investment Facilitation Centre, says Bangladesh has an “estimated mine-able reserves of 1,400 [million tonnes]”, the equivalent of some 37 tcf of gas. It would be worth a staggering Tk 6, 86,000 crore (at $70 per tonne, given that it is high quality coal).11 But this would only be possible with open-pit mining, which until now has not found favour in Bangladesh. Bhutan Bhutan is rich in hydropower resources and according to the latest findings from the National Power System’s Master Plan Update, the country’s hydropower potential is estimated at 30,000 MW of which 23,500 MW is economically feasible for development.12 The hydropower sector is the single largest source of domestic revenues, accounting for some 45 per cent of government revenues and a GDP share of about 12 per cent. Owing to the importance of hydropower in making the country self reliant, the government places high priority for the development of hydropower resources. The present installed hydropower capacity is 1,488 MW. Bhutan plans to become fully electrified by 2020. Currently, access to electricity is somewhat limited. Bhutan has substantial sources of clean and renewable hydropower energy which can be developed and exported to neighbouring countries. Consumption of imported petrol and diesel oil has increased with the development of transport facilities. Bhutan does not have reserves of oil, gas, and coal and, therefore relies on imports. The energy basket of Bhutan comprises 80 per cent hydropower, 13 per cent oil, and 7 per cent coal. Sri Lanka Natural resources such as wind, hydro resources, wave energy, plant derived biomass material, solar energy, etc., and so-called renewable energy resources

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are all available in moderate quantities for the generation of energy or heat. Sri Lanka derives electrical energy from thermal as well as hydro sources and the composition of the product mix is, however, weather dependant. During the heavy monsoon seasons, hydropower predominates over the thermal, with the year round mix averaging at 60–40 per cent, hydro to thermal. The energy basket of Sri Lanka comprises 82 per cent oil and 17 per cent hydropower. Sri Lanka, which imports all its oil, needs to secure its own supplies as costlier imports and military purchases have raised consumer prices. Surging crude oil prices raised Sri Lanka’s oil import bill by 25 per cent in 2006 to $2.07 billion. There are some ongoing projects with India and China to develop oil wells near the coast. Exacerbating the issue, the demand for power is rising at a rate of 7.8 per cent annually with the growth of population and industrial activities. Surging crude oil prices raised Sri Lanka’s oil import bill by 25 per cent last year to $2.07 billion. Import costs have been boosted by a depreciating currency. Sri Lanka has the potential to develop its limited coal resources as an alternative to hydroelectric power. Sri Lanka’s export potential and economic opportunities will increase with the construction of the proposed TalaimannarDhanushkhodi land bridge, which would link Sri Lanka to India. Demand for electricity in Sri Lanka is increasing at an average rate of around 8–9 per cent per annum. The present demand for electricity is expected to double to around 9,600 GWh by 2010. India India is the world’s eleventh largest energy producer, with 2.4 per cent of energy production, and the world’s sixth largest consumer, with 3.5 per cent of global energy consumption. Domestic coal reserves account for approximately 55 per cent of India’s energy needs, 32 per cent is met by oil, with more than 65 per cent of that oil being imported. Natural gas accounts for 7 per cent of the energy basket, and hydropower for 5 per cent. Demand for energy is expected to double by 2025; by then, 90 per cent of India’s petroleum will be imported. Efficiency, fiscal reform, expanding the possibilities for private sector involvement in energy, and energy diplomacy are all different facets of the same basic requirement to service India’s growing market. India’s basic approach to energy diplomacy — both oil and gas — has been to develop as many potential supply arrangements with as many potential suppliers as it possibly can. ONGC Videsh, the international arm of Oil and Natural Gas Corporation Ltd. (ONGC), has been actively pursuing foreign

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energy sources for energy supply contracts, and exploration and drilling rights. The Indian government has also ventured into Africa and Central Asia. India has acquired shares in oil exploration ventures in Indonesia, Libya, and Nigeria, and made substantial investments in Sudan’s hydrocarbon sector. It has also announced plans to invest approximately US$1 billion dollars in the Ivory Coast for offshore drilling. Furthermore, Reliance Industries, India’s largest private-sector oil firm, is currently negotiating energy partnerships in Angola, Cameroon, Chad, Congo, and Nigeria. The increased presence of China in the region has also been a contributing factor. China has been pursuing India’s neighbours such as Sri Lanka for energy cooperation. India recently lost a deal for a gas pipeline from Myanmar to India via Bangladesh to China. Energy policy in India is overseen by several government agencies, including the Ministry of Petroleum and Natural Gas, the Ministry of Coal, the Ministry of Non-Conventional Energy Sources, the Ministry of Environment and Forests, the Department of Atomic Energy, and the Ministry of Power. Within the Ministry of Power, the Central Electricity Regulatory Commission works closely with individual state electricity boards (SEBs) and utilities in power generation, transmission, and distribution of electricity. Whilst each ministry is a specialist agency, the devolution of power also has had drawbacks as each ministry operates separately from the others with a different vision and goals. India currently imports 60 to 70 per cent of its oil needs, mainly from countries in the Middle East. Experts estimate that by 2025, India will be the third largest importer of energy, with 90 per cent of India’s supply being imported from abroad. The Government’s Hydrocarbon Vision 202513 sets a road map for energy policy reform that proposes revising foreign ownership, regulations for refineries to allow 100 per cent foreign ownership, and sets the goal of meeting 90 per cent of India’s petroleum and diesel needs from domestic sources. While these progressive suggestions may become official policy, the document maintains the privileges of the state-owned companies. Policy reform in the energy sector has been particularly slow. Electricity consumption is still heavily subsidized for some agricultural and household uses. While the Administered Pricing Mechanism (APM) for petroleum products ended in April 2002, government control over pricing has lingered. The Indian Electricity Act of 2003 was a major step in the reform of energy policy. The Act aims to create a more liberal framework for development for the power sector. It also includes more stringent provisions relating to electricity theft and safeguarding consumer interests. India is the world’s sixth largest consumer of energy and relies on coal for nearly half its

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total energy needs. Coal consumption is projected to increase to 450 million short tonnes in 2010. Private sector involvement has been restricted to the refining section of the energy industry. ONGC, the government’s oil exploration and production enterprise, is one of the most profitable companies in India and is responsible for 77 per cent of crude oil production and 81 per cent of natural gas production. A majority of India’s refineries are owned by Indian Oil Corporation (IOC), which is one of the twenty largest petroleum companies in the world. Maldives The Maldives has no coal reserves, no conventional energy resources such as oil, and presently does not produce or consume natural gas. It depends 100 per cent on oil which is imported. The Maldives consume about 7,200 barrels of oil per day. Nepal Per capita energy consumption in Nepal is among the world’s lowest. Only about 15 per cent of Nepal’s population currently has access to electricity. In rural areas, access is even lower, at about 5 per cent. The residential sector is the highest energy consumer in the country, accounting for 89 per cent of total energy utilization. Nepal does not consume any natural gas. The country relies almost exclusively on hydroelectricity to satisfy its energy needs. Demand for power in Nepal currently exceeds supply by 25 MW, or 10 per cent per year. Nepal has sufficient hydroelectric potential to fulfil domestic consumption needs and export to India, Bangladesh, and Pakistan. The demand for clean, renewable energy in Nepal, Northern India, and Southwest China, is expected to at least double over the next decade, providing a significant potential market for Nepal’s hydroelectric resources. Furthermore, India’s energy deficit is expected to reach 20,000 MW by 2010, while China’s will reach 330,000 MW by 2015. The potential market for power in these countries, is thus, large. India’s Northern Grid Region, in particular, faces chronic power shortages that are likely to continue in the future and could benefit from power exports from Nepal. Pakistan The energy basket of Pakistan is dominated by gas which accounts for 50 per cent of the energy mix. Oil, hydro, and coal contribute 28, 13, and

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7 per cent respectively. During the next twenty years, Pakistan’s energy demand will increase by 350 per cent, yet the percentage of its total energy needs met from indigenous sources will fall from 72 to 38 per cent.14 Pakistan currently consumes all its domestic natural gas production, but without higher production, Pakistan will need to become a natural gas importer. As a result, Pakistan is exploring several pipeline and Liquefied Natural Gas (LNG) import options to meet the expected growth in natural gas demand. Pakistan is currently in the process of negotiating two important pipelines, TAPI and IPI, in the region. SAARC INITIATIVES FOR REGIONAL ENERGY COOPERATION Though each country is evolving its own energy policy and strategy in order to meet the challenge of ensuring energy security, a regional approach could facilitate a more cost-effective and sustainable set of solutions and foster economic relations. As early as in its Fifth Session (Dhaka, 4 December 1985), the Standing Committee approved the recommendation of the then Technical Committee on Science and Technology to hold a workshop on Renewable Energy. Since then, various activities were held in the energy sector under the auspices of the Technical Committee on Science and Technology. Subsequently, cooperation in the energy sector was brought directly under the purview of the SAARC Integrated Programme of Action (SIPA) in January 2000 by establishing a new Technical Committee on Energy. The twelfth SAARC Summit in January 2004 called for creation of a forum for South Asian Energy Cooperation. In July 2004, SAARC endorsed the concept of an “Energy Ring” of interconnected energy systems in the region. The Twenty-fifth Session of the Council of Ministers (Islamabad, 20–21 July 2004) approved the Report of the First Meeting of the Working Group on Energy (WORGEN).15 The Group noted with appreciation that the recommendations made at the erstwhile Technical Committee Meeting merits continuity under the new framework of the Working Group. They decided to pursue cooperation in all recommended areas, that is: • • • •

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Exchange of Energy information; Environment friendly energy; Creation of a Regional Power-Grid; and Cooperation regarding renewable energy.

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The SAARC Energy Centre (SEC) was set up in Islamabad in March 2006. The goals of the Centre are to strengthen South Asian’s capacity to address regional and global energy issues collectively to facilitate energy trade within the SAARC region and to enhance more efficient use of energy within the region. The primary objective for the establishment of the Centre is to put in place, a regional institution of excellence for the initiation, coordination, and facilitation of SAARC programmes in energy. The SEC has some programmes under it such as: • • • • •

Programme on “Energy Trade between SAARC Countries” (PENT). Programme on “Integrated Assessments of Energy, Transport, and Environment” (PETREN). Programme to Minimize Oil Imports (PROMO) through improvements in Energy Efficiency and Fuel Substitution. Programme to Successfully Implement Technology Transfer (POSIT). Programme on Rural Electricity for Poverty Alleviation (PREPA).

There are also some initiatives under consideration such as the establishment of a South Asia Energy Investment Fund to finance large regional projects, the establishment of mechanisms for joint procurement of fossil fuels to meet the demand for the region as against individual nations, and the establishment of a South Asian strategic hydrocarbon reserve, among others. In this context, establishing a Regional Power Trading Corporation (RPTC) would also be highly beneficial to launch this type of market mechanism in the SAARC region, which could provide market feedback to individual power producers (agents), as well as the power consumers. The SAARC-RPTC can maintain and disseminate information on plant structures, avoidable cost of production, plant sales prices, sales volume, rate of utilization, profits generated, target utilization and market conditions, consumer behaviour, and ongoing plant building and future investment in the sector. This, in essence, would be a pooling of surplus power generated by individual plants in the participating countries, and transporting into deficit ones by a coordinated exchange mechanism, depending on demand and consumer categories (estimating consumer surplus). It has been three years since the region initiated a concentrated effort on regional energy cooperation and the process is at a nascent stage with little work at the ground level. While no obvious reasons have been stated for the delay, one could attribute these delays possibly to the internal turmoil that most South Asian countries are facing and plethora of technical and regulatory issues involved in energy trading.

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Energy Cooperation at the Bilateral Level India, the largest member in the region in terms of population, GDP, size, and energy needs, has been the main perpetrator of bilateral arrangements with its neighbours. Over the past years, the Indian Oil Corporation (IOC), the Oil and Natural Gas Corporation (ONGC), and the National Thermal Power Corporation have supported several joint development projects with Nepal and Sri Lanka in the oil and power sectors. Some of these projects are discussed in more details in subsequent chapters of this book. India-Bangladesh For the past few years, talks have been ongoing for a proposed pipeline between India and Bangladesh, but a decision has yet to be made. The government of Bangladesh has consistently taken the political position that there are insufficient amounts of proven gas reserves to meet domestic demand. As mentioned before, Bangladesh can be used as a transit point for transporting gas from Tripura to West Bengal in India. However, Bangladesh has not been very positive about this project. Similarly, the talks for the Myanmar-Bangladesh-India pipeline have also stalled, with Myanmar granting the pipeline to China. Iran-Pakistan-India pipeline (IPI) and the TurkmenistanAfghanistan-Pakistan-India pipeline (TAPI) These pipelines hold much importance because of the geopolitical and security issues involved externally, as well as internally, to the region. The IPI was first suggested in 1989 and progress on this has been sluggish because of India-Pakistan relations as well as U.S. reluctance to India’s association with Iran. However, there has been progress on most of the contentious issues. The three countries have agreed on the price of gas, which will be based on the average Japan Customs Cleared (JCC) crude oil import prices in Japan, adding that JCC prices are a weighted average price for Japanese crude imports from the Gulf. The 2,720 km Iran-Pakistan-India pipeline, to be completed by 2010, will cost more than US$4 billion. One-third of the Iranian gas to be conveyed through the IPI pipeline will be delivered to Pakistan and the rest to India. The first delivery of gas is expected in 2011. The TAPI pipeline, which is to originate from Turkmenistan’s Daulatabad gas field, would run 145 km in the host country, 735 km in Afghanistan,

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and 555 km in Pakistan to Multan, under the preferred southern route, i.e. via Herat and Kandahar. New Delhi had in June 2006 communicated its intention of joining the project, but has not been officially included in the project as the Steering Committee could not meet. Earlier, doubts had been expressed on the gas reserves in the Central Asian nation and India had asked for a third-party certification to back the export pipeline. After Turkmenistan presents reserve estimates, India and Pakistan will indicate the quantity of gas they wish to import. TAPI is expected to transport 100 million standard cubic metres per day (mmscmd) of gas, of which India’s share at best is likely to be 60 mmscmd.16 Bhutan-India The Tala Hydro Power Project that was commissioned in the 1980s was completed in 2006. As part of the agreement signed between the two countries, the project would transfer power from Bhutan’s 1,020 MW to the Northern and Eastern Power Grid in India. The US$750 million project is the biggest Indo-Bhutan joint venture and completely funded by India. In June 2007, the 1,200 km East-North Tala power transmission line was started as the first public-private partnership of its kind. This transmission line is a 49:51 per cent joint venture between Tata Power and Bhutan’s Power Grid Corporation Limited. It will benefit West Bengal, Bihar, Jharkhand, and Sikkim. Since then, India has been receiving Tala power from Bhutan. Bhutan’s GDP could go up a considerable amount because of the revenue generated through the Tala project. The Chhukha Hydro-power Corporation which was commissioned in 1988 has proved to be “the backbone”, contributing more than 35 per cent of Bhutan’s revenues.17 With the Kurichhu and the Tala projects, the contributions of hydropower projects are expected to be much higher. India has agreed to a minimum import of 5,000 MW of electricity from Bhutan by year 2020, and the umbrella agreement has a sixty-year validity. However, the protocol to the agreement on purchase of power and the tariff of the Tala project is valid for thirty-five years, according to which the first year tariff would be Rs. 1.80 per unit. The agreement has a mechanism for the review of the tariff.18 The Indo-Bhutan energy cooperation also comes under the ambit of SASEC (South Asia Sub-regional Economic Cooperation). As we can see from Table 3.11, the power export to India accounts for more than seventy per cent of Bhutan’s export basket.

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Table 3.11 Sales of Power from Bhutan to India (millions of Ngultrum)

Year

Export of power to India

Total export of principal commodities

Proportion of power in exports to total exports (%)

2000 2001 2002 2003

2189.5 2072.0 2344.2 2603.5

3174.2 3271.5 3307.9 3629.8

68.98 63.33 70.87 71.73

Source: “Promoting Regional Energy Cooperation in South Asia”, Leena Srivastava and Neha Mishra, Energy Policy 35 (2007), pp. 3360–68.

India-Sri Lanka Cooperation The government of India and the government of Sri Lanka signed a Memorandum of Understanding to build a bridge across the Palk Straits in July 2002. However the project has been plagued with political fissures in India over the ramifications to national security once the bridge is built, as well as political opposition from the BJP (Bharatiya Janata Party), a political party in India.19 India is also going to build a 500 MW coal-based thermal power plant in Sri Lanka and will do oil and gas exploration in the Mannar blocks in the Sri Lankan waters. In parallel, China has also been active in Sri Lanka and work on the first coal power plant had began in August 2007 in Norochcholai in the Northwestern province. The Joint Study Group appointed by the governments of Sri Lanka and India (2003), while noting the potential of a regional power pool for Southern India and Sri Lanka, enabled by interconnecting the respective electricity grids, has recommended that the interest of Indian companies to participate in future bids for coal-fired plants in Sri Lanka may be accentuated by the existence of a regional power pool. The importance of the Indo-Sri Lankan land bridge in the Indo-Lanka power interconnection lies in the fact that with reduced infrastructure costs, the transmission line can be laid on the bridge and not in the seabed as perceived earlier.20 India-Nepal Nepal sells electricity (hydropower) to India, which is a major source of revenue for the former (see Table 3.12).

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Table 3.12 Revenue Generated in Nepal from Electricity Sale to India Year

Bulk Supply to India (GWh)

Revenue (in million Rs)

2000 2001 2002 2003 2004 2005*

95.00 126.00 133.86 192.20 141.20 110.70

327.80 396.06 514.12 809.00 673.70 573.40

Note: * provisional Source: .

Sub-regional level BIMST-EC BIST-EC (Bangladesh, India, Sri Lanka, Thailand Economic Cooperation), a sub-regional grouping, was formed on 6 June 1997 in Bangkok. Initially, Myanmar was an observer, but joined the organization as a full member at a Special Ministerial Meeting held in Bangkok on 22 December 1997, upon which the name of the grouping was changed to BIMST-EC. Nepal was granted observer status by the second Ministerial Meeting in Dhaka in December 1998. With regard to energy, work is being done on two issues, namely: • •

Energy Infrastructure Development (Natural Gas) New and Renewable Sources of Energy

For the Trans-BIMSTEC Gas Pipeline Project, Thailand has agreed to share with all BIMSTEC member countries the knowledge and experience of turning abundant natural gas resources into commercial products, and also to create value-added gas utilization to be more efficient and effective. As for the BIMSTEC Trans-Power Exchange and Development Project, Thailand has agreed that technical support on power exchange and development will be given to member countries through various training courses such as power system planning and maintenance planning. On 21 December 2006, the meeting to finalize the Memorandum of Association for the establishment of the BIMSTEC Energy Centre was held in New Delhi. The objective of the BIMSTEC Energy Centre is to coordinate,

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facilitate, and strengthen cooperation in the energy sector in the BIMSTEC region by promoting experience sharing and capacity building. Not much can be reported yet as the Centre is less than a year old. PROSPECTS OF REGIONAL COOPERATION THROUGH ENERGY Tables 3.13 and 3.14 show the growth rate of demand for the four commercial fuels in the medium and long term. Small nations such as Bhutan and Maldives will have high demand in the coming years. In Bhutan, so far only 40,000 houses have been electrified so there is a need to accelerate the spread of electricity. An interesting feature is that Nepal, Pakistan, and Sri Lanka have included coal in their long-term energy security strategy which is to be introduced after 2010 for power consumption. Coal appears for the first time in the fuel consumption packet of Sri Lanka from 2010. The demand for coal will rise in Nepal and Pakistan by more than eleven per cent in the long term, with the possibility of coal reserves in Bangladesh and India, and Sri Lanka setting up thermal power plants post-2010. There is ample scope for cooperating on energy resources among South Asian nations. For instance, as shown in Table 3.9, South Asian countries are using a very minimal percentage of their hydropower potential and consequently the region needs to look into means of harnessing this potential and supplying hydropower to other countries. However, for greater access to Bhutanese power, India will have to upgrade its transmission lines to reach the states of West Bengal, Bihar, and Uttar Pradesh.21 Bangladesh can also be supplied with Bhutanese power through India. Similarly, if the water systems of Nepal-Karnali, Gandak, and Kosi are developed for hydropower generation, it could easily ease the quest for irrigation water and waterways for Bangladesh. Electricity demand in the Maldives will also rise by sixteen per cent, and if there is a regional electricity grid in place, the Maldives could take advantage of the hydropower potential of India, Nepal, and Bhutan. Similarly on natural gas, Pakistan and India have decided to cooperate by working together on the two pipeline projects and this could be a step towards furthering regional cooperation by ensuring economic interdependence. A major step by India to revamp its power sector has been the Electricity Act 2003. Until the Act was enacted in June 2003, cross-border trading with India was limited because of constraints that limited wheeling and selling power to states within India that were the most deficient in power supply. Moreover, cross-border energy trading was carried out only through the Power Trading

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15.0 16.0 0.0 5.0

7.4 7.4 9.4 0.0

Electricity demand Oil Demand Gas demand Coal demand

7.2 4.4 6.8 6.6

India 16.0 12.0 0.0 0.0

Maldives

Source: Regional Energy Security for South Asia, Regional Report, SARI/Energy Programme, 2006.

Bhutan

Bangladesh

Growth Rate (% year) 8.3 6.5 0.0 8.0

Nepal

Table 3.13 Medium-Term Forecast of Commercial Energy Demand, 2002–10

8.2 4.4 6.2 9.0

Pakistan

6.7 8.2 0.0 0.0

Sri Lanka

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8.8 7.4 11.0 5.8

Bangladesh 15.0 16.0 Nil 5.0

Bhutan 7.0 5.1 8.0 6.1

India 16.0 12.0 0.0 0.0

Maldives

Source: Regional Energy Security for South Asia, Regional Report, SARI/Energy Programme, 2006.

Electricity demand Oil demand Gas demand Coal demand

Growth Rate (%) 7.8 3.7 0.0 11.2

Nepal

Table 3.14 Long-Term Forecast of Commercial Energy Demand, 2010–20

6.8 4.6 6.4 11.2

Pakistan

7.9 4.1 0.0 24

Sri Lanka

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Corporation (PTC). The 2003 Act has opened up energy trading within India by authorizing the Central Electricity Regulatory Agency (CERC) and state electricity regulatory agencies to grant licences valid for twentyfive years to any person “to undertake trading in electricity as an electricity trader”. India, because of its geographical location, has to play an important role and could benefit from the trading through wheeling and transmission charges. Another option for India would be to provide trans-South Asia’s oil imports, which are projected to more than double by 2020 as South Asian countries are making a conscious effort to reduce their dependence on the Middle East by expanding domestic petroleum exploration and attracting foreign and private investors. The role of India is central for any kind of regional energy cooperation. India will be the transit route for linking the countries in a regional power pool or electricity grid. An optimistic view could even look at extending the gas pipelines all the way from Pakistan via India to Bangladesh. For greater cooperation, certain prerequisites such as financial and technical support are essential. Moreover the participating countries must adopt a common market design that is implemented by creating either a regional power pool or a regional power exchange. The harmonization of national grid codes, establishing cross-border tariffs and other surcharges such as royalties and custom duties, and avoidance of double taxation are also essential. In July 2003, the Sri Lankan government approved the Petroleum Resources Act to allow for foreign and private investment in its offshore oil and gas fields. India is making attempts to better implement its 1997 New Exploration Licensing Policy (NELP) to increase foreign involvement in exploration. South Asia can also look at other regions which have pooled their resources for ensuring energy cooperation. For instance, the South African Power Pool (SAPP) which was created in 1995 encompassing South Africa, Lesotho, Mozambique, Namibia, Malawi, Zimbabwe, and Zambia under South African development community, is an example which matches the South Asian situation very well. They are wedded together to provide a reliable and consistent economical power supply. SAPP is a mix of hydro and thermal generation plants and the interconnection of power systems of contiguity located countries has provided immense technical and economic benefits. All these would allow each electrical utility to make savings on power plant investment costs as a result of improved use of the interconnected system and the quality of electricity supplied to the customers.

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BOTTLENECKS Energy cooperation in the region is bound to face certain obstacles first as there are political and security issues. While some analysts are of the view that pipelines such as TAPI and IPI can end the economic partition and also bring economies of scale to Pakistan, there are some groups that are concerned about the dependence of India on Pakistan. As far as the IPI is concerned, the United States is not in favour of India cooperating with Tehran as it would not only end Tehran’s geopolitical isolation, but will also allow Iran to use the revenues thus generated for its nuclear programme. Aside from this, presently no major trans-border power transmission links and natural gas pipelines presently exist in South Asia. There is also no mechanism to ensure instant exchange of information as far as electricity is concerned.22 The lack of a common strategy to address regional energy concerns at international forums also needs to be addressed. The region could also face implementation issues since there is a lack of both hard and soft infrastructure in the region. Neither has much research and development been done to implement energy cooperation in the region. Issues such as pricing, tariffs, transmission, and distribution losses need to be addressed.23 For countries like India, lack of coordination among competing government ministries has slowed the effort to institute effective energy policies.24 CONSIDERATIONS/OPTIONS Notwithstanding the bottlenecks that the region faces, there are some steps that the countries can take such as: • •

• • •

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To consider building a regional power pool. To involve the private sector through Public Private Partnership (PPP) in the development of infrastructure. Lessons can be learnt from the Tata and Bhutan Power Grid partnership, which is the first of its kind in the region. To design a regional security arrangement to conform with the national energy security agenda and to ensure the smooth functioning of gridlines and pipeline. To build regional institutional and regulatory framework for regional planning, investment financing, contract enforcement, and dispute settlement. To have a detailed hydropower master plan for South Asia, specifying the locations, the potential generation costs, and transmission costs.

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Spain, Portugal, France, Belgium, Italy, Netherlands, Luxemburg, Austria, Germany, Switzerland, and now extended to Poland, Czech Republic, Slovak Republic, Hungary, Slovenia, and Croatia Norway, Sweden, Finland, and Denmark United States and Canada South Africa, Lesotho, Mozambique, Namibia, Malawi, Zimbabwe, and Zambia Jordan, Bahrain, Tunisia, Algeria, Saudi Arabia, Syria, Libya, Egypt, Morocco, Mauritania, Yemen, Iraq, Lebanon, Palestine, Dubai, and Qatar Argentina, Paraguay, and Uruguay, Central America

Union for the Coordination, Transmission of electricity (UTCE)

Nord Pool

North American Electric Reliability Council (NERC)

Southern African Power Pool (SAPP)

The Commission of Regional Power Integration (CIER)

South America Power Trading

Source: ; ; and .

Member Countries

Regional Arrangement

Table 3.15 Existing Regional Power Pools

Opportunities and Challenges for Energy Cooperation 79

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80

• •

To do a cost benefit analysis of probable projects and to build expertise in the area of energy cooperation. To vest the SAARC Energy Centre with more powers so that it can do more work at the ground level.

