ENERGY is the fuel that drives the economy and makes possible the annual growth rates essential for ensuring economic development. Most of the world’s energy comes from hydrocarbons (oil and gas) which account for 65% of the world’s energy requirements. While oil accounts for 42% in the global energy mix, the other sources of global energy are coal (24%), natural gas (22%), nuclear energy (6%) and renewable and non-conventional sources (7%). World energy demand increased by 95% over the last 30 years and is expected to rise by 60% over the next 20 years. During this period the demand for oil will increase by 42% while the demand for gas will increase by 97%.

In recent years the most significant development in the consumption of hydrocarbon fuels is the anticipated increase in Asian demand. In fact, there has been a consistent increase over the last few decades: between 1970-94, Asian energy demand increased by 400%, with demand for oil increasing by 274%; world demand growth during this period was only 63%. Now, Asian requirement of oil is expected to increase from 30 million barrels per day currently to 130 million barrels per day in 2020.

The bulk of this increase will be accounted for by China and India, together responsible for 35% in the world’s incremental consumption of energy. China’s consumption has been increasing at the rate of 5% per annum. A country which was self-sufficient in hydrocarbons till 1993, will be importing 40% of its requirements by 2010; ten years later, in 2020, its consumption of oil will be 9.5 million barrels per day, with import dependency rising to over 60%. Today, China is the world’s second largest energy consumer, while India ranks sixth.

Let us now take a look at the supply side. World oil reserves are estimated at 1.35 trillion barrels; they are 2.3 trillion barrels if oil sands and shales are taken into account. The Persian Gulf provides the bulk of the world’s oil: just five countries of the Gulf (Saudi Arabia, Iraq, Iran, Kuwait and the UAE) have about 70% of the world’s reserves. By 2020, this region will produce 55.5 million barrels per day, a two-and-a-half times increase over 1991. The share of Gulf oil exports in world export will increase from 42% in 1995 to 59% in 2020. Not surprisingly, world dependence on Gulf oil is likely to increase significantly. This is particularly true in respect of Asia. Asian countries already depend upon the Gulf for 75-80% of their requirements. China, which sourced 53% of its oil from the Gulf in 2000, will obtain 80% in 2010.

The other significant sources of international oil are the Caspian Sea region and Western and Central Africa. The Caspian region came to international attention in the context of hydrocarbons only after the break-up of the Soviet Union. In the early 1990s, US reports had dramatically suggested that the Caspian basin reserves were around 200 billion barrels and that with appropriate investment and exploitation, this region could even rival the Gulf. However, as the 1990s progressed, more mode-rate assessments emerged. The IEA suggests that proven Caspian oil reserves are between 15-40 billion barrels, while possible reserves are between 70-150 billion barrels. Thus, this region is not expected to provide production beyond 5% of world demand in 2020.

Similarly, Sub-Saharan Africa, with Nigeria as the traditional producer and with new discoveries in Angola, Sudan, Ivory Coast, Chad, Equatorial Guinea and Ghana, accounts for 12% of world production but has just 8.3% of world reserves. Sub-Saharan output is expected to increase from 3.8 million barrels per day to 6.8 million barrels per day in 2008, and to 9 million barrels per day in 2030.

 

Natural gas, being a ‘clean’ fuel, is increasingly seen as the fuel of the 21st century. Between 1980 and 2003, the share of gas in the world energy mix rose from 18% to 22%. The demand for gas is expected to increase at 2.4% per annum till 2020, when it will constitute 25% of the world energy mix and consolidate its position as the number two fuel in the world’s energy mix. Since 1980, proven world gas reserves have increased at 3.6% per annum, with volume tripling from 77 trillion cm to 179 trillion cm in 2004.

The location of gas is more diversified than oil: OPEC has 50% of world reserves (as against 75% of oil); the FSU states have 32% of world reserves (against 10% of oil), while the OECD has 10% of gas against 7% of oil. Three-fourths of world reserves are in Russia, Central Asia and the Gulf. The principal gas producers today are Russia, Iran and Qatar. Qatar had begun investments in LNG facilities over ten years back and is presently reaping the benefits as the world’s major supplier of LNG. However, the principal supplier to Western Europe is Russia, which provides gas through transnational pipelines. Russia is already the largest supplier of gas to Europe; by 2030, it will meet 50% of Europe’s needs.

