09-03-2006, 02:03 PM
The new great game - I
Energy security is the new driver of world power politics. Part 1 of a three-part series.
By Sudha Mahalingam
Since the advent of the âhydrocarbon manâ, energy interests have dominated foreign policies of nations. In todayâs frenzied world, where worries over âpeak oilâ prices have assumed paranoid proportions, energy security concerns decisively shape foreign policies of virtually all oil-importing nations. More than most, India, with its acute energy vulnerability, and a dogged and recalcitrant energy-intensive growth paradigm, needs to dovetail its foreign policies to its energy interests.
Energy intensity & vulnerability
Despite the abundance of coal in the eastern states, India has begun importing coal. The poor quality of Indian coal coupled with transportation bottlenecks has made coal imports inevitable.
But the countryâs import-dependence and consequent vulnerability is most acute for oil. We import three out of every four barrels of crude we consume, and pay a whopping $30 billion annually at current prices. That is a very acute degree of import-dependence, worse than that of the US, whose import dependence is around fifty two per cent. (In absolute terms, the US dependence on energy imports is much higher, almost six times as much as ours.)
Even compared to China, which imports almost as much as we do in absolute quantities, India is much more vulnerable, since China imports only a third of its consumption. Indiaâs oil consumption outpaces its GDP growth, and India will soon be importing more than ninety per cent of its crude requirements in a few years. Only two countries in the world, Japan and South Korea, are more vulnerable.
In a globalised world, does such huge import dependence really constitute acute vulnerability? After all, arenât global energy markets, in particular, crude markets, well evolved? Oil is a fungible commodity, and there is a vibrant global market complete with hedging and futures trading, so why worry? Besides, oil-exporting countries have huge stakes in keeping the importers well supplied because their own economies are undiversified and heavily reliant on revenues from this single resource.
Convincing as these arguments appear, there are still reasons to feel vulnerable. Price spikes and price volatility are constant bugbears that importing countries, especially poor developing nations who have better uses for their foreign exchange, routinely wrestle with. Volatility in itself is a source of vulnerability, but things are getting much worse.
Geologists and oil scientists are now convinced that peak oil is nigh. For some years now, there are fewer new oil finds than those we deplete. Thus, there is an alarming downward sloping reserves-to-production ratio. New finds are in remoter regions, which are environmentally sensitive, as in the Arctic National Wildlife Reserve, or in conflict-prone zones, such as Angola or sub-Saharan Africa. Worse, they are difficult to produce, like shale oil or tar sands, which have to be squeezed to extract oil, instead of just pumping out from wells.
New oil sources, therefore, can never replace conventional ready oil. And ready oil is fast depleting. Naturally, there will be a scramble to access the remaining conventional oil sources. Nations will fashion foreign policies to ensure that they get their share of conventional oil â to the very last drop â before they are forced to countenance costlier new sources.
Natural gas, touted to be the fuel of this century, is less whimsical in its distribution. But even so, more than two thirds of it is concentrated in the same regions which also enjoy an abundance of oil, Russia with thirty two per cent, and the Arab Gulf states with thirty nine per cent of global gas reserves. Most countries have to import gas, either through pipelines or in the form of LNG, making them vulnerable, both to terrorist attacks on pipelines or interruption of supplies engineered by geopolitical considerations. Gas is not as fungible as oil. LNG now supplies only five per cent of global consumption and pipelines are the preferred mode of transportation. This makes gas a regional resource, vulnerable to regional geopolitics.
You might argue that countries can wean themselves away from hydrocarbons and turn to newer energy sources, such as nuclear power or hydrogen fuels cells. They are trying, but it is not easy. Hydrogen fuel cells are held out to be the hope for a cleaner future. But hydrogen itself can be produced only from two sources, fossil fuels, notably natural gas, and water. Hydrogen produced from natural gas wonât reduce dependence on fossil fuels even by a fraction. And to split water to produce hydrogen and oxygen, you need electricity, which needs to be produced from either fossil fuels or nuclear reactors. Thus you come the full circle.
Nuclear energy, whether to split water for hydrogen fuel cell or for direct use, is too expensive and controversial. Besides, hydrogen fuel cell technology is still evolving and storing sequestered hydrogen remains a problem. Being a recent technology, it will be years before developing countries can afford it. Apart from Iceland, Australia runs a few fuel-cell buses, at prohibitive cost.