Conclusion To conclude, this chapter highlights the status of energy cooperation in South Asia and the energy scenario in each South Asian country. An analysis of the resources in the region shows there is much scope for energy cooperation in the region especially for hydropower. Energy security is and will continue to be the prime concern of most countries and this is an opportune time to pool the resources that we have and work towards a common agenda. See Table 3.15. Emphasis has to be given to the role India would have to play in this region if energy security and cooperation are to be achieved. While India has been pursuing nations outside the region, it is time for it to look into its own backyard. This sector also gives the region the opportunity to push forward with the agenda for regional integration. And with the implementation of SAFTA and trade barriers coming down gradually, it is a good time for regional integration to gain impetus. NOTES 1

2

3

4 5

6

7

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Trade Facilitation: Reducing the Transaction Cost or Burdening the Poor, Centre for International Trade, Economics & Environment (CITEE), Jaipur, India, 2004. Recently there have been talks between India and Pakistan about Pakistan importing tea from India directly by train so as to avoid the transportation costs via the Gulf States (Interview with Dr Marie Lall, Ministry of Commerce, New Delhi, July 2007). It is noted that defence services account for 20.34 and 16.13 per cent of the total budget expenditures for Pakistan and India respectively (Budget 2005–06). Refer to budget documents or websites. (accessed July 2007). “India & Bangladesh: Bilateral Trade, Potential Free Trade Agreement”, World Bank Report. “South Asian Regional Agreements: Perspectives, Issues and Options”, Jayanta Roy, CII, June 2005. Article 1 of the GATT mentions the MFN Clause which states that any advantage, favour, privilege, or immunity granted by any contracting party to any product originating in, or destined for, any other country, shall be accorded

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8 9

10

11 12 13 14

15 16 17

18 19 20

21

22

23

24

81

immediately and unconditionally to the like product originating in, or destined for, the territories of all other contracting parties. World Energy Outlook, 2006. (accessed 1 August 2007). (accessed 19 September 2007). (accessed July 2007). (accessed 7 August 2007). (accessed 2 August 2007). (accessed August 2007). For more information, check . . “Bhutan’s Revenues Set for a Boost”, The Hindu, 21 June 2007 . . . Dr Mahendra Lama, “Integrating Stakeholders in Energy Cooperation”, South Asian Journal, July–September 2005. “Energy Cooperation in South Asia: Potential and Prospects”, RIS Policy Brief no. 8, December 2003. Electricity cannot be stored and follows the path of least resistance which cannot be determined necessarily by contact. T & D loss — At 31.05 per cent, India had the highest T & D loss in 2004–05. This is followed by Nepal at 21 per cent, and Bangladesh at 18 per cent. India did have a central energy ministry until 1992, when it was broken down into the Ministries of Coal, Petroleum and Natural Gas, Non-conventional Energy Sources, and Power. Several other government agencies, including the Planning Commission and Department of Atomic Energy, play a role in energy policy.

REFERENCES Asian Development Bank, South Asia Department. Ahmed, Mukhtar. Pakistan’s Energy Strategy and its Role in South Asia. Government of Pakistan, 19 February 2007. Murali, D. “Bhutan’s GDP Growth Hinges on the Tala Project”. The Hindu, 20 June 2007. Energy Information Administration (accessed between July and August 2007). International Energy Agency (accessed 30 July 2007).

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Malla, Shankar K. “SACEPS Task Force Report on Energy Cooperation in South Asia”. Executive Summary, Institute for Integrated Development Studies, Kathmandu, Nepal. “Regional Energy Security for South Asia”, USAID’s South Asia Initiative for Energy (SARI/Energy), 2006. South Asian Association for Regional Cooperation (SAARC). Srivastava, Leena and Neha Mishra. “Promoting Regional Energy Co-operation in South Asia”. Energy Policy 35, pp. 3360–68. India: The Energy and Resources Institute, 2007. “US$3.5 Billion TAPI Pipeline Pact Nearing Conclusion”. New Delhi, Islamic Republic News Agency (IRNA), 31 July 2007. Vucetic, Vladislav and Venkataraman Krishnswamy. How Can South Asia Promote Energy Trade . World Energy Outlook, 2006.

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Reproduced from The Geopolitics of Energy in South Asia edited by Marie Lall (Singapore: Institute of Southeast Asian Studies, 2009). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at

4

Pakistan’s Energy Crisis: Challenges and Opportunities Iftikhar A. Lodhi

Introduction In the summer of 2007, Pakistan faced some of the worst power shortages in decades. Power shortages have been endemic in the country, but these shortages were largely due to a surge in electricity demand consistent with, and related to, economic growth. The government did indeed anticipate the shortage, but failed to increase the installed capacity of hydro and thermal power generation. Fuel imports for the power and transportation sector continued to increase, resulting in a large import bill and undermining Pakistan’s balance of payments. Aside from this, the promise of bringing electricity and modern fuels to the large number of people living in the rural areas poses new challenges for the government. Nevertheless, the good news is that the economy has been growing fast and all other macroeconomic indicators are showing healthy signs of improvement. Since 1991, Pakistan has gradually liberalized the economy. Successive governments have carried out a massive reform agenda leading to structural changes in the economy. The current regime took the agenda a step further through privatization and deregulation in the power and hydrocarbon sector. The sustainability of economic growth and the resultant social development will depend on ensuring an adequate and affordable supply of energy.

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ECONOMIC AND SOCIAL BACKDROP Pakistan is one of the fastest growing economies in the world, growing at an average of seven per cent for the last five years (2003–07).1 All three sectors — agriculture, industry, and services — of the economy contribute to this growth at 15, 25, and 60 per cent respectively. Strong domestic demand continues to support equal growth in consumption (50 per cent) and investment (50 per cent). Pakistan’s foreign exchange reserves reached US$16 billion and Foreign Direct Investment (FDI) reached US$7 billion at the end of FY2006–07, having started off from a mere few hundred million at the start of this century. In recent years, public and private investment witnessed 40 and 30 per cent growth respectively, constituting 23 per cent of Gross Domestic Product (GDP) as compared with 16 per cent in 2001. Public sector investment focuses largely on infrastructure projects, enhancing, private investment, which is largely in deregulated sectors such as oil and gas, power, communications, finance, etc. The origins of FDI include the United States, the United Kingdom, United Arb Emirates, Saudi Arabia, China, Norway, Japan, Hong Kong, and Singapore, as well as others. The per capita income has been growing by 13 per cent during the same period, rising from US$586 in FY2002–03 to US$925 in FY2006–07. The population growth, which outpaced low economic growth during the last two decades, has slowed down, resulting in an increased 5.5 per cent growth in real GDP per capita in 2003–07. A growing middle class, along with some demographic transition, is also playing a central role in the economic growth and soaring energy demand. The government has embarked on a large human resource development agenda, almost doubling expenditure on education in 2003–07. However, the improvements in health, employment, and poverty reduction are lagging behind economic growth and need further attention and active government involvement. PAKISTAN ENERGY SECTOR Pakistan’s total primary energy consumption — hydro, oil, gas, coal, and nuclear — has grown by 50 per cent in the last ten years and is expected to double in the next ten years from the current level of fifty-seven million tonnes of oil equivalent (mtoe) in a moderate growth (6–7 per cent) scenario (see Figure 4.1 and Table 4.1). However, traditional biomass still constitutes 30 per cent of the total energy consumption. Moreover, only 50 per cent of the 29.74 million households, in a population of 155 million, are electrified.

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Figure 4.1 Pakistan GDP Growth and Primary Energy Consumption 9 120

8

100

7 6

80

5

60

4

40

3 2

20 Year

0

1 0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2010 2015

Primary Energy Consumption (mtoe) 38.52 40.40 41.72 43.19 44.40 45.07 47.06 50.83 55.53 57.86 79.30 120.18 GDP growth (%)

1

2.6

3.7

5.9

2

3.2

4.8

Primary Energy Consumption mtoe

7.4

7.7

6.9

7

7

GDP growth (%)

Source: Pakistan Economic Survey 2006–07 and Mid-term Development Framework, Ministry of Finance and Planning Commission.

Table 4.1 Pakistan Energy Mix and Demand Forecasts FY04

FY10

FY15

FY04

mtoe

FY15

% Share

Oil

15

21

32

Gas

25

39

Coal

3

7

Hydro

6

Renewable

–

Nuclear

FY10

30

26

27

53

50

49

44

14

6.5

9

12

11

16

12.7

13.9

13.6

1

2

0

1.1

1.3

1

1

2

0.8

0.09

2

Total

50

80

120

100

100

100

Indigenous supplies*

39

50

61

Deficit*

11

30

59

Note: * Data for FY10 is a simple average calculated by the author just for comparison purposes. Source: Mid-term Development Framework, Planning Commission of Pakistan.

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Energy consumption per capita remains one of the lowest in the group of low-income countries. Pakistan remains highly dependent on energy imports (26 per cent of total consumption) for oil, and to some extent, coal, which constitutes 29 and 8 per cent respectively of total primary energy mix (see Figure 4.2). The oil imports constitute 80 per cent of the total of 127.75 million barrels per annum in oil consumption, almost one-fourth of its import bill, and raising Pakistan’s vulnerability to the volatile oil markets. Figure 4.2 Pakistan Primary Energy Mix

Nuclear 1%

Hydro 11%

Oil 29%

Gas 51%

Oil

Coal 8%

Coal

Gas

Hydro

Nuclear

Source: Pakistan Energy Year Book, 2006.

National Energy Security Plan There are considerable unexplored oil, gas, and coal reserves, in addition to the hydropower potential. However, a lack of investment and technology has left large parts of the energy potential underutilized. The rise in energy demand and supply deficit and high import dependency compelled the government to devise an integrated National Energy Security Plan without which growth could not be sustained. The key objectives of energy sector development are as follows:

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• • • • • • • • • • • •

87

To diversify energy resources types as well as aim for an optimum energy mix. To exploit the full potential of hydropower and the development of dams and power plants. To optimize utilization of the country’s indigenous resource base by enhancing exploration and production activities of oil, gas, and coal resources and to develop power plants. To reduce dependence on imported oil and petroleum products. To increase the share of coal and alternative energy in the overall energy mix. To encourage the use of Compressed Natural Gas (CNG) in the transport sector and Liquefied Petroleum Gas (LPG) as domestic fuel. To import natural gas through pipelines from the Gulf, Iran, and Turkmenistan. To import Liquefied Natural Gas (LNG). To improve distribution losses and encourage energy conservation through technological improvements. To limit the role of the public sector through privatization and deregulation. To create a conducive environment for the private sector. To develop the energy scenario in the context of a regional perspective.

Successive governments have been pursuing some of the above policy measures in the past. In fact, import dependence on oil has decreased considerably in percentage terms, if not in amount and quantity. The oil share in the primary energy mix has decreased to 29 per cent from 44 per cent a decade ago. The government projections of energy demand in the Mid-term Development Framework (MTDF) implicitly assume an active government policy, encouraging certain fuels through incentive structures, and infrastructure developments. Consequently, the coal and hydro share in the total energy mix will rise from 7 to 12 per cent, and 12 to 14 per cent, respectively; reducing oil and gas share (see Table 4.1). The government plans to import gas through pipelines and/or LNG, which will fill the supply and demand gap accordingly. However, the case may not be as simple as it seems. There could be a number of problems for the government’s policies. A multiple-scenario approach, as presented by Mukhtar Ahmad in Table 4.2,2 helps to find policy alternatives. The base case is what the government is striving for,

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47 47 47 47 47

Base case Low gas High thar Low hydro High nuclear

2,290 2,290 2,290 2,290 2,290

Indigenous 8,170 – – – –

Imported

Source: Mukhtar Ahmad, “Meeting Pakistan’s Energy Needs”, 2006.

Oil (mtoe)

Scenario

Gas (mmscfd)

750 6,060 6,060 6,060 6,060

LNG (mmscfd) 13 13 44 13 13

Indigenous 3 35 3 43 21

Imported

Coal (mtoe)

Table 4.2 Pakistan Multiple Energy Scenarios (2025)

20,325 20,325 20,325 14,230 20,325

Hydro (MW)

4,400 4,400 4,400 4,400 7,200

Nuclear (MW)

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assuming the entire deficit can be met through imported pipeline gas. In the low gas scenario, Pakistan would have to import LNG as well as coal, or alternatively, would have to develop the unexplored massive domestic coal reserves. Nevertheless, in any scenario, there remains many challenges, from required investments to further deregulation, from organizational reforms to political hindrances. Power Generation The growth in economic activity, rising income levels, large-scale manufacturing, and the government’s village electrification programme have contributed to higher power demand. The power demand is projected to grow further at 7.9 per cent in 2007–11. Pakistan has installed a total capacity of 19,440 MW. Nevertheless, many of the hydro and thermal plants are underutilized due to a shortage of water or fuel. The government has planned to increase the capacity up to 47,540 MW in 2015 (see Table 4.3). However these projections seem too ambitious to be met and a lot would depend on foreign investments and gas flows from neighbouring countries. The coal and hydro development projects could also take more than the anticipated time. The power sector in Pakistan is largely in the public domain and responsible for 70 per cent of power generation. The Water and Power Development Authority (WAPDA), the Karachi Electric Supply Corporation (KESC), the Karachi Nuclear Power Plant (KANUPP), and the Chashma Nuclear Power Plant (CHASNUPP) are the four main public sector organizations involved in power generation, transmission, and distribution of electricity in the country. The Independent Power Producers (IPPs) are responsible for 30 per cent of power generation. The village electrification programme has seen renewed acceleration in recent years, progressing at 12 per cent per year; about 50,000 villages have been electrified in 1997– 2007. The hydro and thermal power generation mix by WAPDA had witnessed a tilt towards thermal power which the government plans to reverse by increasing hydro capacity (see Table 4.4). There are a total of fourteen hydropower projects in implementation phase by public (eight) and private sectors (six) which will add 755 and 502 MW of capacity respectively. Similarly, a 900 MW capacity could be increased through coal-based projects, 800 MW through renewable, and some 4,800 MW through gas power plants.

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400 – 900

2006–07 2010 2015

6,460 1,260 7,570

Hydro 160 900 3,000

Coal 180 700 800

Renewable 6,400 160 300

Oil 5,940 4,860 7,550

Gas

% Share 58.5 56.9 within WAPDA 43.1 within WAPDA 30.1 2.4 9.0 100

Installed Capacity 11,363 6,463 4,900 5,859 462 1,756 19,440

Source: Pakistan Economic Survey, 2006–07.

WAPDA Hydel Thermal IPPs Nuclear KESC Total

Power Company

Table 4.4 Pakistan Installed Power Generation Capacity, 2006–07

Source: Pakistan Economic Survey, 2006–07.

Nuclear

Source (in MW)

Table 4.3 Pakistan Power Generation Plans, 2006–07

19,540 7,880 20,120

Total

27,420 47,540

Cumulative

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Hydrocarbons Pakistan has recoverable resources of 317.82 million barrels of crude oil (January 2007). The reserves can only last thirteen years on the current production levels of 66,485 barrels per day (bpd). However there have been speculations about the potential being as high as 27 billion barrels. The oil and petroleum products are largely consumed by transport (50.7 per cent), power (32.1 per cent), and industry (11.4 per cent). The high oil prices and an established vast network of natural gas were the two fundamental factors when the government decided to move away from oil dependence. An active government policy and appropriate incentive structures resulted in a vibrant natural gas market. The government is working to phase out diesel engine transport from the cities, which will reduce pollution significantly, in addition to allowing for billions of dollars in savings. The average production of natural gas per day stands at 109 million cubic meter per day (mmscmd) and total reserves of 28 trillion cubic feet (tcf ) could last up to 22 years at current production levels. The largest consumers of gas are power (36.4 per cent), fertilizer (21.6 per cent), industrial (19.1 per cent), and households (17.8 per cent). For a detailed discussion on the gas sector, see chapter 5 of this book. The Oil and Gas Regulatory Authority (OGRA) is responsible for regulating all oil and gas activities. While the public sector is a key player in the hydrocarbon markets, particularly gas distribution, the market is fairly open for the players in other sectors. The revamped exploration policy has attracted substantial interest from key players in the sector. The oil and gas sector has been the second largest recipient of FDI after telecommunications. In fact, the public sector entity Oil and Gas Development Corporation Limited (OGDCL) has been the first Pakistani company to register on the London Stock Exchange. Pakistan has recently made enormous discoveries of around 175 billion tonnes of coal, in Thar, northeast of the Sindh province. The coal can provide a cheap source for power generation. The construction and power generation industry has welcomed coal as an alternative to the expensive furnace oil. The growth in demand caused coal shortages in 2006. However the coal field is still under different feasibility studies. The China National Chemical Engineering Group Corporation (CNCEC) and a domestic firm have been commissioned to construct a power generation plant.

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CHALLENGES AND OPPORTUNITIES Some of the challenges and opportunities the power sector is likely to face are briefly discussed below. Investment and Technology are the two fundamental problems likely to impede the development plans. The transmission losses of WAPDA are 22 per cent, which can be improved by upgrading the system with advanced technologies. An estimated US$6 billion investment is required over the next ten to twenty years. However if the government succeeds in bringing investment, whether public, private, or through joint ventures, the spillover effects will bring employment and further increase economic activity in construction and manufacturing. Privatisation and Regulatory Issues ride on investment as well as performance. Inefficient public sector organizations are already going through a restructuring and corporatization process. The government must ensure a smooth and transparent privatization process, taking workers into their confidence. Sharp cuts in employment, price hikes, and corruption incidents have been witnessed in recent privatizations. The regulatory procedures also need to be further simplified. Multiple price regimes are providing subsidies to one sector/consumers, at the expense of other sectors/consumers. The government can do away with the complex pricing system, and if some sectors/consumers need subsidies, it should be provided to them directly. Electricity and Gas Transmission are classical natural monopolies, which means if the marginal cost of providing electricity to a household is greater than the marginal benefit, then private investors are less likely to do so. The government must take a cautious approach in this regard, as the village electrification programme and promoting natural gas as domestic fuel cannot be carried out by private distribution companies at the same cost. On the other hand, any rise in the prices will adversely affect the poor. Hence, the government must ensure the expansion of the network without price hikes and devise a policy to compensate the connection costs. Political Imperatives of the envisaged plans demand statesmanship. The hydropower projects remain a cause of friction between the provinces. The precious gas reserves in Baluchistan and the coal reserves in Sindh have generated regional claims for their revenues. These and other such issues induce ethnic tensions and have been an annoyance in the relations between the federal government and the provinces. Any mismanagement of such issues can escalate to conflict. At the regional level, plans to import electricity and gas from Iran and the Central Asian states will also lead to new considerations and concerns.

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For a detailed discussion on the regional implications, see chapters 3 and 5 of this book. Conclusion Although Pakistan has significant coal and hydro potential, it cannot benefit from these resources in the short run. The dependence on imported fuel will keep growing with economic growth. However it is the government who decide which fuel to import. While oil is an expensive option, gas poses geopolitical challenges, and yet importing coal may not solve problems beyond the limited usage for power generation. The nuclear energy and development of Thar coal reserves are the two options that the government should pursue in the long run. However, in the short run, the government must overcome the geopolitical challenges to bring much needed gas from abroad. NOTES 1

2

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All data in this chapter, unless otherwise stated, are from Economic Survey of Pakistan FY2006–07, State Bank of Pakistan’s different reports, and Pakistan Mid-term Development Framework 2005–10, and calculated by the author. Mukhtar Ahmed, “Meeting Pakistan’s Energy Needs”, presentation delivered at Woodrow Wilson International Center for Scholars, June 2006 (accessed 14 September 2007).

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Reproduced from The Geopolitics of Energy in South Asia edited by Marie Lall (Singapore: Institute of Southeast Asian Studies, 2009). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at

5

Energy Security and Geopolitics in South Asia: Historical Baggage, Global Powers, and Rational Choice Iftikhar A. Lodhi1

Introduction The high economic growth of the Asian economies, particularly China, India, and Pakistan, led by increased integration in the global market, has put an end to their “self sufficiency” paradigms. The unprecedented demand for energy has unleashed a quest for securing energy resources and supplies abroad, profoundly affecting the foreign policy priorities of these countries. On the other hand, dependency on oil leaves their economies vulnerable to the volatile oil markets. The high oil prices threaten to hamper growth and increase the governments’ financial burden. In addition, the growing climate change concerns make natural gas, which is cheaper and cleaner, the “fuel of choice” and the “fuel of 21st century”. The solution for India and Pakistan lies in their neighbourhoods. Iran has the second largest natural gas reserves in the world after Russia. Turkmenistan and the other Central Asian states also have considerable oil and gas reserves.

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The most economical way to bring these untapped resources home is by pipelines. The two proposed pipelines under discussion over a decade now are the Iran-Pakistan-India (IPI) pipeline and the Turkmenistan-AfghanistanPakistan-India (TAPI) pipeline. However, both projects face a number of problems. First, historically, hostile relations between Pakistan and India have not to date permitted any venture of such strategic importance. Secondly, the United States’ strategic interests in the region make it difficult for the countries to pursue independent policies. Finally, the equally important issues are physical security of pipelines in violence-mired territories, pricing of gas, lack of investments and infrastructure, reliable projections of the resources and demand, and regulatory issues. Nevertheless, both pipelines have the potential to change the South Asian politico-economic landscape completely. This chapter is organized as follows. In the second section, the broad issues of “energy security” and “geopolitics” and their interaction in the current situation of the region will be explored. The third section looks at the countries’ energy requirements and the available options, given the current global backdrop. The fourth and the fifth sections assess the economic viability and political acceptability of the two pipelines. In the final section, the chapter discusses the main problems impeding the projects. Finally, the paper concludes that the IPI pipeline is the most viable option, geo-economically as well as geopolitically. However, an uncertain future of the India-Pakistan détente and the convergence of U.S.-Indian strategic interests could delay its construction in full or, at least, its extension to India. The future of the IPI pipeline will truly reveal whether policymakers in South Asia are ready to follow economic rationale or keep carrying historical baggage and let the global powers dictate their policies. ENERGY SECURITY AND GEOPOLITICS Energy security is an umbrella term and can have different meanings for different actors — producers, consumers, states, and corporations — depending on their vulnerability and capacity to influence the world market. Today multiple issues influence the concept of energy security, and consequently, the respective governments’ energy policies viz. sustainable development, climate change, interdependent market structures, and energy supply — reliable, adequate, and affordable. Nonetheless, traditionally, energy supply disruptions and price hikes have been the two primary concerns of energy security, emanating from the dependence of industrialized economies on the geographically concentrated

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resources of energy.2 Hence, energy security is inherently geopolitical in nature and relations among nations affect their energy security policies.3 On the other hand, economic factors play a vital role in defining the geopolitical pursuits of the countries (Hayes and Victor 2006). The rising Asian economies, particularly India and China, underscore this dialectics of energy security and geopolitics. Their growing energy requirements define and redefine their foreign policy priorities. At the same time, the geopolitical and strategic security concerns affect their energy policies. On the one hand, China and India, along with other fuel importing countries, pursue aggressive policies as if they are going to “lock up” energy resources abroad; on the other hand, both countries are members of multiple bilateral and multilateral forums for energy and security cooperation. The resource shortage is not the primary reason for the quest for energy; it is instead the “challenges of ensuring availability of traded oil and gas resources”4 at affordable prices. The world’s oil and gas resources are sufficient for, at least, four to six decades respectively, at current consumption levels and prices.5 Therefore, the intense competition is primarily driven by geopolitical and strategic security concerns.6 The economic viability of the extraction of undiscovered resources is another major concern. Nevertheless, for a sustainable economic growth, countries have to develop new energy resources and markets, which take decades of active government support to develop backward and forward linkages, and need to be planned well in advance. For many years now, the International Energy Agency (IEA) — established in direct response to an oil embargo from the Organization of Petroleum Exporting Countries (OPEC) after the Arab-Israel war (1973) — has successfully managed the “soft” side of energy security by sharing information on reserves, conservation, technology, market mechanisms, and emergency stocks. However, due to the emerging issues, there were repeated calls for a renewed approach towards global energy governance beyond IEA/ OPEC/G8 groupings, since these forums essentially represent the interests of their members.7 Three major considerations are at the centre of these debates. Firstly, a shift in major energy demand centres initiated by the rise of Asian economies. Secondly, a growing concern about climate change and declining energy resources. Thirdly, political instability and terrorism issues in the energy rich regions. The two proposals, among other things, suggest an extension of the G8 and of the IEA by including India, China, Brazil, Russia, and OPEC countries.8, 9

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In the absence of such global mechanisms to deal with energy security issues, the energy importing countries compete through different channels, from free markets to political influence, and even wars. The unprecedented demand for oil and gas has unleashed a quest for securing energy sources and supplies in the politically unstable regions of the Persian Gulf, the Caspian Sea, Latin America, and Africa. The situation becomes more contentious when the security and strategic interests of the nations in the energy competition are in conflict with one another. This is precisely the case among the major global and local powers in South and West Asia. Historically, the United States and the other European powers have managed to keep their hegemony over Middle Eastern resources. The Gulf region,10 because of its huge oil (55 per cent of world total) and gas (41 per cent of world total) reserves, has always been the focus of the strategic interests of the developed countries, and particularly, the United States. The region supplies roughly one-fifth of the United States’ and of the world’s total oil imports. Moreover, undemocratic governments, traditionally with hostile relations with the West, and the Arab-Israel conflict, make the region one of the most volatile in the world. The Caspian region11 is a relatively new focal point of geopolitics. Since the collapse of the USSR, the strategic location of the region and its huge oil, gas, and uranium potential has attracted much attention by the developed countries. As U.S. Vice President Dick Cheney mentioned, “I cannot think of a time when we have had a region emerge as suddenly to become as strategically significant as the Caspian.”12 The United States devised a strategy and supported all moves aimed at integrating newly independent states into the world system by reducing their dependence on the Russian infrastructure. The core of the policy, besides the United States’ commercial interests, is to destroy the geopolitical foundations of Russia’s status as a major power.13 The United States’ military presence in various regions, particularly in Central Asia, its regime change policies, and its attempts to isolate, or attack Iran, are a major concern for China, Russia, and the other oil importing countries. Indeed, the establishment of the Shanghai Cooperation Organization (SCO) was a direct response from Russia and China to the United States-supported colour revolutions, and its military presence in the region.14 This and other measures from Moscow and Beijing are largely seen as counter measures to the United States’ policies and to retain control over Central Asia. On the other hand, the United States has indicated to intervene militarily to protect its energy interests abroad.15

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Nevertheless, despite all this intense competition and rivalries, the increasing interdependent nature of the world economy leaves less room for geopolitics as a zero-sum game played by nation states in their pursuit of power and security. As Hayes and Victor articulated: … relative gains matter, but so do the substantial gains from possible cooperation ... the enormous opportunity for joint gains from international gas trade … as geography, technology and political choices direct gas trade along one route at the expense of another, investment and revenues are diverted as well, with considerable political and economic implications. Countries that commit to importing large volumes of gas place the security of their energy systems partly in the hands of others, which in turn give both suppliers and users of gas a stake in the internal political stability of one another. This is what we mean by ‘geopolitics of gas’— the immensely political actions of governments, investors and other key actors who decide which gas trade projects will be built and how the gains will be allocated.16

Pakistan is a “geopolitical pivot”, as Brzezinsky defines the states with sensitive locations.17 Pakistan’s geo-economic importance stems from its location at the crossroads of “three Asias” — West, Central, and South. The pipelines, or any other transnational project, should be seen in a broader and long-term regional context in which Pakistan’s land mass and Gwadar port are the gateway to connect energy-hungry India and China to the Persian Gulf, and to bring their exports to Central Asia. The pipeline serves as a factor to enhance interdependence, regional integration, and political stability. Hence, the outcomes of the IPI pipeline hold important implications for the future of the region. Geo-strategically, Pakistan’s location is also pivotal for China as well as the United States. It borders Afghanistan and Iran, is central to U.S. policy in the region, is located at the mouth of the Straits of Hormuz, the most critical chock point of energy supplies in the world, and is a major non-NATO ally in the U.S.-led “war on terror”. Pakistan has managed historically close relations with both China and the United States. India’s and China’s energy security in particular, and Asia’s, in general, are tied up with the Middle East and the Central Asian energy resources.18, 19 The United States and other powers, being major potential energy users, are the major actors of the geopolitics of energy in the region. Pakistan has been entangled in a complex geopolitical situation. India is also on the verge of strategic shifts in its foreign policies.20 The United States’ presence in the region and increasing rivalry with China, and the policies on Iran, form the core of this new great game.