 

On the supply side, the prognosis relating to gas is quite comfortable: present resources can meet current demand for 60 years. With new discoveries, reserves could meet demand for 150 years at present rates of consumption. According to industry forecasts, international trade in natural gas is expected to increase significantly in the coming years, accounting for one-third of world output, reaching 1.35 trillion cm per year by 2020. This increased trade will cover both LNG and piped gas. International trade in LNG is expected to grow by 7% p.a. till it becomes 38% of gas trade by 2020. The USA is expected to emerge as a major buyer of LNG, with terminal capacity reaching 140 billion cu metres after the completion of 10 new terminals. Piped gas carried by trans-national pipelines will grow to become 50% of international trade by 2020.

The problem pertaining to gas is not with the reserves; it has to do with the need for fresh investments over the medium-term to develop new fields, albeit in the traditional areas where production in the old fields is declining. It is estimated that investments of about $1-1.2 trillion would be required over the next 10 years to develop the potential to meet global requirements.

Given the importance of hydrocarbons for the economic development and prosperity of nations, oil is obviously more than just a chemical product: it is an international commodity which affects and is affected by international politics. It is therefore not surprising that the stronger nations of the world, through their companies, have attempted to dominate the exploration, production, transportation and refining of oil. Indeed, in global politics over the last 60 years, control over oil has been a significant factor in determining the political and military positions of the major producer and consumer countries of the world. Some instances are examined in the following paragraphs.

 

The territorial boundaries of Iraq are the result of oil. Having secured control over Mesopotamia under the League of Nations mandate, the British had initially planned to take over only the Basra and Baghdad provinces of the old Ottoman empire since this gave them control over the land and sea routes to India. However, the northern province of Mosul was hurriedly added once oil was discovered in that region, the accession being formalised at the 1920 San Remo Conference.

It is not surprising that Iraq, with the world’s second largest oil reserves (11% of world reserves), should find itself in the vortex of post-Cold War politics. Francisco Parra, the international authority on oil politics, has pointed out that the Gulf War of 1990 was perhaps the world’s first oil war. It originated from a quarrel between Iraq and Kuwait over oil rights at their border. Then, Iraq’s occupation of Kuwait gave the former control over 20% of the world’s total oil reserves. Finally, the undoing of this oil-related situation was the principal motive force behind the US-led war to compel Iraq to vacate its occupation of Kuwait.

The current situation relating to Iraq, i.e., the war of 2003, regime-change, and continued US military occupation of the country, is the result of a complex web of US political and strategic interests in West Asia in which oil is a dominant factor. The neo-conservatives (neocons) agenda for West Asia, now dominant in the US Administration, aims at promoting ‘a renaissance based on democracy and economic freedom’ to wean the Arab people, particularly the youth, from the bane of Islam-based extremism and violence.

 

The idealistic grand design of the neocons coincides with the position of the more traditional Republicans for the attainment of US interests in West Asia with regard to control over Gulf oil. This is based on the following considerations:

1. The strategic importance of the Persian Gulf is likely to grow significantly in the next 20 years in view of its oil reserves. With supplies in many other regions, especially the United States and the North Sea, nearly exhausted, oil from Saudi Arabia and Iraq will become ever more critical. By 2020, the Gulf, with increases in production capacity in Saudi Arabia and Iraq, will supply between 54% and 67% of the world’s crude, making the region vital to US interests.

2. US strategists are not worried primarily about America’s own oil supplies: for decades, the United States has worked to diversify its sources of oil with Venezuela, Nigeria, Mexico, and other countries growing in importance. But, for Western Europe and Japan, as well as the developing industrial powers of eastern Asia, the Gulf is all-important. Thus, whoever controls it will maintain crucial global leverage for decades to come. As a US commentator has frankly concluded: ‘Controlling Iraq is about oil as power rather than oil as fuel. Control over the Persian Gulf translates into control over Europe, Japan, and China. It’s having our hand on the spigot.’