On the other hand, replacing liquid fuels with gas-based transportation would defeat the objective to reduce fuel import-dependence and the attendant energy vulnerability. In India, we already import a third of the gas we consume, in the form of LNG from Qatar. This import-dependence will continue, despite the new gas finds in offshore Godavari basin. There is a huge demand for gas from fuel-starved industries, so India will import even greater quantities of gas, in the form of LNG, and hopefully, through pipelines as well, providing regional geopolitics allows it.
Whatever we do, we will continue to require conventional crude to at least run transportation for the next quarter century, if not more. And replacing personalised transportation with mass transport systems wonât be easy. The Delhi Metro still does not reach everywhere in the National Capital Region. Reducing energy-intensity, especially oil-intensity, is easier said than done. And it keeps our energy vulnerability as acute as ever.
To be continued...
Sudha Mahalingam, an energy security expert, is Senior Fellow at the Nehru Memorial Museum & Library.
The new great game - II
By Sudha Mahalingam
Diversification options
How does an import-dependent developing country reduce its energy vulnerability? By diversifying sources of supply. Even a strategic petroleum reserve can last three months at the most, but much less usually. The United States and Saudi Arabia, the leader of OPEC, enjoyed an unparalleled relationship until the last century. US troops guarded Saudi oil installations. Yet, in 2001, the US decided to diversify its sources of supply.
Bushâs energy policy of May 2001, four months before 9/ 11, advocated diversification. Post 9/ 11, US troops in Saudi Arabia pulled out and regrouped in Central Asia and elsewhere. The terror premium in todayâs oil price is as high as $10-12 a barrel. The US is now supplied mainly by Canada, Mexico, Venezuela (despite an anti-US regime) and Western Africa. Even Russian oil is being considered, for which a port will be built in the Barents Sea for shipment to Alaska, and thence to the west coast.
Now, the US gets less than thirty per cent of its imports (and less than fifteen per cent of its total consumption) from the Middle East-GCC (Gulf Cooperation Council) countries. The recently cleared US energy bill expands on diversification. It authorises drilling in pristine Arctic reserves. That the US, which consumes as much as twenty two million barrels a day, more than a quarter of the daily global oil consumption, managed to minimise its dependence on the GCC, is in itself a significant achievement. When the Arctic begins to yield oil, the US will depend even less on GCC imports.
Europe started out more fortunate. North Sea oil had already taken it away from excessive dependence on the Middle East. The disintegration of the Soviet Union and the subsequent rise of the Russian petrostate in Europeâs backyard could not have come too soon, since North Sea has already peaked and is depleting. Russia is pumping oil at a furious pace. With just about five per cent of global oil reserves, Russia finds it profitable to supply twelve per cent of global consumption.
The energy industry now contributes a quarter of Russiaâs GDP, half of its export income, and a third of its tax revenues. This is the key to president Vladimir Putinâs battle with Yukos. Control of the energy industry is critical to control of the Russian state itself. Putin wisely embarked upon consolidation of markets as well. The existing pipeline and port infrastructure serves Europe, the Baltic and Black Sea terminals, the Caspian Pipeline Consortium, the Baltic pipeline system, and the Bluestream pipeline that runs under the Black Sea connecting Russia to Turkey. In a matter of just four, five years, Russia has emerged as the prime energy supplier for Europe. And it is beefing up its pipeline and port infrastructure, building more terminals and new pipelines.
Europeâs growing dependence on Russian gas imports was evident in the recent spat between Russia and Ukraine over gas transit, which caused temporary stoppage of supplies. As winter temperatures dipped, tempers soared, until the dispute was resolved and gas supplies resumed. Europe has succeeded to a large extent in diversifying its source of supply away from the Arab countries, even if it means over-dependence on Russia.
Closer home, how does China ensure its energy security? China is the new energy guzzler, its GDP is growing at 9.5 per cent and its oil consumption at 7.5 per cent, and it will soon become the second largest energy consumer in the world, bested only by the US. Like India, China sources most of its oil from the GCC. The supply route takes it through the congested Straits of Malacca.