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THE GLOBAL AND LOCAL ENERGY SCENE Economic growth is the single most important factor driving primary energy demand. The Energy Information Administration (EIA) estimates the world’s average GDP growth at 4.1 per cent annually over the 2004 to 2030 period. This growth translates into a 57 per cent increase in total commercial energy over the same period. The real engines of growth in coming decades are nonOECD21 Asian economies, led by China and India, which are projected to grow at an average 5.8 per cent annually, compared with a 2.5 per cent growth for OECD countries. The commercial energy demand in non-OECD Asia is expected to grow by 3.2 per cent annually over the same period, constituting three-fourths of the total increase in the world.22 Fossil fuels (oil, gas, and coal) are primary sources of energy in the world, constituting 86 per cent of the world’s energy basket, and will remain reasonably so over the next three decades. The absence of consensus over climate change, its impact, and narrowly defined commercial interests of developed and developing economies alike, are unlikely to permit any upsidedown policy change. However, the share of oil is expected to decline from 38 to 34 per cent while gas and coal share would rise from current levels of 24 per cent each to 26 and 27 per cent respectively, depending on oil prices and the economic viability of clean coal technologies. With increased demand comes increased competition. The oil and gas resources of the North America and the North Sea are maturing, production is expected to start declining in the wake of the next decade, and oil prices will remain above US$50 per barrel, making it economical to use nonconventional resources (like Tar sands of Canada, coal bed methane in the United States).23 Nevertheless, the increased supply from non-conventional resources would not offset the increased demand, hence making OECD countries, particularly the United States, more dependent on the Gulf, South America, Eurasia, and North-West African countries. The increasing demand for Liquefied Natural Gas (LNG) in the United States and other OECD countries will further intensify competition in upstream markets.24 On the other hand, the increased oil and gas demand from the non-OECD countries, led by India and China is bound to increase competition in the same supply centres. In fact, the current oil prices of US$76 per barrel, compared with US$10 in 1999, are largely driven by demand growth and, to a lesser extent, decreased OPEC production and instability in the Middle East.25 The increased competition over the scarce energy resources is what drives the geopolitics of energy today.

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Energy Crisis in India and Pakistan Both India and Pakistan are among the lowest per capita energy consuming countries in the world, with high-energy intensity and import dependency. Both countries have low GDP per capita, high under/unemployment, inflation, and 70 per cent of their populations living below US$2 a day (for basic economic and energy indicators, see Table 5.1). In both countries, a large population depends on biomass (India 23 per cent; Pakistan 30 per cent) and only half of the total households have access to electricity.26 The graph (see Figure 5.1) depicting energy intensity vs. energy imports (as percentage of total exports), exemplifies dependency and vulnerability of an economy — both India and Pakistan lie in the “high risk” area. Also, besides energy demand and oil dependency, price is another important factor for considering gas as a “fuel of choice” for both countries. If imported gas costs $4.93 mBtu (at US$60 per barrel), it translates into $28.5 per barrel of oil equivalent — less than half of current oil prices.27 Since both countries face similar development challenges, it would be worthwhile to put an effort in materializing the cooperative solutions that not only ensure Figure 5.1 Energy Crisis in India and Pakistan

Source: USAid/SARI; Presentation on Regional Conference, 2006.

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Source: EIA, CIA factbook USAid/SARI.

Coal % of primary energy Oil % of primary energy Gas % of primary energy Proven oil reserves Oil consumption (annual) Oil imports; % of consumption Proven gas reserves Gas consumption (annual) Gas imports; % of consumption (annual) Fuel Imports; % of merchandized imports Energy intensity Energy consumption per capita

Population Area GDP (PPP) GDP growth GDP per capita (PPP) HDI

Item

Btu per $ (PPP) mBtu

mtoe b/d thousand b/d tcf bcf bcf

2004–05 50% 35% 9% 124 846,000 2,630 38 996 1,089 36.28% 2.10 14.5

1,121 (2nd) 3.28 (7th) 4.04 (4th) 8.50% 3,737 (118th) 0.611 (126th)

million million skm billion US$ US$

India

Unit

Table 5.1 Economic and Energy Indicators, 2006–07

5% 27% 55% 210 60,000 350 28.2 967.6 967.6 21.54% 2.54 12.4

168.8 (6th) 803, 940 (36th) 475.6 (25th) 7.50% 3,004 (128th) 0.539 (134th)

Pakistan

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mutual energy security, but also provide peace dividend by interlocking the economies. Indian Energy Scene India, with a population of more than one billion, is one of the world’s fastest growing economies, recording an average 8–9 per cent growth (see Table 5.1). Its energy market as a whole is highly regulated and controlled by the Public Sector Utilities (PSUs), with a complex web of regulatory regimes. India, being an energy supply constrained economy, sustainability of its development will largely depend on availability of affordable, adequate, and reliable energy — consequently, massive investments in social and physical infrastructure are needed. Indian primary energy demand is expected to grow by 6 per cent at an estimated 7–8 per cent GDP growth over the next decade. Coal is the largest source, constituting 51 per cent of the total primary energy basket; the rest includes 36 per cent oil, 9 per cent gas, and 4 per cent nuclear and renewable (see Figure 5.2). India imports 75 per cent of its approximate 960 million

Figure 5.2 India Primary Energy Mix

Gas 9%

Hydro 2%

Nuclear 2%

Oil 36% Coal 51%

Oil

Coal

Gas

Hydro

Nuclear

Source: Indian Eleventh Five-Year Plan; Energy Working Committee Report; Integrated Energy Policy; Planning Commission of India.

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barrels per annum oil consumption, raising its vulnerability to volatile oil markets. The Reserve Bank of India reports that every one-dollar rise in the international price per barrel of crude oil adds US$600 million (around Rs. 28 billion) to the country’s import bill28 — that already has grown fourfold over the last five years — and “15 basis points to wholesale price index as a direct effect and another 15 basis point as an indirect effect in absence of any countervailing policy intervention”.29 All these factors adversely affect the growth of the economy in developing countries. According to the International Energy Agency, a US$10 rise in crude prices (from US$25 to US$35), would reduce India’s GDP by 1 per cent and the other poor countries’ GDP by up to 1.6 per cent.30 Hence there is an acute need to diversify types, as well as sources, of energy to ensure continuous availability of energy at affordable prices. Many policy-makers have pointed at hydro and nuclear power as alternatives. However, the fact is that even if India realizes 100 per cent of its 150,000 MW hydroelectric potential — a sixfold increase in installed capacity of 25,000 MW — its share in the total primary energy mix would still be 5–6 per cent and the same stands true for other renewable sources. “Similarly even if a 20-fold increase takes place in India’s nuclear power capacity by 2031–32, the contribution of nuclear energy to India’s energy mix is also, at best, expected to be 5–6%.”31 Coal as an alternative fuel is also not free from challenges. Although India has the world’s fourth largest coal reserves, domestic supplies fall short of demand and almost 10 per cent of its consumption is imported. Coal is also cheap vis-à-vis gas for power generation, but infrastructure investments are comparable to those of gas. There are other riders as well when depending solely on coal, including climate change and economic viability of extraction. Hence mere “large estimates of total coal resources give a false sense of security”.32 A deregulated market and an increased demand within India and other parts of the world will eventually determine real prices of coal in the future. India’s proven natural gas reserves are 38 tcf (or 1.075 tcm).33 India produces eighty-five million metric standard cubic meters per day (mmscmd) or 1.08 tcf per annum of natural gas, almost half of the potential demand.34 The natural gas demand is expected to reach about 400 mmscmd by 2025 (see Figure 5.3). There have been two highly contentious and important aspects of the gas market in India in the context of pipeline imports, demand/supply projections, and pricing. Much of the controversy over demand/supply estimates, besides political motivation, arises from employing different econometric models and

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mmscmd

Figure 5.3 India Gas Demand Projections 450 400 350 300 250 200 150 100 50 0 Year EIA EIA EIA EIA EIA

2005 74 91 195 89 98

2010 93 140 277 115 134 EIA

2015 124 189 329 149 183 IEA

IHV

2020 155 228 358 194 249 IV

2025 195 259 391 258 328

PED

Source: Indian Eleventh Five-Year Plan; Energy Working Committee Report; Integrated Energy Policy; Planning Commission of India.

an inherent price sensitivity in the gas market. However, there is no substantial difference in the projections from different agencies except for the India Hydrocarbon Vision (IHV 2025).35 The IHV projections (see Figure 5.4) are, in fact, substantially higher vis-à-vis other models because of its taking into account the existing supply and demand gap which other models do not incorporate. The eleventh (XI) five-year plan (2007–12) acknowledges this gap, which is currently managed by arbitrary rationing — resulting in an under-utilization of the installed capacity in fertilizer as well as the power sector.36 The IHV projections also presumed an active government role for the development of gas infrastructure and imports and were reflected in the tenth five-year plan (2002–07). Nevertheless, the investment targets envisaged in the tenth five-year plan could not be met, and in the consequent five-year plan, pipeline imports are not even part of targeted supply.37 The pipeline targets were dropped in the eleventh plan, and the government claimed that India would be a gas surplus country at the end of the eleventh plan thanks to the enormous discoveries by private and public utilities in the Krishna-Godavari Basin on the east coast.38 However, before

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Figure 5.4 India Gas Supply and Demand Gap Projections 300 250 Anticipated

mmscmd

200 150

Gap/Surplus

LNG

100 ONGC/JV/PVT

50 0 Year Gap/Surplus

2007–08 69

2008–09 44

Anticipated LNG ONGC/JV/PVT

30 80

33 119

ONGC/JV/PVT

LNG

2009–10 –16 74 52 115

2010–11 –5 84 70 113

Anticipated

2011–12 –6 94 83 108

Gap/Surplus

Source: Indian Eleventh Five-Year Plan; Energy Working Committee Report; Integrated Energy Policy; Planning Commission of India.

the discoveries were certified, Gujarat State Petroleum Corporation (GSPC) and Oil and Natural Gas Corporation (ONGC) have lowered their estimates from 20 to 1.38 tcf and from 21 to 2 tcf respectively.39 Apparently there is no guarantee that the anticipated 74 to 94 mmscmd supplies could be realized (see Figure 5.4) and whatever new finds, once brought to market and infrastructure put in place, will only act as catalyst to spur further demand.40 Liquefied Natural Gas (LNG) is another option for India to meet its increasing demand. India had planned twelve LNG plants in late 1990s, but only five have been built and further construction has been halted.41 India is currently importing LNG from Qatar and a twenty-five-year deal with Iran is under negotiation. The Qatar gas costs US$3.6 mBtu, plus an additional US$1 mBtu for re-gasification and transportation. Both LNG contracts would still be unable to offset the demand supply gap. The price of gas in the Indian market, which is highly subsidized and controlled through the Administered Price Mechanism (APM), varies from US$1.93 mBtu to US$9. While government bodies such as GAIL supply

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gas to the fertilizer and power sectors at APM prices of below US$2.5 mBtu, the joint ventures and private supplies under the New Exploration Licensing Policy (NELP) fall between US$3.5 and US$4.5 mBtu, excluding an additional US$1 to US$1.5 mBtu for transportation and taxes. On the other hand, Shell was able to sell its on-spot LNG imports at US$7 mBtu.42 Petronet on-spot LNG is priced at $7.6 mBtu, GAIL’s on-spot LNG shipment from Algeria costs $9.28 mBtu.43 With rising demand putting pressure on the LNG market, future LNG on spot prices could cost anywhere between US$7 and US$10. The government is already pursuing a fast track deregulation policy and has plans to switch to market prices. The government, after a long debate, recently approved Reliance Industries Ltd’s (RIL) US$4.2 mBtu wellhead price under NEPL, which simply indicates that further discoveries will go beyond this price.44 However, the power and fertilizer sectors would have to adjust to market prices sooner rather than later, as public sector supplies will not be able to meet demand. How much of this increased burden will be borne by the government and how much will be shifted to the end customer is the actual question the government should ponder on. India will have to pursue an aggressive strategy of oil and gas diplomacy if it is to compete in the fossil fuel market. Finding a successful energy management structure in the short term would allow India time to harvest viable renewable sources. Since hydro, nuclear, and renewable energy production will take decades to develop, India will be forced to rely on fossil fuels to meet the majority of its energy needs, especially in the short term. Pakistan Energy Scene Pakistan faces similar problems. In the last five years, its economy has been growing on average by 7 per cent. Energy demand is estimated to grow steadily. However, Pakistan’s energy mix presents a different picture and is more dependent on gas, compared with India (see Figure 5.5). Natural gas is the largest source of primary energy, comprising 51 per cent of the total primary energy, the rest being oil, 29 per cent, hydro, 11 per cent, coal, 8 per cent, and nuclear, 1 per cent. Pakistan imports 80 per cent of its 127.75 million barrels oil per annum, which constitute one quarter of its import bill and raise Pakistan’s vulnerability to the volatile oil markets. This was the very reason, when in late 1990s, the government decided to move away from oil dependency. The government provided incentives for the transport and power generation sectors to switch to natural gas. According to a private study commissioned by the government, the natural gas demand is expected to grow further from the current level

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Figure 5.5 Pakistan Primary Energy Mix Nuclear 1%

Hydro 11%

Oil 29%

Gas 51%

Oil

Coal 8%

Coal

Gas

Hydro

Nuclear

Source: Pakistan Energy Year Book, 2006.

of 113 mmscmd to 350 mmscmd in 2025 (see Figure 5.6). Even by the conservative standards of the Mid-Term Development Framework (MTDF), the demand will almost double from current levels by 2015.45 Pakistan’s gas sector is very well-established and has one of the most extensive infrastructures in the developing world with 8,200 kilometres of transmission network. The largest consumers of gas are power (36.4 per cent) and fertilizer (21.6 per cent), followed by industries (19.1 per cent), households (17.8 per cent), and commercial (2.7 per cent). Although Pakistan has 28 tcf (792 billion cubic metres), the demand-supply gap will rise from the current 10 mmscmd to 90 mmscmd in 2015, according to moderate demand estimates (see Figure 5.7). To bridge this gap, Pakistan would have to import natural gas through LNG imports or pipelines. While the Sui Southern Gas Company (SSGCL) has been sanctioned for an LNG terminal in Karachi, the real emphasis is on pipeline imports because LNG imports will be costly and insufficient. Natural gas prices have been linked with crude oil in Pakistan. There are multiple price regimes for different consumers and different suppliers, ranging from US$1.9 to US$6.5 mBtu. However, the power, industry, and transport sectors are absorbing about US$4 to US$5 mBtu. The only highly subsidized sector is fertilizer where price ranges from US$0.7 to US$2 mBtu.46

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Figure 5.6 Pakistan Gas Demand Projections 400 350 300 mmscmd

250 200 150 100 50 0 Year

PWC/HB MPNR/SSGCL MTDF

2005

2010

2015

2020

144 107 89

191 148 129

250 168

375 197 258

PWC/HB

MPNR/SSGCL

MTDF

Source: PWC/HB, MPNR/SSFCL/MTDF; Ministry of Petroleum and Natural Resources and Planning Commission of Pakistan. Figure 5.7 Pakistan Gas Supply and Demand Gap Projections 400 350 300 250

Surplus

200 150

LNG

100 50 0 Year Gap/(Surplus) TAP(w/o India)

Indigenous

IPI Anticipated

Anticipated 2007

2008

2010

2011

2013

2015

2020

2025

10

9

23

7.3

–44

–14

121

10 2.7 14 122

60 8 28 115

60 13 28 104

–26 90 60 27 28 71

95 90 60 41 28 61

IPI Anticipated LNG Indigenous

TAP

Shortfall

Demand

103

118

LNG

Anticipated

IPI

TAP (w/o India)

Gap/(Surplus)

Source: PWC/HB, MPNR/SSFCL/MTDF; Ministry of Petroleum and Natural Resources and Planning Commission of Pakistan.

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Given the demand and supply gap situation and prices, the Pakistani market seems more mature and ready to absorb high-price imported gas, which can also free domestic resources to be used for the domestic and fertilizer sectors. The high dependence on gas and extensive infrastructure in Pakistan all point to the fact that while India may have some expensive options to substitute gas, Pakistan simply does not have any other alternative but to import by pipeline. THE IRAN-PAKISTAN-INDIA (IPI) PIPELINE With a total length of 2,775 km and at an estimated cost of $7.4 billion, the IPI pipeline is bound to change the face of regional politics in South Asia. The IPI pipeline, which is expected to be completed within three to five years, will pump 60 million standard cubic meters (mmsc) of gas every day into Pakistan, whilst India would receive 90 mmscmd. The pipeline, wtih a 56-inch diameter, starts from Assaluyeh, South Pars gas field, stretching over 1,100 km of Iranian territory before entering Pakistan and travelling through either Khuzdar-Multan or along the coastline, and then connecting to India. This project offers great opportunities to Pakistan, as the gas pipeline could also set the course for possible oil and gas pipelines to China, especially since China in the past has expressed its willingness to import oil and gas via Pakistan. Iran has proven reserves of about 971.2 trillion cubic feet (tcf ), the second largest in the world after Russia. The IPI’s source, the South Pars field, contains 300 tcf, with a current production capacity of 3.1 bcf/d. Economic Viability There were two major issues with regard to the economic viability of the project: the price of gas and the financing of the construction of the pipeline. Gas prices proposed by Iran were more than double what Pakistan and India were willing to accept. India wanted to pay a fixed amount per unit delivered to its border; however Iran wanted the cost to be linked to fluctuating international energy prices, saying the prices offered by Pakistan and India were only half of what it was looking for. Price negotiations in the IPI context are quite complex. All three parties have been meeting frequently to come up with an agreeable formula. After an exhaustive exercise over two years, all three parties finally agreed on most things in the last week of June 2007. According to the new formula, the price of gas will translate into $4.93 per mBtu, which is linked to the Japan Crude Cocktail (JCC) price (at

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a current level of $60 per barrel)47 at the Pakistan-Iran border. In the case of the oil price being $40 or $70 per barrel, the equivalent gas prices would be $3.67 and $5.56 respectively. All three parties have expressed satisfaction with the formula while Pakistan has officially approved it. A high-level Economic Cooperation Committee (ECC) officially endorsed the formula and there are plans for the construction of the Pakistani segment, showing a commitment on the Pakistani side to go ahead with the pipeline even without India. The same high level meetings are expected in India in the coming months. On the Transit and Tariff side, Pakistan initially asked for $1 per mBtu as transit fee, and $1.57 mBtu for transportation (and tariff ), while India was not willing to pay more than $0.15 and $0.40 respectively. In later meetings, differences were brought down. Both parties agreed on $0.70 for transportation and tariff. The only remaining issue was the transit fee. Nevertheless, India expects Pakistan to waive the transit fee as a gesture of goodwill, with the argument that only a 103 km-extension will be required to India. Another argument is based on international transit fees, which are approximately $0.10 in the case where the transit country is not a beneficiary. Pakistan in turn offered a fee based on 10 per cent of the gas price (which currently translates into $0.493) and India offered $0.20 per mBtu in absolute terms.48 The difference, it was hoped, would be solved in the coming months. Pakistan has offered India the alternative option to buy gas at the Pakistan-India border from Pakistan and let Pakistan and Iran deal with the pipeline.49 This offer also circumvents India’s two critical concerns: dealing with Iran, which is inviting pressure from the United States, and to some extent, the security issues in Baluchistan, both of which are discussed in the next section. But many Indian experts still believe that the confidence level is not high enough for India to give Pakistan such leverage. As for the financing of the project, the earlier concerns raised are now no longer critical due to the segmented “build, own, and operate” approach. The pipeline will be running 1,115 km within Iran (Assayaullah to the Pakistan border) and 898 km within Pakistani territory before entering India, and another 740 km within India. Iran has already started construction work at South Pars, primarily to supply gas to its eastern regions. Pakistan has also approved construction plans and is in the process of doing a route and procurement feasibility study.50 International funding for the IPI pipeline is no longer a serious problem either. Despite the Iran-Libya Sanctions Act of 1996 and a pending Iran counter proliferation Act 2007 by the United States Congress, companies have been doing business with Iran much beyond the limit of $20 million

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mentioned in these Acts. A consortium was also under discussion among BHP (Australia), NIGC (Malaysia), Total (France), Shell (Netherlands), BP (UK), in addition to Irani, Pakistani, and Indian national gas companies.51 These developments also brought Russian Gazprom onto the scene. Gazprom came forward during the crucial time when analysts were raising questions about the funding of the project. Gazprom expressed interest and last month Russian Prime Minister Fradkov visited Pakistan and signed a number of cooperation agreements. China also offered to help finance the project and already has billions of dollars of investment in the Iranian energy sector.52 The most recent breakthrough came on 2 May 2007 when the World Bank’s vice-president confirmed that the World Bank was willing to fund either of the gas pipelines [IPI and TAPI] if ever approached.53 The statement came on the same day the United States Congress Committee on International Relations wrote a rather rude letter to the Indian Prime Minister showing serious concerns over New Delhi’s growing ties with Tehran. Political Acceptability The IPI pipeline has faced multiple problems since its conception in 1989 by Iran’s Ali Shams Ardekani, then deputy foreign minister, and Tata Energy Research Institute’s (TERI) Rajendra Pachauri, then TERI’s director general. After four years of different studies, India signed a MoU in 1993 with Iran.54 However, due to security concerns, the project was shelved and only re-emerged in the early 1990s when discussions between Iran and Pakistan started, with India joining in later. Pakistan actually extended its support for the IPI pipeline in 1994; however, Benazir Bhutto’s government remained unsuccessful in getting the army’s support. India also explored the feasibility of offshore, deep sea, and shallow sea pipelines as alternatives to crossing through Pakistani territory. However, the technological problems of a deep-sea (2,400 metres) pipeline were difficult to overcome with the given technology. The shallow-sea option along the Pakistan’s coastal line, which would cross Pakistan’s Exclusive Economic Zone (EEZ), was rejected by Sharif ’s government due to Pakistani army and navy security concerns.55 General Pervaiz Musharaf, now president of Pakistan, was then Chief of Army Staff. Pakistan, however, signed an agreement with Iran in 1995 to build a pipeline from Iran’s South Pars gas field to Karachi along the coastline. Pakistan also, along with ADB and some United States companies, was persuaded to look at the Turkmenistan-Afghanistan-Pakistan (TAP) pipeline, which had the support of both the United States and the Pakistani Army.

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After that, the IPI project was neglected for many years due to changes in the regional equation, such as the Taliban’s takeover in Afghanistan in 1996, and Pakistan’s support of the regime, which India and Iran both perceived as a threat to their interests. Later Pakistan-India and Pakistan-Iran relations deteriorated. In the aftermath of 9/11, resulting in the U.S. invasion of Afghanistan, India — Pakistan relations started normalizing, with a brief lull in 2002 after the parliament bombing incident in New Delhi. In early 2005, the IPI project saw renewed interest from all sides. Indian security strategists remain wary of giving Pakistan considerable leverage over Indian energy security. They fear Pakistan would withhold gas supplies in case of any tension between the two countries, or simply to bargain tariffs. However, their fears are unsubstantiated, given the experiences from across the world, which suggest otherwise in similar situations. There have been eleven intentional gas pipeline disruptions in the seven cases studied by Hayes and Victor, out of which three each were caused by the transit country and the supplier, while five were caused by users.56 Nevertheless, a number of proposals have been brought forward to eliminate such fears, each with its own merits and problems. First, there is a suggestion to extend this pipeline to China, in which case it would be difficult for Pakistan to cut supplies, given the friendly relations between the two countries. Second, it has been argued that a power generation plant, fed by the IPI pipeline, can supply Pakistan electricity, hence interlocking the dependence. Third, India and Iran can get into an agreement where if Pakistan cuts Indian supplies, Iran would cut Pakistan’s supplies. Fourth, the Indian government has indicated using WTO instruments for gas transit, whereby both countries will be bound under international law. Finally, involving third parties or international institutions is another option, which could also help in financing the project. The World Bank has arbitrated in the Indus Water Treaty between the two countries on the sharing of waters for forty years. In short, if there is political will, such solutions can be sorted out. Pakistan-Iran Relations Iran and Pakistan historically enjoyed friendly and cooperative, if not always smooth, relations. But more often than not, the underlying reasons were external factors rather than implicit tensions such as Pakistan’ relations with the United States, Arab states, and Iran’s friendly relations with India, as well as opposing policies in Afghanistan. The only implicit irritant in the relations is increased sectarianism in Pakistan and the killings of Shiites during the 1990s.