 

The 60 year old strategic partnership between Saudi Arabia and the United States has been based on the fact that the Desert Kingdom has the world’s largest oil reserves (25%). In this partnership the United States was required to provide security to the kingdom, and the kingdom on its part was expected to maintain steady oil supplies to meet the substantial US crude requirements.

For most of this period, the relationship has worked for mutual benefit. The kingdom and led by it, OPEC, have maintained steady supplies of oil in the market. Specifically, Saudi Arabia has regularly intervened in the oil market to maintain supplies at times of crises such as the Iran-Iraq war, the Iraqi occupation of Kuwait, the period following 9/11 and, more recently, the US-led war on Iraq in 2003. Even during periods of high oil prices caused by real and imagined international anxieties, the Saudi kingdom has played an effective role as a swing producer in stabilizing supplies and prices.

The events of September 11 posed the first serious challenge to the Saudi-US relationship even as the neocons and other anti-Saudi elements in the US establishment seized the opportunity to malign the kingdom and question its status as the US’s strategic partner and friend. However, the logic of ‘oil politics’ has ensured that the relationship would not only survive the serious challenge posed by 9/11, but appears to be asserting the enduring value of its underpinnings based on the kingdom’s unique status in the world of oil.

Despite its relatively modest potential, the Caspian region continues to be of enduring value to the West as an alternative source of supply with considerable untapped potential. US policy in Central Asia is aimed at isolating Iran, limiting Russian influence in the region, and bringing this region within its sphere of influence. Towards this end, since the early 1990s the US has pursued a robust policy of engagement with the newly independent Central Asian republics. Over the last five years, US total investment in the region has reached $30 billion, buttressed by a significant military presence. The Baku-Tblisi-Ceyhan (BTC) pipeline set up in adverse political, financial and environmental conditions, is an enduring example of the success of this effort.

 

The United States has also actively supported the Turkmenistan-Afghanistan-Pakistan pipeline aimed at bringing Turkmenistan gas to Pakistan and possibly India. The United States supported this project even when Afghanistan was in the throes of civil war and its territory was dominated by the marauding Taliban. Later, with the departure of the US energy company, Unocal, from the scene, the lead role in promoting this project has been taken over by the Asian Development Bank. This project is likely to have more geopolitical and economic complications than the BTC project since doubts have been raised not only about the gas reserves at the Daulatabad field in Turkmenistan but also the possible legal commitment of these reserves to the Russian company Gazprom.

However, the US is not the sole role-player in this region: EU countries, China and India are also in pursuit of their interests as they seek to diversify their energy sources. Iran, with a long border along the Caspian Sea, is also active in the region as it seeks to negotiate the best share for itself of the Caspian Sea reserves.

 

The Hydrocarbon Vision 2025, published by the Government of India in February 2000, set out in stark terms India’s energy security predicament: its crude oil self-sufficiency declined from 63% in 1989-90 to 30% in 2000-01. The situation is only likely to get worse in the future: India’s demand for oil is expected to increase from 122 million tonnes in 2001-02 to 196 million tonnes in 2011-12, and 364 million tonnes in 2024-25. Domestic production during this period would increase from 26 million tonnes to 52 million tonnes in 2011-12, and to 80 million tonnes in 2024-25. In 2024-25, crude oil self-sufficiency would be a mere 15%. The situation relating to gas is equally grim.

In response to this negative scenario for India’s energy security, the Vision 2025 document has set out an elaborate action plan for the acquisition of hydrocarbon resources required by the country to meet its economic requirements. It provides for a robust effort to expand domestic production of oil and gas through the liberalization of the oil sector, encouragement to the entry of private Indian and foreign companies, investments in technology and R&D, and so on.

An important component of this effort is the external dimension which is made up of the following: (i) acquisition of assets abroad: this consists of two approaches: (a) acquiring equity participation in developed fields, and (b) obtaining exploration and production (E&P) contracts in different parts of the world; (ii) entering into long-term LNG supply contracts; (iii) pursuing transnational gas pipeline proposals ; and (iv) promoting partnerships with foreign entities in the downstream sector, both in India and abroad.