But in recent years, China has been aggressively acquiring oil acreages in remote corners of the world, as far away as Venezuela and Mexico. It is setting up a strategic petroleum reserve, reforming its oil industry, using diplomatic, political and strategic initiatives to promote its energy interests. And it has not forgotten to diversify.
China will be able to access oil from Angarsk in Russia from where a pipeline is being constructed all the way to the Pacific coast, possibly via Daqing, Chinaâs Bombay High. China, South Korea and Japan will also access gas from fields in Russiaâs Far East, Siberiaâs Kovykta and Sakhalin. Besides, Chinaâs own west-east pipeline will carry gas from the western province of Xinjiang all the way to its main consumption centre, Shanghai. The recently launched oil pipeline from Kazakhstan to Xinjiang will also reduce Chinaâs excessive reliance on GCC, at least for meeting its incremental demand.
For all the countries in Asia, the Caspian region offers another source of supply diversification. The Caspian has at least as much oil as North Sea, and plenty of gas. The Paris-based International Energy Agency thinks the region has about forty billion barrels of oil at a minimum, and may even be up to one hundred and fifty billion barrels. The elephant fields of Tengiz, Kashagan and Karachaganak are producing far below their capacity for want of evacuation infrastructure. No wonder, the US hurriedly built the Baku-Tbilisi-Ceyhan pipeline at enormous cost not to be left out of the great oil game being played out in the Caspian.
To be continued...
Sudha Mahalingam, an energy security expert, is Senior Fellow at the Nehru Memorial Museum & Library.
The new great game - III
By Sudha Mahalingam
The tyranny of geography
But India has few alternatives, because of the tyranny of geography, and diversification possibilities are limited. It is not on the global oil map, and it wonât be, despite the recent discoveries in Rajasthan. Nor is it near to the regions where oil veins are, except the Persian Gulf. Venezuela, Columbia, Mexico, Trinidad & Tobago, Nigeria, Angola, Ivory Coast, Sudan, Libya, Algeria, Egypt, Mauritania, Kazakhstan, Turkmenistan, Uzbekistan, Russia, the Russian Far East, Sakhalin, and so on, are too distant from the Indian sub-continent to make physical shipment of oil commercially viable. Transportation cost becomes critical when oil prices are already high. Naturally, then, India gets sixty eight per cent of its imports from the GCC region. Some quantities of oil do come from Nigeria and Sudan, but they can never supplant Gulf supplies.
The landlocked Caspian in our extended neighbourhood affords some possibility for oil and gas. Mighty mountain ranges such as the Pamir, Karakoram and the Hindukush could make way for oil or gas pipelines, but geopolitical differences are enormous. Caspian oil or gas would have to traverse Afghanistan and Pakistan, one is unstable, and the other is unfriendly.
The only other route for accessing Caspian energy would be through Iran. There is a proposal to build a pipeline from Neka terminal in the southern shores of the Caspian up to Chah Bahar outside the Straits of Hormuz. If Kazakhstan loads oil on tankers and sends it to the southern shores of the Caspian, it can flow right up to the Persian Gulf, from where it could be shipped to us. But this would not amount to diversification of supply sources. They would still be anchored in the Persian Gulf.
Geopolitics is queering our eastern pitch as well. Bangladesh is playing dog in the manger. It cannot afford to buy its own gas being produced by Shell and Unocal because it is contracted to purchase it at exorbitant prices linked to the Japanese crude cocktail basket. At the same time, it wonât allow the MNCs to export the gas to India. It wonât allow us to even pipe gas from Myanmar through its territory. Already, thereâs talk of sending the gas eastward to Thailand and other markets. Geopolitics and geography have confounded Indiaâs energy security plans.
Which brings to my original point, our foreign policy must dovetail with our energy interests. We need to acknowledge our unique geographical and geopolitical location, which puts most of our energy eggs into the same GCC basket. Our foreign policy must address this imperative. Fortunately, there is emerging mutual interdependence between the GCC states and India.
Most of the GCC countries are single-resource economies, heavily dependent on energy exports to sustain their standard of living. They have a huge interest in continued access to stable markets, markets that wonât be poached by new oil and gas producers. And India, with its geographical proximity, and its burgeoning economy, is a perfect fit to this.
Sudha Mahalingam, an energy security expert, is Senior Fellow at the Nehru Memorial Museum & Library.