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The relationship began with Pakistan’s emergence as an independent state, following the partition of India in 1947. Iran was the first to extend recognition to the new state. It established diplomatic relations with Pakistan in May 1948, and Pakistan’s Prime Minister Liaqat Ali Khan visited Iran in May 1949. The Shah of Iran was the first head of state to pay a state visit to Pakistan in March 1950, and in the same month, a Treaty of Friendship was signed. Both countries were part of American Cold War alliances, CENTO and SEATO. Even in the 1960s, both countries looked at the possibility of forming a confederation.57 In 1964, they formed the Regional Cooperation for Development (RCD) organization with Turkey, which was renamed Economic Cooperation Organization in 1985, and expanded in 1994 to include five states of Central Asia — Kazakhstan, Turkmenistan, Uzbekistan, Tajikistan, Kirghizstan — and Afghanistan. Iran’s 1953 coup of the Mussadaq’s government, organized by the CIA, was the first incident which had lasting effects on United States-Iran relations, although the Shah remained on friendly terms with the United States. Nevertheless, the Iranian people and political activists, divided into socialists and Islamic revolutionaries, both remained wary of the United States. A complete departure of the United States-Iran cordial relations, after the Islamic Revolution in 1979, did not hurt relations with Pakistan, owing to their common antipathy to socialism and the Soviet invasion of Afghanistan.58 With the end of the Cold War and the United States’ hegemony in the Middle East, Iran-Pakistan relations grew cold. In the same period, Pakistan’s support for the Taliban Government, which initially had the United States’ support as well, would have meant isolating Iran and posing serious challenges to its security and national interests. Iran coordinated with Russia, India, and the Central Asian countries to counter the Pakistani move in Afghanistan. The more Iran got involved in the Afghan conflict, the more it “turned into a direct conflict with Pakistan”. Finally, when the Taliban in 1996 took over and killed an Iranian diplomat, the friendly relations and cooperation were over.59 The socio-economic and political conditions in both Iran and Pakistan have been under tremendous pressures. Iran has been witnessing an intense internal power struggle between the conservatives and the liberals/moderates for many years now. It has also been under pressure from the United States and the European Union for its plans to acquire nuclear technology for possible weapons capability. Pakistan has been facing ethnic, sectarian, and extremism problems.60

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The events of the 9/11 forced Pakistan back into the United States-led alliance, albeit fighting the “war on terror” rather than the “communist threat” this time. The wars raging at Iran’s eastern and western flanks have had their effect on the relations between the two countries. The United States’ agenda of isolating Iran and a possible threat of military attack from Pakistan’s territory, in particular, are two of Iran’s profound concerns with regard to Pakistan. However, Pakistan has categorically denied such a possibility. India-Iran Relations Iran and India share thousands of years of history, culture, and trade relations. However, from the Indian partition in 1947 to 1979, their relations remained less than friendly, partly because of Iran’s close ties with Pakistan, and Iran’s support for the Kashmir conflict. In addition, during the same period, Iran was a member of the American alliances, and India was leading the nonaligned movement. Indian alignment with the Arab nationalist movements also had a cooling effect on their relations.61 The rapprochement process was slow and gradual with a brief lull after the Islamic revolution in 1979, starting from the Iranian moral support to India during the Sino-Indian war in 1962. The dismemberment of Pakistan in 1971 and the Shah’s disaffection with the United States also brought India and Iran closer.62 The real turning point in the relations, however, was in the early 1990s. Iran and India both supported the “Northern Alliance”, as opposed to Pakistan’s support for Taliban in Afghanistan. Later both countries supported the U.S. military-led ousting of the Taliban regime. Iran enjoys good relations with the Karzai Government in Kabul who is, to some extent, also dependent on Iranian support to remain in office. India and Iran have cooperated in the Afghanistan reconstruction activities. India has since the early 1990s had its eyes on the Iranian routes to access Central Asian markets and is building Iran’s Chahbahar port just 200 km west of Pakistan’s Gwadar port. Tehran sees India and China as its potential customers for oil and gas as well as a way out from U.S. attempts to isolate Iran.63 The years 2003–05 saw a further deepening of India-Iran ties. In the New Delhi Declaration (January 2003), both countries “decided to explore opportunities for cooperation in defence and agreed areas, including training and exchange of visits”.64 The IPI pipeline discussions were renewed in the same period and a US$40 billion LNG deal was signed to supply 7.5 million tonnes of liquefied natural gas (LNG) over twenty-five years, starting from 2009. However, in light of the high oil prices, Iran asked

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for price renegotiation or the deal would be cancelled. Nevertheless, many analysts see, quite illogically, Tehran’s move as a direct result of New Delhi’s votes against Iran in IAEA and UNSC on the nuclear issue. Though there was resentment in Tehran on the vote, it is unlikely that the Tehran administration would let the much needed billion dollars go for nothing. The recent nuclear deal between the United States and India has put a strain on India-Iran relations since the United States had exerted pressure on India to distance itself from Iran. In January 2006, the U.S. ambassador to India explicitly linked progress on the proposed United States-India civil nuclear cooperation with India’s upcoming vote against Iran, saying if India chose not to side with the United States, he believed the U.S.-India initiative would fail in Congress. U.S. officials repeatedly and unequivocally expressed their opposition to the IPI gas pipeline. However, Indian side categorically and persistently has been refusing to be under the United States pressure, inviting much opposition from the left parties of the ruling coalition. Now that the nuclear deal has been struck and U.S. pressure on Iran is mounting, IPI pipeline politics have become more critical. How will New Delhi react to the expected more aggressive U.S. moves against Iran? This is the critical question, which will, to a large extent, define the future of IPI pipeline. Another question is how Beijing and Tehran will respond to the emerging U.S.-India alliance. THE TURKMENISTAN-AFGHANISTAN-PAKISTAN-INDIA (TAPI) PIPELINE The TAPI pipeline, with a total length of 1,700 km, is expected to transport about 30 billion cubic meters of gas annually from the Dauletabad gas fields in southeast Turkmenistan to consumers in Afghanistan, Pakistan, and India. The cost of the project is estimated at about $3.3 billion. Project implementation will take about five years, after the cooperating countries and other partners finally agree on project design, operating parameters, and contractual agreements. The idea of transporting Turkmen gas and other Central Asian mineral resources to the South Asian market and Indian Ocean for exports was born after the collapse of the USSR. The United States devised a strategy and supported all moves aimed at integrating newly independent states into the world system by reducing their dependence on the Russian infrastructure. The “founding” agreement for building a pipeline linking Turkmenistan’s Dauletabad gas fields with Multan in Pakistan was signed in March 1995 between Turkmenistan’s President Saparmurat Niyazov and the then Prime

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Minister of Pakistan, Benazir Bhutto. The Afghan government expressed full support for the project and Uzbekistan’s President Islam Karimov also committed to sending Uzbek gas through the pipeline. Two years later, the two leading governments in the project, Turkmenistan and Pakistan, signed an agreement with the United States’ Unocal and Saudi Arabia’s Delta Oil to build the pipeline. By October 1997, Unocal established the Central Asian Gas Pipeline consortium to build the Turkmenistan-Pakistan segment of the pipeline at an estimated cost of US$2 billion ($2.7 billion if extended to India). Construction was scheduled to begin as early as 1998, but the ongoing civil war in Afghanistan obstructed any opportunities for financing the project. After the withdrawal of two major financers, Russian Gazprom and Unocal, the consortium was dismantled. After the U.S. invasion of Afghanistan in 2001, the TAPI project received a new impetus with the removal of the Taliban regime in Afghanistan, following a summit between the leaders of Turkmenistan, Afghanistan, and Pakistan in May 2002. The parties affirmed their decision to revive the project and established a Steering Committee to oversee its implementation. At its first meeting in July 2002, the Steering Committee invited the Asian Development Bank (ADB) to play the role of development partner and help prepare the feasibility study of the project. In December 2002, the ADB approved a $1-million technical assistance grant for undertaking a feasibility study. India was officially invited in 2005 to which India agreed. Economic Viability The realization of the TAPI project will bring enormous benefits, although there may be some countries on the losing end such as Iran, China, and Russia. Turkmenistan may not be able to convince the buyers about its ability to observe all sales contracts. The TAPI pipeline is expected to transport 30 bcm/year for the duration of about thirty years. Turkmenistan will have to provide nearly 850–900 bcm for this project. Whether Turkmenistan has over-contracted its gas for exports and its potential implications for the TAPI is now a major question. As part of the feasibility study for the TAPI, the ADB has requested the Turkmen Government to prepare an extensive survey of the gas reserves in the Dauletabad gas fields. While the parties at the Steering Committee meeting in late 2003 agreed on Turkmenistan’s conclusion of the survey by the end of June 2004, preliminary estimates indicate that sufficient reserves exist. The United States-based EIA has estimated that proven

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reserves of Turkmenistan stand at 2.86 trillion cubic meters overall and that reserves in the Dauletabad field are 1.3 trillion cubic meters. Further growth in Turkmenistan’s proven reserves is expected due to the relatively low level of exploration in the offshore fields of Turkmenistan. The report says “judging merely from the resource base of the country, it is highly likely that Turkmenistan will be able to observe existing and additional gas export contracts”. IPI OR TAPI? Security Issues Besides economic issues and geopolitics, there have been serious concerns over the physical security of the pipelines as both of these pipelines pass through the violent regions of Pakistan (and Afghanistan). These concerns are valid for all stakeholders. Whether Pakistan, even if it wants to, can guarantee security or not is a matter of concern for at least India. Gas supply disruptions, even if Pakistan pays all direct and indirect losses, could cause Indian power plants and industry a great deal of trouble. Attacks on the economic interests of involved parties have been a tactic of all guerrilla movements across the world.65 The Baluch militants have been attacking the public utilities. The northwest tribal areas have also seen a frenzy of suicide attacks on different government interests. However, many Indian analysts have overstated these security risks, at least, in the case of Baluchistan. The phenomenon is not unique for the IPI or TAPI pipelines. The Kurd militants have carried out similar attacks on the Iran-Turkey pipeline. Even within India, the domestic infrastructure is not immune to attacks from Assam separatists and Naxalites. However, there is a stark difference between the two security threats. The Islamic militants in the northern areas demand nothing but the Sharia or Violence. Hence, this is the need to deal with them with an iron hand, supplemented by revamped education and development policies for the backward regions. Moreover, looking at the Afghan security conditions, the Pakistani state and government is a good candidate to count on vis-à-vis Afghanistan. The situation in Afghanistan is unlikely to be resolved in the near future. The Baluch militants, on the other hand, are largely driven by nationalist sentiments and motivated by historical grievances. The unequal distribution of revenue generated from Baluch resources has led to violence, the sabotage/ disruption of power production, and the destruction of gas pipelines in

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the past. The current movement is more or less centred around the same arguments. Baluchistan has a population of 6.5 million and 43 per cent of Pakistan’s total area. It produces 36 per cent of Pakistan’s total natural gas production. In addition, it has a huge potential of underground gas and oil reserves, gold, copper, uranium, and other minerals. Strategically located, Gwadar port is the only deep-water port in the region, located as it is on the mouth of the Straits of Hormuz, the most crucial chock point of energy transport. There are many mega projects on the way to connect China and Central Asia with Gwadar port. Since 1947 Baluchistan has been excluded from development. Most of the population is poor without access to education, health, and infrastructure. Even, the gas the province produces is not available to its residents. The likelihood of an independent Baluchistan seems a very distant possibility since it would not benefit the region or the main parties involved, not even the Baluchis. However, other solutions can be sorted out under the Pakistan’s constitutional framework, that is, provincial autonomy with greater public participation. This approach, if supplemented with revamped funding for the development of the region, would largely solve the problem. Indeed these were the considerations behind the “provincial autonomy bill” forwarded in the National Assembly in July, for debate. Conclusion A look at the available reserves at the sources, the political and security situation and economic viability, the IPI pipeline makes much more geoeconomic and geopolitical sense compared with TAPI. Though the converging India-United States strategic interests make a good case for TAPI, the security issues within Afghanistan and in the northwest tribal areas of Pakistan are not going to be resolved soon. On the other hand, IPI poses low-level security risks, particularly if the coastal line route is adopted. But in this case, India may have to stand up against the wishes of the United States. The post-United States-India Nuclear Deal scenario does not seem particularly indicative of this direction, at least, not in the immediate future, as Lall points out in chapter 2 of this book on Indian foreign policy. In addition, the rapprochement between India and Pakistan is still uncertain. There are Confidence Building Measures (CBMs) taken, but the one that can really bring about a big change is the gas pipeline. However, it would be naive to call it a “peace pipeline”, as pipelines do not bring peace without the nations, their political leadership, institutions, and visions.

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NOTES 1

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Acknowledgement: The author is grateful to Rajiv Sikri, former Secretary East, Ministry of External Affairs, India, and S. Narayan, former Economic Advisor to Prime Minister of India, for their valuable feedback and insights. The author is also highly indebted to Dr Marie Lall, Lecturer, University of London, and Visiting Research Fellow at Institute of South Asian Studies, for sharing her field research and generous support in editing. About 80 per cent of the world’s oil and gas reserves are concentrated in an arc from Russia to Nigeria, centring on Iraq, Iran, and the Saudi kingdom, while about 60 per cent of demand comes from OECD, and 10 per cent from nonOECD Asia, including India and China. Daniel Yergin, “Ensuring Energy Security”, Foreign Affairs, vol. 85, no. 2 (March/ April 2006). Mukhtar H. Sahir and Arshad H. Qureshi, Energy Policy 35 (2007). Ibid. There is a heated debate between “peak oil” and technology enthusiasts about the life of the planet’s hydrocarbon resources. Most IGOs avoid estimating the availability of reserves beyond a certain time period. However, decline in production from the maturing sources has been confirmed by many agencies such as IEA and EIA. Nevertheless, there are potential reserves unexplored, BP Statistical Review of World Energy (2007) and Hydrocarbon Processing (2004) estimate. A.H. Cordesman and K.R. Al-Rohadhan, “The Geopolitics of Energy, Geo-strategic Risks and Economic Uncertainties”, Center for Strategic and International Studies, Washington, D.C., United States, 2006. “The New Energy Security Paradigm 2006”, World Economic Forum. A.S. Thompson, Policy Brief, University of Waterloo, United Nations University, 2005; F.J. Lin and I.C. Bradford, 2006. Brookings Institute Policy Brief no. 152, April 2006. Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. Kazakhstan, Turkmenistan, Azerbaijan, Russia, and Iran. Lutz Kleveman, “The New Great Game”, The Guardian, 20 October 2003 (accessed 5 June 2007). Quoted Dick Cheney in a speech to oil industrialists in 1998. Zbigniew Brzezinski, The Grand Chess Board (New York: HarperCollins Publishers, 1997), p. 51. Quoted two Russian scholars on their impression of the U.S. policy. M.B. Olcott, “The Shanghai Cooperation Organization Changing The ‘Playing Field’ in Central Asia”, testimony before the Helsinki Commission, 26 September 2006, prepared by Carnegie Endowment for International Peace. “Energy and Security, the Geopolitics of Energy in the Asia Pacific”, IDSS, p. 11.

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Mark H. Hayes and David G. Victor, “Politics, Markets and the Shift to Gas: Insights from the Seven Historical Case Studies”, in Natural Gas and Geopolitics from 1970 to 2040, edited by David G. Victor, Amy M. Jaffe, and Mark H. Hayes (New York: Cambridge University Press, 2006). Brzezinski, The Grand Chess Board, p. 41. S. Fesharaki, G.K. Sueda, and J. Brown, “Asian Energy Security in a Global Context”, Geopolitics of Energy, vol. 25, no. 6, June 2003. L. Wu, “China’s Oil Security Challenges and Its Countermeasures”, Geopolitics of Energy, vol. 26, no. 11, November 2004. See chapter 2 of this book on “India’s New Foreign Policy”. This definition excludes the Middle East and Eurasia and comprises SAARC, ASEAN, and China. Energy Information Administration (EIA), International Energy Outlook (IEO) 2007, pp. 5–16. EIA, International Energy Outlook 2007, calculates low (US$36) and high price (US$100) scenarios where the average ranges from US$49 to US$59 in real US$, base year 2004, pp. 31–47. Ibid. EIA, “STEO Supplement: Why Are Oil Prices So High” (accessed 5 July 2007). SARI, “Regional Energy Security for South Asia 2006”, pp. 2–7. Calculated by the author using EIA energy calculator; can be accessed at . Paranjoy Guha Thakurta, “High Oil Prices Would Hit Indian Economy”, Business Line, 20 March 2004 (accessed 5 July 2007). Leena Srivastava and Neha Misra, “Promoting Regional Energy Cooperation in South Asia”, Energy Policy 2007, p. 3. Cited “Economic Trends and Prospects in Developing Asia”, ADB’s Development Outlook 2006. FICCI, “Emerging Oil Price Scenario and Indian Industry”, December 2004 (accessed 5 July 2007). Planning Commission, Government of India, Draft Report of Expert Committee on Integrated Energy Policy 2005, p. 8. Ibid., p. 14. 1 trillion cubic feet (tcf ) = 0.0283 trillion cubic metre (tcm). S. Srivastava, “India Grapples with Energy”, Asia Times Online, 24 March 2007, (accessed 5 May 2007). Other projections from private corporations are not included due to incompatibility in comparison, which are close to IHV 2025 projections. Planning Commission, Government of India, Draft Report of Expert Committee on Integrated Energy Policy 2005, pp. 34, 49.

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Ibid. Includes Oil and Natural Gas Corporation (ONGC), Gujrat State Petroleum Corporation (GSPC), and Reliance Industries Ltd. (RIL). S. Srivastava, “India Eyes Military Favours for Myanmar Oil”, Asia Times Online, 20 July 2007 (accessed 25 July 2007). The same views have been expressed repeatedly by many senior officials and industry experts. David Temple, “The IPI Pipeline: Intersection of Energy and Politics”, IPCS research reports (April 2007). Gaurav Raghuvanshi, “High Prices Hit Shell, Hazira Plans to Sign New Customers”, 29 September 2005 (accessed 27 July 2007). “Spot Cargos Spark LNG Prices”, Times of India, 15 June 2006 (accessed 27 July 2007). “India Says Gas Wellhead Price Not Capped For All”, Reuters, India, 17 September 2007 (accessed 17 September 2007). Pakistan Energy Year Book 2005–06, Ministry of Petroleum and Natural Gas, Government of Pakistan. Pakistan Oil and Gas Regulatory Authority . There is a ceiling and a floor fixed with it from $30–$70. If price of JCC is within the ceiling, then the gas will be priced at 0.063 times of the JCC price, plus a fixed component of $1.15. If JCC falls outside the range of $30–70, the multiplier will be 0.05. The fixed components will be $1.54 and $2.06 respectively when the JCC is priced below $30 and $70 per barrel. S. Srivastava, “India Grapples With Energy”, Asia Times Online, 24 March 2007 (accessed 5 May 2007). S. Srivastava, “India Weighs the Pipeline Odds”, Asia Times Online, 19 April 2007 (accessed 5 May 2007). Daily Dawn, 17 April 2007 . S. Shahid, “Iran-Pak-India Gas Pipeline: Implications and Prospects”; The News, Pakistan, 15 January 2007. Daily Dawn and Asian Age ePaper, 17 April 2007. Daily News, 3 May 2007 . S. Pandian, “The Political Economy of Trans Pakistan Pipeline: Assessing the Political and Economic Risks for India”, Energy Policy 33, 2005. Ibid. Mark H. Hayes and David G. Victor, “Politics, Markets and the Shift to Gas: Insights from the Seven Historical Case Studies”, in Natural Gas and Geopolitics: From 1970 to 2040, edited by David G. Victor, Amy M. Jaffe, and Mark H. Hayes (Cambridge University Press, 2006).

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S. Alam, “Iran Pakistan Relations, Political and Strategic Dimensions”, Strategic Analysis, vol. 28, no. 4, 2004. Ibid. Nazir Hussain, “Pak-Iran Relations in Post-9/11 Period: Regional and Global Impact”, Regional Studies XX(4) (Autumn 2002): 57. Ibid. S.M. Burke and L. Ziring, Pakistan’s Foreign Policy: An Historical Analysis, (Karachi: Oxford University Press, 1990). Ibid. CRS Report for Congress, “India-Iran Relations and U.S. Interests”, Foreign Affairs, Defense, and Trade Division, 2 August 2006. Ibid. Marie Lall, “India’s Energy Juggling Act”, Far Eastern Economic Review, July 2007.

12/1/08 10:35:02 AM

Reproduced from The Geopolitics of Energy in South Asia edited by Marie Lall (Singapore: Institute of Southeast Asian Studies, 2009). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at

6

Energy Cooperation between India and Bangladesh: Economics and Geopolitics M. Shahidul Islam1

Introduction It is well documented that energy supply constraints in India and Bangladesh have been impeding the economic growth of these countries. Both nations have been experiencing acute power shortages and both, but especially India, are expecting a steady demand for power and hydrocarbon resources in the near future. With an installed capacity of 123 GW, India faces an electricity shortage of 8 per cent and a peak demand shortage of 11.6 per cent (KPMG 2007). Estimates predict that the fast growing Indian economy might face a shortfall of over 34,000 MW power in the year 2012 (South Asia Regional Initiative for Energy [SARI] 2006). Bangladesh, one of the least per capita energy users in the world, expects a rise in power demand at the rate of 10 per cent or more per year (Rasheed 2007). According to World Bank estimates, the economy of Bangladesh loses US$1 billion annually due to unreliable electricity supply which, in turn, results in a 0.5 per cent reduction in its annual GDP growth (quoted in SARI 2006, and Tamim and Gulen 2004). The energy demand in India and Bangladesh, the world’s second and seventh most populous countries respectively, is growing

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in line with their higher economic growth, steady population growth, and rapid paced urbanization.2 However, the existing low stock of domestic hydrocarbons, conventional, and other renewable energy resources have serious supply constraints in the medium to long term in both countries. Consequently, energy security3 has of late become a major concern both for New Delhi and Dhaka. New Delhi’s concern for energy security is so imperative that energy issues are influencing the country’s foreign policy formulation considerably. India’s age-old priority of swadeshi or “self-sufficiency” is no longer a feasible goal and regulating relations with states that can provide the badly needed gas and oil is seen as central to India’s new foreign policy (Lall 2006). India and Bangladesh have different energy endowments. Bangladesh sits on a sizeable amount of natural gas4 (henceforth gas) and this meets 68 per cent of the country’s primary commercial energy 5 needs (see Figure 6.1). Coal feeds 51 per cent of India’s current primary energy demand (see Figure 6.2). Though the available gas reserves in Bangladesh can continue to feed the lion share of its energy requirements in the near future, its next-door neighbour India has been desperately seeking a diverse source of energy suppliers to continue to fuel its economic growth. In this regard the country is trying to import gas from its close neighbour Bangladesh. However, exporting its “surplus gas” to India is a highly controversial issue in Dhaka as there are huge anomalies regarding the proven and probable gas reserve data. Furthermore, only one-third of its population has access to electricity (see Table 6.3), and to generate more electricity and to support its economic growth, Bangladesh is heavily dependant on domestic gas. India’s other close neighbour, Myanmar, is blessed with hydrocarbon resources (natural gas and oil). However, the adverse geographical position of India and Myanmar is a major impediment for exporting gas from the latter to the former. Bangladesh can bridge India’s access to Myanmar’s gas resources, thanks to its excellent geographical location. Since 2005 these three close neighbours have been negotiating a tripartite gas pipeline project that could meet India’s energy needs partly, if signed. But, the gas pipeline issue has been dormant for the time being as Yangon has lately decided to sell its natural gas to China from Blocks A-1and A-3.6 India is also in a position to mitigate Bangladesh’s chronic power dearth to some degree by allowing the country to import hydropower from Nepal and Bhutan. Apart from these, Bangladesh can trade or swap electricity with Nepal, Bhutan, and India based on their seasonal peak and off-peak demands.

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Figure 6.1 Primary Commercial Energy Use by Fuel in Bangladesh, 2004 Hydro 2%

Oil 30%

Gas 68%

Source: Based on Data of Regional Energy Security for South Asia, Regional Report, SARI 2006.

Figure 6.2 Primary Commercial Energy Use by Fuel in India, 2004

Gas 9%

Nuclear Hydro 2% 2%

Oil 36%

Coal 51%

Source: Planning Commission, Government of India, 2006.

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Thus, it is not the lack of energy resources, but rather the non- or limited cooperation between New Delhi and Dhaka that is a major roadblock in exploiting South Asia’s energy bundles. A wide range of economically viable energy options have not been receiving the necessary attention due to the lowlevel bilateral relations between India and Bangladesh. However, the scenario started to change. A major policy shift in India regarding its neighbours, and the country’s quest for energy security, have been stirring Indo-Bangla bilateral ties in a promising way. Taking into account the ever-growing energy demand in India and Bangladesh, the supply uncertainties of fossil fuels, and the consequent importance of energy security, this chapter explores the possibilities of energy cooperation7 between these two countries. It also aims to study how greater cooperation between Dhaka and New Delhi can exploit the diverse set of energy resources of their neighbouring countries. The next section briefly reviews the literature pertaining to energy and economic growth. Section three looks at the energy scarcity and energy security issues of India and Bangladesh, and analyses the current state and future projections of energy demand and supply in these countries. In section four, the chapter explores a few energy cooperation options that include the prospect of Bangladesh’s gas export to India, the economics and politics of the Myanmar-Bangladesh-India tripartite gas pipeline, Bangladesh’s access to the hydropower resources of Nepal and Bhutan, and the power trade/ swap between Bangladesh and India, and between Nepal and Bangladesh. Section five reviews Indo-Bangla bilateral ties and also looks at how the political differences between India and Bangladesh have been undermining economically viable energy interactions between these two close neighbours, and how greater cooperation between Dhaka and New Delhi can make both nations better off in terms of energy security. In conclusion, section six offers some policy notes. ENERGY AND ECONOMIC GROWTH: LITERATURE REVIEW The mainstream theory of economic growth pays little attention to the role of energy in promoting economic growth. However, the models or literature pertaining to resource economics use energy or other natural resources as important explanatory variables which are highly compatible with the second law of thermodynamics. Known also as the efficiency law, it implies that “a minimum quantity of energy is required to carry out the transformation of matter”. Further, the relationship between energy and economic growth

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Standard Granger Test

Morimoto and Hope (2004)

Error-correction model Error-correction model

Asafu-Adjaye (2000)

Paul and Bhattacharya (2004)

1950–96

1973–95

1955–90

1960–99

1960–98

1954–76

Period

Notes: Energy Income, denotes causality runs from energy consumption to income. Income Energy, denotes causality runs from income to energy consumption. Energy Income, denotes bi-directional causality between income and energy. Source: Based on data from Lee Chien Chiang, 2005.

Error-correction model

Masih and Masih (1996)

Toda and Yamamoto (1995)

Standard Granger Test

Yu and Choi (1985)

Fatai et al. (2004)

Empirical method

Authors

Energy

Thailand and the Philippines

Energy

Pakistan

India

Energy

Energy

Income

Indonesia

India and Indonesia

Energy

India

Income

Income

Income

Energy

Income

Non-cointegrated

Malaysia, Singapore, and the Philippines

Income

Energy Income

Income

Income

Energy

India and Indonesia

Energy

Energy

Philippines Sri Lanka

Income

Causal Relationship

South Korea

Subject

Table 6.1 Comparison of Empirical Results from Developing Countries

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was awarded special interest after the two oil crises in the 1970s, and the skyrocketing prices of oil and other hydrocarbon resources lately. The correlation between energy consumption and economic growth is positive and many studies have supported the fact.8 The relationship between the Human Development Index (HDI) and electricity consumption per capita has also been found to be positive.9 However, this correlation does not necessarily imply causation in any meaningful sense of that word. The econometric graveyard is full of magnificent correlations, which are simply spurious or meaningless in many cases.10 Since the seminal paper by Granger (1969), the literature on Granger causality has grown exponentially and both resource and mainstream economists have been employing the “Granger causality tests” to see the linkages between energy and economic growth. Table 6.1 shows the results from the causality test for energy and income (GDP growth as a proxy of income) for developing countries. Some studies found that there exists causality running from energy consumption to income growth for India, which implies that energy is an impetus for GDP or income growth (see Table 6.1). Based on these studies, it can be said that India is an energydependent economy and any shortfalls of energy may affect the country’s long-term economic growth adversely. Nevertheless, as shown in Table 6.1, studies found mixed results on energy-income causal relations for many developing countries, as some papers show a reverse chain of causality from income to energy or no causality in either direction. ENERGY SCARCITY AND ENERGY SECURITY: INDIA AND BANGLADESH India and Bangladesh share a common history, culture, and a land border of 4,096 km. Both have been undergoing economic transformation and India especially is achieving higher economic growth after decades of stagnation (what was euphemistically called the “Hindu growth rate”). Table 6.2 shows some selected economic indicators of these two neighbours. India is ahead of Bangladesh in terms of per capita GDP and other economic yardsticks, thanks to its recent high growth story. However both countries are considered low-income countries and there is no substantial difference in social sector developments in either country, which is reflected in the United Nation’s Human Development Index. The per capita energy consumption in both countries is very low visà-vis the global average and only 56 per cent of the people in India and 32 per cent in Bangladesh have access to electricity (see Table 6.3). Like most

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Table 6.2 Key Economic Indicators of India and Bangladesh, 2005 Item

Unit

India

Bangladesh

Population Population growth Urban population Urban population growth GDP (current) Per capita GDP GDP growth rate HDI

Million % % (of total) %

1095 1.5 28 2

141 2 25 3

Billion US$ $/Year/Per person % Rank in no.

