[A-List] India, China And The Asian Axis Of Oil

["tony black" <tal@xxxxxxxxxxxxx>]

----- Original Message -----
From: Rick Rozoff
To: Stop NATO
Sent: Monday, January 23, 2006 9:51 PM
Subject: [stopnato] India, China And The Asian Axis Of Oil


http://www.hindu.com/2006/01/24/stories/2006012403181000.htm


The Hindu
January 24, 2006


India, China and the Asian axis of oil
Siddharth Varadarajan

The new Sino-Indian partnership could serve as the
foundation for an Asian Energy Union and much more.


In less than a year, India and China have managed to
confound analysts around the world by turning their
much-vaunted rivalry for the acquisition of oil and
gas assets in third countries into a nascent
partnership that could alter the basic dynamics of the
global energy market.

At stake is not just the issue of joint acquisition,
although the most important of the agreements signed
in Beijing on January 12 during the visit of Petroleum
and Natural Gas Minister Mani Shankar Aiyar envisages
ONGC Videsh Ltd (OVL) and the China National Petroleum
Corp. (CNPC) placing joint bids for promising projects
elsewhere.

Rather, the prospects for Sino-Indian cooperation
across the length of the hydrocarbon chain could pave
the way for the creation of an Asian energy market and
architecture — an Asian axis of oil — with major
geopolitical consequences for the United States.

The international market for hydrocarbons is not a
free market and has never been one. There is a
suppliers' cartel — the Organisation of Petroleum
Exporting Countries — and a well-organised market
driven primarily by demand in the advanced industrial
economies of the world, all members of the OECD. Trade
is conducted in dollars, which effectively ensures
that countries around the world hold their foreign
reserves primarily as greenbacks. And prices are set
on the basis of Western benchmark crudes like West
Texas Intermediate and Brent, neither of which
represent anything but a small fraction of the oil
that is extracted and traded internationally. So
strong is the monopsonist power of the U.S. and Europe
that oil exported to Asia from the Persian Gulf costs
as much as $2 a barrel more.

Into this dismal equation must be added two further
constants. First, the role of speculators who trade in
oil futures on the New York Mercantile Exchange and
International Petroleum Exchange and who have
propelled oil prices to absurdly high levels.
Secondly, the huge and growing U.S. military presence
in Asia that underpins the petro-dollar-unipolar
system and is a major source of instability and
violence. The position of Asia couldn't be more
abject. A continent that hosts the world's largest
producers and fastest growing consumers of energy is
forced to play second fiddle, relying on institutions,
trading frameworks, and armed forces from outside the
region in order to trade with itself. Such a situation
makes for unstable politics and bad economics, not to
speak of atrocious geography. Central Asia is close to
China and Iran but the U.S. has spent the better part
of a decade trying to make sure pipelines carrying oil
and gas from there only go westward. Gas pipelines
connecting Iran to India make financial sense but the
threat of U.S. sanctions means this project might not
get off the ground. If the 21st century is to be an
`Asian century,' Asia's passivity in the energy sector
has to end.

Objective circumstances favour change. Central Asia
has emerged as a major producer and India and China
are two of the fastest growing economies in the world.
Traditional suppliers, too, have much to gain from an
Asian market, especially if this means greater
stability and predictability in prices. Saudi Arabia
may like high prices but not prices that are
"unreasonably high." It is not a coincidence that the
first overseas tour of King Abdullah is to China,
India, Pakistan, and Malaysia and that his agenda, at
least in Beijing and New Delhi, involves important
energy-related initiatives like the proposed oil
reserve facility on Hainan island.

For the new India-China energy partnership to work,
however, both countries must be prepared to invest the
political capital necessary. There are traditional
suspicions to contend with, besides the fact that
commercial cooperation between companies, even if
publicly owned, can run into practical difficulties on
the ground. Individual deals will still be contested
and should not be the cause of unnecessary heartburn,
the recent reports of Myanmar offering gas to China
being a case in point. There is also the negative role
of the U.S., which sees India as the weakest link in
the emerging Asian chain. Today, Washington is trying
actively to divert New Delhi away from the task of
creating new regional architecture by dangling the
nuclear carrot and the promise of world power status
in alliance with itself. India will have to resist
these allurements if the Asian project is to go
anywhere.

