Background

The 21st century will be dominated by the quest for and access to the world’s energy sources. It is expected that by 2020, world oil consumption will rise by about 60%. The two countries with the highest rate of growth in oil use are China and India, whose combined populations account for a third of humanity. In the next two decades, China's oil consumption is expected to grow at a rate of 7.5% per year and India’s 5.5% (compared to a 1% growth for the industrialized countries).

Of the trillion barrels of currently estimated total world oil reserves, 6% are in North America, 9% in Central and Latin America, 2% in Europe, 4% in Asia Pacific, 7% in Africa. But over 70 % of them lie in the West and Central Asia and Asiatic Russia –– Saudi Arabia (25%), Iraq (11%), Iran (8%), UAE (9%), Kuwait (9%), and 6% each in Russia and Central Asia. In addition, Russia holds the world's largest natural gas reserves, Iran the second largest and Central Asia in substantial quantities too. The geological potential in Central Asian states is still under-explored, so the region may actually contain much more oil and gas than generally known today. Kazakhstan, Azerbaijan, Turkmenistan and Uzbekistan share the majority of the region's hydrocarbon wealth. But being landlocked countries, they all depend on their neighbours –– Russia, the Caucasian States of Georgia and Armenia and Turkey for access via pipelines to the Western markets and Kyrgizstan, Tazakhstan and Afghanistan to China, Pakistan and India. While there is already a good network of pipelines via Russia, the new thrust is to create alternative routes to get out of the bear-hug.

Oil was first discovered in Azerbaijan and a primitive oil industry set up in Baku by the early 19th century. Because of this, Central Asia in the last two centuries played an important role in the geopolitical balance of Eurasia. In World War II, during his campaign against Russia, Adolf Hitler sought to capture Baku and the Caucasian oil fields in a bid to replenish his depleted fuel supplies before attacking the Middle East. After the war, the Soviets took over control of the Central Asian oil and gas fields. Now with the collapse of the Soviet Union, the independent republics of Central Asia realizing oil to be the fastest way for them to secure their economic and political independence, have sought to exploit their oil wealth, thereby leading to a renewed struggle for political and economic hegemony in the region.

Besides Russia, USA and China have emerged as the main contenders with Iran playing a side role. Their aim is control of oil and gas production as also the pipelines that deliver the energy resources. The transit route through Iran to the Gulf would be the most economical outlet but the US seems determined to block it, because such a solution will strongly reinforce Iran’s position in both the world oil market (change over to Euros from Dollars and transit for the oil) and in the political context of West Asia. With Iraq and Afghanistan already in its politico-military sway, undercutting Iran is an obvious way for the US to exercise containment of the emerging world power –– China and keeping Russia within manageable bounds. This may be the prime reason for making so much fuss on Iran’s nuclear activities. Japan is another major importer of oil, for geographical reasons, has made moves only towards the Iranian and Russia’s Siberian oil and gas reserves on purely commercial terms.

The 9/11 Effect

The US undertaking of war on terror after 9/11 and in the light of the rise of radical Islam, America is now considering reduction of its dependence on Middle East oil. Moreover, to offset the growing influence of Middle East oil producers, non-OPEC countries in Africa and Russia have increased their production considerably. It has even been suggested that Russia could take on OPEC and help shift the hub of global oil supply away from the Middle East. Even though Russia’s oil production did increase to the point that it became the second largest exporter behind Saudi Arabia, its prospects of becoming a key player in the oil market in the long run are dim because of the depleting reserves. United States, which consumes more energy than any other country in the world, imports roughly half its oil. Hence oil plays a key role in its strategic manoeuvres in the world in general (Venezuela/Nigeria/Indonesia) and Asia in particular. So the great game over Central Asian energy resources is the ‘flavour’ of the new century.

Russia being a constant factor, seeks to retain both economic and political control of the region. In the Soviet era, it had already connected Azerbaijan and other Central Asian republics to its territory and Europe by a network of oil and gas pipelines. The United States having now emerged as the world’s sole superpower, has universal interests. As the world’s leading oil importer harbouring the major part of the world’s oil industry, it has a persistent interest and a stake in and preferably a control of the world’s major oil producers, wherever they are. The Central Asian oil and gas reserves therefore present a tempting fare to US oil companies, thereby making Washington evince an avid interest in this region. The politico-military aspect of the power play has been covered in a previous article “Central Asia –– A Chessboard of Power Play”. The intricate game over energy in the region is detailed in the succeeding paragraphs.