805.71 588 9 126

60.03 433 6 137

Source: Based on data of World Development Indicators online database, World Bank, United Nations Human Development Report, 2006.

Table 6.3 Key Energy Indicators of India and Bangladesh, 2004 Item

Unit

World Average

India

Bangladesh

Commercial energy consumption per capita

kgoe

1793

531

164

Electricity consumption per capita

kWh

2606

457

140

(Btu per 2000 US$)

NA

4205

1125

Access to electricity**

%

75.6

55.5

32

Per capita emissions

MT

4.24

1.04

0.27

Energy Intensity*

Notes: * Total primary energy consumption per dollar of GDP using Purchasing Power Parities. ** 2005 data Source: Based on data of World Development Indicators online database, World Bank, Energy Information Administration, 2004; International Energy Agency, 2006.

countries of South Asia, both Bangladesh and India rely heavily on noncommercial energy, mainly biomass, and non-conventional energy constitutes 58 and 23 per cent of total energy in these countries (see Figure 6.3). However, the rising pace of urbanization, industrialization, and modernization

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Figure 6.3 Energy Status Indicators of India and Bangladesh (mtoe) 500 450 400 350 300 250 200 150 100 50 0

India Bangladesh

Oil

Natural Gas

Hydroelectricity

Nuclear Total Total & Commercial Energy Others

Biomass

Coal

106

171

124

28

18

8.5

349.5

455.5

16.64

0

3.71

8.29

0.23

0

12.23

28.87

Source: Based on Data of Regional Energy Security for South Asia, Regional Report, SARI 2006.

of the agricultural sector has been placing substantial pressure on hydrocarbons and other commercial energy resources. India is the world’s fifth largest energy consumer and the total annual energy consumption (commercial) was 349.50 million tonnes oil equivalent (mtoe) for the year 2003–04 (see Figure 6.3). However, the scenario is set to change very rapidly. As India continues to grow at the rate of 7 to 8 per cent and an estimated energy elasticity of 0.8 per cent, the energy demand of the nation is expected to grow at 4 to 5 per cent per annum over the next few years (KPMG 2007). The Energy Information Administration (EIA), the Paris-based energy watchdog, reports that China and India account for the world’s largest projected increases in national electric power demand over the 2004 to 2030 period (IEA 2007). India’s current energy basket shows that coal is the major source of energy, followed by oil, gas, hydro, and nuclear energy (see Figure 6.2). India has the world’s fourth largest coal reserves (6.9 per cent of world’s total stock), 38.9 trillion cubic feet (tcf ) gas reserve (0.6 per cent of world reserves), and

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5.9 billion barrels oil reserves (0.5 per cent of global reserves), according to the British Petroleum Statistical Review of World Energy (as of 2005).11 It is expected that coal will meet most of India’s energy demand in the near future, thanks to its vast stock of coal, as well as poor domestic reserve of other hydrocarbons, and to some extent, the price and supply uncertainties of oil and gas in the global market. In 2005–06, the country consumed 405.2 MMT of coal and it is estimated that its coal consumption will increase by nearly 40 per cent over the next 5 years, and set to almost double by 2019–20 (KPMG 2007). India has merely 786 Mt reserve of crude oil, which is only less than seven years’ of worth of its 2004–05 level of consumption (Planning Commission, Government of India 2006). Hence, India will continue to rely on its traditional Persian Gulf suppliers for its oil and other petroleum imports, which currently constitute roughly 67 per cent of India’s oil imports. It is also exploring other African countries apart from Nigeria, which supplies approximately 15 per cent of India’s oil imports. Furthermore, the quest for oil has even prompted New Delhi to source energy suppliers in Latin America. Natural gas currently meets 8 per cent of India’s energy needs, which is quite low compared with gas-based economies like Japan, Korea, and the United States (the world average is 24 per cent).12 However, in pursuit of its energy basket diversification, New Delhi has joined Beijing as a major buyer of gas on the world market. The growth of gas consumption has witnessed a dramatic upward trend in the country. Its share rose to about 7 per cent in the mid-2000s from 2.5 per cent in the 1980s, and it is estimated that by 2030, this share will rise to more than 10 per cent (Bahgat 2007). India has been planning to import gas either through pipelines, or in the form of liquefied natural gas (LNG)13 . It seems that in the short to medium term, the prospects of LNG trade is limited due to the inability of key sectors such as power to absorb high international prices (KPMG 2007). Hence, India is keener to import pipeline-based gas from a few neighbouring and Central Asian countries. The Planning Commission of India has projected a few energy supply scenarios for an 8 per cent GDP growth rate. For the interest of our analysis we have taken two scenarios, namely “coal-based developments” and “renewables”. The coal-based development scenario assumes that by 2031–32 most of the electricity would be generated by the most economic option, which turns out to be primarily coal. The renewable scenario assumes that renewable energy sources, namely wind power, solar power, biomass power, would

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132

generate 30,000 MW, 10,000 MW, and 50,000 MW of electricity respectively and would produce 10 MT of biodiesel and 5 MT of ethanol by 2031–32. (For details, see Planning Commission, Government of India 2006.) From Figures 6.4 and 6.5, it is obvious that India will continue to rely on non-renewable fossil fuels (coal, oil, and gas) in the next few decades even if the country makes significant strides in developing renewable energy resources like hydro, solar, and nuclear power. Bangladesh, one of the smallest per capita energy users in the world, has currently been experiencing acute power shortages and is expecting a rise in power demand at the rate of 10 per cent or more per year.14 However, the current power crisis is not because the country lacks available fuels to fuel the power generation, but rather because of the corruption in power development projects and inefficient management. The economic growth in Bangladesh since 1990 has been steady and the nation could achieve higher GDP growth if the authorities address some of its structural issues successfully. As can be seen from Figure 6.1, currently gas meets 68 per cent of Bangladesh’s energy demand followed by oil, coal, and hydropower. Like in India, the rural people in Bangladesh depend heavily on traditional sources

Figure 6.4 India’s Energy Basket in 2031–32: Coal Dominant Case Non-Commercial 10% Nuclear 4% Hydro & Other Renewables 1%

Oil 26%

Natural Gas 6%

Coal 53% Source: Based on data of Integrated Energy Policy, Planning Commission, Government of India, 2006.

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Figure 6.5 India’s Energy Basket in 2031–32: Forced Renewable Case

Non-Commercial 12% Nuclear 6%

Oil 23%

Hydro & Other Renewables 8% Natural Gas 10% Coal 41% Source: Based on data of Integrated Energy Policy, Planning Commission, Government of India, 2006.

of energy such as biomass, firewood, and animal dung (see Figure 6.3). The country has sizeable gas reserves (18.0 tcf, according to the Bangladesh Government’s estimate). However, estimates show that this hydrocarbon resource might dry up by 2020 unless new gas fields are discovered (Wood Mackenzie 2005). The short-to-medium term forecast of commercial energy demand in India and Bangladesh shows a steady demand for hydrocarbon resources (see Figure 6.6). As can be seen from the figures, Bangladesh faces an astounding demand for gas and oil. Considering the current power shortages and the country’s long-term energy security, policy-makers in Dhaka, like those in India, are keen to diversify its energy basket. The energy authorities of Bangladesh are particularly interested in importing hydropower from Nepal and Bhutan. The demand forecast in Figure 6.6 and prospective energy supply scenarios in Figures 6.4 and 6.5 exhibit India’s huge appetite for gas, coal, oil, and electricity. India’s poor reserve of oil and gas, and its major economic rival China’s “String of Pearls” strategy15 have forced it to secure diverse sources of hydrocarbons.

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134

Figure 6.6 Short-to-Medium Term Forecast of Commercial Energy Demand in India and Bangladesh 500 450 400 350 300 250 200 150 100 50 0

Oil IN

Oil BD

Coal IN

Coal BD

Gas IN

Gas BD

116

3.71

169.9

0

29.74

8.29

2010

150.2

5.7

248.7

0.5

47.19

15.51

2020

246.9

11.6

447.6

0.9

101.88

44.03

2003–04

2003-04

2010

2020

Source: Based on Data of Regional Energy Security for South Asia, Regional Report, SARI 2006.

ENERGY SUPPLY OPTIONS AND PROSPECTS OF ENERGY COOPERATION BETWEEN INDIA AND BANGLADESH Looking at it from an 8 per cent GDP growth scenario and assuming a baselevel consumption of 2003–04, India’s energy supply would need to increase from 5.2 to 6.1 per cent per year (Planning Commission, Government of India 2006). Since, with the exception of coal, India’s domestic sources of commercial energy is quite limited, the country’s dependence on import of oil and gas will grow in line with its economic growth. This growing dependence on energy import pushes India towards three specific types of risks namely, supply risk (possible disruption or shortfalls in domestic production), market risk (a sudden increase in oil or other hydrocarbon resources), and technical

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risk (technical failures may disrupt the supply of energy) and any of these risks poses a substantial threat to the country’s energy security. To minimize its overall energy risk, India is forced to diversify the fuel choices and supply sources of energy. Besides its traditional petroleum suppliers (especially the Middle East), New Delhi is exploring its neighbouring and regional hydrocarbon resources of late India’s two close neighbours, Bangladesh and Myanmar, are hydrocarbon-rich (especially gas) countries and closer cooperation between these nations can partly mitigate New Delhi’s energy security. Lately, Bangladesh has also realized that in order to mitigate its chronic power dearth and to secure its long-term energy supply, there is a pressing need for it to diversify its energy basket, both in terms of energy types and suppliers. Broader cooperation with it next door neighbours (India and Myanmar) could ensure the country’s energy security in the long run. As discussed in section three, India and Bangladesh are endowed with different energy bundles (India has vast stock of coal and Bangladesh has considerable gas reserves) and this leaves the possibility of energy cooperation between these two neighbouring countries. However, neither has abundant exportable surplus of hydrocarbon resources if we consider the long-term energy trade prospects between the two countries. Though in terms of its gross energy use, coal adds very insignificant weight vis-à-vis other hydrocarbons, currently a portion of Bangladesh’s coal demand is sourced from its own mines, and the rest imported, particularly from India. New Delhi has been trying to buy gas from Bangladesh for the last few years. The government of Bangladesh is also facing huge pressures from multinational oil and gas companies (that are involved in on- and offshore hydrocarbon exploration in Bangladesh) to export gas to India. In India, gas is currently a minor fuel in the overall energy mix, representing only 8 per cent of total primary energy consumption in 2004. However, the country is rapidly expanding infrastructure to facilitate gas consumption as well as gas imports. It is projected that gas consumption in non-OECD Asia, led by demand in China and India, will expand by 4.6 per cent per year on average from 2004 to 2030 (EIA 2006). The subsequent sub-sections explore a few energy cooperation options between India and Bangladesh. India’s Quest for Gas and the Feasibility of Gas Export from Bangladesh to India Considering India’s low level of domestic oil and gas reserves, environmental concerns for coal uses,16 and high volatilities in the global crude oil market,17

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India has a long-term plan to increase the share of gas in its energy basket. Prized for its relatively clean and efficient combustion,18 and because of global warming concerns due to the use of higher carbon dioxide-emitting fuels such as oil and coal, gas is being considered the fuel of the twenty-first century, just as coal was in the nineteenth century, and oil in the twentieth century. Natural gas is projected to be the fastest-growing major source of primary energy over the coming decades, with global consumption increasing nearly twofold by 2030.19 In order to diversify its gas suppliers, New Delhi has been eyeing Bangladesh’s gas resources for the last few years.20 There is huge uncertainty and debate in Bangladesh regarding the export of gas to India, as well as over the country’s total reserve of gas. It is a politically hot-button issue in Dhaka. The policy-makers of Bangladesh are torn between the opinion of multinationals and that of local experts, on the issue of gas export to India. Foreign oil and gas companies that are engaged in the exploration of gas resources in Bangladesh and some other vested quarters, are of the view that Bangladesh should export gas to India to mitigate its financial constraints. However, the general population in the country is against it. Economists and energy experts in Bangladesh think that the country should not export its gas resources to India unless its proven reserves can meet its domestic demand for at least fifty years. Since gas is the only major domestic source of commercial energy, export of this non-renewable resource demands very careful study. From an economic perspective, there are two major determinants of gas export from Bangladesh to India. First, Bangladesh’s total amount of gas reserves, and second, its domestic demand for gas. However, there are huge anomalies about Bangladesh’s proven gas reserve data. Multinational hydrocarbon exploration and marketing companies such as Shell, British Petroleum, and Unocal, and Bangladesh’s state-sponsored energy outfit Petrobangla conducted independent studies on the gas reserves of Bangladesh in different periods. As can be seen from Figure 6.7, the proven gas reserves in Bangladesh are somewhere between 5 to 18 tcf. However, the U.S. Geological Survey has estimated that Bangladesh contains another 32.1 tcf in additional “undiscovered reserves” on top of this amount.21 According to the Strategic Planning Division of Petrobangla, a stateowned energy entity, the probable reserve of gas in Bangladesh is 14.4 tcf. The USGS-Petrobangla 2001 study is the most recent, systematic, and extensive study that best reflects Bangladesh’s undiscovered gas resource potential. This study determines that the undiscovered gas resources of Bangladesh ranges from 8.43 tcf (95 per cent probability), to 65.70 tcf (5 per cent probability), with a 50 per cent probability of 29.2 tcf and a mean of 32.10 tcf.

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Wood Mackenzie, an energy consulting outfit, in conjunction with Petrobangla, studied the medium-to-long term gas demand for Bangladesh using different GDP growth scenarios. Of these, we have taken two GDP growth scenarios (Scenario A and Scenario B) to predict the gas demand in Bangladesh (see Table 6.4). Figure 6.7 Bangladesh’s Proven Gas Reserves (in tcf) 20 18 16 14 12 10 8 6 4 2 0

Oil & Gas Journal

IKM, Canada

Petrobangla

British Petroleum

Unocal

Shell

5

9.04

9.2

15.4

16.1

18

Gas Reserve (in tcf)

Gas Reserve (in tcf)

Source: A.K.M.A. Quader and Edmond Gones, “An Explanatory Review of Bangladesh Gas Sector: Latest Evidence and Areas of Further Research”, CPD Occasional Paper no. 17, Centre for Policy Dialogue, Dhaka, Bangladesh.

Table 6.4 Bangladesh’s GDP and Gas Demand Forecasts, 2025

Scenarios

Average GDP Growth (in %)

Gas Demand (in bcfd)

Gas Demand Growth, Per Annum (in %)

A B

5.5 6.8

4 5.6

6% 7%

Source: Based on data of Wood Mackenzie and Petrobangla, 2005.

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Scenario A, which assumes an average of 5.5 per cent GDP growth rate,22 predicts that Bangladesh’s gas demand will increase at a rate of 6 per cent per annum till 2025. Scenario B, which assumes a 6.8 per cent annual growth rate,23 forecasts that the demand will be 7 per cent per year for the same period. Tables 6.5 and 6.6 show the supply and demand gap based on Scenario A and Scenario B respectively. As can be seen in Scenario A (see Table 6.5), Bangladesh could run out of gas as early as 2012 if no drastic changes happen in the gas sector. If the probable reserves are firmed up and converted to proven reserves, then the country can meet supply up to 2017. It is also obvious that even if the possible reserves and yet-to-find resources are proven, Bangladesh will fail to meet demand in 2023. From the Wood Mackenzie analysis it can be said that the current level of potential reserves cannot be relied upon to meet the forecast demand out to 2025. The Wood Mackenzie and Petrobangla study deduced that “therefore additional reserves/resources need to be proved up and in Wood Mackenzie’s opinion an additional 10–15 tcf needs to be proved up between now and 2012 based on a reasonable 5 year discovery to production schedule”. Table 6.5 Gas Supply-demand Summary: Scenario A Gas Reserves

Supply Shortfall Begins

Reserves Needed to Fill Supply Gap

Proved (P90*) Probable (P50**) Possible (P10***) Yet to find (P95****)

2012 2017 2020 2023

18 16 13 5

Notes: * At least a 90 per cent probability that the quantities actually recovered will equal or exceed the estimate. “Proved” remaining reserves of 9.2 tcf on 30 June 2005, supplied by the Strategic Planning Division of Petrobangla. ** At least a 50 per cent probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable reserves. “Probable” remaining reserves of 14.4 tcf on 30 June 2005, supplied by the Strategic Planning Division of Petrobangla. *** At least a 10 per cent probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable plus possible reserves. “Possible” remaining reserves of 22.2 tcf on 30 June 2005, supplied by the Strategic Planning Division of Petrobangla. **** Wood Mackenzie study determined that the undiscovered gas resources of Bangladesh range from 8.43 tcf (95 per cent probability) to 65.70 tcf (5 per cent probability) with a 50 per cent probability of 29.2 tcf and a mean of 32.10 tcf. Source: Based on data of Wood Mackenzie and Petrobangla, 2005.

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Table 6.6 Gas Supply-demand Summary: Scenario B Reserves

Supply Shortfall Begins

Reserves Needed to Fill Supply Gap

Proved (P90) Probable (P50) Possible (P10) Yet to find (P5)

2011 2015 2019 2023

26 24 19 11

Source: Based on data of Wood Mackenzie and Petrobangla, 2005.

It is also obvious in Scenario B (see Table 6.6) that Bangladesh’s gas reserves could be exhausted as early as 2011 if nothing further is done or changed. If the probable reserves are firmed up and converted to proved reserves, then Bangladesh can meet demand till 2015. Even if the possible reserves and yet-to-find resources are proven, Bangladesh will still fail to meet demand by 2023. Based on Scenario B, the Wood Mackenzie and Petrobangla study reports that “clearly the current level of potential reserves cannot be relied upon to meet the forecast demand out to 2025. Wood Mackenzie and Petrobangla felt that “therefore an additional 20–25 tcf needs to be proved up between now and 2010 based on a reasonable 5 year discovery to production schedule”. (For details, see the Wood Mackenzie and Petrobangla study, 2005.) From a domestic demand perspective, Bangladesh’s prime gas consumers are the power sector and the fertilizer industries, which account for around 70 per cent of daily production (Quader and Gomes 2002). The other demand comes from industry, commerce, and households. It is projected that gas demand will increase between 7 to 10 per cent in fertilizer production, and 10 to 13 per cent in the power sector (Quader and Gomes 2002). Forecasts show that power demand will exceed 10,000 MW by 2015, from its current range of 4,000–4,500 MW (Rasheed 2007). Furthermore, in some areas of the western part of Bangladesh, which domestic gas supply does not reach, the government has had to fuel power generation by imported petroleum fuels that are quite costly vis-à-vis domestic gas resources. Bangladesh’s proven gas reserves, which are negligible in terms of global reserves, and the growing power demand in line with the country’s economic growth, show that the prospect of gas export to India is improbable, at least in the short run. However, if the energy authorities of Bangladesh implement

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the gas sector development plans and monetize it as advised by multilateral organizations, there is a possibility that it can export some gas to its neighbour in the future. Myanmar-Bangladesh-India Tripartite Gas Pipeline As the prospect of gas imports from Bangladesh in the short term is quite limited, India has been trying to import hydrocarbons from Myanmar. In recent years, India has given up its previous policies towards Myanmar and has established closer ties with the military government of Yangon largely because the latter’s vast gas resource can help mitigate the former’s energy demand. Two issues are major impediments to materializing this plan. First, gas is not an easily tradeable commodity. Second, there are adverse geographical distances between Myanmar and India. In this regard, India has two options for importing gas from Myanmar either in LNG form or by pipeline. Because of the high price (conversion to LNG remains a costly option) and the lack of LNG infrastructure in Myanmar, a gas pipeline is the only viable option in this regard. Moreover, the LNG projects are economically less attractive than a pipeline if importing countries have available gas suppliers in their proximity. Though they are neighbours, the adverse geographical locations and unfavourable geopolitical conditions, particularly in the northeast part of India, have been major impediment in materializing New Delhi’s gas pipeline plan from Myanmar. However, Bangladesh’s excellent geographical location can give India access to the hydrocarbon resources of Myanmar. The geographical proximity of these three countries offers economically viable energy interactions among them. Bangladesh is surrounded by India almost entirely on three sides (land border of 4,096 km) except for a small but significant border of 277 km with Myanmar in the southeast. The Bay of Bengal, with a shared coastline with India and Myanmar, bounds the south. Myanmar’s recoverable gas resources are around 51 tcf due to the discovery of large offshore fields opposite Thailand, and another opposite Bangladesh, according to the Myanmar Oil and Gas Enterprise (MOGE), (Tin Maung Maung Than 2005, quoted in Lall 2006). For the past few years, New Delhi has been trying to realize the cross-border gas pipeline project (joining Myanmar, Bangladesh, and India). Major Indian energy companies namely, GAIL India, ONGC Videsh Ltd., and ESSAR have invested in Myanmar’s hydrocarbon sector. ONGC Videsh Ltd. and GAIL India have a thirty per cent stake in Blocks A-1 and A-3, whereas South Korea’s Daewoo has a sixty per cent stake.

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In 2005, the energy ministers of Myanmar, India, and Bangladesh agreed in Yangon in principle to lay a gas pipeline to bring exported gas from Myanmar to India through Bangladesh. The proposed US$1-billion, 290-km gas pipeline, which is much shorter and less costly than the alternative IndoMyanmar route through India’s northeast, is designed to begin, transmitting gas to India’s Tripura from Myanmar and then entering Bangladesh in the East and passing on to West Bengal. As part of the deal, Bangladesh would have received $125 million in transit fees as well as access to the gas, if the project finally saw light. However, Indo-Bangla bilateral issues became a major bone of contention in realizing the plan. The project became uncertain when Bangladesh set three conditions24 for allowing the installation of the pipeline through its territory. As the future of the tripartite gas pipeline has become uncertain, Myanmar has asked India to install a gas pipeline laid along a longer route through Northeast India, bypassing Bangladesh. In 2006, GAIL India Ltd. completed a feasibility study for laying a 870 mile-pipeline (1,400 km) at a cost of $3 billion from Sittwe in Myanmar to Gaya in Bihar via Mizoram, Assam, and West Bengal.25 However, thanks to renewed Indo-Bangla ties, Bangladesh has now agreed to resume pipeline talks, leaving its earlier position of linking Indo-Bangla bilateral issues to the tripartite pact. The current caretaker regime in Bangladesh has realized that the proposed gas pipeline would not only provide some financial benefits, but will also ensure the country’s future energy security. In the previous section, we explained that the gas reserves of Bangladesh might dry up after 2020 if there is no significant breakthrough in gas sector development in the near future. Therefore, unless Bangladesh discovers new gas fields, it might face huge setbacks in supporting its economic growth after 2020 owing to energy scarcity. Given this scenario, Bangladesh should consider the proposed tripartite gas pipeline as an infrastructure for importing gas from Myanmar. The present caretaker government of Bangladesh has now taken steps to initiate formal talks with Myanmar to import natural gas to meet the country’s growing demand for both domestic and industrial use. However in the summer of 2007, the Myanmar authorities decided to sell gas from Blocks A-1 and A-3 to China by pipelines. Yangon has allowed Beijing to plan and construct two pipelines connecting the Arakan coast with Yunnan — one for oil and the other for gas. It is widely speculated that China will use both the pipelines to transport part of its imports of oil and gas from West Asia and Africa in order to reduce its dependence on the Malacca Straits. Consequently, the Indo-Myanmar or Indo-Bangla-Myanmar gas pipeline prospects are dormant for the time being. However, there is still a chance to

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revive the pipeline project if Myanmar auctions the deep sea gas blocks off and India bids for them in the near future. Bangladesh’s Access to the Hydropower Resources of Nepal and Bhutan and Potential Power Trade In South Asia, Nepal and Bhutan have hydropower resources well in excess of their projected domestic demand. India is also well endowed with this clean form of energy. Out of the region’s total hydropower potential, around 98 per cent is in Bhutan, Nepal, and Northeast India. Figure 6.8 shows that Nepal and Bhutan have hydroelectric potential far in excess of their domestic needs and both countries see this resource as a major potential source of future export earnings. Currently Bhutan exports its surplus hydropower to India. Apart from India, Bangladesh is a potential market for these renewable resources. The geographical proximity between Bangladesh and Northeast India offers an opportunity to harness the regional hydropower resources. Figure 6.8 Hydropower Utilization and Potential: Nepal, Bhutan, and India 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Hydropower Potential (MW) Installed Capacity (MW)

Nepal

Bhutan

India

42,130 527

16,280 432

148,701 25,587

Source: Based on Data of Regional Energy Security for South Asia, Regional Report, SARI 2006.