India has been pursuing this strategy over the last few years. These efforts have acquired a sharper impetus in the last year and a half, with Petroleum Minister Mani Shankar Aiyar attaching the highest importance to robust foreign engagement across the hydrocarbon value chain from Alberta to Australia.

The Indian hydrocarbon strategy has already begun to yield some positive results. We have a 25% equity participation in a producing field in Sudan, which provides India with three million tonnes of oil per annum. We have also secured E&P contracts in Sakhalin (Russia), Vietnam, Iran, Myanmar, and Cuba. Alongside these successes, have also been well publicized setbacks when our companies failed to acquire assets in Angola, Ecuador and Kazakhstan.

 

It is important to point out that India’s external hydrocarbon strategy is being implemented in a highly competitive international environment which is made up of international and national oil majors contending vigorously for assets in the few new areas in which they are available, i.e., in the Caspian, in Western and Central Africa, and in some parts of Latin America, while consolidating their presence in the Gulf. Again, this effort is currently being mounted in an oil market that has seen prices reach new heights, in turn generating a frenzied environment, with international companies offering billions of dollars for assets that have acquired an enhanced and even undue value because of the high oil prices.

The scramble for oil resources poses a unique challenge to Indian oil diplomacy in that it requires us to explore new engagements or, alternatively, to imbue traditional political relationships with a new, hydrocarbon-related value. Taking into account the geopolitical situation and the competitive edge that informs the global hydrocarbon scenario, some of the major challenges to Indian oil diplomacy are examined in the following paragraphs.

 

Clearly, the Persian Gulf region has and will continue to occupy a central position in India’s quest for energy security. However, the hydrocarbon resources of this region will be sought by not just India but also by other Asian and even European countries. The USA too will import a substantial portion of its requirements from the Gulf, even though it has been attempting to diversify its resources to Latin America, Africa and Europe.

The Gulf region has unfortunately been in the vortex of considerable instability and insecurity for more than 25 years, witnessing the eight-year long Iran-Iraq war in the 1980s; the first Gulf war in 1991; the prolonged period of sanctions, no-fly zones and inspections against Iraq all through the 1990s; and, finally, the fallout of September 11 and the US-led war on Iraq in 2003. Despite this environment of instability and violence, the region has generally been able to maintain the oil and gas supplies required by the world. However, from a geopolitical perspective, we cannot ignore the possibility of large scale violence which could seriously disrupt supplies. This also raises questions relating not only to the security of the hydrocarbon facilities and the regimes that control them but also the safety of maritime carriers and the freedom of the sea lanes, particularly the Straits of Hormuz, the Suez Canal and Bab-al-Mandab.

Hence, even though the Gulf will continue to be our principal supplier of hydrocarbon resources, prudent energy security policies require that sources of supply be diversified. In this context, it is noteworthy that Nigeria has now emerged as the number two supplier of oil to India, though these supplies are based on spot purchases rather than term contracts as is the case with supplies from the Gulf. On these lines, India is also actively looking for assets both in terms of equity participation and E&P contracts in Central Asia, West and Central Africa and Latin America. We have had some modest success in acquiring stakes in blocks in Nigeria, and are pursuing proposals in Angola, Kazakhstan, Cuba and Venezuela.

India is also an active player in the LNG market. So far, two agreements for supply of five million tonnes of LNG have been finalized with Qatar and Iran. However, given India’s huge requirements and proposals to set up additional LNG terminals along both the West and East coasts, India has already conveyed its need for increased supplies to both these countries and to other suppliers.

 

Transnational oil and gas pipelines are not only able to transport large quantities of hydrocarbons across hundreds, and even thousands of kilometres but, given their reach and range and the terrain they traverse, they also have significant geopolitical implications and even the ability to influence bilateral relationships and regional cooperation scenarios. The Baku-Tblisi-Ceyhan (BTC) pipeline seems to be a manifestation of US attempts to exclude Russia and Iran from the Central Asian hydrocarbon calculus. However, this policy is unlikely to succeed over the medium-term as Central Asia will seek to reach the lucrative markets of Asia through pipelines across Russia and Iran.

