Gas balloons over India’s Persian gulf

Oct 05, 2005 02:00 AM

by Himraj Dang

Is Iran doing India a favour by planning to sell gas? For a deal value in excess of $ 22 bn does the seller nation ‘‘favour’’ the buyer nation? Is there a ‘‘non-aligned’’ discount in the LNG gas trade? How does China balance its voting record at the UN (closer to that of the US than India), and its energy security?
Should India not develop its lagging civilian nuclear energy programme, hamstrung as it is with international sanctions? Are Indian interests permanently to be subordinated to those of non-alignment? Could India ever be aligned to its own interests and aspirations?

With the dust settling in the aftermath of India’s affirmative vote at the IAEA in favour of the EU-3 resolution on the Iranian nuclear programme, it is time to ask and ponder these and other questions related to the country’s energy security.
Energy imperatives: India depends on imported energy (76 % of oil, 20 % of gas, and four % of coal consumption). This dependence will continue, and, possibly, escalate. India’s GDP growth is energy-intensive (elasticity of power demand to GDP growth is 1.2x).

India’s oil production is already declining, gas production from existing fields (that is, ex-KG basin) will soon do so as well, and reforms in the coal sector necessary to bring in additional (private) investments are unlikely.
There is a potential saviour: vastly greater energy efficiency. This cannot happen without price reforms. Currently, the government of India is bearing a $ 10 bn subsidy (approximately at $ 61/barrrel oil) on account of under-recovery on sale of oil products. This is a monster fillip to consumption by the government (we should be so grateful, those who pay taxes).

The signals toward efficiency are no better in the power sector, which consumes 75 % of coal and 30 % of gas produced. With $ 9 bn of theft and dacoity losses resulting from distribution failure, in turn, linked to subsidised power pricing, there’s little chance we will consume electricity more efficiently.
No Siree, industrialists must be given a chance to consume unmetred agricultural power, farmers must be given free power, even if it is no power, and residential consumers can simply continue to suffer (and profit from) hungry meter readers.

On the transport side, India will send more freight on the rapidly improving road network, rather than by slashing freight rates for rail transport, as the latter would require raising subsidised passenger fares. Without changing energy tariffs and liberalising regulatory regimes, there is no succour from increased energy efficiency for India.
With no ready domestic solutions to the growing demand for energy, India has but two large-scale options: gas and nuclear energy. The options are not mutually exclusive. With progress in negotiations with the US, India is on track to joining the international nuclear regime, and being able to avail the latest civilian nuclear technology.

India’s nuclear power production, at 3,000 MW, is much below forecasts that predicted 10,000 MW by now. The development of cost-effective nuclear power, albeit with issues of waste disposal, would greatly alleviate the power shortages in the country (on average 12 % of capacity, or 10,000 MW).
Similarly, imported gas can make a difference for the power, fertiliser, and transport sectors. Transnational pipeline gas is always more complex to arrange, but is a cheaper option. There is no reason why, in the long run, India cannot attract pipeline gas from all four potential sources -- Turkmenistan, Iran, Myanmar, and Bangladesh.

In the meantime, India can arrange to sign up for LNG supplies. With three receiving terminals, and more to come, India can source LNG from a multitude of sources, provided the price and terms are right. The runaway success of Petronet, as the lowest-cost buyer in the world (from Qatar), is a tribute to the foresight of its PSU sponsors and officials in the Ministry of Petroleum and Natural Gas.
With LNG prices moving up steadily to current spot prices of $ 10/ mm Btu, and global LNG supplies almost fully committed, India’s negotiations with Iran assume great importance. The South Pars LNG deal is important for both countries. India would be an anchor customer to this new industry in Iran.

With the state of its relations with the US, Iran doesn’t have a range of customers, as do Abu Dhabi, Oman, and Qatar. Further, India is a creditable, and long-term customer, in a market still characterised by long-term, less flexible, government-to-government negotiated deals.
For India, the deal represents an affordable price (it would have been downright attractive had we accepted the initial Iranian offer of $ 2.2/mm Btu) and a meaningful volume (starting at 5 mm tpy).

Effective diplomacy and energy security require a separation of business and politics. Which is why the US will import crude from Venezuela (and the latter will export it to the US). The stakes are so high that the global oil industry is completely divorced from human rights and political considerations. Iran will no doubt continue selling oil to those countries which voted against it at the IAEA (Singapore is one of them).
The mature missives from the Iranian authorities suggest they will not scrap the LNG deal with India for this one vote (and, perhaps, others to come). The pipeline is dearer still to Iran (and Pakistan), and India would be wise to reflect on the many dimensions of its emerging energy relationship with Iran.

Energy security, nevertheless, also requires a diversification of supplies. In the medium-term, by 2010, when oil prices are forecast to finally weaken, India will have developed other energy import options. With KG in production by then, it is also likely India would have tied up at least one other international pipeline and one other LNG supplier.
With this in mind, Iran would be remiss to re-open the current LNG contract, for which it has in any case asked for a higher Brent crude indexation ceiling than that agreed on ($ 40, up from $ 31).

If the Iranian pricing waltz continues, India would be advised to sign up only a medium-term deal. The ongoing engagements with Qatar, Australia, Turkmenistan, Oman, Malaysia, and Iran, help keep the parties rational, and, at least mildly customer-sensitive.
Iran will no doubt become an important LNG supplier in the future, but there will always be multiple sources, prices will be more transparent than they are today, and India will have options. The Indian vote at the IAEA does not imperil the country’s energy security, and there is little justification for the political hysteria generated.

Finally, and this bears repetition ad nauseum, energy security requires India to remove pricing distortions from energy intensive sectors: power, fertiliser, oil, gas, and passenger rail transport.
There are more effective ways to increase welfare for target groups than distorting energy markets, which are ultimately international in nature. Demand-side management is critical to energy security. It’s the in-house prevention which is better than the cure of imports.

Importing oil and gas need not create insecurity or dependency. Oil-importing European countries and China all defend their national interests successfully.
As a growing and emerging economy, India will need to engage dispassionately with multiple suppliers, gear up to pay international prices by moderating demand, and accumulate foreign reserves by greater participation in international trade.

You may be sure that Russia and China will continue to enjoy their privileged position in the Nuclear Suppliers’ Group, cast vetos on the plans of countries with nuclear aspirations, sign up oil and gas deals with them, and simultaneously engage in clandestine proliferation. The management tool that permits this schizophrenic promiscuity is equal part diplomacy and hypocrisy.
We could use these native qualities to develop Indian energy interests, provided we have a domestic consensus for alignment with them!
The author is an independent energy consultant.

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