Politics of energy

Written by Tayyab Siddiqui • October 2010

neighborpic1 How the energy policies of any country impact the dynamics of bilateral relations is a fascinating subject. The study of Indian diplomacy in the region and its ambitions to play an important role on the global scene offers an illustration of this dilemma.

The unprecedented economic growth and political stability of the countries in East Asia and Pacific region and China during the last three decades of the last century made analysts forecast that the 21st century would belong to China. The phenomenal growth of the Chinese economy and the ASEAN countries, also made economic planners realize how important energy was to sustain this growth and meet people's growing expectations of a better economic future.

There was a scramble to secure energy supplies. Search for new resources acquired priority. The focus was on building up national reserves and securing long term deals abroad. China was the first to recognize the imperative of emerging needs and availability of sources. It offered $14 billion in cash to acquire U.S. oil firm UNOCAL and its second largest oil company SINOPEC signed a deal worth $100 billion with Iran to develop the giant Yadavaran gas field. China also entered into long terms deals with Sudan, Syria and Angola and announced plans to invest $5 billion in other oil producing countries.

India, a neighbor and a rival caught up with accelerated economic growth in the last decade, but followed an equally aggressive policy to seek energy sources to ensure its economic future and strategic concerns. It looked around the region and found Iran as the primary and long-term source of energy to meet its growing needs.

India and Iran have enjoyed good relations but lacked the warmth that Iran-Pakistan ties had, both during the Shah's days and later with the coming of the Islamic Republic. To provide its economic relations a strong base, India initiated a robust policy of engaging Iran politically. President Rafsanjani was invited as the Chief Guest at its Republic Day celebration in 2003 and a vigorous campaign was initiated to expand the relationship.

In the energy sector, most critical for the Indian economy, a $22 billion deal to buy Liquefied Natural Gas (LNG), was signed in 2005, starting in 2009. India's oil products requirements are estimated at 274 million tones and 400 million cu. meters of gas per day over the next 20 years. Iran has the second largest gas reserves in the world and the third largest oil reserves. Some 16.5% of India's crude oil requirements are met by Iran and today it is the second largest supplier of oil. Indian policy to energize bilateral relations with Iran, however, have met with obstacles, the main being the U.S.-Iran nuclear deal and India's growing relations with Washington.

President Bush followed a vigorous policy of isolating Iran, that continues till date. Iran was declared "an outpost of tyranny", a "prime sponsor of terror." Its nuclear program was dubbed as "a threat to world peace and US security."

Indian policy planners soon realized the built-in contradictions in its energy policy. Dependence on Iran and its ambitions for a global role with U.S. assistance required a balancing act and has since remained a major headache for South Block. There is growing convergence of views between Washington and Delhi on India's role in the power play in the region. Bush administration formally declared its policy to help India become "a major world power in the 21st century" and an "indispensable" and "natural ally" of the U.S.

Prime Minister Manmohan Singh, a brilliant economist and statesman of world stature, responded with alacrity and rightly concluded that energy should be the centerpiece of friendship with U.S. There was a flurry of diplomatic activity and contacts. Indo-U.S. relations flourished in all directions but the crowning achievement has been the Indo-U.S. civilian nuclear accord signed in June 2005. It brought India out of nuclear isolation. It unlocked the energy starved country's nuclear industry market estimated at $150 billion, at a time when nuclear energy is deemed a more environment-friendly alternative to fossil fuels. Under the accord India has won access to U.S. nuclear technology and fuel and also attained the status of a world nuclear power.

While India was busy negotiating the civilian nuclear deal in Washington, Iran's nuclear controversy was reaching a flash point. The U.S. pressured IAEA - the watchdog body for monitoring nuclear proliferation in the world - to take the issue to the United Nations Security Council for sanctions against Iran on its alleged nuclear weapon program. This was hotly contested by Iran which claimed that it was peaceful and as a NPT signatory, was well within its rights to pursue the program.

During the presidency of Khatemi, the moderate Iranian leader, India and Iran had developed fairly close relations and in diplomatic circles it was being asserted that India with its pretence of championing third world causes and also its close bilateral relations with Iran, would not support the U.S. in its bid to impose SC sanctions against Iran. Contrary to these speculations, India voted for the IAEA resolution, to establish its credentials as a strong U.S. ally. A hurt and angry Iran retaliated with cancellation of the LNG deal, insisting on renegotiating at higher prices

To secure its energy future, India also joined negotiations on the IPI project, concurrent with talks with U.S. on the civilian nuclear deal. IPI as a gas pipeline project involving India, Pakistan and Iran. Bilaterally India showed great interest in the project. The pipeline would run for about 115 km in Iran, 705 km in Pakistan and 850 km in India. The total investment was estimated at $7.4 billion and the project would take four to five years to complete. There were lengthy but unfruitful discussions on India's concerns on safe delivery of gas, price structure and the security of the pipeline through Pakistan. Just as the nuclear deal was approved by U.S. Senate and Indian Parliament, India withdrew from the talks.

The IPI project has been stoutly opposed by the U.S. and Indian involvement in the project was a clever diplomatic move to keep pressure the U.S. to finalize a civilian nuclear deal and also to secure its flanks in term of energy supplies should the nuclear deal fall throw. The negotiations were delayed with India adopting an inflexible stand on different issues to buy time. Interestingly now India has again expressed interest in the project and has urged Iran to allow it to rejoin. Indian private sector negotiated $5 billion investment in the Iranian gas fields in June 2009.

Indian diplomatic initiatives to balance relations with Iran and U.S. have exposed the pressures on an energy deficient country to strike a balance between the geo-politics of energy and its national policies. The conflicting interests and competing objectives need a high degree of sophisticated diplomacy to reconcile these factors to sustain economic growth. Indian efforts to maintain strategic relations with the U.S. and also stay friendly towards Iran and factoring in its energy policy within its international role with U.S. support, will continue to pose a serious challenge to Indian diplomacy.