governance, political economy, institutional development and economic regulation

Give Us Energy Mr. Putin

coalfire

(photo credit: http://www.smithsonianmag.com)

India has negligible resources of oil and gas in the context of our future needs and from the perspective of the currently available extraction technology. Oil markets are liquid and sufficiently deep not to worry about oil availability so long as one has the USD to purchase it with. Oil, gas and petroleum product imports account for around one half of our exports. This could be worrisome in an environment of export pessimism. But expectations of enhanced competitiveness do not align with such pessimism.

If 25% of our energy needs are to be met by gas-one of the cleanest fossil fuels- we will have to ramp up our gas imports. Today 10 GW of power capacity is stranded because of shortage of gas supply. Households still cook on wood, charcoal or kerosene because domestic gas supply is constrained by availability.

Gas, has a very shallow and illiquid international market. Whilst 67% of the oil produced is traded only 30% of the gas produced is traded internationally. The bulk of gas trades are settled by gas being piped to the customer. Liquefied Natural Gas (LNG) – the option to piped supply of gas- accounts for less than one third of total gas trade (exports).

India is poorly situated to avail of piped gas from Qatar, Iran, Turkmenistan,  Russia or Australia-who control more than 50% of world gas reserves. Sub-sea pipelines account for a marginal amount of gas trades across oceans due to the higher costs and associated technological challenges. The real option till 2025 is LNG import.

Enter Russia: President Putin could be the White Knight meeting India’s LNG demand. Of course selling gas to India is propitious. The post Ukraine sanctions are hurting Russia and it needs to have reliable, long term arrangements for selling gas and oil. India is not a party to the sanctions and it is in its self-interest to focus on energy as what it wants from Russia during the Modi-Putin talks in New Delhi this week.

Russia hasn’t exactly been sitting on its hands to counter the US sanctions. It has already mended fences with China with whom it has concluded oil and gas supply deal. More generally it is leaning towards China, as a natural partner, in the global clustering against the US led set of allies. It would like to induct Iran and India as partners in this grouping.

India is a marginal player in this “great game”. It would be a complete mistake to barter our acceptability to all sides by putting our eggs into one basket. If Australia-a close US ally, can depend on China to absorb its energy exports and keep its economy humming, there is little reason for India to choose between the Great Powers.

It is to our advantage that we have extraordinarily good relations with Japan and other East Asian allies of the US. A long term contract for Russian LNG can be used to swap Russian LNG cargos (meant for India) with LNG coming from Qatar to Japan, cutting transportation costs for both. This could become a trilateral arrangement between Russia-Japan and India once the sanctions get diluted.

Nuclear Energy is the second area where we badly need Russian help. India needs an additional 10 GW of Nuclear Power. The State Owned Nuclear Power Corporation of India (NPCIL), which is the monopoly operator of all civil Nuclear assets in India, has lobbied to ensure that the Nuclear Liability Act 2010 approved by the Indian Parliament exempts the “operator” from all risk and liability in the event of a nuclear incident and loads it instead on equipment suppliers and project developers. This has effectively ensured that no private Insurance company would be willing to bear the unlimited risk of a nuclear mishap and private Banks would not finance such a project.

The only players left in the field could be State Owned Corporations both Indian and Russian. A State Owned Indian General Insurance Corporation could provide the Insurance cover and a Russian State Owned Project Developer could build the plant. Implicitly the risk will devolve onto the Governments of India and Russia and Bank finance would view this as a Sovereign risk. Clearly this is not a commercially palatable deal but it can be the classic outcome of G2G cooperation, in the spirit of the Russo-India friendship, where Russia helps India out of a jam of its own making: Bangladesh liberation (1971) being one such.

Will sealing these two energy deals brown-off China and the US? Russia delights in browning-off the US in any case whilst its relationship with China is at best of “mutual transactional benefit”.

In the case of India, we are perpetual wafflers and fence sitters who hop from one transactional advantage to another. This is perfectly aligned with our relatively diminutive economic stature and pressing domestic concerns. No one expects different from us.

PM Modi has been warmly congratulatory about China’s economic and poverty reduction achievements. It would help if we were also more respectful of China’s international status, since China is so status conscious. But this is difficult, because we have a completely different political and social environment and a vastly different institutional architecture. Our unresolved border disputes add fat to the fire.

There is however no reason to blur mutual economic self-interest with ideological compatibility. It makes sense for India to use its growing markets to bind China more firmly to the India growth story much like China has done versus the US. It is false ego to be at pains to keep China out of South Asia, just to protect our “dominance” in the Region.

Regional dominance has to have economic underpinnings. China has the fire power. We don’t. Trying to wean our neighbours away from China can end up “immiserizing” India. More importantly why even try?

Regional trade and output enhancing strategies need to willy-nilly include India because of its size and central location. Assured access for Nepal and China to the Indian Ocean; for East Asia assured access via Bangladesh, India, Pakistan, and Afghanistan to Turkey, all serve to bind the economic interests of our neighbours with our own.

India has to boogie with the US, China and Russia, but openly recognize that in this group, we are the “little fish”. We can be a “large fish” but only in some other a small pond with shrinking water levels. The question is which pond serves our national interest better.

Our relationship with Russia has principally been of dependence for armaments and collaboration in diplomatic fora since we have no clashing international alignments. The defence cooperation is destined to transform into a commercial one since India is opening up to becoming a defence manufacturer rather than just an importer. Business interests will invest in India depending on the competitiveness of the opportunities available.

The energy link between Russia and India is about the only slender but substantive chain, which can bind state owned gas exporters in Russia and gas importers in India. It is time to forge this chain to retain the warm glow, older Russians still feel, when Raj Kapoor’s films are screened.

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