July 6, 2010Pax Indicageopolitics

Playing the energy game against China

Democratic governments are unlikely to necessarily prefer India over China. They are, however, likely to be less susceptible to being bought over.

This is an unedited draft of my Pax Indica column for Yahoo! (2010-2011)

Yes, India has lost several rounds of the energy resources game — as much to itself as to China — over the last few years. In a recent, well-researched article Bloombergs Rakteem Katakey and John Duce point out that in last year alone, companies controlled by the Chinese government spent $32 billion acquiring energy and resources assets around the world. In comparison, India’s Oil & Natural Gas Corporation (ONGC), also a state-owned company, spent $2.1 billion. Like that kid who comes to school in his father’s Mercedes, China’s oil companies have access to a parent with far deeper pockets. China’s foreign reserves are ten times that of India’s, the yuan is getting stronger and Beijing has purposefully used its financial strength towards buying up what it wants.

Does it mean that India has already lost the game? Not quite. Sure, China has a head start. It is exploiting this start to the fullest. From Kazakhstan to Australia, from uranium to natural gas, Chinese state-owned companies are grabbing as much of the world’s natural resources as they can get their hands on, and reaching for more. Yet, while all this sounds like someone playing a real-world game of Risk, the question for India is not how much of the world’s resources China ends up controlling. The question is whether India has access to all the resources that it needs.

Moreover, the game” is not one-off. It is a continuous ongoing game that will be played for generations. Nor is it entirely zero-sum”. It is possible to envision a world where both China and India have access to the energy resources they need. Such a world is possible even when, perhaps only when, the two countries are competing (in a free market) for those resources. Such a world, however, will certainly not come into being merely by wishing for it. It has to evolve, under the tender loving care of nuclear weapons.

The Indian government is trying to improve its score. It has set overseas acquisition targets for state-owned corporations and permitted them to spend $1.1 billion without government approval’. This might yet produce some results — especially if it is backed by political support. It is unlikely, though, that bidding wars with companies that have parents with the world’s deepest pockets are winnable. That’s not all. As India found out in Kazakhstan in August 2005, the kid whose dad drives a Merc can get the goalposts shifted after the game begins.

Clearly, India’s strategy must be different. It must be one that plays to India’s strong points. It must also be one that undermines China’s advantages. The greatest asymmetries that are in India’s favour are democracy and private enterprise.

Consider. It would be much harder for China to move goalposts by coddling the dictator if there were no dictator to coddle. It would be much easier for Indian companies to compete against Chinese ones if the former didn’t have the Government of India as the single largest shareholder. In other words, in the long term, it is in India’s interests for resource-rich countries to be democracies. It is also in India’s interests to facilitate its private sector to expand globally.

Now the idea of spreading democracy is highly controversial. During and after the Cold War, the United States used it as a slogan to install regimes that said they would do its bidding. India need not use that subterfuge, because it enjoys a bottom-up advantage in many countries. India’s engagement of many countries in Africa has been decentralised and broad-based. Niranjan Rajadhyaksha, for instance, notes that because Indian firms tend to hire local labour we could be making more friends among ordinary Africans but relatively few friends in governments.”

India has not yet tried to make political power flow into the hands of ordinary Africans. It should. Democratic governments are unlikely to necessarily prefer India over China. They are, however, likely to be less susceptible to being bought over.

The current thinking on energy security presumes that the Indian government and by extension, the companies it owns, must be the primary players. That leads to such astoundingly unsound ideas as the Iran-Pakistan-India natural gas pipeline — not only would it place a vital asset in the hands of the Pakistani military-jihadi complex, it involves a risky bilateral commercial deal with the Iranian regime. It is far better to purchase the same gas from Iran as LNG, invest in processing terminals all along India’s west coast and make it available across India through a system of domestic pipelines. If India invests in LNG infrastructure, Indian energy companies can purchase gas as easily from Russia and Nigeria as from Iran. The government would still have a role, but it would be different. Instead of investing in pipelines, it would need to ensure that the international LNG market is competitive, and secure the world’s shipping routes.

Before the liberalisation of the telecommunications sector, you would have been laughed off if you had suggested that Indian companies would operate some of the world’s biggest networks. Less than a decade later, Tata, Bharti and Reliance have large international footprints. Indeed, the Tata group turned VSNL, a state-owned company, into a globally competitive firm with assets across the globe. Why should oil & gas be any different?

There are many more Pax Indica columns here

If the Indian government cannot create the conditions for private companies to become global players, then it is hardly China’s fault. Reliance Industries has already invested $3 billion in US gas assets, yes, without government approval’. So why not let the likes of Mukeshbhai take on the Chinese companies?

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