Avoid unreliable energy suppliers

In search of energy security the Petroleum Minister has scoured the world for gas and oil deals, including stakes in oilfields abroad. Alas, such purchases could mean insecurity, not security. Many countries do not respect contracts, and India should reduce its dependence on unreliable suppliers of energy. Two such countries, unreliable in very different ways, are the USA and Iran.

The Bush-Manmohan Singh agreement on nuclear supplies offers India entry into what was once a white man’s club. Given rising oil and gas prices, India needs to switch to coal and nuclear energy wherever possible. It needs to get the best technology and equipment for a series of nuclear power stations, something China is doing. The Bush-Manmohan agreement aims to get India off the blacklist for nuclear supplies imposed by US law and the Nuclear Suppliers Group.

However, once India is off the blacklist, it should give US nuclear companies only a small share of contracts, and give most to France, Russia and Germany. The US is an unreliable supplier of sensitive equipment, as has been demonstrated in many past defence deals. The worst sufferer, ironically, was Pakistan, which paid for F-16s in the 1980s but never got delivery because it was blacklisted. Even when the US Administration wants to continue defence supplies, individual legislators can tack supply conditions and sanctions onto all sorts of bills.

Hence India has long avoided the US as a key defence supplier. It has sought supply security by buying Sukhois from Russia, Mirages from France, and submarines from Germany and Russia.

Suspicions are easing with the warming of Indo-US relations. The recent Indo-US defence agreement talks of joint weapons production and anti-missile cooperation. Yet, as a supply precaution, some military experts urge India to buy French Mirages rather than American F-18s. I agree.

For similar supply security, India should minimise its energy dependence on Iran. That country has dragged its feet on implementing the recent agreement to supply 5 million tonnes per year of liquefied natural gas, a disturbing sign. Many experts have opposed the proposed Iran-Pakistan-India gas pipeline, citing Pakistan’s unreliability. To this we must now add Iran’s unreliability.

On two occasions, Teheran has issued veiled threats to renege on gas supplies if India keeps voting against Iran in the UN and IAEA on nuclear enrichment. Maybe this is just bluff. But the mullahs have already ditched India once.

People forget. India was part of a consortium led by Amoco producing oil at the Rostam and Raksh fields in Iran in the 1960s. But when the mullahs came to power, they nationalized the oilfields, giving India a pittance as compensation. India did not protest: it feared antagonising an important oil supplier. But Amoco fought for and got much higher compensation.

The Petroleum Ministry seems to have forgotten this episode altogether, and once again seeks energy concessions in a country that has already expropriated it. The mullahs must be laughing at our cupidity. India should seek gas from Qatar rather than Iran.

India seeks concessions in Venezuela, and this is also risky. Like Iran, Venezuela does not respect contracts. President Chavez has just told foreign oil companies to hand over 60-90% of their shareholding or leave. The royalty on oil has been increased from 1% to 30%, and the oil tax from 34% to 50%.

In Russia, privatized oil companies have in effect been renationalised. We should not be surprised if the Sakhalin field, where India has a stake, is also nationalised.

The Mittal-ONGC combine has been granted an oil concession in Nigeria provided India invests $ 6 billion in Nigerian infrastructure. Some people are celebrating this. But note that the oil concessions can later be expropriated by Nigeria, while India cannot expropriate the infrastructure. The current Nigerian government is much better than earlier dictators who looted the oil industry, yet is not a safe oil haven.

The lesson: it is safer to simply buy than produce oil in such countries. Japan, a massive oil importer, has flourished by buying rather than owning oil supplies. US companies once owned giant oilfields in the Gulf but were expropriated. They are now buyers, not owners.

Buying oilfields in countries lacking property rights provides no sort of energy security at all. Finding a really large oilfield in such countries will probably be followed by a really large expropriation. If India wants to own reserves, the best way is to buy a sizable shareholding in Exxon, Shell and Total, whose reserves are unlikely to be expropriated.

With oil prices booming, companies want to exploit tar sands, which were earlier too expensive to exploit. India has sought a tar sand deal in Venezuela. Far safer will be Canada’s tar sands, which in theory comprise higher reserves than Saudi Arabia’s. Ownership in Canada looks secure, unlike in Venezuela. That’s the way to go.

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