India is the world’s second most populous country (after China). Its population is projected to increase to 1.46 billion by 2030 from 1.09 billion in 2006. This expansion means an increasing number of energy consumers.
India’s energy outlook is further complicated by its robust economic growth. After years of pursuing economic policies based on import substitution and state ownership of key industries, India’s government has embarked on a series of economic reforms since the mid-1990s. This economic liberalization includes a relaxation of restrictions on foreign ownership in some sectors and privatization of some industrial enterprises. These reform policies are considered the main drivers for the nation’s economic growth.
India is projected to maintain its impressive economic growth in the foreseeable future. During 2003-30, the world economy is expected to grow by 3.1%/year, while India’s economy’s growth rate will be 5.8%. Without reliable and affordable energy, India will not be able to sustain high economic growth. Its fast-growing economy and rapidly increasing population raise serious concern about the nation’s energy security.
Indigenous production has failed to keep pace with rising demand, and the already large gap between energy production and consumption is growing larger. Because this skyrocketing energy demand has been increasingly met by imports, India is growing more dependent on and vulnerable to foreign energy supplies.
Energy mix
India currently is the world’s fifth largest energy consumer-after the US, China, Japan, and Russia. Like other major energy consumers, India seeks to diversify its energy mix. The nation’s energy sector is largely dominated by coal, followed by oil, and to a lesser extent natural gas. New Delhi plans to reduce its dependence on fossil fuels by expanding its reliance on nuclear power.
India holds the world’s fourth largest proved coal reserves (after the US, Russia, and China) and is the world’s third largest coal producer and consumer (after the US and China). Coal satisfies more than half of India’s energy demand, particularly in the electric power generation sector. Coal production is controlled almost entirely by the government.
Oil accounts for about one third of India’s energy consumption. Most of the oil and its products are consumed in the transportation, commercial, industrial, and domestic sectors. India holds limited proved oil reserves, with only 0.5% of the world’s total. The country accounts for only about 0.9% of total world production but about 3% of worldwide consumption. India consequently imports 70% of its oil supply. Given stagnant production and a high depletion rate, India is expected to continue importing an incrementally large proportion of its oil supply.
The search for oil in India started in the 1860s when the country was under British occupation. Upon independence, the government realized the importance of oil in consolidating its political and economic development. In the mid-1950s the government set up the Oil and Natural Gas Directorate to develop natural resources. Later, the directorate was elevated into a commission with additional powers. These institutional initiatives underscore the government’s intention to maintain a dominant role in the oil industry. The intentions became clearer in 1959, when Oil India Ltd. (OIL) was created, with substantial government ownership and control.
In the following decade, the government tried unsuccessfully to attract private investment to oil exploration and development. But private companies hesitated to participate in India’s oil industry for two reasons: the low recovery rates and uncertain political climate.
In line with the state-led economic strategy, India in the mid-1970s nationalized the few private and foreign oil companies operating in the country. In addition, the Administered Pricing Mechanism (APM) was introduced to set the price of petroleum products. These steps ensured a dominant government role in the oil industry and eliminated private and foreign competition. As a result, the oil sector suffered from inefficiency, and production levels became stagnant. In response, the New Delhi government decided to change course and adopted a new measure known as the New Exploration Licensing Policy (NELP) in order to again attract foreign investment.
Most of India’s oil reserves are located in the Mumbai High, Upper Assam, Cambay, Krishna-Godavari, and Cauvery basins. The offshore Mumbai High field is by far India’s largest producing field. Production from these reservoirs has proven insufficient to meet the country’s skyrocketing demand. The nation’s oil consumption is projected to rise at a rate of 2.4%/year by 2030 to 4.5 million b/d from 2.3 million b/d in 2003. Meanwhile, production will rise to 1.4 million b/d from 800,000 b/d during the same time.
Natural gas
Like oil, India holds limited proved gas reserves-only about 0.6% of the world’s total-but the balance between gas production and consumption is a little better than that of oil. India’s share of world gas production is 1.1%, while its share of world consumption is 1.3%.
India is a relative newcomer to the use of gas. However, in the last few years, gas has become the fastest growing source of energy in the country. Its share of the nation’s energy consumption rose to about 7% in the mid-2000s from 2.5% in the 1980s. By 2030, this share is projected to rise to more than 10%. The surge in gas consumption is due to its being a less polluting fuel than coal or oil.
In order to meet growing demand for gas, the government has invested substantial resources in exploration and development. Since the early 2000s several important new discoveries have been announced. These include a discovery in the Krishna-Godavari basin off Andhra Pradesh along India’s southeast coast, another one off Orissa, and a third one off Gujarat. However, India will grow more dependent on imported gas.
