India And China: Oil-Patch Partners?

It's one of Asia's most intense rivalries. With their fast-growing economies and soaring demand for energy, both India and China have been desperate to lock in long-term oil supplies in recent years. The oil majors of the two nations have spent billions bidding to invest in oil fields in places as far-flung as Angola, Burma, and Russia. "India and China are competing in the same sandbox. It creates a lot of tension," says Gal Luft, executive director of the Institute for the Analysis of Global Security in Washington.

"Historic meeting"

But now there could be a new twist in this intensifying competition. Indian Petroleum Minister Mani Shankar Aiyar wants to boost energy cooperation in Asia, including with China. On Jan. 6 he hosted oil ministers from China, Japan, and South Korea -- as well as eight OPEC producers -- to discuss creating a loosely named "Organization for Oil Importing Countries" to ensure a stable, equitably priced energy supply for Asia. By teaming up, Aiyar figures, China, India, South Korea, and Japan can cut a better price deal from OPEC producers. He also wants to attract more investment. "It was a historic meeting that could influence geopolitical roles," says Ivo Bozon, Amsterdam-based chief of the global oil and gas practice at McKinsey & Co. "If these [Asian] countries collaborate and influence the Arab nations on energy, they will be a formidable new energy bloc," adds Wenran Jiang, a political scientist who follows Asian energy at the University of Alberta in Edmonton, Canada.

Aiyar's oil diplomacy may reflect a broader rapprochement in India-China relations, which have long been strained by border disputes and Beijing's military backing of Pakistan. In recent years, India-China trade has enjoyed double-digit growth and is now close to $13 billion. On Jan. 24 officials from both governments met in New Delhi to begin a strategic dialogue on issues ranging from terrorism to energy. And Chinese Premier Wen Jiabao plans to visit India in March. "It is the first time in five decades that New Delhi and Beijing find relations so cozy," says Zhu Feng, professor at Beijing University's School of International Studies.

Growing thirst

Some energy cooperation is already under way. China and India work together in Sudan, where China National Petroleum Corp. operates Sudan's Greater Nile oil field. India's Oil & Natural Gas Co. (ONGC) bought a 25% stake in the field in 2002. In Russia, ONGC is interested in a 20% stake in Yugansk, the unit of oil giant Yukos that was recently renationalized by state-owned Rosneft. China may lend Rosneft $6 billion in exchange for a long-term oil contract. Aiyar would also like Chinese oil companies to invest in India and for pipelines to connect the countries. In addition, India is considering pipeline projects with countries such as Iran, Pakistan, Burma, and Bangladesh. "We need to build a truly Asian oil market," he says.

One way or another, Asia's oil thirst will grow. India imports more than 70% of its oil. China imports about 40%. That number could grow to 75% by 2025, the U.S. Energy Dept. estimates. China and India can compete for oil in a new version of the Great Game -- or they can break the rules of power politics and step up cooperation. That would be startling indeed.

By Manjeet Kripalani in Bombay, with Dexter Roberts in Beijing and Jason Bush in Moscow

Edited by Rose Brady

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