Energy security is the new driver of world power politics. Part 1 of a three-part series.
By Sudha Mahalingam
Since the advent of the âhydrocarbon manâ, energy interests have dominated foreign policies of nations. In todayâs frenzied world, where worries over âpeak oilâ prices have assumed paranoid proportions, energy security concerns decisively shape foreign policies of virtually all oil-importing nations. More than most, India, with its acute energy vulnerability, and a dogged and recalcitrant energy-intensive growth paradigm, needs to dovetail its foreign policies to its energy interests.
Energy intensity & vulnerability
Despite the abundance of coal in the eastern states, India has begun importing coal. The poor quality of Indian coal coupled with transportation bottlenecks has made coal imports inevitable.
But the countryâs import-dependence and consequent vulnerability is most acute for oil. We import three out of every four barrels of crude we consume, and pay a whopping $30 billion annually at current prices. That is a very acute degree of import-dependence, worse than that of the US, whose import dependence is around fifty two per cent. (In absolute terms, the US dependence on energy imports is much higher, almost six times as much as ours.)
Even compared to China, which imports almost as much as we do in absolute quantities, India is much more vulnerable, since China imports only a third of its consumption. Indiaâs oil consumption outpaces its GDP growth, and India will soon be importing more than ninety per cent of its crude requirements in a few years. Only two countries in the world, Japan and South Korea, are more vulnerable.
In a globalised world, does such huge import dependence really constitute acute vulnerability? After all, arenât global energy markets, in particular, crude markets, well evolved? Oil is a fungible commodity, and there is a vibrant global market complete with hedging and futures trading, so why worry? Besides, oil-exporting countries have huge stakes in keeping the importers well supplied because their own economies are undiversified and heavily reliant on revenues from this single resource.
Convincing as these arguments appear, there are still reasons to feel vulnerable. Price spikes and price volatility are constant bugbears that importing countries, especially poor developing nations who have better uses for their foreign exchange, routinely wrestle with. Volatility in itself is a source of vulnerability, but things are getting much worse.
Geologists and oil scientists are now convinced that peak oil is nigh. For some years now, there are fewer new oil finds than those we deplete. Thus, there is an alarming downward sloping reserves-to-production ratio. New finds are in remoter regions, which are environmentally sensitive, as in the Arctic National Wildlife Reserve, or in conflict-prone zones, such as Angola or sub-Saharan Africa. Worse, they are difficult to produce, like shale oil or tar sands, which have to be squeezed to extract oil, instead of just pumping out from wells.
New oil sources, therefore, can never replace conventional ready oil. And ready oil is fast depleting. Naturally, there will be a scramble to access the remaining conventional oil sources. Nations will fashion foreign policies to ensure that they get their share of conventional oil â to the very last drop â before they are forced to countenance costlier new sources.
Natural gas, touted to be the fuel of this century, is less whimsical in its distribution. But even so, more than two thirds of it is concentrated in the same regions which also enjoy an abundance of oil, Russia with thirty two per cent, and the Arab Gulf states with thirty nine per cent of global gas reserves. Most countries have to import gas, either through pipelines or in the form of LNG, making them vulnerable, both to terrorist attacks on pipelines or interruption of supplies engineered by geopolitical considerations. Gas is not as fungible as oil. LNG now supplies only five per cent of global consumption and pipelines are the preferred mode of transportation. This makes gas a regional resource, vulnerable to regional geopolitics.
You might argue that countries can wean themselves away from hydrocarbons and turn to newer energy sources, such as nuclear power or hydrogen fuels cells. They are trying, but it is not easy. Hydrogen fuel cells are held out to be the hope for a cleaner future. But hydrogen itself can be produced only from two sources, fossil fuels, notably natural gas, and water. Hydrogen produced from natural gas wonât reduce dependence on fossil fuels even by a fraction. And to split water to produce hydrogen and oxygen, you need electricity, which needs to be produced from either fossil fuels or nuclear reactors. Thus you come the full circle.
Nuclear energy, whether to split water for hydrogen fuel cell or for direct use, is too expensive and controversial. Besides, hydrogen fuel cell technology is still evolving and storing sequestered hydrogen remains a problem. Being a recent technology, it will be years before developing countries can afford it. Apart from Iceland, Australia runs a few fuel-cell buses, at prohibitive cost.
