How A Thirst For Energy Led To A Thaw

On the sidelines at the U.N. General Assembly meetings in New York last September, Indian Prime Minister Manmohan Singh and Pakistani President Pervez Musharraf held an historic meeting in which they agreed to seriously negotiate on economic cooperation. One tangible expression of that cooperation would be a 2,700-kilometer natural-gas pipeline from southern Iran to Rajasthan in central India, with Pakistan allowing the pipe to pass through its territory in exchange for a yearly transit fee of as much as $330 million, plus some of the gas for its own use.

Funny how a thirst for energy can make the oldest of foes suddenly eager to cooperate. As India's economy undergoes a dramatic expansion, it finds itself desperate for new supplies of oil, gas, and electricity. And diplomacy -- even with fierce rival Pakistan -- is one way of getting them. Indeed, India is conducting petroleum diplomacy throughout the region and beyond. In October, Burmese head of state General Than Shwe visited India following a deal with Indian oil major Oil & Natural Gas Corp. (ONGC) that would open up Burma to oil and gas exploration. And India is negotiating with Bangladesh to buy some of its gas and to allow the Burmese pipeline to pass through its territory.

According to India's Planning Commission, India needs to triple its power generation over the next two decades to feed its fast-growing technology and manufacturing industries. Beyond that, it needs lots of oil and gas for its autos and household cooking needs. But India is even shorter on energy resources than neighboring China. It imports 73% of its oil, largely from the Middle East, spending about $21 billion a year, or 4% of its gross domestic product. Those imports will only increase: Research by Bombay's Strategic Foresight Group predicts that by 2030, 90% of India's oil and gas will be imported. So India is reaching out to its neighbors. "Finally, India has recognized the need to engage in larger energy diplomacy," says Leena Srivastava, director of the Energy & Resources Institute (TERI), an energy think tank in New Delhi.

Leading the charge to find new oil and gas supplies is ONGC, with $11 billion in annual revenues. Through subsidiary ONGC Videsh Ltd., the government has been scouring the world, acquiring stakes in existing oil fields, and securing the rights into the future. The strategy is to go to oil-rich countries where U.S. companies cannot go or to developing nations with which India has long-standing diplomatic ties. Thus, since 2001, ONGC Videsh has spent an estimated $11 billion investing in 14 oil and natural gas projects in Sudan, Russia, Vietnam, Iran, Iraq, and Burma.

Everywhere it goes looking for petroleum, India is shadowed by China. It is sometimes outbid for oil concessions by China's three largest oil companies, which have more money to spend. So the Indian government is now starting to use its diplomatic clout. While bidding for a 20%, $1.7 billion share in Sakhalin I, an offshore oil and natural gas field, in 2001, New Delhi exploited its 50-year-old diplomatic alliance with Russia to win the deal.

If good diplomacy makes good economics, it works the other way, too. The "peace pipeline" that is to run from Iran through Pakistan will cost billions but is expected to save India $300 million a year in energy transport costs. Pakistan will get its transit fee, a share of the pipeline gas, plus the right to buy diesel fuel from India. Mean-while, India also wants to trade Indian power for Bangladeshi gas, an energy swap that could serve to relieve border tensions. And Nepal has extra hydroelectric energy it could sell to its neighbors. The implications of the various proposed energy deals are vast, since they will connect South Asia to new road and power grids in Southeast Asia. "Once roads, an electricity grid, and a natural-gas pipeline are linked, India will be a welcome addition to ASEAN," says TERI's Srivastava, referring to the Association of Southeast Asian Nations. "It will really open up Asia."

Skeptics doubt that the energy linkups will do more than paper over long-standing enmities. Still, in India's case, neither the government nor the business Establishment is willing to let a shortage of energy curb the country's rise as an economic power. So whatever geopolitical obstacles may get in the way, the diplomacy of energy will continue.

By Manjeet Kripalani in Bombay

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