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However, as Bhutan and Nepal are landlocked and surrounded by the Himalayan Mountain and India, New Delhi’s role is extremely critical here in facilitating the hydropower export from Nepal and Bhutan to Bangladesh. Indeed this is one of the conditions that Dhaka did include in the tripartite gas pipeline talks earlier. Of late Bangladesh has formally made proposals to neighbouring Bhutan and India to import hydroelectricity from the Himalayan country.26 Available news reports show that Dhaka has received a positive signal from New Delhi regarding electricity import from Nepal and Bhutan.27 Indeed Bangladesh’s energy security strategy focuses on the potential for seasonal power trade between Bangladesh and Nepal or Bhutan. During the summer, when there is surplus power in Nepal or Bhutan, Bangladesh experiences a high power demand. Bangladesh does intend to import power from these countries during the dry season. The greater use of hydropower offers a range of benefits to the stakeholders. First, it will provide the much needed foreign exchange to the poverty-stricken Himalayan nations. Second, such initiatives will give South Asia’s regional trade a boost. Third, the increasing use of hydropower will lessen the pressure on fossil fuel prices. Fourth, such trade will benefit the environment as renewable resources are eco-friendly vis-à-vis fossil fuels. Last, but not least, this renewable resource can partly mitigate Bangladesh’s power dearth. Apart from these benefits, there is the prospect of exporting electricity from the eastern part of India to Western Bangladesh and exporting electricity from gas-fired power stations in Bangladesh to India, whether for consumption solely in India, or for onward trading to Western Bangladesh if these plants are located in the eastern half of Bangladesh. Currently India has similar power swap arrangements with Nepal and Bhutan. Bangladesh and Nepal (as well as India and Bangladesh) will both be better off if they initiate power swap or trade on the basis of their respective peak and offpeak demands. INDO-BANGLA BILATERAL RELATIONS India, thanks to its central role in the independence of Bangladesh in 1971, had very cordial relations with Dhaka until 1975. They signed the “Treaty of Friendship, Cooperation and Peace” in 1972 for twenty-five years. However, the bilateral ties between these two neighbours have seen an up and down trend since 1975 when Sheikh Mujibur Rahman, the father of the Bangladeshi nation, was assassinated. A myriad of issues, including water sharing, the

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transfer of the Teen Bigha Corridor to Bangladesh, illegal Bangladeshi immigrants in India, the cross-border insurgency in the northeast region of India, the rise of Islamic fundamentalism in Bangladesh, the transit facilities (to Northeast India through Bangladesh and to Nepal and Bhutan through India), the trans-Asian highway route, and the Indo-Bangla trade imbalances, have been the major bones of contention in developing congenial relations between New Delhi and Dhaka. The relations between the two countries hit a historic low when India unilaterally withdrew from the Ganges water despite strong protests from Bangladesh in 1976 and 1977. After two decades, both countries signed a thirty-year treaty on sharing the Ganges water on 12 December 1996 in New Delhi and agreed to resolve other water-sharing issues. India and Bangladesh share fifty-four common rivers and the agreement has been signed only on the water sharing of the Ganges. After the signing of the treaty, the relations between them witnessed an upward trend for a while — but three major issues remain the principal impediments to improving relations between these two countries. They are the Indo-Bangla trade imbalances, the rise of Islamic fundamentalism in Bangladesh, and cross-border terrorism, especially in the northeast part of India. Bangladesh-India trade relations are marked by huge imbalances in favour of India. In 2005–06, India’s exports to Bangladesh were $1.8 billion, whereas the latter’s exports to the former were only $242 million.28 India’s non-tariff barriers and other qualitative or quantitative restrictions among others have become major roadblocks for Bangladeshi products to access Indian market over the years. In recent times, the rise of Islamic fundamentalism in Bangladesh, especially after 9/11, and cross-border terrorism are major security concerns for New Delhi. The Indian authorities did refuse to attend the SAARC Summit held in Dhaka in 2005 on security grounds. Consequently, these factors have undermined their bilateral ties. A low level of bilateral relations did adversely affect energy interactions between the two countries. Traditional blame-game politics often dominates economics when policy-makers of both countries talked about energy issues. Keeping aside the huge anomalies concerning the proven and probable gas reserve data, gas export to India has been, and is still, a politically sensitive issue in Dhaka. However, thanks to changes in New Delhi’s policies regarding the SAARC countries 29 and the formation of the army-backed caretaker government in Bangladesh, bilateral ties between these countries have shown

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some improvement. Today, India sees Bangladesh as a strategic country for mitigating its energy needs, apart from being one of its important political and economic partners. Policy-makers in Bangladesh have also realized the potential benefits of renewed Indo-Bangla ties. The latest diplomatic meetings between the two countries on the sideline of the 14th SAARC Summit held in India in April 2007, and the Indian foreign secretary’s high-profile visit to Dhaka in June 2007, show commitments from both sides to renew Indo-Bangla ties. The current interim government of Bangladesh seems committed to working closely with New Delhi to resolve the cross-border insurgency in the northeast region of India. During the SAARC Summit, Indian Prime Minister Dr Manmohan Singh signed a treaty that will allow Bangladesh and other LDC members of SAARC to enjoy duty-free access to the Indian market, and New Delhi assured its counterpart that selected Bangladeshi products would be permitted to access the Indian market by 2007. The renewed Indo-Bangla ties are also affecting energy issues positively. The Foreign Advisor of Bangladesh discussed the gas issue with the Myanmar government during his recent official visit to Yangon. Furthermore, the Energy Ministry of Bangladesh has expressed its serious intention to import hydropower from Nepal and Bhutan recently. It seems that, like in India, the energy issue is very much a foreign policy priority in Bangladesh. The history of economic cooperation in South Asia shows that without having political commitments from politicians and policy-makers, it is very difficult to move forward with any sort of economically viable programmes. As former Indian Minister for Petroleum and Natural Gas Mani Shankar Aiyar rightly observed, “dealing with the Pakistanis and Bangladeshis is really a question of engaging them. If we don’t engage them then the fissures go on widening” (Khosla 2005). Consequently, any complacency in dealing with its close neighbour Bangladesh might cost India its quest for energy security from a regional perspective. For instance, Myanmar is now actively negotiating with China rather than India in terms of gas export and other energy cooperation issues, as both New Delhi and Dhaka have failed to reach a concrete agreement on the tripartite gas pipeline issues. Conclusion It is an undeniable fact that both India and Bangladesh have many reasons to be concerned about their long-term energy security. As has been discussed in this chapter, there are a few areas, namely gas pipelines, hydropower,

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and power swap, where close cooperation between these two countries can partly mitigate their energy demands. Though the available data on Bangladesh’s gas reserves and its domestic needs do not support any ad hoc possibilities of exporting gas from Bangladesh to India, there might be some opportunities in the future as the former modernizes its gas sector and increases its gas exploration programmes. Nevertheless, Bangladesh can mitigate India’s gas requirements, thanks partly to its strategic location between India and Myanmar. Though the prospect of a tripartite gas pipeline is dormant for the time being, some future opportunities could still arise when Myanmar auctions off its deep sea blocks. If India finally gets access to Myanmar hydrocarbon resources by capitalizing the strategic location of Bangladesh, then this will not only help India’s energy needs, but also aid the infrastructure of Bangladesh’s future energy needs. Further, such initiatives will enhance regional connectivity and will give South Asian integration a boost. Apart from the gas pipeline, Indo-Bangla cooperation will open the floodgates for Nepal’s and Bhutan’s hydropower potential. The prospect of Bangladesh importing hydropower from these Himalayan nations is provided India allows Bangladesh to do so. Hydropower trade is desirable not only for Bangladesh’s interest, but also because such initiatives will increase the share of non-fossil fuel based energy in the region where all parties are set to enjoy the external economies generated by renewable resources. The power trade between India and Bangladesh on the basis of peak and off-peak demands shows some prospects that might help the power situation in both countries. This study offers a few viable energy trade potentials between India and Bangladesh, however, the Indo-Bangla bilateral ties remain the major obstacles to initiate, if not beef up, energy cooperation between these two countries. New Delhi’s loss of Myanmar gas to China gives us another reminder that any complacency pertaining to India-Bangladesh relations undermines both parties economic interest substantially. Had there been an agreement between these two neighbours on the tripartite gas pipeline issue, India could have accessed the Myanmar gas reserves and Bangladesh would also have benefited financially. Consequently, in order to secure their respective energy securities, both New Delhi and Dhaka should work closely to exploit the regional energy resources by giving up their traditional mindsets regarding any sort of economic cooperation. A renewed tie between these close neighbours can make both New Delhi and Dhaka better off in terms of energy security than the existing level of relations.

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Appendix Acronyms and Units of Measure MTOE million tonnes oil equivalent GW giga watt MW mega watt KWh kilowatts per hour mkWh million kilowatts per hour KGOE kilogramme oil equivalent BCM billion cubic metres BCFD billion cubic feet day NOTES 1

2 3

4

5

6

7

8 9

10 11

12 13

14

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Acknowledgement: The author would like to thank Dr Marie Lall, Visiting Research Fellow, Institute of South Asian Studies, for her useful comments. For details, see Table 6.2. The World Energy Assessment Report (UNDP 2000) defines energy security as “the continuous availability of energy in varied forms in sufficient quantities at reasonable prices”. It essentially involves ensuring uninterrupted supply of energy to support the economic and commercial activities necessary for sustained economic growth. For details, see José Goldemberg et al. 2000. There is much uncertainty and debate in Bangladesh regarding the total reserve of natural gas. Details have been analysed in sections three and four. Primary energy comprises commercially traded fuels only. Excluded, therefore, are fuels such as wood, peat, animal waste, and other biomass. Myanmar to sell gas to China . This chapter looks mainly at two types of energy resources, namely natural gas and hydropower (coal, to some extent) in terms of the Indo-Bangla energy cooperation. IEA 2005, quoted in Planning Commission, Government of India, 2006. UNDP 2004, IEA 2004, quoted in Planning Commission, Government of India, 2006. Eviews 6, User Guide, available at . Statistical Review of World Energy 2007, British Petroleum . KPMG 2007. LNG is natural gas reduced to a liquid state by cooling it to about minus 260° Fahrenheit (–160° Centigrade). Rasheed 2007.

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148 15

16

17

18

19 20

21 22 23

24

25

26

27

28

29

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The “String of Pearls” describes the manifestation of China’s rising geopolitical influence through efforts to increase access to ports and airfields, develop special diplomatic relationships, and modernize military forces that extend from the South China Sea through the Straits of Malacca, across the Indian Ocean, and onto the Arabian Gulf (Pehrson 2006). Most Indian coals have a high ash content to the order of 25–35 per cent. High ash in the coal, not only reduces the thermal value of coal, but also leads to production of fly ash, which is a major environmental problem (Vijayalakshmi 2002). The price of standard crude oil on NYMEX was under $25/barrel in September 2003, but by 11 August 2005, it had risen to over $60/barrel, and hit a record price of $78.40 per barrel on 13 July 2006 . Natural gas is considered a clean fuel because of its environmentally friendly properties: (1) commercialized natural gas is practically sulphur free and thus it produces virtually no sulphur dioxide; (2) natural gas emits lower levels of nitrogen oxide than oil or coal and emissions of carbon dioxide are less than those of other fossil fuels . EIA 2004 and IEA 2004, quoted in David G. Victor, et al. 2006. India’s total gas reserve is higher than Bangladesh’s; however, in per capita terms, India’s share is much lower vis-à-vis its neighbour. Quoted in Wood Mackenzie and Petrobangla 2005. Based on Bangladesh’s average GDP growth rate for the past ten years. The growth rate Bangladesh needs to achieve to meet the Millennium Development Goals. The three conditions are giving transit facility through India to facilitate transmission of hydroelectricity from Nepal and Bhutan to Bangladesh; unhindered utilization of corridors for trading between Bangladesh, and Nepal or Bhutan, through Indian territory; and effective measures to reduce the trade imbalance between India and Bangladesh. Myanmar Wants Pipeline Through NE India . Bangladesh proposes import of hydro-electricity from Bhutan . Bangladesh gets positive response from India to import electricity from Bhutan, Nepal . Bangladesh to gain little from FTA with India: WB report . Lately, India has realized that it needs more support than ever from its neighbours in order to be a regional power.

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REFERENCES Bahgat, Gawdat. “India Steers New Course Toward Energy Reform”. Oil and Gas Journal 21 (2007): 20–24. Energy Information Administration. “International Energy Outlook 2006” (accessed July and August 2007). ———. “International Energy Outlook 2007” (accessed August 2007). Engle, Robert E. and Clive W.J. Granger. “Co-integration and Error Correction: Representation, Estimation and Testing”. Econometrica 55 (1987): 251–76. Goldemberg, José. et al. “World Energy Assessment: Energy and the Challenge of Sustainability”. World Energy Council, United Nations Development Programme, 2000 (accessed August 2007). Granger, C.W.J. “Investigating Causal Relations by Econometric Models and Crossspectral Methods”. Econometrica 37 (1969): 424–38. International Energy Agency. “Key World Energy Statistics 2005” (accessed June, July, and August 2007). ———. “World Energy Outlook 2007” (accessed June, July, and August 2007). Khosla, I.P. “Energy and Diplomacy”. New Delhi: Konark Publishers, 2005. KPMG. “India Energy Outlook 2007” (accessed August 2007). Lall, Marie. “Indo-Myanmar Relations in the Era of Pipeline Diplomacy”. Contemporary Southeast Asia 28, no. 3 (2006): 424–46. Lee, Chien-Chiang. “Energy Consumption and GDP in Developing Countries: A Co-integrated Panel Analysis”. Energy Economics 27 (2005): 415–27. Pehrson, Christopher J. “String of Pearls: Meeting the Challenge of China’s Rising Power across the Asian Littoral”. Strategic Studies Institute, July 2006 (accessed August 2007). Planning Commission, Government of India. “Integrated Energy Policy Report of the Expert Committee”. New Delhi, 2006. Quader and Gomes Edmond. “An Exploratory Review of Bangladesh Gas Sector: Latest Evidence and Areas of Further Research”. Centre for Policy Dialogue Occasional Paper 17, October 2002 (accessed July and August 2007). South Asia Regional Initiative for Energy. “Basis for Selected Regional Power Trading Schemes in South Asia Today”, 2006 (accessed July 2007). Srivastava and Misra. “Promoting Regional Energy Co-operation in South Asia”. Energy Policy 35 (2007): 3360–68.

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Tamim and Gulen. “Perils of Bangladesh Energy Value Chain”. Energy and Power, July 2004. United Nations. “The Energy Challenge for Achieving the Millennium Development Goals”, 2005 (accessed August 2007). Victor, David G. et al. “Natural Gas and Geopolitics from 1970 to 2040”. Cambridge: Cambridge University Press, 2006. Vucetic Vladislav. “South Asia Energy Trade: Opportunities and Challenges”. The World Bank, 2004 (accessed July 2007). Wood Mackenzie and Petrobangla. Revised Interim Report on Development of Gas Sector Master Plan, 2005 (accessed August 2007). Zachariadis, Theodoros. “Exploring the Relationship between Energy Use and Economic Growth with Bivariate Models: New Evidence from G-7 Countries”. Energy Economics, 2007, doi:10.1016/j.eneco.2007.05.001. NEWS ARTICLES AND WEBSITES Laxman, Kumar Behera. “Natural Gas: The Fuel of 21st Century” (accessed July and August 2007). Rasheed, K.B. Sajjadur. “Energy Security Beyond 2020”. Daily Star, April 2007 (accessed July 2007). Bilateral.org. “Bangladesh to Gain Little from FTA with India: WB report” (accessed August 2007). Burma Net. “Myanmar to Sell Gas to China” (accessed August 2007). Financial Express. “Bangladesh Proposes Import of Hydro-electricity from Bhutan” (accessed August 2007). People’s Daily Online. “Bangladesh Gets Positive Response from India to Import Electricity from Bhutan, Nepal” (accessed August 2007). Energy Information Administration . Eviews 6, User Guide . International Energy Agency . South Asia Regional Initiative for Energy . Statistical Review of World Energy 2007, British Petroleum (accessed August 2007).

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The New York Mercantile Exchange . United Nations Population Fund . United Nations Human Development Report . World Development Indicators, World Bank . Worldporess.org. “Myanmar Wants Pipeline Through NE India” (accessed July and August 2007).

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Reproduced from The Geopolitics of Energy in South Asia edited by Marie Lall (Singapore: Institute of Southeast Asian Studies, 2009). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at

7

Sino-Indian Energy Politics Mingjiang Li As China is one of the largest consumers and importers of energy resources, its energy demand and activities are now felt in every corner of the world. South Asia, which is part of China’s immediate neighbourhood, is no exception. China is involved in the exploration, production, and transportation of oil and natural gas in the South Asian region. The most important aspect of China being an actor in South Asian energy politics, however, has to do with China’s relationship with India in the energy sector. The interactions between the two giants in this respect will be a significant factor in shaping the energy outlook as well as the geopolitical landscape in the region and the world at large. This chapter is intended to examine the prospect of Sino-Indian energy cooperation. It will address three broad issues: the need for cooperation, the current trend in Sino-Indian energy ties, and some of the barriers that need to be overcome for future cooperation. NEED FOR COOPERATION Both China and India have been experiencing rapid economic growth. Since 1980, the Chinese economy experienced on average an annual growth of over 9 per cent, whereas the Indian economy grew by more than 5 per cent year on year. Now both countries face an enormous challenge in securing energy supply to sustain their economic growth. Ever since China became a net importer of oil in 1993, its demand of energy has assumed a rapid momentum. An official Chinese report published in 2003 mentions that by 2020, China will have to import 500 million tonnes of oil and 100 billion

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cubic metres of natural gas.1 According to another policy report conducted by thirty-one leading Chinese scientists, China’s known oil reserve by 2003 was 6.5 billion tonnes, one-fifth of the world’s average per capita.2 And this deposit is rapidly decreasing. In 2003, China’s known oil deposit dropped by twenty per cent from ten years ago. It is now increasingly difficult for Chinese oil companies to increase oil output in Chinese territories. From 1997 to 2003, the annual total oil output stayed roughly constant at 160 million to 170 million tonnes.3 The dire situation has alarmed top Chinese decision-makers. At a central meeting on economic issues on 29 November 2003, Chinese President Hu Jintao emphasized China’s oil security. He urged his colleagues to regard the energy issue from a new strategic height, adopt a new oil development strategy, and take effective measures to ensure China’s energy security.4 India has roughly the same situation. India is not rich in oil reserve. With 16 per cent of the world’s population, India has only 0.4 per cent of the world’s oil reserve. India has a total deposit of 1.66 billion tonnes of prospected oil, with an actual output of about thirty million tonnes annually. Yet, India consumes 120 million tonnes of oil every year, with 75 per cent being imported.5 According to an estimation by the International Energy Agency, by 2030, India will need to import 91 per cent of its total oil demand.6 Many Chinese analysts believe that given the enormous demand for energy resources in both countries and the limited global reserve, China and India are bound to engage in a fierce competition for oil and natural gas worldwide. From the perspective of India, China is the arch rival that may be critical for India’s energy interests. In early 2005, the Indian government attempted to revamp its state-run oil and natural gas firms. Indian Prime Minister Manmohan Singh explicitly justified the reorganization effort by saying that “China is ahead of us in planning for its energy security” and that “India can no longer be complacent”.7 In practice, the two countries adopt roughly the same approaches in international energy politics. Both countries import the bulk of their oil from the Middle East. This explains why both of them have tried to sign long-term agreements with suppliers in the Middle East. Both countries pursue a strategy of diversifing their sources of supply through proactive business and diplomatic moves in other parts of the world, Central Asia, Russia, some African countries, and Latin America. Despite the apparently zero-sum game in energy politics between China and India, the two countries also have a lot of incentives to cooperate. The increased demand from China and India has partly contributed to the rise in oil price in the past few years. Keeping the oil price at a reasonable level

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would be beneficial to both economies. Both sides have gradually realized that their competition has been driving up the cost of their overseas projects. Both countries need a stable supply of oil and other energy resources over the long run. Both countries need to ensure safe and uninterrupted transportation of energy goods to their ports. Moreover, both countries, because they are latecomers in the international energy rivalry, face strong pressures from those financially strong, technologically more advanced, and operationally more experienced large Western corporations. CURRENT STATUS OF COOPERATION China and India learnt to cooperate in the energy sector in a hard way. A few years ago, China and India both regarded competition in the energy sector as a purely zero-sum game, although there were cases of occasional cooperation. The two countries had competed against each other in many projects in the world. In Southeast Asia, the two countries competed in Indonesia and Myanmar. In South Asia, India has been able to have a tight grip on Bangladesh because of its geopolitical advantage. In addition to standard business operations, the two countries have used all sorts of means in their diplomatic arsenals to obtain energy assets or concessions in other countries. The overall strategy was to forge closer strategic and political ties with oil-rich countries. Chinese entangling with Iran, Sudan, and Venezuela, although often criticized by the United States, has to do with Beijing’s interest in the oil resources of those countries. When it comes to overseas bids for oil assets or concessions, economic and political instruments are often used. Offering economic assistance to the target country is the frequently used tactic. For instance, in 2004, when the Indian Oil and Natural Gas Corporation (ONGC) sought to purchase shares of Shell in Angola, China offered the Angolan government US$2 billion of assistance, which facilitated the Angolan state oil company to use its priority right to buy Shell’s shares. Also, to win a bid, the winner often has to offer a higher price. In August 2005, China National Petroleum Corporation (CNPC) offered $4.18 billion, much higher than the joint offer by ONGC and Mittal Steel, and successfully bought PetroKazakhstan Inc., the third largest oil producer in Kazakhstan. The Chinese media hailed this deal as a “victory for China in its rivalry with India”.8 Political tactics are also sometimes involved. For instance, in a bid for oil concessions in Ecuador, the Chinese oil company was able to secure strong government support. In addition to the Chinese government’s promise to provide financial assistance for Ecuadorian educational projects, Beijing

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exercised its veto power in the U.N. Security Council to kill a resolution that sought to impose economic sanctions on Ecuador. These Chinese moves outmanoeuvred the Indians, and as a result, the Chinese company was able to win the bid.9 These cases seemed to suggest Chinese victory, yet Chinese analysts came to understand that there was no ultimate winner — China had to pay a much higher economic and political price to succeed. Through these competitions and rivalries, both Beijing and New Delhi realized that unrestrained competition worked against the interests of both parties and that they could actually benefit from cooperation and collaboration. In a nutshell, although Chinese analysts still believe that competition in the energy sector between China and India is inevitable, they maintain that the competition needs to be restrained or better coordinated. At the first China-India strategic dialogue in January 2005, Chinese Deputy Foreign Minister Wu Dawei stated that the common interests outweigh differences between the two countries in the energy sector. India has obviously drawn the same lessons. New Delhi realized that Chinese state-run oil companies are financially better prepared and operationally more skilful than their Indian counterparts in the international market. Chinese companies can also exploit the political resources of the Chinese state in many parts of the world. To some extent, India seems to have been more active in seeking energy cooperation with China and other Asian consumers. In January 2005, India sponsored a round table at the ministerial level on oil cooperation in Asia, the first such meeting between major oil suppliers in the Middle East and consumer states in other parts of Asia. India hoped to push for a dialogue mechanism between Asian producers and consumers, a possible informal organization among major Asian importers, coordination in establishing strategic reserves, and stable oil prices. Participants of the conference were also interested in solving the surcharge (US$1–$2 per barrel extra charge) that the Middle East producers imposed on other Asian countries. In April 2005, Chinese Premier Wen Jiabao visited India. The joint declaration stated that both sides agree to enhance cooperation in energy security and encourage their relevant domestic organizations to join hands in prospecting and exploiting oil and natural gas resources in a third country. Wen’s visit marked the beginning of substantive China-Indian energy cooperation.10 After the visit, the two countries started to engage each other in the international energy arena. In August 2005, China and India held a strategic dialogue that specifically addressed energy issues. The memorandum that the two sides signed aimed at ameliorating the vicious

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rivalry between the two countries in bids in other countries. Beijing and New Delhi realized that stable and long-term cooperation would benefit both sides and maximize benefits in their overseas operations. According to the agreement, the two countries vowed to cooperate in seven areas: the upper end of energy prospecting, exploring and producing, marketing, oil and natural gas transportation and urban supply, transnational pipelines, technological innovation and development, and software and information regarding energy. The two sides decided to set up a bilateral work group to have a meeting every year on energy cooperation, which indicates emerging attempts to institutionalize energy cooperation between the two countries. There are already a few successful cases of Sino-Indian cooperation in oil and natural gas. For instance, China and India worked together in Sudan, where the CNPC operates Sudan’s Greater Nile oil field. India’s ONGC bought a 25 per cent stake in this Chinese operation in 2002.11 Also in Sudan, India’s ONGC has jointly developed the Malut oil field with CNPC. This cooperation scheme was expected to reduce the cost in exploitation and enhance technological exchanges between the two sides. China set up a refinery in Khartoum and India constructed a pipeline to transport the refined oil to the port. In Iran, the same two companies jointly exploited the Yadavaran oil field, with the Chinese side owning 50 per cent of the stake, India 20 per cent, and Iran 30 per cent. In 2004, China Gas Holdings Ltd. and the Gas Authority of India Ltd. signed a memorandum through which the latter purchased 10 per cent of the stocks of the Chinese company. The two companies also agreed to set up a joint venture to invest in natural gas projects in China.12 On 20 December 2005, CNPC and ONGC, the two largest oil companies in their respective countries, announced that they had jointly won a bid to acquire 37 per cent of Petro-Canada’s stake in Syrian oil fields for US$573 million. ONGC and CNPC, both state-owned, would have equal shares in the al-Furat oil and gas fields.13 There are also many opportunities for the two countries to cooperate on oil transportation. In February 2005, then Indian Minister for Petroleum and Natural Gas Mani Shankar Aiyer proposed a grand plan to construct a pan-Asia natural gas network centred in India.14 The proposed project envisions three major pipelines: Iran-Pakistan-India, Turkmenistan-Afghanistan-PakistanIndia, and Myanmar-Bangladesh-India. New Delhi further proposed that the Myanmar-Bangladesh-India line could be extended to China’s southwest through Myanmar. Involving China in the project is India’s consideration of the Pakistan factor. Indian analysts believe that if China becomes part of the whole project, Pakistan will be less likely to cut off the pipeline in times

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of crisis. A few months later, Aiyer proposed another energy pipeline that connects Russia’s Siberia, China’s Xinjiang, and North India.15 There have also been discussions of an energy pipeline from Pakistan’s Gwadar port to the Xinjiang region. If completed, this pipeline is supposed to transport oil originating in the Middle East and Africa to China’s Xinjiang. The proposals to construct a pipeline from South Asia to Xinjiang, either from Pakistan or India, have not won favour with most Chinese analysts. They worry about the enormous costs because of its going through mountainous areas, extreme weather conditions, and the volatile situation in the Kashmir area. The pan-Asia gas pipelines project that centres on India has also not received a positive response from China. At the moment, China seems to be uninterested in any major pipeline project in which India may play the dominant role, largely due to strategic concerns. Instead, China shows strong interest in the Myanmar-Yunnan pipeline project. In April 2007, China and Myanmar announced that they would start a feasibility study on the proposed project. Analysts believe that there are many other areas where the two countries can strengthen bilateral cooperation. Both China and India use a lot of coal. It would be good for both if they can cooperate on technologies on the clean use of coal. It is believed that China has advantages in utilizing conventional energy resources, such as hydraulic power, while India has a niche in sustainable energy, such as wind power. In addition, the two countries also have a lot of room for cooperation in nuclear energy. BARRIERS FOR FURTHER COOPERATION Energy cooperation between China and India can never be separate from the political relations between the two countries. China-India relations have improved significantly in the past few years. But there are still considerable strategic misgivings between the two countries that hamper bilateral cooperation in the energy sector. Having experienced many difficulties during the Cold War, the two countries started to improve bilateral relations in the late 1970s, culminating in the then Indian Prime Minister Rajiv Gandhi’s landmark visit to Beijing in 1988. In the post-Cold War era, Sino-Indian ties have acquired a new momentum, partly as a reflection of the imperative of priority on economic development in both countries. In 1993, China and India signed the Agreement on the Maintenance of Peace and Tranquility along the Line of Actual Control in the India-China Border Areas. In 1996, former Chinese President Jiang Zemin visited India and the two sides agreed to forge a “constructive partnership”.