On the other hand, replacing liquid fuels with gas-based transportation would defeat the objective to reduce fuel import-dependence and the attendant energy vulnerability. In India, we already import a third of the gas we consume, in the form of LNG from Qatar. This import-dependence will continue, despite the new gas finds in offshore Godavari basin. There is a huge demand for gas from fuel-starved industries, so India will import even greater quantities of gas, in the form of LNG, and hopefully, through pipelines as well, providing regional geopolitics allows it.
Whatever we do, we will continue to require conventional crude to at least run transportation for the next quarter century, if not more. And replacing personalised transportation with mass transport systems wonât be easy. The Delhi Metro still does not reach everywhere in the National Capital Region. Reducing energy-intensity, especially oil-intensity, is easier said than done. And it keeps our energy vulnerability as acute as ever.
To be continued...
Sudha Mahalingam, an energy security expert, is Senior Fellow at the Nehru Memorial Museum & Library.
The new great game - II
By Sudha Mahalingam
Diversification options
How does an import-dependent developing country reduce its energy vulnerability? By diversifying sources of supply. Even a strategic petroleum reserve can last three months at the most, but much less usually. The United States and Saudi Arabia, the leader of OPEC, enjoyed an unparalleled relationship until the last century. US troops guarded Saudi oil installations. Yet, in 2001, the US decided to diversify its sources of supply.
Bushâs energy policy of May 2001, four months before 9/ 11, advocated diversification. Post 9/ 11, US troops in Saudi Arabia pulled out and regrouped in Central Asia and elsewhere. The terror premium in todayâs oil price is as high as $10-12 a barrel. The US is now supplied mainly by Canada, Mexico, Venezuela (despite an anti-US regime) and Western Africa. Even Russian oil is being considered, for which a port will be built in the Barents Sea for shipment to Alaska, and thence to the west coast.
Now, the US gets less than thirty per cent of its imports (and less than fifteen per cent of its total consumption) from the Middle East-GCC (Gulf Cooperation Council) countries. The recently cleared US energy bill expands on diversification. It authorises drilling in pristine Arctic reserves. That the US, which consumes as much as twenty two million barrels a day, more than a quarter of the daily global oil consumption, managed to minimise its dependence on the GCC, is in itself a significant achievement. When the Arctic begins to yield oil, the US will depend even less on GCC imports.
Europe started out more fortunate. North Sea oil had already taken it away from excessive dependence on the Middle East. The disintegration of the Soviet Union and the subsequent rise of the Russian petrostate in Europeâs backyard could not have come too soon, since North Sea has already peaked and is depleting. Russia is pumping oil at a furious pace. With just about five per cent of global oil reserves, Russia finds it profitable to supply twelve per cent of global consumption.
The energy industry now contributes a quarter of Russiaâs GDP, half of its export income, and a third of its tax revenues. This is the key to president Vladimir Putinâs battle with Yukos. Control of the energy industry is critical to control of the Russian state itself. Putin wisely embarked upon consolidation of markets as well. The existing pipeline and port infrastructure serves Europe, the Baltic and Black Sea terminals, the Caspian Pipeline Consortium, the Baltic pipeline system, and the Bluestream pipeline that runs under the Black Sea connecting Russia to Turkey. In a matter of just four, five years, Russia has emerged as the prime energy supplier for Europe. And it is beefing up its pipeline and port infrastructure, building more terminals and new pipelines.
Europeâs growing dependence on Russian gas imports was evident in the recent spat between Russia and Ukraine over gas transit, which caused temporary stoppage of supplies. As winter temperatures dipped, tempers soared, until the dispute was resolved and gas supplies resumed. Europe has succeeded to a large extent in diversifying its source of supply away from the Arab countries, even if it means over-dependence on Russia.
Closer home, how does China ensure its energy security? China is the new energy guzzler, its GDP is growing at 9.5 per cent and its oil consumption at 7.5 per cent, and it will soon become the second largest energy consumer in the world, bested only by the US. Like India, China sources most of its oil from the GCC. The supply route takes it through the congested Straits of Malacca.