New Delhi has considered two options for importing gas: LNG and pipelines. The nation’s first major gas import deal was effected in January 2004 with the start of deliveries to the Dahej terminal from Qatar’s Rasgas LNG plant. India’s Foreign Investment Promotion Board actually approved 12 prospective LNG import terminal projects in the mid-1990s, but this plan was considered unrealistic because the combined capacity would have exceeded the most optimistic demand projections. Consequently, the government froze approvals of new LNG terminals in 2001. By 2009-10, Gas Authority of India Ltd. (GAIL), the main gas operator, expects LNG imports to supply about 38% of consumption, up from 22% in 2005.1
Proximity to several major gas producers adds financial and strategic incentives to the pipeline option. All pipeline options rely on difficult negotiations with neighboring countries. Four pipeline schemes have been under consideration for several years that would deliver gas from Bangladesh, Myanmar, Iran, and Turkmenistan.
Nuclear power
Nuclear energy is seen as critical to fostering India’s economic growth because of the environmental, geological, financial, and geostrategic limitations on the development and importation of fossil fuels. Nuclear-energy generation, however, has fallen woefully short of projections made in the 1970s, when it was thought that 10% of the nation’s electric power would be nuclear by 2000. In 2002, nuclear power constituted only about 2% of the electricity generated in India, far less than in many other nations.2
India’s nuclear power industry received a boost from the US in the mid-2000s, however. In July 2005 Washington and New Delhi reached an agreement under which India agreed to take several steps to demonstrate its commitment to being a responsible nuclear power and supporter of nonproliferation goals. In exchange, the US agreed to permit exports of nuclear equipment and technology to India.
In December 2006 President George W. Bush signed into law a bill called the US-India Peaceful Atomic Energy Cooperation Act. Under the law, India will allow inspections of its 14 civilian nuclear plants in exchange for fuel and nuclear technology from the US. Eight military plants in India will be off-limits to inspection, though. The bill was passed overwhelmingly by the US House and Senate.
Opponents of the law warn that it could be a huge mistake that will only accelerate the proliferation of nuclear weapons and foment a dangerous nuclear arms race in Asia. Proponents of the law, however, argue that with a population of more than a billion people, India has massive and growing energy needs, and civilian nuclear technology would help it to modernize.
Despite these promising prospects for India’s nuclear energy, the implementation of nuclear cooperation with the US will take many years. For the foreseeable future, coal, oil, and gas will continue to dominate India’s energy.
Fractured energy strategy
India’s efforts to address the dilemma of energy security are further complicated by what can be described as “institutional fragmentation.” Despite long traditions of central planning and a state-led economy, there is no central authority in charge of drawing and implementing a long-term energy strategy. Many governmental institutions and private companies with competing interests vie for influence in shaping the nation’s energy policy. The long list includes governmental entities such as the Ministry of Petroleum and Natural Gas, the Ministry of Coal, the Ministry of Nonconventional Energy Sources, and the Department of Atomic Energy.
In addition, the state owns several major oil and gas companies such as Oil & Natural Gas Corp. (ONGC), OIL, GAIL, Indian Oil Corp. Ltd., Bharat Petroleum Corp. Ltd., and Hindustan Petroleum Corp. Ltd.
The Indian government and national companies are not the only players in the nation’s energy sector. Increasingly, private and foreign companies have made their presence felt. Essar Oil Ltd., Reliance Industries Ltd., Videocon Industries, British Gas Group, British Petroleum, and Royal Dutch Shell carry out major exploration and development. Despite this fragmentation among public and private entities, the government still holds decisive influence in making and implementing the energy policy.
For the last several decades the Indian government has tried to enhance the nation’s energy security and reduce its vulnerability to supply disruption. A major step in this direction is the multidimensional deregulation of the oil and gas industry. In the early 1990s the government determined that fixed prices had deprived oil companies of the financial resources needed for exploration and development.
In response, oil and products prices were raised gradually, domestic prices were linked to international prices, and eventually companies were allowed to set their own prices. These developments have transformed the overall pricing structure away from a subsidized-controlled regime to a more market-based, competitive one.
These steps to reform the pricing system were accompanied by several cuts in taxes and duties on some petroleum products. The government also has encouraged research in fuel substitution, particularly biofuels such as biodiesel and ethanol. Like other major energy consumers, India is seeking to reduce energy losses and improve conservation and efficiency.
Another major shift in India’s energy policy was the introduction of NELP in 1997. The policy seeks to attract private and foreign investors by proposing attractive fiscal and contractual terms. According to NELP, all companies would compete on an equal footing to obtain exploration licenses from the government and would have equal access to high-quality seismic data. NELP promises a stable fiscal regime and guarantees companies the right to market their oil and petroleum products.3
The efforts to attract foreign investment have achieved modest success. Direct foreign investment in the 2000s is higher than that of the 1990s but much lower than in China and other competitors. The underlying reason behind multinationals’ hesitation to invest in India’s energy sector is that the probability of striking hydrocarbons in India is perceived as being extremely low. India will continue its heavy dependence on imported oil and gas, particularly from the Middle East.