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This trend of continuous improvement in Sino-Indian relations was interrupted in 1998 when India conducted its nuclear tests, particularly when India officially justified its tests on the ground of security threat from China.16 China reacted strongly to the Indian assertion and bilateral ties reached an all time low. Bilateral ties started to warm up again two years later. In 2000, then Indian President K.R. Narayanan visited Beijing, marking the end of the short period of uneasiness in bilateral ties. Former Prime Minister A.B. Vajpayee’s visit to Beijing in June 2003 marked another important step towards China-Indian reconciliation. The joint declaration signed during the visit stated that China was not a threat to India. Beijing and New Delhi appointed special representatives to accelerate the process of talks on the border issues. During Chinese Premier Wen Jiabao’s visit to New Delhi in April 2005, India and China, announcing their common aspiration of a “strategic partnership”, agreed on the principles to facilitate a final solution to the territorial dispute. India’s recent reaffirmation of China’s sovereignty in Tibet and China’s statement on Sikkim being part of India, underscore the political will on both sides to sustain the current trend in bilateral relations. Together with the improving political ties, bilateral trade between China and India has also grown exponentially. In 1990, Sino-Indian total trade was only $260 million. It increased to $2 billion in 2000, and then to $18.7 billion in 2005.17 In spite of all the positive progress, there is still a fair amount of mistrust between the two countries. In recent years, relations between India and the United States have developed significantly. A large group of the foreign policy community in the United States always regards China as the possible challenger and seeks to restrain or constrain China. They believe that India should be one of the U.S. partners in encircling China. Some Indian decisionmakers also regard China as India’s main threat and hope to be part of the U.S. containment policy on China. This has had a significant impact on SinoIndian strategic trust.18 Despite India’s open statement that it will not join the U.S. effort, many Chinese analysts believe that India is at least implicitly cooperating with the United States to put strategic pressure on China. They think that the recent nuclear deal between Washington and New Delhi is a good example of the U.S.-India hidden agenda. Beijing also keeps a close watch on India when Japan strenuously appeals to India to support its Asian “arch of freedom” proposal. On the other hand, India has always been very sensitive to China’s role in South Asia. Chinese close ties with Myanmar and its naval presence in the Bay of Bengal are regarded by India as a threat to its national security. China’s quasi-alliance relationship with Pakistan is always a source of Indian

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suspicion of China playing the Pakistan card to restrain India. Despite the fact that China has tried to maintain a neutral position on the Kashmir issue, for instance, during the 1999 Kargil conflict, India always suspects that China is intent on supporting Pakistan and playing the balance-of-power politics in South Asia. India is also quite reluctant to see the growth of Chinese influence in the South Asia Association for Regional Cooperation (SAARC), which India regards as its traditional sphere of influence. No doubt, energy cooperation between China and India will continue to be negatively affected by the strategic mistrust between the two countries. But, with the mounting common challenge of energy security and the first good taste of cooperation, China and India may be more willing to deepen their energy cooperation in the near future, which will contribute positively to energy politics as well as the strategic and political situation in South Asia. NOTES 1

2

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Xu Longdi, “Ershiyi Shiji Diyuan Zhengzhi Zhong De Nansha Qundao” [Spratlys in the 21st Geopolitics], Journal of Shanghai Jiaotong University, vol. 13, no. 5 (2005): 39–44. Yang Wenwu and Dai Jiangtao, “Zhong Yin Zai Hai Wai Shiyou Nengyuan Gongji Zhong De Jing He Taishi Ji Boyi Fenxi” [The Sino-Indian Rivalry in Overseas Oil Resources and a Game-theory Analysis], Shengtai Jingji (Ecological Economy), issue 4 (2006): 39–43. Task Team of China Land and Resources Security Analysis, “Wo Guo Nengyuan Wenti De Hexin: Shiyou Anquan” [The Core of China’s Energy Issue: Oil Security], Zhongguo Guotu Ziyuan Bao (China Land and Resources Newspaper), 21 November 2005. Shi Hongtao, “Zhongguo De Maliujia Kunju” [China’s Malacca Dilemma], China Youth Daily, 15 June 2004. Tan Yundong and Zhang Kang, “Zhong Yin Nengyuan Hezuo De Qianjing” [The Prospect of Sino-Indian Energy Cooperation], International Oil Economy (Chinese), vol. 13, issue 4, April 2005. Ibid. Parwini Zora and Daniel Woreck, “Indian Government to Merge State-run Oil Firms” (accessed 1 September 2007). People’s Daily . Yang Wenwu and Dai Jiangtao, Shengtai Jingji [Ecological Economy], issue 4 (2006): 39–43.

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160 10

11

12

13

14

15

16

17

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Zhao Yi, “Zhong Yin Nengyuan: Cong Jingzheng Zou Xiang Hezuo” [China and India on Energy: From Competition to Cooperation], China Society Periodical, issue 4, 2006. Manjeet Kripalani, et al., “India And China: Oil-Patch Partners?” Business Week, 7 February 2005. Yang Wenwu and Dai Jiangtao, Shengtai Jingji [Ecological Economy], issue 4, (2006): 39–43. Indrajit Basu, “India, China Pin Down $573m Syria Deal”, Asia Times Online, 22 December 2005 . Zhang Baoping, “Yindu Tiyi Jianli Fan Ya Tianranqi Wangluo” [India Proposes to Construct Pan-Asia Natural Gas Network], China Petroleum Newspaper, 17 February 2005. Zhang Kang, “Nanya-Xinjiang Yu Miandian-Yunnan You Qi Guan Xian Fang An De Fen Xi” [An Analysis of the South Asia-Xinjiang and Myanmar-Yunnan Oil and Gas Pipelines Proposals], China Foreign Energy (Chinese), vol. 11, issue 2, April 2006. New York Times, “India’s New Defence Chief Sees Chinese Military Threat”, 5 May 1998. Jiang Yong, “Zhong Yin Jingji Anquan: Zou Chu Gong Tong Kun Jing” [Economic Security for China and India: Tackling the Common Dilemmas], World Knowledge (Chinese), issue 15, 2006. Zhang Guihong and Wan Xuefen, “Lengzhan Hou Zhong Yin Guanxi Zhong De Meiguo Yinsu” [The U.S. Factor in Post-Cold War Sino-Indian Relations], South Asian Studies Quarterly (Chinese), issue 4, 2003.

REFERENCES Basu, Indrajit. “India, China Pin Down $573m Syria Deal”. Asia Times online, 22 December 2005 . Jiang, Yong. “Zhong Yin Jingji Anquan: Zou Chu Gong Tong Kun Jing” (Economic Security for China and India: Tackling the Common Dilemmas). World Knowledge (Chinese), issue 15, 2006. Kripalani, Manjeet, et al. “India And China: Oil-Patch Partners?” Business Week, 7 February 2005. New York Times. “India’s New Defence Chief Sees Chinese Military Threat”, 5 May 1998. People’s Daily . Shi, Hongtao. “Zhongguo De Maliujia Kunju” (China’s Malacca Dilemma). China Youth Daily, 15 June 2004.

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Tan, Yundong and Zhang Kang. “Zhong Yin Nengyuan Hezuo De Qianjing” (The Prospect of Sino-Indian Energy Cooperation). International Oil Economy (Chinese), vol. 13, issue 4, April 2005. Task Team of China Land and Resources Security Analysis. “Wo Guo Nengyuan Wenti De Hexin: Shiyou Anquan” (The Core of China’s Energy Issue-oil Security). Zhongguo Guotu Ziyuan Bao (China Land and Resources Newspaper), 21 November 2005. Xu, Longdi. “Ershiyi Shiji Diyuan Zhengzhi Zhong De Nansha Qundao” (Spratlys in the 21st Geopolitics). Journal of Shanghai Jiaotong University, vol. 13, no. 5 (2005): 39–44. Yang, Wenwu and Dai Jiangtao. “Zhong Yin Zai Hai Wai Shiyou Nengyuan Gongji Zhong De Jing He Taishi Ji Boyi Fenxi” (The Sino-Indian Rivalry in Overseas Oil Resources and a Game-Theory Analysis). Shengtai Jingji (Ecological Economy), issue 4 (2006): 39–43. Zora, Parwini and Daniel Woreck. “Indian Government to Merge State-run Oil Firms” (accessed 1 September 2007). Zhang, Baoping. “Yindu Tiyi Jianli Fan Ya Tianranqi Wangluo” (India Proposes to Construct Pan-Asia Natural Gas Network). China Petroleum Newspaper, 17 February 2005. Zhang, Guihong and Wan Xuefen. “Lengzhan Hou Zhong Yin Guanxi Zhong De Meiguo Yinsu” (The U.S. Factor in post-Cold War Sino-Indian Relations). South Asian Studies Quarterly (Chinese), issue 4, 2003. Zhang, Kang. “Nanya-Xinjiang Yu Miandian-Yunnan You Qi Guan Xian Fang An De Fen Xi” (An Analysis of the South Asia-Xinjiang and Myanmar-Yunnan Oil and Gas Pipelines Proposals). China Foreign Energy (Chinese), vol. 11, issue 2, April 2006. Zhao, Yi. “Zhong Yin Nengyuan: Cong Jingzheng Zou Xiang Hezuo” (China and India on Energy: From Competition to Cooperation). China Society Periodical, issue 4, 2006.

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Reproduced from The Geopolitics of Energy in South Asia edited by Marie Lall (Singapore: Institute of Southeast Asian Studies, 2009). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at

8

Linkages in Urban and Energy Policies: An Analysis of China and India Indu Rayadurgam

Introduction China and India are two countries which have been naturally compared and contrasted by academics and policy-makers, especially in the past decade, in terms of development patterns and market opportunities, among others. Often the roles played by these two countries are analysed through the concept of competition, mostly due to historical baggage, the population factor, and the ever increasing growth rates. The rise in economic growth has led to a proportional increase in demand for more energy supplies and alternatives, fuelling competition at the international stage. Many countries today are faced with the challenges of energy shortages and management of sparsely available resources. These resources, especially petroleum, oil, and natural gas, are distributed unevenly across nations, and thus, their supply and prices can be controlled by the fortunate few, a large proportion of which are located in the Middle East. Countries such as China and India, which have implemented economic reforms, are faced with the multifaceted challenges of sustaining high economic growth rates, the demand for which

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has to be fuelled by a constant supply of energy, and also of ensuring a decent supply of vital energy for the burgeoning population. In order to meet the two aforementioned demands, the two nations have engaged in many conflict-cooperation scenarios, mainly to procure unevenly endowed energy sources. The most important issue to be addressed here will be: Why will the issue of competition not go away? This can be illustrated with the help of Figure 8.1. The figure clearly illustrates the fact that it is domestic priorities and policies that drive geopolitics. In terms of energy use, it is well-known fact that, as the two fastest growing economies in the world, China and India are expected to consume a substantial share of the world’s energy resources in the coming decades. The study of competition between China and India will be analysed in light of this background. The patterns of energy consumptions in these sectors will have important ramifications on global energy usage. At the domestic level, it is essential to consider the two issues that drive energy consumption: the urban residential and transport sectors. The concept of industrial energy conservation has acquired an important dimension in both these countries, mainly because of the attractive cost savings mechanism due to energy conservation, When considering the urban residential and transport sectors, it is important to consider the consumption-cum-conservation patterns and also the conservation policies that are operational de jure and de facto. Therefore, the main objective of this chapter would be to give an overview of the consumption patterns in the urban residential and transport sectors and the policy measures initiated by China and India. The following section will give a brief overview of Sino-Indian economic reform patterns and also the current state of cooperation between the two countries. Figure 8.1 The Dynamics of Bilateral Relations China-India Relations

Domestic Environment

Actions by the Government and Eeconomic Entities

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Linked by Economies and Political Actions

Foreign and Trade Policies

Competition and Cooperation for Markets and Resources

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BRIEF OVERVIEW OF SINO-INDIAN RELATIONS An interesting aspect provided by the International Relations experts is the concept of enduring rivalries.1 This theory attempts to analyse the conflicts occurring over one period of time affecting conflicts in another period of time. If this research can be implemented in the Sino-Indian dispute, it can be concluded that the 1962 war left a deep impact on their relations and will continue to do so. But serious efforts are being made at the diplomatic level to erase the memories. India has been affected and has to remove the prejudices and view the emerging bilateral relations with a positive attitude. The nuclear tests in 1998 repositioned India’s status as a major power player in the international system. It removed the ambiguity of India’s nuclear posture and made other nations realize its immense potential of becoming a dominant player in the future. A longstanding objective of the Indian elite has been the achievement of major power status in the international system. All major powers in the system are nuclear powers and this was one of the main reasons for India to gatecrash into the nuclear club. While India might be the second most populous country in the world, it is ranked eighth in nuclear status and its power position is confined only to South Asia.2 Even in South Asia, India’s influence is resisted by the Chinese policy of containment. India’s hegemonic designs in South Asia have not been a major success to date. This is because of the ambiguity surrounding India’s foreign policy vis-à-vis its neighbours. India has not taken direct measures to court or confront the nations in South Asia. It has devoted all its attention and resources to resolving the Kashmir dispute, virtually ignoring its other South Asian counterparts. This is in direct contrast with China’s foreign policy of multiple engagements and its efforts to dominate other countries with military, political, and economic cooperation. The analysis of Sino-Indian relations in the post-Pokhran period reveals only slight changes in the foreign policy directions of both countries. The priorities of both nations in their respective foreign policies have been different. Chinese foreign policy-makers have been highly indifferent towards India’s demand for a solution to the border dispute. China’s vision is set on becoming a major competitor to the United States by the year 2040. Compared with that objective, the resolution of the borders involving the states of Kashmir and Arunachal Pradesh with India becomes very insignificant. China does not consider India a threat and is not inclined to resolve the disputes between the two. Many Chinese analysts have pointed

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out that it was not India’s nuclear tests which annoyed China, but China being stated as the main reason for the nuclear tests that propelled it into a diplomatic war with their Indian counterparts.3 The Chinese policy of containment in Asia, with its arms sales and technology transfer to all smaller countries, has been going on for the past three decades. China has restricted the influence of America in East Asia and also in South Asia (in its dealings with Pakistan). It is not ready to give up its superior position and this has led to a stalemate in many aspects of its bilateral relations with India. China’s consistent efforts to maintain its relations with Pakistan prove this point. India, on the other hand, has been optimistic in its relations with China, despite the fact that its nuclear position has not helped its relations with its neighbours. In order to counter China’s presence, India is developing strong ties with the United States and other European powers and is also courting countries from the Association of Southeast Asian Nations (ASEAN). A mixed scenario is likely to emerge in the relations between both countries. In the fields of trade and commerce and interactions with the WTO, there might be cohesive efforts by both nations for the mutual benefits of enlarged trade and economic gains. But the Sino-Pakistan nexus, China’s presence in the Indian Ocean, and its arms trade with its smaller countries, will be major factors impeding the normalcy. At the diplomatic level, China and India have identified many possible areas of mutualism. A Joint Study Group (JSG) of the China-India working committee has recommended various levels of cooperation, particularly for hydrocarbon-based resources, development of advanced technology for electricity production through nuclear energy, exploration of oil and natural gas resources in other countries, development of renewable resources, and most importantly, the setting up of a joint institutional mechanism for efficient energy management. Despite these initiatives, it is an open secret that these energy-voracious nations are going to encounter many conflict zones in the process of their economic development. The emerging trends of cooperation between both countries have given an optimistic outlook for cooperation in spite of intense competition generated by the reform process. In the field of energy acquisitions from abroad, China has built a refinery in Khartoum, Sudan, and India built the pipeline from the refinery to the port. India’s ex-Petroleum Minister Mani Shankar Aiyar has remarked, “There are enormous prospects for India and China to work together. Our interests are complementary.”4 The next section will give a brief overview of the economic reform process.

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THE PROCESS OF ECONOMIC REFORMS IN CHINA AND INDIA According to Klein (2004), “India is joining the high-growth club of nations, but in their own way, as a democratic nation. Politically and culturally, the two nations differ markedly, but economically they have some great similarities.” This view was echoed by Sen (2005), “China has joined and become a leader of the world economy with stunning success, and from this India, like many other countries, has been learning a great deal, particularly in recent years.”5 “Reforms put in place decades ago have transformed China and India’s economies and lifted millions out of poverty”, said Shenggen Fan, director of the development strategy and governance division at International Food Policy Research Institute (IFPRI).6 But there are still lots of people who are yet to feel the benefits of the reforms. The background and approaches of these countries have been different. While China initiated reforms in the agriculture sector and rural areas at the end of the 1970s, India began by reforming its manufacturing sector in the early 1990s. These reforms led to rapid economic growth rates of eight to nine per cent per annum in China, and five to six per cent per annum in India. T.N. Srinivasan,7 an expert on China-India relations, has explained the course of China’s economic reforms in the following three stages: the beginning from 1978–84 concentrated on rural areas with the creation of four economic zones and the replacement of profits surrendered by urban enterprises with taxes; the second stage from 1985–92 focused on urban areas and the creation of more coastal SEZs (Special Economic Zones); in 1992, the Chinese Communist Party embarked on the creation of a Socialist Market Economy, which is still in process. This stage also led to China’s accession to the WTO in 2001, financial sector liberalization, and reforming the SEZs. The literature also reveals that the Chinese Communist Party (CCP) has adopted both “top-down” and “bottom-up” approaches in the reform process. “The Centre gave sufficient flexibility for provincial governments to adopt models or pilots that were better suited to local circumstances.” In China, there was no macroeconomic crisis to induce reforms. The Cultural Revolution and the subsequent changes led to the process of reforms gradually. In 1991, the Indian reform process which began after a severe balance of payments crisis was given support by the World Bank and the International Monetary Fund (IMF).The focus of reforms was on the fiscal consolidation of the economy, trade and investment liberalization, and financial sector reforms. India concentrated on reforming its manufacturing sector.8 Since India’s economic reforms were launched in 1991, the Indian economy has

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sustained an annual average growth rate of over six per cent.9 From 2002, the growth rate has hovered around eight per cent, with substantial reductions in poverty. It is also stated that China and India accounted for the largest share of reducing the number of people living on US$1 a day. However, even now, a substantial share of the population live under the poverty line in both these nations. Spurred by these reforms, China and India now face new challenges on the path to further prosperity. Looking at the causality in the relationship between economic growth and energy consumption, particularly in the technology-rich and resource-hungry urban centres of growth, the following section will provide a review of the existing literature on urban and energy policies, with reference to transport and residential sectors. LITERATURE REVIEW An analysis of the integration of energy policies and urban management in the developed world reveals interesting and useful results. It is stated that, “A major factor in the expansion of central city into a sprawling metropolis has been the abundance of fossil fuels or sufficient supplies of energy to satisfy the needs and wishes of its inhabitants.”10 It was only in the 1980s that the metropolis was considered a unit of analysis in the study of energy policy of developed nations, particularly in the United States. In a research work on “Energy Policy and Urban Fiscal Management” in 1981, it was quoted that, “Not only are three-fourths of America’s households in metropolitan areas dependent upon effective fiscal responses to energy dilemmas at the urban level, but the vast majority of America’s vehicular traffic, public utility networks, industries, commercial establishments animating urban areas will also be affected by and respond to urban energy policies.”11 Also, in the United Kingdom, buildings account for over half of all energy consumed (compared with 41 per cent in the European Union and 36 per cent in the United States), and in commercial urban areas, there will be less transport energy use due to better public transport facilities; for example, only 10 per cent of commuters travel by car compared with 40 per cent of the national average. The existing literature on developed countries also reveals that various models have been promulgated in order to understand and better plan energy efficient programmes in the urban areas. A glimpse into the history of developed countries reveals that it is very important for developing countries to incorporate urban energy management into policy implementation in the wake of the shortages faced in terms of essential economic energy inputs. The geopolitics of a state or other territorially defined society means its pursuit of geographically dimensioned aims that are connected with its

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economic and political position, security, and culture. This succinctly brings out the interplay between domestic economic policies and international politics in the functioning of any country. Household consumption of energy for space heating and cooling, lighting, appliances, transportation, and other energy services is a key driver of national energy demand.12 Demographic factors such as population size, age structure, and levels of urbanization have an important role to play in the projections of national energy demand. Why is this present study important? It has been stated in the literature that, “Influence of urbanization on energy use appears to be an underdeveloped but promising avenue of research.”13 Also, international relations theories postulate the correlation between domestic and foreign policies.14 The importance of this study stems from the fact/premise that similar countries pursuing disconnected urban and energy policies tend to compete for the same scarce energy resources at the geopolitical level. Similarities in domestic and foreign policy deployment lead to a natural competition amongst countries for scarce global energy resources. Therefore, this chapter aims to trace the evolution of urban policies in China and India vis-à-vis energy conscious planning and development. The scope of the chapter has been restricted only to urban areas — mainly residential and transportation. The analysis of the domestic policies of these will lead to a better understanding of the policies of these two nations in the geopolitical context. The options for China and India on energy security will also depend on the types of domestic modernization drives and policies adopted by them. The existing plethora of literature indicates trends of conflict and cooperation in the process of achieving a stable energy security policy in China and India. This chapter aims to throw a fresh perspective on this issue by analysing the growing energy needs of both the countries vis-à-vis the domestic urban scenario. An important issue to be addressed in this context is the evolution of urban residential and transport policies and their integration with existing energy policies. This chapter also reviews current policy mechanisms aimed at the efficient use of energy and its conservation. Before delving into these issues, the next section will explain the historical background and the environment in which these emergent Asian countries are operating. RELEVANCE OF URBAN TRANSPORT AND RESIDENTIAL SECTORS IN ENERGY POLICIES The previous section of the chapter dealt with a comparative perspective on China and India, basically stressing the need for a holistic approach in analysing the relations between the two Asian economies.

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Transportation Sector Energy use in the transportation sector includes the energy consumed in moving people and goods by road, rail, air, water, and pipeline. Growth in economic activity and population growth are the main factors driving the transportation demand. The rise in industrial activity due to higher economic growth will increase the movement of raw materials and final products across the economy. Similarly, a rise in income levels will lead to a higher standard of living, thus hiking the demand for personal transport utilities. According to International Energy Outlook 2007, in the next twenty-five years, demand for petroleum and other liquid fuels is expected to increase more rapidly in the transportation sector than in any of the other end-use sectors. In the OECD countries, which are projected to remain the greatest users of energy for transportation, the transportation sector’s share of total liquids demand is projected to rise from 58 per cent in 2004 to 63 per cent in 2030.15 In the non-OECD countries, the transportation sector is projected to account for a rising share of liquids consumption, and the liquids share of transportation energy use will grow from 42 per cent in 2004 to nearly 50 per cent in 203016 (see Table 8.1). The demand for personal travel mostly due to urbanization and rising incomes will lead to higher air travel and motorization. According to World Energy Outlook 2007, the role of alternative fuels like biofuel is likely to be very minimal until the 2030s in both OECD and non-OECD countries. China and India are expected to show the largest increases among the non-OECD countries. The combined growth rate for transportation energy use in all the countries of Central and South American economies

Table 8.1 Demand for Energy in Transport Sector: OECD and Non-OECD Countries Year

OECD

Non-OECD

2004 2010 2015 2020 2025 2030

57.9 60.5 63.7 66.9 69.9 73.4

29.8 37.0 42.7 48.5 55.4 63.1

Source: International Energy Outlook, 2007.

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is projected to be similar to that in India.17 The world’s average energy use for transportation is likely to increase by 1.7 per cent per year, compared with 4.9 per cent increase in China and 3.3 per cent in India. The Chinese transportation sector’s energy consumption was 4.4 quadrillion btu in 2004 and is expected to increase to 15.5 quadrillion btu in 2030. The demand for personal air travel is on the rise, and so is the use of automobiles. But there are only 4.5 million automobiles in China compared with 130.8 million in the United States. Similarly, the Indian automobile component industry is considered to be a major driver of the Indian manufacturing sector. India has a well developed transport infrastructure network, compared with other developing countries — its road and rail networks especially have penetrated into almost all areas. The National Highways Development Programme (NHDP), which was initiated in 1998, aims to connect all the major cities, the most important link of the project being the “Golden Quadrilateral”, expected to be completed by the end of 2007. China has also introduced the “7918 network”, expected to be completed by 2020, which will link Beijing with seven main development centres. Residential Energy Use Energy use in the residential sector, which accounted for about eleven per cent of worldwide delivered energy consumption in 2004, is defined as the energy consumed by households, excluding transportation use. Worldwide, the projected increase in residential electricity demand will account for nearly sixty per cent of the growth in overall residential energy demand from 2004 through to 2030. By 2025, electricity will overtake natural gas as the world’s largest source of energy for household use.18 China and India are expected to account for more than forty per cent of the increase in residential energy use in non-OECD countries through to 2030 as their economies continue to grow rapidly over the projected period (see Figure 8.2). Apart from residential and transportation sectors, the commercial sector also plays an important role in the consumption of energy. India’s economic growth is mostly service driven, with services contributing more than fifty per cent to Gross Domestic Product. Energy consumed for services not associated with buildings, such as for traffic lights, city water, and sewer services, is also categorized as commercial sector energy use. The above section described the transport, residential, and commercial sectors’ role in the consumption of energy in both China and India. It is quite inevitable that economic growth will propel demand for energy sources. But

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Figure 8.2 Residential Energy Consumption

40 35 30 25 20 15 10 5 0

2004

2010 OECD

2015

2020

2025

2030

Non-OECD

Source: CII Newsletter, December 2000, based on a World Bank Report.

it is also possible to conserve and use energy efficiently to avoid conflicts at both the national and international levels. AN OVERVIEW OF ENERGY POLICIES IN CHINA AND INDIA According to a research by the International Energy Agency (IEA), China, South Asia, East Asia, Latin America, Africa, and West Asia will account for sixty-eight per cent of the increase in world energy demand between 1997 and 2020.19 Given this scenario, how are these countries managing their energy needs and supplies? A look at the two emerging Asian giants China and India shows they have yet to formulate a National Energy Policy. India’s current energy situation, depicted in Table 8.2, reveals that the proportion of transport, residential, and other energy uses (which will include energy used by the commercial sectors) in the total consumption was

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Table 8.2 Current Energy Situation in India 1990–91 1991–92 1992–93 1993–94 1994–95 1999–2000 Availability Gross availability Conversion loss Net availability Consumption Agriculture Industry Transport Residential Other energy uses Non-energy uses

187.6 63.0 124.6

193.8 63.2 130.7

201.4 65.1 136.4

210.6 69.8 140.8

223.2 74.5 148.6

— — —

4.9 61.9 28.0 12.6 3.9

5.6 65.9 29.3 13.1 4.0

6.1 68.5 30.6 13.7 4.1

6.8 71.0 31.6 14.3 4.4

7.7 73.9 33.4 15.4 4.6

5% 49% 22% 10% 14%

13.5

12.8

13.4

12.7

13.6

Sources: (a) Bureau of Energy Efficiency, the Government of India, and (b) The Oxford Handbook of Energy, 2003.

46 per cent in 2003. But, the per capita consumption of energy in India is one of the lowest in the world at 439 kgoe (kilogramme of oil equivalent) per person of primary energy in 2003, compared with 1,090 in China and the world average of 1,688.20 Even if the per capita consumption is low, the energy use efficiency for generating Gross Domestic Product (GDP) in terms of Purchasing Power Parity (PPP) is lower than the world average. It is stated that the energy intensity can be reduced with the help of efficient regulations and technology management. A study of India’s energy policy options, based on the Integrated Energy Policy Report21 by the Expert Committee in 2006, reveals that the broad vision includes the necessity to meet the demand for energy sources22 from all sectors and install efficient incentive-disincentive mechanisms for usage and savings.23 According to India’s energy outlook as stated in its tenth fiveyear plan, energy conservation efforts are mostly proposed to be targeted in four sectors — industry, transport, agriculture, and domestic sectors. This is mainly due to the sectoral consumption patterns as reflected in Table 8.3. It is important to note that India has not developed a coherent energy policy and the four main energy ministries act like “different countries at work”.24 India’s Central Energy Ministry was divided in 1992 into the Ministries of Coal, Petroleum and Natural Gas, Non-conventional Energy

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Table 8.3 China: Share of Total Primary Energy Supply Type Oil Gas Nuclear Hydro Coal Comb, Renewable & Waste

Share (in %) 19.3 2.6 0.8 1.9 61.7 13.7

Source: International Energy Agency Statistics, 2004.