Kazakhstan on its part has already indicated its interest in utilizing its hydrocarbon potential to firm up engagements with all its neighbours: if it has appeased the Americans by participating with its oil in the BTC pipeline, it has also participated with the Russians in the Aktau-Novorossisk pipeline, and with the Chinese in the 2000 km long Kaza-khstan-China pipeline, currently under construction. The outlet for Kazakh oil to the Persian Gulf, through Iran, was the first project considered by the Kazakhs, in the late 1990s, and had to be put on the backburner under US influence. There are indications that this project could be revived as a gas pipeline project to take advantage of the huge market for Kazakh gas in South Asia.

 

Pipelines have had certain curious implications for India’s quest to diversify its sources. Thus, the BTC pipeline aimed at carrying Caspian oil to Europe has also raised the possibility of Caspian oil being shipped to India from Ceyhan, either through the Suez Canal (in case of small shipments) or through the newly revived Ashkelon-Eilat pipeline in Israel which, through an arrangement of double shipment from Ceyhan to Ashkelon and then from Eilat by crude carrier to India, has for the first time made Caspian oil available to India.

In case the plan for a sub-sea pipeline from Ceyhan to Israel via Turkish Cyprus was realized, then India and other Asian countries would be able to obtain Caspian oil at Eilat on the Red Sea. Similarly, if the proposed pipeline from Alexandria to the Red Sea were to be implemented, India would be able to obtain access to oil from North Africa, particularly Algeria and Libya, which today can reach India only by going round most of the African continent.

In order to meet its gas requirements, India is vigorously pursuing gas pipeline projects both on its eastern and western land frontiers. The Iran-Pakistan-India pipeline is expected to bring to India nearly 90 mmcmd of gas which will be utilized to fuel power and fertilizer projects in North and North Western India. In the East, the Myanmar-Bangladesh-India pipeline will not only bring Myanmar gas, but would also possibly carry Tripura gas to India, and Bangladesh gas from its eastern part where it is produced to the western part where it is required.

 

India has also agreed to participate in the Turkmenistan-Afghanistan-Pakistan pipeline, initially as an observer. Taking into account concerns relating to Turkmenistan reserves at Daulatabad, India proposes to suggest to participating countries that Daulatabad be seen not just as the sole source of gas in the project but as the junction to which gas from neighbouring countries, such as Uzbekistan, Kazakhstan, Azerbaijan and, possibly, Russia could be injected.

All these pipeline proposals, being transnational in character and involving neighbouring countries with complex histories in terms of bilateral relations, are fraught with political and security related problems that would need to be addressed. If these projects are to be realised, we must first accept that they are extremely important, indeed critical, for India’s energy security interests. Once this is understood, international best practice can readily yield arrangements that would be put in place in regard to all aspects of the projects – technical, financial, commercial and legal, that would serve to insulate the projects from the vagaries of day-to-day politics and provide the desired level of comfort to our policy-makers.

As noted above, the contemporary international hydrocarbon environment is highly competitive, pitting corporations and nations against each other in ruthless contention. It involves billions of dollars of financial flows and, on occasion, even extra-legal skulduggery. At the same time, this is also a period of unprecedented opportunity, with high oil prices opening up exploration and production prospects and compelling producer and consumer countries to pursue investments in the downstream sector. India’s long term interests lie in putting together alliances and partnerships that would bring together different capabilities in joint proposals.

Minister Aiyar, over the last year, has engaged across the globe carrying the message of partnership and synergy in place of wasteful and unnecessary contention. Some of his more significant interactions have been with Russia; the Central Asian countries of Kazakhstan, Uzbekistan and Azerbaijan; and Turkey and Romania, that constitute a link between Central Asia and Europe. He and other officials have also engaged with Norway, Nigeria, Angola, some Latin American countries, and most recently, China. These diplomatic engagements have confirmed that the countries concerned are anxious to cooperate and that they see in India a worthy partner, given its human, capital and technical capabilities.

 

The proposed cooperation ranges across the hydrocarbon value chain, and includes prospecting in each other’s territories as also exchange of R&D, technology, safety norms and training. Beyond the bilateral aspect, it includes the possibility of Indian and foreign national companies working together on specific projects in third countries, particularly in the Gulf, the Caspian, Africa and Latin America.