But in recent years, China has been aggressively acquiring oil acreages in remote corners of the world, as far away as Venezuela and Mexico. It is setting up a strategic petroleum reserve, reforming its oil industry, using diplomatic, political and strategic initiatives to promote its energy interests. And it has not forgotten to diversify.
China will be able to access oil from Angarsk in Russia from where a pipeline is being constructed all the way to the Pacific coast, possibly via Daqing, Chinaâs Bombay High. China, South Korea and Japan will also access gas from fields in Russiaâs Far East, Siberiaâs Kovykta and Sakhalin. Besides, Chinaâs own west-east pipeline will carry gas from the western province of Xinjiang all the way to its main consumption centre, Shanghai. The recently launched oil pipeline from Kazakhstan to Xinjiang will also reduce Chinaâs excessive reliance on GCC, at least for meeting its incremental demand.
For all the countries in Asia, the Caspian region offers another source of supply diversification. The Caspian has at least as much oil as North Sea, and plenty of gas. The Paris-based International Energy Agency thinks the region has about forty billion barrels of oil at a minimum, and may even be up to one hundred and fifty billion barrels. The elephant fields of Tengiz, Kashagan and Karachaganak are producing far below their capacity for want of evacuation infrastructure. No wonder, the US hurriedly built the Baku-Tbilisi-Ceyhan pipeline at enormous cost not to be left out of the great oil game being played out in the Caspian.
To be continued...
Sudha Mahalingam, an energy security expert, is Senior Fellow at the Nehru Memorial Museum & Library.
The new great game - III
By Sudha Mahalingam
The tyranny of geography
But India has few alternatives, because of the tyranny of geography, and diversification possibilities are limited. It is not on the global oil map, and it wonât be, despite the recent discoveries in Rajasthan. Nor is it near to the regions where oil veins are, except the Persian Gulf. Venezuela, Columbia, Mexico, Trinidad & Tobago, Nigeria, Angola, Ivory Coast, Sudan, Libya, Algeria, Egypt, Mauritania, Kazakhstan, Turkmenistan, Uzbekistan, Russia, the Russian Far East, Sakhalin, and so on, are too distant from the Indian sub-continent to make physical shipment of oil commercially viable. Transportation cost becomes critical when oil prices are already high. Naturally, then, India gets sixty eight per cent of its imports from the GCC region. Some quantities of oil do come from Nigeria and Sudan, but they can never supplant Gulf supplies.
The landlocked Caspian in our extended neighbourhood affords some possibility for oil and gas. Mighty mountain ranges such as the Pamir, Karakoram and the Hindukush could make way for oil or gas pipelines, but geopolitical differences are enormous. Caspian oil or gas would have to traverse Afghanistan and Pakistan, one is unstable, and the other is unfriendly.
The only other route for accessing Caspian energy would be through Iran. There is a proposal to build a pipeline from Neka terminal in the southern shores of the Caspian up to Chah Bahar outside the Straits of Hormuz. If Kazakhstan loads oil on tankers and sends it to the southern shores of the Caspian, it can flow right up to the Persian Gulf, from where it could be shipped to us. But this would not amount to diversification of supply sources. They would still be anchored in the Persian Gulf.
Geopolitics is queering our eastern pitch as well. Bangladesh is playing dog in the manger. It cannot afford to buy its own gas being produced by Shell and Unocal because it is contracted to purchase it at exorbitant prices linked to the Japanese crude cocktail basket. At the same time, it wonât allow the MNCs to export the gas to India. It wonât allow us to even pipe gas from Myanmar through its territory. Already, thereâs talk of sending the gas eastward to Thailand and other markets. Geopolitics and geography have confounded Indiaâs energy security plans.
Which brings to my original point, our foreign policy must dovetail with our energy interests. We need to acknowledge our unique geographical and geopolitical location, which puts most of our energy eggs into the same GCC basket. Our foreign policy must address this imperative. Fortunately, there is emerging mutual interdependence between the GCC states and India.
Most of the GCC countries are single-resource economies, heavily dependent on energy exports to sustain their standard of living. They have a huge interest in continued access to stable markets, markets that wonât be poached by new oil and gas producers. And India, with its geographical proximity, and its burgeoning economy, is a perfect fit to this.
Sudha Mahalingam, an energy security expert, is Senior Fellow at the Nehru Memorial Museum & Library.