Control over Oil and Gas

For Russia energy has emerged as a tool for strategic leverage, in effect replacing its traditional reliance on the "hard power" of military with a new exercise of the "soft power" of energy resources. The use of this soft power as leverage consists of three components. First, it has supplemented, and in some cases even projected, an effective reassertion of Russian power and influence within the so-called "near abroad" of former Soviet states. Most notably, this can be seen in the Russian dominance over the energy sectors of much of the South Caucasus and Central Asia. Second, it has also featured the use of energy as a tool for strengthening state power, empowering Russia's status as a regional and an Asian power. And thirdly, it has afforded Moscow an attractive way to restore its international position and regain its geopolitical relevance. Russia signed a long-term cooperation accord with Turkmenistan covering natural gas exploration, production, processing, transport, and marketing. Just ten days before this deal, Gazprom announced having reached a similar agreement with Kazakhstan over that country's oil resources. It has also a fair share of the Azeri oil and gas resources though the US and Europe have managed to cut into the bounty. Russia has also succeeded in stalling US political and military forays in all Central Asian states and at present glides smoothly over the present and future energy sources of the region with China as a strategic partner.

In Oct 05, Beijing scored a second major geopolitical coup when it completed a $4.18 billion takeover of PetroKazakhstan Inc. It was, in a sense, revenge on Washington for the blocking of China’s acquisition of Unocal. US oil majors had made major efforts to lock up Kazakhstan oil after discovery of major oil offshore in the Kashagan field. The Kazakh president Nazarbayev, in spite of having good relations with Russia's Putin (he was general secretary of the Communist Party when Kazakhstan was part of the USSR), kept his reputation of being a sly fox in dealing with Moscow, and turned down Russia's Lukoil offer for the PetroKazakhstan Inc, while the Indian bid was pipped by the Chinese. Before that Condoleezza Rice's company, Chevron, was the lead oil contractor and operator in the Kazakh Tengiz oil field. Now, a decade later and with the scope of Kazakh oil deposits dwarfing others in the region (estimated to be twice that of North Sea) with its recent confirmed drillings in the Kashagan field, Nazarbayev has scored a political balance of power coup by turning to Beijing.

Earlier at the end of 2004, Beijing signed a $100 billion deal with Iran to import 10 million tons of liquefied natural gas over a 25-year period in exchange for a Chinese stake of 50% in the development of the giant Yadavaran oilfield. This is China's largest OPEC energy deal todate and includes construction of related petrochemical and gas infrastructure as well as pipelines. A second phase in the Iran–China strategic energy cooperation will involve constructing a pipeline in Iran to take oil some 386 kilometers to the Caspian Sea, there to link up with the planned pipeline from China into Kazakhstan. On signing the deal, Iran's Petroleum Minister announced that Tehran would like to see China replace Japan as Iran's largest oil importer. Iran now supplies about 14% of China's oil.

PetroChina recently inked a MoU with Myanmar to supply 6.5 trillion cubic feet of gas from Block ‘A-1’ of the Shwe gasfields in the Bay of Bengal for over 30 years. The decision came as a major blow to India whose two state owned companies –– ONGC and GAIL –– hold 30% equity in it. It also marked one more victory for Beijing energy giants which have consistently been beating Indian energy firms in the acquisition of oil and gas reserves around the world. India's state-owned oil giant Oil and Natural Gas Corporation (ONGC) has lost to Chinese companies, in Kazakhstan, Ecuador, Angola and Nigeria. Now, with Block A-1 gas from Myanmar going to China, the cost of transportation will increase as the other available block close to India is A-2, which will require an additional 150km of pipeline for the gas to reach here. India’s oil diplomacy has not been sufficiently geared to meet the competition from China. The cash-rich Chinese firms are favourably placed as they can dispense government aid to secure deals as well as draw on hefty credit lines from Chinese financial institutions.