These proposed engagements involve refreshing traditional relationships with a new hydrocarbon-related content such as the proposed links with Russia and Romania; or replacing old suspicions with the new building blocks of cooperation, understanding and friendship with countries such as Pakistan, Bangladesh and China. It also has the potential of expanding India’s diplomatic penetration across continents to new areas such as Norway, Latin America and countries of North and West Africa that have traditionally been at the margins of India’s diplomatic consciousness, and imbuing them with a new importance and urgency.

 

In recent years, oil-related think-tanks have engaged in a debate on whether supply of hydrocarbons has ‘peaked’ so that the next few years will see a steady decline in supplies, with consequent implications for prices, economic development programmes and heightened political contentions. However, the emerging view is that hydrocarbon resources to meet demand over the next 30-50 years are available. Historically, though pre-dictions of ‘peak oil’ have been made from time to time, global production has regularly increased to meet demand. As Daniel Yergin has pointed out, new technologies have made it possible for oil companies to find new sources of oil and extract oil from old sources. According to a survey released by him recently, between 2004-2010 world oil supplies will increase by 16 million barrels a day, well over the likely demand increase.

However, there is no room for complacency since new oil will be available in physically challenging areas such as the deep sea or frozen terrain or environmentally sensitive locations. Again, it will require rather huge investments for its extraction, amounting cumulatively to about $5 trillion up to 2030, at the rate of $20 billion per annum.

Meeting the global demand for oil and obtaining the financial resources to ensure supplies requires the rejection of political contentions based on narrow national considerations. Instead, we need an integrated global effort pooling together the world’s human, financial and technological resources to explore and develop these difficult and sensitive areas in a spirit of cooperation based on considerations of mutual benefit.

India took the first significant step in promoting cooperation at the regional level by convening a Round Table in New Delhi in January 2005 of the four principal Asian oil-consuming countries – China, Japan, Republic of Korea and India – getting into dialogue with the principal oil-producing countries of West Asia and South East Asia. The eleven assembled ministers agreed on the importance of this first dialogue between Asian consumers and producers and, in a consensual statement, identified substantial commonality of interest as also areas of cooperation. They also recognized that, for the interests of the Asian consumers and producers to be pursued effectively, the knowledge-base of Asian countries would have to be expanded even as they develop policies and programmes linked to promoting crisscross investments in each others’ hydrocarbon sectors as also in the areas of conservation and efficiency and environment protection.

 

This regional dialogue has thrown up a number of specific areas for cooperation. These include reform of the Asian oil markets, promotion of crisscross investments in hydrocarbons between producers and consumers, development of strategic reserves, development of the Asian gas pipeline grid, development and transfer of R&D and technology, and development of capabilities to promote energy conservation and efficiency and environment-friendly fuels. The ministers have agreed to meet annually to pursue their consensual plan of action.

Separately, in order to complement the earlier Round Table, India has now taken the initiative to bring together the four principal Asian oil-consuming countries in dialogue with oil-producers of North and Central Asia, including Russia, Kazakhstan, Uzbekistan, Azerbaijan, Turkmenistan and Turkey, in November 2005.

There is now a slow but steady acceptance that national energy security interests are best served by pursuing policies of cooperation so that energy resources can be efficiently harnessed for regional and global development. The oil market is already integrating in significant ways: there is a clear trend in favour of oil companies integrating across the hydrocarbon value-chain – from exploration to production to transportation, to refining and to petrochemicals. E&P proposals in producer countries are increasingly being linked to refinery proposals and, on occasion, to other infrastructure development proposals such as roads, railways, mining, and port development projects. Hurricane Katrina, by damaging US facilities across the entire supply system in the region, has redefined energy security to mean, as Yergin has noted, ‘the security and integrity of the whole supply chain and infrastructure from production to consumer.’ Above all, the surge in global demand for hydrocarbons represents, again in Yergin’s words, ‘the success of globalization – the best global economic performance in a generation.’

The challenge before India is to understand the impact of these myriad developments and effect the required adjustments in our politics and policies and, above all, in our mindset, so that we can effectively respond to and participate in these global trends.

 

* The view expressed in the article are personal.