At the core of the new Sino-Indian energy partnership
is the proposal for OVL and CNPC to place joints bids
for facilities in third countries. Last December, the
two companies successfully bought the al-Furat
oilfields in Syria and are today reportedly working on
an acquisition in Russia's Udmurtia Republic. There
were bitter fights in the past — in Kazakhstan, for
example, OVL lost out to the Chinese — and there are
some areas where China will outshine India simply
because of its deeper pockets and greater strategic
élan. A case in point is the China National Overseas
Oil Corp. decision earlier in January to purchase the
Akpo field in Nigeria weeks after the Manmohan Singh
Government vetoed OVL's proposed acquisition of the
lucrative field as too "risky." However, the scope for
synergy between the two countries is tremendous.

Though some Western analysts are dismissive of Chinese
and Indian efforts to acquire "equity oil" — why buy
the field when you can always buy the oil on the spot
market, they ask — it is this element of the
partnership that is likely to prove most irksome to
established oil majors in the first instance. Both
Chinese and Indian oilmen see the advice against
equity oil as self-serving, given that similar counsel
could easily be given to the Western oil majors making
the same energy acquisitions around the world. As Mr.
Aiyar told Ma Kai, chairman of China's powerful
National Development and Reforms Commission, shortly
before the two men signed their MoU, "When companies
from the two sides submit a joint bid, no project
would be beyond our reach." Senior Chinese oil
executives enthusiastically reciprocated these
sentiments. "We should go forward together and bid,"
Chen Geng, president of the China National Petroleum
Corporation (CNPC), told Mr. Aiyar. "Otherwise it is
the third party which wins."

Apart from acquiring equity oil and gas, there are
other areas where companies from the two countries are
planning to cooperate. The Chinese have pioneered oil
recovery technology, which helps maintain production
at ageing oilfields such as Dagang and Daqing at
levels far higher than Indian fields of comparable
vintage. The Chinese side also excels in basin
evaluation and drilling rigs. Indian companies have an
advantage in IT-enabled exploration and production
services. There is scope to work together but this
would mean the Indian security establishment being
less paranoid about the involvement of Chinese
expertise in domestic, particularly offshore, energy
locations. The two countries also need to join hands
to develop new energy transport mechanisms, including
pipelines within the region and the use of backhaul
cargoes in very large crude carriers (VLCCs) and swaps
to jointly source crudes from distant sources such as
West Africa and Venezuela.

Asian oil market in euros?

Above all, India and China need to keep in mind the
big picture — the evolution of an Asian market for
crude and products with long-term supply contracts and
stable prices, and, eventually, an Asian Energy Union.
As Mr. Aiyar pointed out in a lecture to Chinese
energy specialists in Beijing, the European Union
started life as a coal and steel union before growing
eventually into a full-fledged economic and political
community. Could energy play the same role in Asia
with India and China serving as sheet anchors in the
way France and Germany did in Europe? With India and
China committed to building strategic petroleum
reserves, South Korea offering to work on an
`Inter-Asia Oil and Gas Transportation System,' and
Iran planning its own hydrocarbon bourse, such an idea
is no longer far-fetched.

Linked to an Asian oil market is the billion euro
question of non-dollar denominated energy trade. Asian
countries collectively hold more than two trillion
dollars worth of foreign reserves, the overwhelming
share of which is in dollar-denominated instruments.
Prudential norms suggest the diversification of the
Asian reserve portfolio is overdue. In China, the
State Administration of Foreign Exchange (SAFE) has
signalled its intention to explore the more "efficient
use" of the country's forex reserves and in India,
commentators like S. Venkitramanan (see `Playing it
Safe — Lessons from China's reserves management,' The
Hindu Business Line, January 23, 2006) have suggested
the RBI start thinking along similar lines.

One way to sustain this shift would be to consider yen
or euro-based trading in energy. The economic dynamism
of Asia for the foreseeable future suggests what is
needed is a strategic rather than tactical change in
the composition of reserves. The huge and
unsustainable deficits being run by the U.S. are
undermining the "oil standard" that has been central
to the hegemony of both the dollar and Washington for
more than three decades. Relying on the dollar for
energy trade will hurt Asia's producers and consumers
alike in the long run. An Asian oil market trading in
European euros. Now surely that's a good recipe for a
multipolar world?




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