India has made moves to buy 7.5 million tons of LNG a year for 25 years from Iran but the deal has not yet been ratified by the Iranian President and there is now a question mark over it due to India’s vote on referring Iran’s nuclear affairs to UNSC. India's Petronet and Qatar's Ras Laffan LNG Company (Rasgas) have signed an agreement for the provision of 10.3 billion cubic meters per year of LNG, and deliveries began in January 2004. India has also taken equity stake in Russia’s Sakhalin oil/gas fields.

Besides already having secured sizeable oil supplies from Tehran, Japan two years ago sealed a deal with Iran on a billion-dollar project to develop Azadegan oil field, estimated to hold the World's second-biggest single oil reserves. Of late Washington has raised objections to this deal. Iran as Japan's third-largest oil supplier provides 14% of Tokyo’s needs. Japan has also made large investments in the development of Russia’s Siberian oil and gas fields. Offshore of Russia’s Sakhalin Island, Japanese companies are participating in the first $10 billion slice of what could be a $100 billion development of oil and gas reserves believed to rival the North Slope of Alaska. Japan imports nearly 60 percent of its oil from the Arab countries.

With gas emerging as an equally valuable energy source, China and Japan are shadowing each other in the East China Sea. With China laying a 300-mile gas line to offshore deposits, Japan has complained that China will tap into a 246 billion cubic meter gas field that is partly Japanese. With each country's exclusive economic zone in dispute, China's moves to develop the gas have been met by Japanese naval/survey ships, exploring the contested area in the southern tip of Okinawa Prefecture. In the rivalry between Japan and China for Russia's eastern petroleum, China seems to have surged ahead as during his recent visit to Beijing on 21–22 Mar 06, Putin declared that the planned natural gas pipeline to China would begin delivering gas within five years and supply up to 80 billion cubic meters annually. The gas supplies would come from fields in both western and eastern Siberia. Russia has also promised to ship 15 million tons of crude oil in 2006, more than a tenth of China’s needs.

Race for Pipelines

Baku–Tblisi–Ceyhan (BTC) Pipeline. The 1,700 km, $3.6 billion Baku (Azerbaijan)–Tblisi (Georgia)–Ceyhan (Turkey) oil pipeline that opened in May 05 is a US sponsored move to bypass Russia, Black Sea and Bosphorus for oil supplies from Azerbaijan and other states of Central Asia. It plans to eventually pump one million barrels of oil per day up to the Mediterranean Sea close to the Syrian coastline. The present US thrust against Syria could well have more to do with the fact that the Syrian coastline is too close to where this pipeline ends than with the so-called foreign insurgents in Iraq. Question marks about BTC’s economic viability have arisen as the Azeri oil wells are depleting and Kazakhstan is yet to commit its oil to this pipeline. The US is trying hard to persuade Alma Ata to opt for the Baku–Ceyhan pipeline for the flow from the Kashaghan oilfields and president Bush is due to visit Kazakhstan later this year.

Kazakhstan–China Pipeline. On 15 Dec 05, the state-owned China National Petroleum Corp (CNPC) inaugurated an oil pipeline running from Kazakhstan to northwest China. The pipeline undercuts the geopolitical significance of the Washington-backed Baku–Tbilisi–Ceyhan (BTC) oil pipeline which opened earlier last summer amid big fanfare.

Making the Kazakh–China oil pipeline link even more politically interesting, from the standpoint of an emerging Central Asian move towards some form of greater energy independence from Washington, is the fact that Russian companies have agreed to help fill the pipeline with oil, until the Kazakh supply is sufficient thereby implying closer China–Kazakhstan–Russia energy cooperation. This pipeline runs 962 kilometers and will take China a third of the way to Kashagan in the Caspian Sea. Once the link between Kenkiyak and Kumkol is finished, connecting existing infrastructure near the Caspian with the portion inaugurated on 15 Dec, the project will pump 1 million bpd. That would be about 15% of China's crude oil needs. China then plans to tap into production from dozens of Kazakh sites it has acquired during the past several years. This is the oil that currently goes west, or north through Russia. There is also a proposal to connect this pipeline with the Iran’s oil from the giant Yadavaran fields which China has contracted to develop.