Oil diplomacy
Heavy dependence on foreign supplies suggests a growing preoccupation with energy that is certain to shape India’s foreign policy for years. The goal is to ensure continued access to outside suppliers. Indian officials describe this energy-driven foreign policy as “enlightened self-interest.” The efforts to enhance the nation’s energy security have prompted New Delhi to seek cooperation and partnerships with major oil and gas producers.
In addition, Indian oil companies have sought to acquire stakes in oil and gas blocks overseas. Indian oil companies, with governmental encouragement and approval, have won exploration and development rights in several foreign countries since the mid-1990s. The list includes Russia, Vietnam, Myanmar, Sudan, Qatar, Syria, Iran, Iraq, Australia, Cuba, and Egypt. India’s quest for equity overseas faces strong competition from the other Asian giant-China.
New Delhi’s drive to cooperate with other nations has expanded to other neighbors. India has called for the creation of a so-called Asian Oil Community to promote dialogue between the energy producing nations of Azerbaijan, Kazakhstan, Russia, Turkmenistan, and Uzbekistan and energy consuming nations of China, India, Japan, and South Korea. Given Russia’s massive hydrocarbon resources, India has expressed strong interest in investing in and working with Russian companies. India’s ONGC, for example, owns a 20% stake in Russia’s Sakhalin-1 project.
Like other energy consuming nations, India tries to diversify the sources of its oil and gas supplies. However, the bulk of India’s imported oil comes from the Persian Gulf. The top five oil exporters to India are Saudi Arabia, Nigeria, Kuwait, Iran, and Iraq. This close cooperation between the two sides reflects long-standing historical, cultural, and strategic ties.
Two recent highly-publicized developments have demonstrated these close ties between India and energy producers in the Persian Gulf. In January 2006 King Abdullah visited India on his first trip outside the Middle East since becoming the Saudi ruler in August 2005. This was also the first visit by a Saudi king to India since 1955. The kingdom does not want to be too dependent on exporting its oil to a few Western markets and seeks to diversify its oil export destinations. Accordingly, the bulk of Saudi oil is shipped to China and India under its so-called “Look-East Policy.”
The other important event was the convening of a meeting in New Delhi in January 2005 of major Asian energy consumers (China, India, Japan, Malaysia, and South Korea) and major Persian Gulf producers (Iran, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE) The goal was to foster energy partnership between the two sides and address mutual concerns about security of supply and demand. A second meeting was held in Riyadh on May 2, 2007.
The way ahead
For the next several years four projections can be made regarding India’s energy sector. First, the fundamental shift in India’s overall economy and its energy industry away from central planning to a more competitive and market-based system is likely to continue. India’s membership in the World Trade Organization since January 1995 reflects and reinforces this trend.
Second, booming economic growth in India and other Asian economies has turned Asia into the center of gravity for energy consumption. The fact that India and its Asian neighbors lack sufficient indigenous energy resources means that they will grow more dependent on foreign supplies.
Third, the International Energy Agency projects that non-OPEC production will be flat in the coming few years. Most of the incremental demand for oil will be met by OPEC members, particularly those in the Persian Gulf.
Fourth, India and other Asian countries need long-term energy supply security.
On the other hand, Persian Gulf producers need to secure markets for their oil and gas. This emerging “interdependence” between the two sides would serve their mutual interests and would contribute to the overall stability of global energy markets.
References
- Gavin, James, “Demanding Times for South Asia’s Giant,” Petroleum Economist, Vol. 72, No. 10, October 2005, pp. 26-27.
- Thyagaraj, Manohar, Thomas, Raju G.C., “The US-Indian Nuclear Agreement: Balancing Energy Needs and Nonproliferation Goals,” Orbis, Vol. 50, No. 2, Spring 2006, pp. 355-69, p.356.
- “New Exploration Licensing Policy: Will It Strike Oil?” Energy and Resources Institute (http://static.teriin.org/energy/nelp.htm), accessed Dec. 22, 2006.
The author
Gawdat G. Bahgat is professor of political science and director of the Center for Middle Eastern Studies at Indiana University of Pennsylvania in Indiana, Pa. He has taught at the university for the past 11 years and has held his current position since 1997. He also has taught political science and Middle East studies at American University in Cairo, the University of North Florida in Jacksonville, and Florida State University in Tallahassee. Bahgat has written and published six books and monographs on politics in the Persian Gulf and Caspian Sea and has written more than 100 articles and book reviews on security, weapons of mass destruction, terrorism, energy, ethnic and religious conflicts, Islamic revival, and American foreign policy. His professional areas of expertise encompass the Middle East, Persian Gulf, Russia, China, Central Asia, and the Caucasus. His latest book is “Proliferation of Nuclear Weapons in the Middle East (2007).” Bahgat earned his PhD in political science at Florida State University in 1991 and holds an MA in Middle Eastern studies from American University in Cairo (1985) and a BA in political science at Cairo University (1977).
