The Broad Mind | Energy makes for strange bedfellows

By Ameya Naik

As oil grows costlier and more difficult to obtain, trust will become a rare and precious commodity.

In politics, we are told, there are neither permanent friends, nor permanent enemies – only permanent interests. “Politics by other means” would be one way to see the oil and natural gas game, especially where players are of the National Energy Company (NEC) variety. Consider, for example, Russia in the Putin era. The rise of RosNeft – the Russian National Oil Company (NOC) that recently almost became the world’s largest producer of oil – closely parallels both political configurations in Moscow and global imperatives of the nation itself. RosNeft’s friends and enemies are not what one would expect. The former, for instance, include producers in former Soviet states, most notably Grozneftegas (the Chechen NOC which it helped set up). RosNeft evidently subsidises the operations of the Chechen company to fulfil an important diplomatic role; the clear support for a key driver of industry aids Russia in defending its claim of genuinely promoting Chechen interests.

Russia’s best friends are unmistakeably the Chinese. This is unsurprising: Russia needs money, China needs oil, and both need to show domestic constituencies that they are actively addressing these needs. Diplomatic implications remain; most notably, the building of the East Siberian and Pacific Oil (ESPO) pipeline has seen the two giant neighbours put to rest decades of squabbling over an uneasy border between Siberia and Manchuria. China increasingly helps finance not only RosNeft’s construction, but also acquisitions – including its controversial takeover of assets from Yukos. Thus, in 2006, Sinopec successfully bid for a controlling interest in Udmurtneft – then promptly sold it to Rosneft. The formula followed, according to one scholar, has been “our assets, for your money, but under our control.”

These convoluted purchases aid Rosneft to outmanoeuvre its unexpected arch-rival: natural gas giant and fellow NEC Gazprom. The rivalry is evidently political, with the board of RosNeft headed by Igor Sechin, most prominent of the former-KGB-turned-mandarin ‘siloviki’ faction, while Gazprom’s board comprises mostly the older ‘civilian’ faction. While both sides are accused of corruption and conflict of interest, investors seem to prefer the state-assured stability of RosNeft, warts and all, reversing the global norm of preferring private firms that must answer to stakeholders. Even China has been content to let the Russian NOC operate the fields where it invests, signing contracts guaranteeing flows of its share in supplies – for as many as 20 years – in exchange for the money they generate. This is the opposite of the Chinese approach in the Middle East and Africa, where they set up entire value chains from rigs to refineries (such as in Nigeria), and even infrastructure, such as an airfield in Iraq to directly fly in Chinese manpower.

Unlike Russia, India has an ambivalent approach in dealing with Chinese NOCs. They are our biggest competitor for energy assets – and it is a competition we have never won. In 2005, OVL lost a bid for PetroKazakh in Kazakhstan, and a bid for EnCana’s stake in Ecuador – both to PetroChina. Before that, China also beat us to Royal Dutch Shell’s 50 percent stake in Angola’s Offshore Block #18. Only last week, the Kazakh government exercised its first right of refusal to reject OVL’s $5 billion bid for ConocoPhilips’ share in the promising Kashagan oilfield, preferring to acquire the stake itself and sell it to CNPC. We are yet to enter either Ecuador or Angola.

Despite (or perhaps, to some extent, because of) this rivalry, we signed a Memorandom of Understanding (MoU) with China in 2006, renewing and expanding it in 2012 to cover various areas including exploration, development, production, pipelin1es and even marketing. Sino-Indian joint ventures exist in Sudan (GNPOC), Syria (Himalaya Energy), Colombia (Mansarovar Energy) and Myanmar. But we have also continued to compete, most notably for the Rumaila oilfield in Iraq, eventually won by a BP-CNPC consortium. (The Chinese reportedly impressed all parties during this negotiation, even speaking Iraqi-accented Arabic with the Iraqis and Kurdish dialects of farsi with the Kurds).

The 2012 MoU also covered “information exchange for mutual benefit”; theoretically it could even see PetroChina investing in Indian oilfields – though, given the Huawei controversy, one doubts they will ever receive security clearance to be operators here. We may develop our own variant of the Russian model – our assets, for your money, under our control, producing oil for us (though we’ll pay for your share). India may even prefer to make such payments in yuan, protecting our dwindling stock of dollars and simultaneously scoring diplomatic brownie points with both China and BRICS.

Old ONGC hands I’ve spoken to are blunt in addressing the flaw with such plans: it is difficult to trust the Chinese. Their anecdotes point to a deeper truth. The economic interests of Russia and China – one the largest producer of oil, the other the fastest growing consumer – align well, and even their political interests may align, around an axis of authoritarianism. It will be rarer for India to find common diplomatic interests with China, except where we use each other’s presence as a shield from international opprobrium (as in Iraq or Sudan). We do have a combined economic interest, in making sure that no seller plays us off against each other to obtain inflated prices, but each party could easily see benefit in cutting the other out of the deal eventually, making each new JV an exercise in trust.

As oil itself grows ever costlier and more difficult to obtain, such trust will become a rare and precious commodity indeed.

Ameya Naik is a Takshashila Scholar

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.