The Japanese Route –– Angarsk–Nakhodka  The Chinese/Japanese competition for becoming the primary partner for Russian energy exports from the Far East is much less a commercial competition than a complex game as in the case of the Baku–Ceyhan oil pipeline where geopolitical considerations far outweigh any and all commercial aspects. The Japanese route, from Angarsk to Nakhodka, would be roughly double the price and, at a projected 3,700 kilometers, would be significantly longer than the Chinese alternative to Daqing. For Tokyo, the Angarsk–Nakhodka pipeline is significant for two strategic reasons. First, the pipeline could result in a substantial reduction in Japan's reliance on Middle East oil imports. The second strategic factor stems from the fact that if Tokyo is able to conclude a successful agreement with Russia, it would represent a strategic reengagement with Moscow –– important in view of the marked decline in Japanese economic and political influence, and even presence, in Russia. But the main obstacle for this project is the territorial dispute with Russia over the Kurile Islands which is rooted in history and remains an unresolved issue. 

The Chinese Route –– Angarsk–Daqing   The Chinese route, running from Angarsk to China's energy-rich region of Daqing, would be considerably shorter, at 2,400 kilometers, and significantly cheaper –– costing $1.7 billion as against $5 billion for the Nakhodka terminal, thus making it practical to build for 600,000 barrels a day of exports, an amount that the region could produce. The pipeline would be the largest economic cooperative endeavour between Russia and China and significantly during his visit to Beijing on 22 Mar 06, president Putin had affirmed that this project would be completed within the next five years.

Turkmenistan–Afghanistan–Pakistan–India (TAPI) Pipeline   With a cloud over the Iran–Pakistan–India (IPI) gas pipeline due to US objections, India has virtually decided to join the US-backed Turkmenistan–Afghanistan–Pakistan–India (TAPI). Paradox-ically, New Delhi has found an uncommon ally in Islamabad, which is pushing for India's involvement in the TAP as well as the IPI.

Afghanistan and Pakistan have been seeking India's participation as vital for the TAPI's viability, which would stretch from the Turkmenistan–Afghanistan border in southeastern Turkmenistan to Multan, Pakistan (1,270 kilometers), with a 640km extension to India. The TAPI not only provides a southern exit route for the land-locked Central Asian gas that will not have to cross Iran or Russia, it is also an important cog in Washington's Afghan rehabilitation plan as it will earn substantial transit fees. With potential hydrocarbon reserves of over 45.44 billion tonnes of oil equivalent, Turkmenistan can significantly increase supplies to the international market. As on 18 Mar 06, Pakistan has decided to start the $5 billion pipeline project to import gas from Turkmenistan provided Ashgabad confirms availability of sufficient reserves.

Iran–Pakistan–India (IPI) Gas Pipeline. While India, Pakistan and Iran go through the motions of pursuing the IPI project, apparently unaffected by the International Atomic Energy Agency's referral of Tehran to the UN Security Council, most observers claim that the prospects of the pipeline materialising are now remote. The $7 billion pipeline that Washington opposes would be 2,700 kilometers long and was first proposed in 1994 but progress has been slow, firstly due to tensions between the nuclear armed rivals and neighbors India and Pakistan and secondly because USA has put it on the chopping block.

All the same, the three sides have been talking and there are some differences over the pricing. Another one is on terms of payment. Iran insists that India sign a "take-or-pay" contract, meaning that India would be obliged to pay for gas whether the gas was actually imported and consumed. But India has suggested a "supply-or-pay" arrangement in which Iran is contractually obligated to deliver gas at the Indian border with Pakistan, or else pay for the quantity not delivered. Further, the Iranian vice president Rahim Mashaee during his visit to Delhi on 27 Mar 06 said there is “good news” on IPI and in-principle clearance had been given.

The Myanmar–China Gas Pipeline. Myanmar is taking India for a ride on supplying gas from fields where two Indian state owned companies hold 30% equity. While assuring New Delhi’s share, it is going ahead with plans to lay an export pipeline to China in return for soft loans to jack up its own drilling capabilities. Myanmar has been getting impatient with India over the delay in settling the transportation issue over the Myanmar–Bangladesh–India (MBI) pipeline.

