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India must return to Eurasian energy game

If the great game over the energy resources of the Caspian Sea and Central Asia were to be compared to a five-act Shakespearean play, we might say Act III, Scene I has just begun. On a Venice street, Shylock famously posits to Salarino the metaphorical relationship of intricate counter-balances: “If you prick us, do we not bleed? If you tickle us, do we not laugh? If you poison us, do we not die? And if you wrong us, shall we not revenge?”

The geopolitics of energy in the Central Asian steppes cannot have a better description. The interlocking trends are several. Russia remains the lead player but the United States is aggressively striving to retake some of the territory it lost. Central Asian countries have become savvier in creating space for themselves as energy exporters. Meanwhile, an ancient traveller has appeared on the Silk Road leading from Kashgar. China has raised its head above the parapet. This holds the prospect of transforming the great game over energy into a “multipolar” affair in the spirit of our times.

To be sure, the robustness and sense of direction in the Kremlin’s energy diplomacy in recent years have inevitably come to be associated with President Vladimir Putin’s leadership. During the last two months, despite the Russian leader’s watch of the Kremlin apparently ending, he continued to press ahead with his string of successes. On November 27, 2007, Russia’s Gazprom and Italy’s Eni signed a deal on the South Stream project, a 900-km under the Black Sea from Russia to Bulgaria. The 30 billion cubic metre capacity pipeline will strengthen Russia’s position as Europe’s main energy supplier and further diminish the viability of U.S.-sponsored projects such as the Trans-Caspian Pipeline and the Nabucco gas pipeline project, envisaging the transportation of Caspian oil and gas bypassing Russia.

On December 12, Russia agreed with Kazakhstan and Turkmenistan on constructing a Caspian littoral pipeline for transporting Turkmen and Kazakh natural gas to Russia. During the visit of Greek Prime Minister Costas Karamanlis to Moscow in mid-December, Russian-Greek cooperation in South Stream was fleshed out and an accord was initialled on the so-called Burgas-Alexandroupolis project, an oil pipeline almost parallel to South Stream.

On January 18, Russia and Bulgaria signed a multilateral agreement on South Stream, which could have potential branches reaching Greece, Italy, Serbia, Hungary, Austria, Croatia, and Slovenia. A spectacular deal concluded in Moscow on January 25 envisages Gazprom’s takeover of Serbia’s entire energy sector, shifting the locus of geopolitics of the Balkans. An American commentator warned: “Moscow plans to use Serbia’s territory as a gateway to break into Central Europe.”

Again, on January 25, 2008, Gazprom signed a deal with Austrian energy company OMV to jointly operate Europe’s third largest energy trading hub at Baumgarten. On the same day, Kyrgyz Prime Minister Igor Chudinov announced, while on a visit to Moscow, that Kyrgyzstan would be selling its national gas company to Gazprom.

Washington is scrambling to react to Russia’s strategic coup. A new office has been created in the State Department — Coordinator of Eurasian Energy Diplomacy. A search is on for a special envoy on energy diplomacy. Washington seems to be reverting to its strategy of the early 1990s of gaining access to energy reserves before working on transportation routes. The diplomatic focus will be on Kazakhstan, Uzbekistan, Turkmenistan, and Azerbaijan.

The high profile visits in January by the former chairman of the U.S. senate foreign relations committee, Senator Richard Lugar (who remains a major force in the foreign policy establishment), to Baku — two other Congressional delegations also visited Baku earlier in January — and by Admiral William Fallon, head of the U.S. Central Command, to Tashkent underscored this. Clearly, there is a sense of urgency on the part of the George W. Bush administration for achieving diplomatic results in the Caspian Basin during its remaining term in office.

Geopolitically, the revamped U.S. diplomacy will almost certainly speed up the integration of Georgia and Azerbaijan into the North Atlantic Treaty Organisation. NATO is poised to discuss energy security issues at its coming summit meeting in Bucharest, Romania, in April. But despite strong efforts, Washington has not succeeded in getting the European Union to rally behind it in confronting Russia, much as the EU is committed to diversifying its energy imports. Thus, it came as a big disappointment for Washington when the EU spokesman described South Stream as a complementary project, and not a competing one, to Nabucco.

