India's energy security challenge

India's energy security challenge

Like China, India is a growing giant facing the critical challenge of meeting a rapidly increasing demand for energy. With over a billion people, a fifth of the world population, India ranks sixth in the world in terms of energy demand. Its economy is projected to grow 7%-8% over the next two decades, and in its wake will be a substantial increase in demand for oil to fuel land, sea, and air transportation.

While India has significant reserves of coal, it is relatively poor in oil and gas resources. Its oil reserves amount to 5.9 billion barrels, (0.5% of global reserves) with total proven, probable, and possible reserves of close to 11 billion barrels. The majority of India's oil reserves are located in fields offshore Bombay and onshore in Assam. Due to stagnating domestic crude production, India imports approximately 70% of its oil, much of it from the Middle East. Its dependence is growing rapidly. The World Energy Outlook, published by the International Energy Agency (IEA), projects that India's dependence on oil imports will grow to 91.6% by the year 2020.

Concerned about its growing reliance on oil from the Persian Gulf - 65% of its energy is imported from the region - India is following in the footsteps of other major oil importing economies, and seeking oil outside the Gulf. Indian firms' investment in overseas oilfields is projected to reach $3 billion within a few years. Of particular interest is Africa, especially Sudan, where India has invested $750 million in oil, and Nigeria, with which India reached a deal last November enabling it to purchase about 44 million barrels of crude oil per year on a long term basis. Additionally, India recently finalized a contract in Syria for the exploration, development and production of petroleum with a Syrian company. Sakhalin, in Russia, and Vietnam and Myanmar in Southeast Asia are also potential suppliers to the Indian market.

But the most attractive oil domain outside the Persian Gulf is the Caspian Basin where India is trying to befriend the region's leaders and, if possible, gain a foothold. To support energy security interests in Central Asia, India has already stationed troops in Tajikistan, provided it with $40 million aid package and undertook to refurbish an air base near the Tajik capital Dushanbe. India is also pursuing relations with Kazakhstan, Azerbaijan and Iran.

India policy of source diversification has problematic implications. First, many of the countries with which India is dealing are known for severe violations of human rights, sponsorship of terrorist activities, and general misuse of oil revenues. Further enrichment of oil supplying countries like Sudan, Syria and Iran is not in the interest of India, a country which itself is a prime target of Islamist terrorism. Second, the exploration of overseas oilfields, especially in the area of the South China Sea, could bring India in direct competition with fellow Asian countries like China and Malaysia. Most importantly, this policy contributes to accelerating global depletion of non-Middle East oil reserves, and will lead India and the rest of the world to a point in which dependence on the region would be far stronger.

In addition to its struggle to secure supply, India is becoming increasingly aware of the fact that its economy is highly vulnerable to supply disruptions. Till recently, India did not have an energy security policy or contingency plans to fall back on in case of crisis. Nor is it a member of any organization like the International Energy Agency, which was born in the aftermath of the 1973 oil crisis to protect members from any future disruptions in the energy market. To minimize the impact of global fluctuations, India is building a strategic crude oil reserve facility on its southern and eastern coasts.

Other policies implemented by the government are:

* Increased fuel efficiency through a cut in state subsidies on all petroleum products, except some household necessities such as kerosene and cooking gas which receive the up to 40% subsidy to benefit the poor.
* Shift to natural gas and LNG: India will be a major importer of natural gas and LNG over the next few decades. The cheapest way to supply India with gas would be through pipelines from Central Asia and the Middle East, through Pakistan, but due to tense relations with Pakistan the two countries have not been cooperating on energy schemes and such pipelines are politically infeasible. On the eastern coast, imports of small amount of natural gas from Bangladesh may be feasible. However, Bangladesh's internal party politics does not allow it to take a decision in favor of New Delhi. Consequently, India is focusing on costlier LNG imports especially from Oman and Qatar. This would require construction of LNG terminals which pose security risks and are attractive targets for terrorists.
* Increased domestic production: In the past five years the government introduced a new exploration licensing policy aimed to promote investment in the exploration and production of domestic oil and gas. It is premature to determine how much oil can be generated domestically and for how long, but privatization of the oil sector, removal of bureaucratic obstacles and improved business climate could improve India's energy security.
* Increased utilization of clean coal technology: The country is the third largest coal producer and holder of 7% of global reserves of coal. Coal provides 56% of India's commercial energy supply. Application of the coal gasification combined cycle process is an emerging technology for clean and efficient coal fueled generation.
* Shift to next generation fuels and increased use of renewable sources of energy: India is probably the only country in the world with a full-fledged ministry dedicated to the production of energy from renewable energy sources. The Indian government is promoting the use of ethanol made from sugar cane and bio-diesel extracted from trees that are common in many parts of India, such as the Jetropha, Karanja and Mahua. Additionally, India is emerging as a growing market for solar, wind and hydroelectric power. According to a report by the American Wind Energy Association India currently ranks fifth in the global wind energy production.