The survey by PetroChina for laying a 2,380-km pipeline from Myanmar’s Kyaukphyu in the Bay of Bengal to Ruili in China has been completed. China’s MoU with Myanmar envisages supplying 6.5 tcf (trillion cubic feet) of gas for 30 years from Block ‘A-1’ field in which ONGC Videsh owns 20% and GAIL 10% equity. Now the available block close to Bangladesh bordering area is ‘A-2’ and if the Myanmar authorities want to sell gas to India, at least 150 km additional pipeline will have to be built to bring gas to India. The earlier project was mainly designed to bring gas to India from Myanmar's A-1 block, which is near to Teknaf of Bangladesh.

Myanmar–Bangladesh–India (MBI) Gas Pipeline. A year after India, Myanmar and Bangladesh signed a trilateral pact to collaborate on the MBI project, serious doubts over its viability have arisen due to differences over many other issues between New Delhi and Dhaka.

Though Bangladesh stands to earn substantial transit fees of $125 million per year, it has set conditions that include creation of corridors through India to carry out trade with other neighbors, such as Nepal and Bhutan, as well as steps to reduce its $2.5 billion trade deficit with India. New Delhi appears to have made up its mind to bypass Dhaka, even though the cost of the pipeline stands to increase substantially. At the third meeting to which Bangladesh was not invited, New Delhi talked of the possibility of constructing the pipeline from Myanmar into Mizoram and onwards to Assam and culminating in West Bengal. The shortest pipeline route is from Myanmar to Bengal through Bangladesh while the alternative land route would be twice the distance. India is also considering shipping the gas as LNG/CNG, in an undersea pipeline or a swap deal.

Conclusion

The race for energy resources in Asia is being run by many contenders some established ones and the others as new entrants. Russia has a historical advantage and with China and Iran in the team, it seems to have checkmated USA for the time being. China is likely to substantially reduce its oil imports by sea from Iran and Middle East thus avoiding American military threat from sea and airborne attacks. However, Japan and India will have to depend mostly on this mode of supply which requires constant maritime security. Does that mean greater US–Japan–India naval cooperation? What problems could Pakistan in league with China pose to India with its Gwadar port nearly ready? Could Iran–Pakistan–India pipeline be an antidote? Answers to these questions lie in how the concerned countries would act in pursuance of their respective interests. But the next 20 years are going to be filled with tremendous interest and excitement.

India will be watching the expanding horizons of Russia–China energy cooperation with mixed emotions. Last year at a meeting of the newly constituted business council in Vladivostok between the foreign ministers of India, China and Russia, New Delhi had signaled that energy cooperation is at the top of its concerns, while working with Russia and China in a new spirit of regional cooperation. Russian–Chinese cooperation holds implications for India in terms of the politics of energy security. It underscores the reality that while nuclear energy could be an option for meeting energy needs in the medium and long term, oil and gas will remain the main sources of energy, at least for the next quarter century –– especially gas. India would therefore have to closely monitor how the Russian–Chinese equations develop in the fields of oil, gas and nuclear energy.

India also cannot overlook that Russia and Iran are the only viable sources of gas supplies for the Indian market. Also, Russia virtually controls the entire gas flows of the post-Soviet space, including Central Asia. From the perspective of energy diplomacy, therefore, India's friendly relations with Russia and Iran assume a greater criticality than ever. This brings back to focus the Iran gas pipeline project for India (IPI), no matter what Washington may tell Delhi. Furthermore, in the light of the upcoming gas pipelines from Siberia into China, Delhi should look seriously at the viability of extending these Russian pipelines to India through China in possibly in a rough north–south direction along the existing railway lines and roads in Kazakhstan and the Xinjiang region of China. For any of the possible pipeline grids, the hubs would be Urumchi and Kashgar in Xinjiang and then to Yarkand, Shahudullah and India. China holds the key to the success of such pipeline alignments.

China could conceivably be interested in swap deals with India, namely, buying India's oil and gas in Sakhalin in exchange for the oil and gas produced in its assets in Xinjiang and Kazakhstan. There could be an overland route via India to China for the Persian Gulf region oil/gas (extension of IPI) which can do away with the long and perilous supply lines through the Indian Ocean via the Malacca Strait and the South China Sea. The proposed TAPI could also be extended to Kazakhstan to integrate the Central Asian oil and gas resources. All this may appear wishful thinking but economic interests invite us to give these ideas serious consideration and diplomatic momentum. In the present day world, economic interests overwhelmingly drive national policies and can bring what appears far fetched today, in the realm of reality tomorrow.