Sources, and a separate Power Ministry. The Planning Commission and the Department of Atomic Energy also play a vital role in energy policy. It is generally felt that the lack of coordination among these institutional centres hinders effective implementation. The Fuel Policy Committee (1974), Working Group on Energy Policy (1979), and the report on Integrated Energy Policy (2006) by an expert panel led by Kirit Parikh,25 are the leading recommendations on India’s energy policy. Also, an Energy Conservation Act 2001, is being held in “abeyance” for want of awareness in energy conservation areas. The Integrated Energy Policy has made the following recommendations for India’s energy security in the long run: (a)

(b)

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Energy for Growth: The population of India is expected to reach 1.47 billion by 2031–32. In order to help millions of people living below poverty line, an estimated level of 8 per cent growth is necessary. The report states that “to fuel a sustained 8 per cent growth requires the basic capacities in the energy sector and related physical infrastructure such as rails, ports, roads and water [to] grow by factors of 3 to 7 times by 2031–32 alongside a 20-fold increase in nuclear and a 40fold increase in renewable energy”.26 Reliance on both commercial and traditional energy sources: The report also states that India’s reliance on traditional non-commercial energy sources will rise in absolute terms to 185 mtoe in 2031–32 from the current level of about 150 mtoe, despite the share of traditional sources being reduced by about 20 per cent. It is also clear from the policy recommendations that providing clean commercial fuels to households and diverting more supply to industry and power generation

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are priorities.27 It is thus important to ensure that energy-efficient mechanisms are in place for residential and transport uses, in order to divert more energy for growth generating activities. A diversified energy basket: It is projected that fossil fuels will dominate, along with coal, oil, and natural gas in the coming decades. But, with respect to domestic demand and use, renewable energy will serve as an important resource base. By 2031–32, import dependence, which will definitely fuel competition at the geopolitical level, would be about 29 per cent in the most energy-efficient scenario, and about 59 per cent in the most energy-intensive scenario.28 The report has also reiterated the fact that reducing energy intensity will definitely lower demand and will make the projected growth rate happen at lower levels of energy uses. Coal is expected to remain India’s most important energy source. The report thus states that alternative sources of energy, coupled with energyefficient and conservation methods, should be prioritized. A look at the following data will reveal a better picture of India’s current consumption scenario. The table reveals that transport and residential sectors consume about thirty-two per cent of the total available energy. As is stated in the report recommendations, if the government concentrates on ensuring efficient uses of energy in these two areas, more energy can be diverted for industries and growth-generating enterprises, without having to increase its import dependence.

Compared with India’s domestic energy policy, China has a mature policy of acquisition as well as conservation. The only similarity between China and India in terms of energy policies has been the lack of a National Energy Policy. Former Chinese Premier Deng Xiaoping stated in 1980 that, “Energy is the Priority Issue in the Economy”. Between 1980 and 2000, GDP growth quadrupled in China, helping about fifty million people out of the poverty line.29 Since the inception of economic reforms, China has progressed dramatically, driving its energy demand to a comparatively high level. It is estimated that, to quadruple its GDP, while only doubling energy between 2000 and 2020, the energy elasticity of GDP (the ratio of growth in energy use to growth in GDP) will have to reverse its current trend and remain below China’s average of the past two decades. The role of the government has been enunciated as being responsible for setting the “rules of the game” in order to align individual actors’ economic motivation with distributed public benefits articulated in its social policy.30 Figures 8.3 and 8.4 reveal the consumption and supply patterns in China’s energy sector. Coal is predominantly the main source of energy and is expected to be so

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Figure 8.3 Energy Consumption Patterns in China 50

40 Total energy consumption

EJ

30

Industry 20

Residential

10

0 1985

1990

1995

2000

Source: Annual Review of Energy, 2001.

Figure 8.4 Energy Supply Patterns in China 1200 Total electricity available for consumption

1000

Industry

GWh

800

Residential 600 400 200 0 1985

1990

1995

2000

Source: Annual Review of Energy, 2001.

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for some decades ahead. In terms of consumption, transport and residential sectors consume a fair share of the total, necessitating the need for efficient conservation and usage measures. Energy consumption in the residential sector is one of the main parts of the total consumption in China. In this study, China is divided into seven regions, according to climatic characteristics. Using statistical data, the annual consumption of electricity, coal gas, LPG, natural gas, coal, as well as energy for district heating in urban residences in different regions is analysed. The relationship between the annual energy consumption per household (UEC) and heating degree-days was examined for China, Japan, Canada, and the United States. In 1997, the average UEC for the urban areas of China is 17.2 GJ, which is about 39 per cent, 16 per cent, and 12 per cent as much as that of Japan, the United States, and Canada, respectively.31 China’s energy planning consists of five parts, namely to analyse the present situation of energy utilization in China, situation and task before energy conservation work, energy conservation guiding ideology, principles and objectives, and concentrating on safeguarding measures.32 According to various reports, the implementation of energy conservation methods has yielded substantial benefits. Calculated at the constant price in 1990, energy consumption per 10,000 Yuan GDP dropped from 5.32t standard coal in 1990 to 2.68t standard coal in 2002, a fall of 50 per cent, with the annual average energy conservation rate at 5.6 per cent.33 During the twelve years from 1991 to 2002, accumulatively 700,000,000t standard coal were saved and energy consumption at a 3.6 per cent growth rate supported the growth of the national economy at the rate of 9.7 per cent. The energy saved corresponds to an emission reduction of 10,500,000t sulphur dioxide.34 The energy conservation law of China came into effect as early as 1 January 1988. It states that “Energy conservation as mentioned in this law refers to reducing loss and waste in various energy stages from energy production to energy consumption, and using energy more efficiently and rationally by strengthening management of energy use and adopting measures which are technologically feasible, economically sound, and environmentally and socially affordable.”35 An evaluation of China’s strategy options reveals that changing the energy basket to a cleaner fuel mix by decreasing the demand for fossil fuels and coal has been given a lot of importance. Also, an important aspect to be noted is that in order to promote energy efficiency, the following strategies have been suggested, namely: elevating energy conservation to a fundamental state policy; establishing a resource savings office; raising public awareness;

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establishing economic incentives to save energy, including peak power pricing; implementing stricter energy efficiency ordinances for equipment in industry and buildings; and also introducing fuel taxes and fuel efficiency standards in the transportation sector. Therefore, a comprehensive look at China’s energy policies reveals that aggressive acquisition in terms of geopolitics seems to be balanced with sufficient energy conservation methods at the domestic sectoral level. The above section has given an overview of the energy demand and consumption patterns in both China and India. The stress for conservation techniques in the residential and transport sectors are important simply because of the percentage of energy consumed by these entities. The following section will reveal the urban policies shaped by the governments in China and India and subsequent analyses will be made on the inter-linkages between energy and urban policies. THE STATUS OF URBAN POLICIES IN CHINA AND INDIA: AN OVERVIEW The concept of urbanization is important as the growth of cities will lead to a rise in energy demand. Urban areas are centres of economic importance in any nation as they are major contributors to national income. In India, sixty per cent of total income has been sourced from urban towns and cities. Initial trend in urbanization studies in the 1980s and 1990s indicated that the phenomenon contributed to environmental sustainability in densely populated Asian countries.36 This view has been based under the assumption of efficient use of infrastructural resources and transportation. Also, this study had been conducted within the realm of global warming and biomass consumption. Biomass accounts for seventy per cent of total fuel use amongst China’s rural population. Therefore, urbanization, according to this theory, will lead to a shift in the energy consumption basket and might lead to a drop of emissions, which could reduce global warming. It is important to note that this theory has been made with the assumption that urban process warrants efficient usage of resources. But the reality on the ground could be very different. Therefore, the following section will give a detailed overview of the urbanization policies of China and India over the past few decades. This will help to compare and analyse the effects and benefits of urban policies and the importance given by them for energy efficiency and conservation. The sectoral demand for energy in any economy arises mainly from the requirements of lighting and cooking in the household sector, irrigation, and other agricultural operations in the growth sector, transport of passengers

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and freight in the transport sector, and fuel and feed stock requirements in the industrial sector.37 China and India are countries with accelerating population growth in the past decade, with India experiencing faster growth than China. India’s population growth at a rate of 0.9 per cent from 1989–2005 was double that of China’s.38 Cities in China and India have a common basket of problems to deal with in terms of energy use, pollution, transport crisis, high population growth, suburban expansion, and increasing motor vehicle ownership and use (see Table 8.4). Compared with India, China’s urban infrastructural levels are higher utility services. Almost sixty-seven per cent of households have access to gas which is used not only for cooking, but also for heating. It has also been stated that energy consumption in the residential sector is one of the main aspects of total energy consumption in China. Another important factor also mentioned is that property-led industrial development has become an important aspect of a Chinese city. Also, the private final consumption expenditure by households of fuel, water, and transport will give an important indication of the growing demand for energy-based services. Private and public consumption is one of the important indicators of the nature of any economic engine. The Statistical Handbook of China (2005) reveals that the private final consumption expenditure for China in terms of fuel, power, and transport and communication has been on the rise. In India, the proportion of fuel and light in total consumer expenditure has risen from under 6 per cent to 10 per cent in both rural and urban areas in 2004–05.39 The proportion of urban households using LPG as cooking fuel rose to 56 per cent in the first half of 2004 compared with 47 per cent in 2000–01. Among rural households, the proportion increased to 9 per cent from 7 per cent in 2000–01.The proportion of rural households using kerosene as a primary source of energy for lighting fell to 46 per cent in January–June 2004, from 48 per cent in 2000–01. In urban households, the percentage fell to 7 per cent in January–June 2004, from 9 per cent in 2000–01.40 A brief look at the urban policies in China and India would help explain the existing maturity in urban policy-making and subsequent implementation of the policies. Evolution of Urban Policy-making in India Urban Development in India is a state responsibility and the central government performs an advisory and coordinating role, apart from providing technical and financial assistance for promoting orderly urbanization. In

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1,313 2,291 3,627 5,335

China 2000 2010 2020 2030

Source: World Energy Investment Outlook, 2003.

508 831 1,310 1,961

India 2000 2010 2020 2030

Country/Fact

GDP (billion dollars)

132 142 150 154

309 354 393 429

Population Density (persons/km2)

99 100 100 100

43 52 61 70

Electrification Rate (%)

Table 8.4 China and India: Comparative Indicators

1 1 1 1

0.3 0.4 0.4 0.5

Energy/Capita (toe/capita)

0 0 0 0

77 79 64 46

Urban Population Without Electricity (million)

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1990–91, the union government formulated a policy of a twenty-point programme under the Ministry of Urban Development. But in the same analysis, there seems to be a lot of overlapping in terms of urban development and poverty alleviation policies in rural areas. For example, under the schemes, allotments of house sites and construction assistance to rural landless agricultural workers have been covered. Also, the government in 1990–91, stressed the environmental improvement of slums, rather than their massive clearance and relocation (in contrast to urbanization policies). This scheme continued through the sixth, seventh, and eighth five-year plans. An analysis of the planning, legislation, and implementation mechanism of the urban development policies reveals a haphazard picture vis-à-vis the entire sector. The plans show signs of consistency, with more issues being added as and when the structure of the political economy warrants them. The addition of the role of cities as wealth creators in the course of the seventh and eighth plans enunciates the same. Despite the fact that India is comprised of many states with unique local endowments and attributes, an evident feature of all the plans has been the lack of regional cooperation within a national framework to avoid ad hoc planning and implementation by separate entities. This calls for the need to expedite the progress of the National Urban Policy. The top-down approach has also been recommended in the Ninth Plan, with calls for plans to be formulated by the centre on the basis of feedback from the states. Common operational problems such as the unavailability of funds, which has specifically brought about the problem of decentralization, also deserve attention. Wastage of funds is also evident through the multiplicity of programmes targeted at the same group with no proper linkages amongst them (Ninth Plan report). Therefore, a national policy to guide and complement state policies is the need of the hour. It is also important to note that a draft of the National Urban Transport Policy has been designed with the objective “to ensure safe, affordable, quick, comfortable, reliable and sustainable access for the growing number of city residents to jobs, education, recreation and such other needs within our cities”.41 Another initiative by the Department of Economic Affairs, Ministry of Finance, Government of India, and the Asian Development Bank has led to a report titled “Facilitating Public-Private Partnership for accelerated infrastructural development in India”, which stresses the importance of enhanced private participation in rural and urban infrastructure. The National Urban Policy proposes to address problems relating to urban infrastructural deficiencies by giving special emphasis to the housing sector, water supply and sanitation, municipal solid waste management,

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and urban transport. It also proposes to reduce urban poverty by increasing investment in poverty alleviation programmes, development of employment generation strategy, and by trying to integrate poor communities into city planning by improving access to services and land rights.42 China’s Urban Planning and Evolution Compared with those in India, China’s urban development indicators are at a higher level, in terms of utilization of resources and also the planning and implementation process. China’s urbanization rate is about 43 per cent or 560 million people. In the next ten to fifteen years, its urbanization rate is expected to increase to 50 per cent.43 According to World Bank suggestions for China’s eleventh five-year plan, the country needs to enhance its resource utilization mechanism, particularly energy and water. In China, urban planning is done at four levels, the national, regional, city, and the borough levels. The State Council of the People’s Republic of China (PRC), the Ministry of Construction, the Ministry of Land and Resources, and then the Urban Planning Bureau at the city and the borough levels. Only the city of Shanghai is directly under the State Council. Basically, the plans formulated at the national and regional levels will be implemented by the respective departments of the Ministries of Construction and Resources. Also to be noted is that the word “Master Plan”44 in Chinese refers to an overall allocation plan and not an urban design document. “Urban System Plan”45 defines the size and functions of urban settlements for both big cities and rural areas as well as their relationship with one another. In China, urban areas are developing more specialized forms on many scales, resembling a western oriented pattern of development to include the following features:46 • • • • • • •

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The formation of central business districts through the large-scale addition of office buildings in the city centre. The development of residential districts, often on the urban fringes. The reduction of residential densities. The relocation of manufacturing and industrial firms from city centre to the suburbs. Targeted development zones, new sub-centres and foreign enclaves. The separation of commercial, retail, and social spaces from residential ones. The restoration of some historical districts.

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URBAN AND ENERGY ECONOMIES: VITAL LINKAGES The urban centre as a unit of analysis in energy policy is gradually gaining importance. The above sections have delineated the energy and urban polices in both China and India, and have also given an overview of the consumption and conservation patterns adopted in their domestic economies. Keeping this in mind, this final part of the chapter will analyse the reasons and factors involved in the effects of urban residential and transport sectors and why they have to be studied under the purview of energy policies and the conservation mechanisms in place. The energy saving potential in the urban residential and transport sectors were estimated at about 20 per cent each (see Table 8.5) for India in 2000, and about 28 per cent and 20 per cent for China in 2003 (see Table 8.6). With advances in energy efficient technology and effective conservation policies, the savings potential for energy in these two sectors is immense. The

Table 8.5 Energy Saving Potential in India Sector/Industry

Potential (%)

Domestic & Commerical Transport Agriculture Industries Iron and Steel

20 20 30 25 10

Source: CII Newsletter, December 2000, based on a World Bank Report.

Table 8.6 Energy Saving Potential in China Sector

Potential (%)

Industry Primary Energy Consumption Final Energy Consumption Household Transport

25 26 26 28 20

Source: IEEJ, October 2003.

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governments of both these countries have embarked on a few energy efficient and conservation policy mechanisms in the past few years. In India, a few energy conservation policies have been proposed. The Energy Conservation Building Code for the construction sector was introduced, which basically sets out targets for minimum energy performance standards for the design and construction of non-residential buildings. It has also established a Bureau of Energy Efficiency with representations from the Ministries of Power, Coal, Petroleum and Natural Gas, Non-conventional Energy Sources, Renewable Energy and Atomic Energy. This Bureau was formed as a part of the Energy Conservation Act in 2001.47 This has been targeted at industrial and commercial consumers of energy. Also, the Ministry of Power, Government of India, has stated that nearly 25,000 MW of capacity creation through energy efficiency in the electricity sector alone has been estimated. In India, the Standards and Labelling (S&L) programme has been identified as one of the key activities for energy efficiency improvements. The S&L programme when in place would ensure that only energy efficient equipment and appliances would be made available to the consumers. Initially the equipment to be covered under the S&L programme are household refrigerators, air-conditioners, water heaters, electric motors, agriculture pump sets, electric lamps and fixtures, industrial fans and blowers, and air-compressors. Preliminary discussions have already taken place with manufacturers of refrigerators, air conditioners, agricultural pump sets, motors, etc., regarding the procedure for fixing labels and setting standards for minimum energy consumption. An amendment to the constitution, referred to as the 74th amendment in terms of higher decentralization of power to the municipal bodies in India has also not reflected an initiation towards energy management efforts. Subsequently, the ninth and the tenth plans identified the development of urban areas as “economically efficient, socially equitable and environmentally sustainable entities”. This provides a slight indication of the incorporation of environmental-conscious planning. In spite of having formulated two national housing policies, the central government is yet to configure general national energy and urban policies respectively for the country as a whole. The conservation efforts were initiated a decade back, but have not been substantially implemented. This has been “due to the lack of adequate focus on institutional arrangements to devise suitable incentives and disincentives backed by statutory power of enforcement”. But here, an integration of this conservation policy with the Ministry of Urban Development and the transport sectors might prove to be beneficial, considering the decentralized functioning of the latter.

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At present, the energy consumption of heating per unit of building area in China corresponds to two to three times that in developed countries with similar climatic conditions. Experts have analysed that, it is practical and feasible to execute a 50 per cent energy-saving standard comprehensively for public buildings and residential buildings in China. Compared with developed countries, it will still have a 50 per cent energy-saving potential even though the objective of 50 per cent energy conservation is achieved. The main reason for the low energy-utilization efficiency in China is its extensive economic growth, irrational structure, backward technical equipment, and low management level. Despite all the problems involved, China accounts for one-fourth of the reduction in the world energy intensity.48 It has introduced very strong policies on energy efficiency and conservation, with a few commonalities with India in terms of an Energy Conservation Building Code, a Standards and Labelling Programme to ensure supply and use of energy efficient equipment to be made available to consumers. Most importantly, the pioneering role of governments in initiating energy efficient and conservation methods has been stressed in both countries. A few examples from other countries in terms of energy conservation methods give a very optimistic picture in this regard. In the United States, Canada, Australia, New Zealand, Malaysia, Germany, and Taiwan, the practice of “Green Buildings” is followed as set by their Environment Protection Agencies. In the United States, the Leadership in Environment and Environmental Design (LEED) that has been enacted through law is expected to help save 20 per cent on energy cost and 20 per cent reduction in water costs.49 Through this law, the State of Seattle alone has achieved about 35 per cent reduction in energy demand.50 In Barcelona, new buildings are not given approval unless 60 per cent of the heating is from solar power. Similar rules are in place in the United Kingdom and Denmark. Another important initiative in the conservation sector has been the introduction of Compact Fluorescent Lamps (CFL) in many countries. It is estimated that 110 million American households can save enough energy to power a city of 1.5 million people by switching to CFL lamps. The Indian State of Rajasthan has introduced this scheme in the public sector. More recently, the Indian government has announced similar plans. The law of large numbers will play an important role in energy conservation, especially in the household sector. South Korea, Japan, Australia, and Mexico have stringent norms for the procurement of electrical and electronic appliances, most importantly by the local governments. A significant example in terms of urban decentralization and energy efficiency can be studied in Bulgaria where the local bodies have been participating effectively in helping to

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improve energy efficiency standards. This can be used to study India and China’s decentralized urban system and how energy policies can be filtered through the devolved channels. Conclusion The chapter has focused on the urban residential and transport sectors and the presence of energy policies in these two high energy-consuming sectors. The relationship between energy consumption and economic growth has been the prime focus of economists and policy-makers since the 1990s. The main focus of this relationship has been the question: “Does economic growth stimulate consumption of energy or can energy consumption be a stimulus for economic growth via the indirect channel of effective aggregate demand, improved overall efficiency and technological progress?” 51 The causality running from income to energy consumption implied that energy conservation policies may be initiated without deteriorating economic side effects. In terms of economic growth, changes in economic structure also greatly influence energy intensities. It is stated that services require seven times less energy inputs per unit of value added compared with industries.52 But the electricity intensity in the service sector is increasing, especially in less industrialized countries where the service sector is contributing a higher share to the economic income. This aspect is important when comparing ChinaIndia relations as India’s future projections are mostly service and IT driven, compared with China’s strong manufacturing base. But, both these countries have given utmost importance to the automobile sector as a driver of manufacturing growth. This is an important source of concern that will give rise to the conflict between economic growth, energy efficiency, and environmental protection. Therefore, energy planning for urban use has to be given utmost importance as cities are the drivers of economic growth in many developing countries. The priority to use public transport has been stressed in India’s National Urban Transport Policy. While responsibility for the management of urban areas rests with the state governments, a national policy has been called for due to the multiplicity of institutional structures, including transport, housing, poverty, planning and also to generate a balanced growth in all urban centres. Another factor which has to be given due priority is the energy consumption and usage by the government sector, especially in terms of street lighting and provision of other basic services. Data to this end have been very

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limited or even non-existent. If energy-efficient methods are carried out by the government, then they can be effectively trickled down to the people. To conclude, it is essential to view energy security also from the consumption point of view. There is potential for improvement in terms of energy usage, for both sub-sectors. If efficient energy is consumed in residential and transport sectors, the conserved energy can be diverted to economically viable ventures in the industrial or services sector. This can help keep the economic momentum in these fast growing economies. Also, the reduced cost of energy for consumers, governments, and others alike can help allocate finances to other ventures. Most importantly, efficient energy consumption will definitely reflect on geopolitics. It can be regarded as a Confidence Building Measure (CBM), whereby in the areas of procurement at the geopolitical level, it can be used as a bargaining factor to acquire more energy. Effective mechanisms in place to consume and conserve energy at the domestic level will definitely have its ramifications in the international context. To conclude, as depicted in Figure 8.5, efficient energy consumption can lead to better utilization of resources and a higher growth. Figure 8.5 The Virtuous Cycle

Economic Growth, Urbanization and Population Increase

Resources can be diverted to other ventures

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Increase in Demand

Energy conservation can lead to better utilization of resources and higher growth

Leads to acquisition and procurement of scarce resources — Importance of govt policies

Conservation method reduction in costs

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NOTES 1

2

3

4

5

7 8 9

10

11 12

13 14

15

16 17 18 19

20

21 22

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Erik Gartzke and Michael W. Simon, “‘Hot Hand’: A Critical Analysis of Enduring Rivalries”, The Journal of Politics, vol. 61, no. 3 (August 1999): 777–98. Baldev raj Nayyar and T.V. Paul, India in the World Order: Searching for Major Power Status (Cambridge: Cambridge University Press, 2003), p. 27. Yuan Jing-Dong Yuan, “India’s Rise after Pokhran II — Chinese Analyses and Assessments”, Asian Survey, vol. XLI (November/December 2001): 979. Gillian Goh Hui Lynn, “China and India: Towards Greater Cooperation and Challenge” . Sudip Ranjan Basu, “Comparing China and India: Is Dividend of Economic Reforms Polarized?”, HEI Working Paper no. 01/2007, United Nations Conference on Trade and Development and Graduate Institute of International Studies 6 . . . . Lenneal J. Henderson, “Energy Policy and Urban Fiscal Management”, Public Administration Review, vol. 41, Special Issue: The Impact of Resource Scarcity on Urban Public Finance (January 1981): 158–64. Ibid., p. 158. Brian C. O’Neill and Belinda S. Chen, “Demographic Determinants of Household Energy Use in the United States”, Population and Development Review, vol. 28, Supplement: Population and Environment: Methods of Analysis (2002): 53–88. Ibid., p. 60. Robert D. Putnam, “Diplomacy and Domestic Politics: The Logic of Two-level Games”, International Organization 42 (Summer 1988): 3. International Energy Outlook 2007 . Ibid. Ibid. International Energy Outlook . “Household Energy Consumption in the Asia Pacific Region” . Integrated Energy Policy: Report of the Expert Committee 2006, The Planning Commission, Government of India, p. 2. Planning Commission, Government of India. Obtained from the Integrated Energy Policy: Report of the Export Committee 2006. Planning Commission, Government of India. .

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The expert panel was appointed by the Planning Commission of India and the panel came up with a report titled, “Integrated Energy Policy”, 2006. Integrated Energy Policy, Planning Commission, Government of India. Ibid. Ibid. Evaluation of China’s Energy Strategy Options, China Sustainable Energy Programme, p. 3. Ibid., p. 4. . From China’s Eleventh Five-Year Plan. . Ibid., p. 4. . Leiwen Jiang and Brian O’Neill, “Economic Growth, Population, and Residential Energy Consumption in China” . India’s Eighth Five-Year Plan. John Pucher, et al., “Urban Transport Trends and Policies in China and India: Impacts of Rapid Economic Growth”. . . Ministry of Urban Development, Government of India. Reply to the Lok Sabha Unstarred Question no. 3290 by The Minister of State for Urban Development and Poverty Alleviation, Shri Rajagopal, 10 December 2002. “Urbanization and the Eleventh Five Year Plan”, China Urban Development Quarterly, Issue 1, 2006 . . Ibid. Bryn Sadownik, “Sustainable Energy and Urban Form in China: The Relevance of Community Energy Management”, School of Resource and Environmental Management, Simon Fraser University, 1998. ; . “Energy Efficiency: A World Wide Review”, Synopsis, published by the World Energy Council. Ahmad Rafay Alam, “Towards Energy Efficient Urban Areas”, The News, 10 August 2007 . Ibid.

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Sustainable_energy_policies_clean_air_india.pdf. ; ; and . Ibid., World Energy Council, p. 6.

REFERENCES Banerjee P. Bani. Energy and the Environment in India. New Delhi: Oxford University Press, 2005. Basu, Sudip Ranjan. “Comparing China and India: Is Dividend of Economic Reforms Polarized?”. HEI Working Paper, no. 1, United Nations Conference on Trade and Development and Graduate Institute of International Studies, 2007. Economic Analysis Division. World Energy Investment Outlook. Paris: International Energy Agency, 2003. Energy in Developing Countries: A Sectoral Analysis. Belgium: International Energy Agency and OECD, 1994. Energy Working Group. APEC Energy Handbook 2004. Singapore: The Energy Data and Modelling Center and the Institute of Energy Economics, Japan, for AsiaPacific Economic Cooperation, 2006. Gartzke, Erik and Michael W. Simon. “‘Hot Hand’: A Critical Analysis of Enduring Rivalries”. The Journal of Politics, vol. 61, no. 3 (August 1999): 777–98. Ghosh, Sajal. “Sustainable Energy Policies for Clean Air in India”. The Atlantic Council of USA and the Confederation of Indian Industries . Henderson, J. Lenneal. “Energy Policy and Urban Fiscal Management”. Public Administration Review, vol. 41, Special Issue: The Impact of Resource Scarcity on Urban Public Finance (January 1981): 158–64. Jiang, Leiwen and Brian O’Neill. Economic Growth, Population and Residential Energy Consumption in China. Paper presented at the XXV International Population Conference by the International Union of the Scientific Study of Population (July 2005) . Lynn, Gillian Goh Hui. “China and India: Towards Greater Cooperation and Challenge” . Mahadevia, Darshini. “Urban Infrastructure Financing and Delivery in China and India”. China and World Economy, vol. 14, no. 2 (2006): 105–20. Nayyar, Baldev raj and T.V. Paul. India in the World Order: Searching for Major Power Status. Cambridge: Cambridge University Press, 2003. O’Neill, C. Brian C. and Belinda S. Chen. “Demographic Determinants of Household Energy Use in the United States”. Population and Development Review, vol. 28, Supplement: Population and Environment: Methods of Analysis (2002): 53–88.

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