Besides, it is doubtful whether the distractions over Iraq and growing worries over the U.S. economy will allow the Bush administration to focus on energy diplomacy with the same high-level attention that the Kremlin devotes. The U.S. may lack the political influence to overcome Russian opposition. Russia is an established partner and the Central Asian countries need to be convinced that Western companies are a better option. Also, Russia is flush with funds for investment.

But another worry for the U.S. will be China’s growing access to Kazakh oil and Turkmen gas. China is virtually replacing the U.S. in Kazakhstan’s energy policy. The phenomenal economic development of Xinjiang opens up for Kazakhstan a market next door with an unlimited capacity to absorb its energy exports. The China National Petroleum Corporation is finalising a production-sharing agreement on the Darkhan oil field in the eastern Caspian, which is estimated to hold more than 11 billion barrels of oil. Construction of the $1 billion 750-km long Kenkiyak-Kumkol oil pipeline is to commence in March and is expected to be completed by October 2009, forming the second phase of the multistage Kazakh-Chinese pipeline projects.

Work has begun on a 7,000-km pipeline with an annual capacity of 30 billion cubic metres that will take Turkmen gas to China by 2009. [The pipeline is extendable to Iran.] China is separately building a massive 7,000-km West-to-East pipeline grid costing $5 billion that will transport Central Asian gas from Xinjiang to Guangzhou, capital of the southern province of Guangdong, and further eastward to end at Shanghai. Chinese investors are developing under production-sharing agreements the gas fields in the Bagtyyarlyk region of the eastern side of Amu Darya and in Uzbekistan for feeding the pipeline to Xinjiang.

It is very obvious, as a leading Russian expert wrote recently, that the “big Eurasian oil and gas war” is far from over. The skyrocketing oil prices are prompting consumer countries to flock to the Caspian and Central Asian oil and gas reserves. Therefore, India’s absence from the scene is extraordinary. Delhi lacks coherent energy diplomacy toward the region. Our oil majors seem more interested in taking billion dollar stakes in Canada’s oil sands assets than in the pursuit of energy reserves nearer home. True, Central Asia is a difficult region, but with the right mix of political and financial capital, India could still make headway.

The opportunity lies ahead for exploring and developing oil and gas fields in Central Asia — specifically Turkmenistan, Kazakhstan, and Uzbekistan. The primary task will be to convince the Central Asian leaderships to grant Indian firms the opportunity. There is hardly any time to waste in wooing the Central Asian leaderships. So far we have been confining ourselves to pious declarations. As an American official said with biting sarcasm, “Pipeline declarations are a dime a dozen. If declarations counted, we would have seen pipelines criss-crossing Afghanistan into India. You only know that a pipeline is real when you get to financial close.”

The energy game in the Caspian Basin will never be the same in the coming months following Kazakhstan’s stunning success in renegotiating and doubling its stake in the Kashagan project in a deal with a powerful foreign-dominated consortium that includes Eni SpA, ExxonMobil, Royal Dutch Shell, Total, and ConocoPhillips. Again, the implications of Iran’s imminent entry into the international energy market are going to be far-reaching. Significantly, talk has revived about the major gas-producing countries forming a cartel as early as June when the Gas Exporting Countries Forum holds its next session in Moscow.

So, where indeed does India’s problem lie? At the institutional level, the problem seems to be that the External Affairs Ministry, which has expertise in the region, plays only a peripheral role in energy diplomacy. It is a catch-22 situation. Without a presence in the hydrocarbon sector, economic interaction with Central Asian countries becomes difficult.

That limits the intertwining of India’s geopolitical interests with the interests of those countries. In turn, the inability to intertwine puts us at a disadvantage while bidding for energy deals.

China came from far behind and overtook India. Its success offers useful lessons. Like in a Shakespearean playhouse, watching the great game involves using the imagination. There are no backdrops, no lighting, no horrific acoustics — only exaggerated movements on the 5 feet high main stage, and the actors are not even shouting their lines to be heard by all.

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