An Ukrainian lesson (for India)

Depending on a single supplier is a bad idea

Russia sells its natural gas at two prices. Countries in its sphere of influence pay in the order of $50 per thousand cubic metres. Others, like many EU countries pay ‘market rates’ of about $230 per thousand cubic metres. Post-Orange revolution Ukraine under President Viktor Yuschenko wants to move away from Russian influence. So President Putin of Russia wants Ukraine to pay the (market) price. When it refused, Russia turned off gas supplies and turned on the political pressure. What effect this will have on world politics and energy prices and how Ukraine rides out this crisis remains to be seen. But there are immediate lessons for India.

Ukraine depends on Russia for most of its gas supplies — even the gas it receives from Turkmenistan is supplied by Gazprom, Russia’s state-owned energy firm. If India proceeds to build a pipeline to access natural gas from Iran, it will find itself in situation not unlike (but much more complicated than) Ukraine’s. There will only be one supplier connected to the gas pump. If Iran decides to turn off the tap — for whatever reason — then there is little that India will be able do. While purchasing natural gas from Iran itself is not in question, the manner in which it is transported to India will have strategic implications for India’s energy security. Because building new pipelines takes years and existing pipelines cannot be diverted, an Iran-India pipeline will give Tehran unprecedented influence over India. And then there is Pakistan. (Read Atanu Dey’s point too)

The Acorn has argued that there is an alternative to the Iran-Pakistan-India pipeline. That alternative relies on investing in facilities and infrastructure at home to be able to plug in to the global energy supply chain. This will allow India to purchase natural gas not just from Iran, but also from any other country that sells it, including Russia, Indonesia and Timor Leste. But no single supplier will be hold the government to ransom. Perhaps they’ll listen now.

“For seven years, [former Chancellor] Schroeder narrowed the German energy strategy on Russia,” said a commentary in the German newspaper Die Welt. “It is now in the hands of the new federal government to secure sources of natural gas for Germany that are outside Russia. The example of Ukraine should teach caution to all of Europe.” [WP]

That leaves a huge energy gap to fill. And relying on Russian gas is now exposed as a very risky way to fill it…
Whatever happens, it’s clear that the UK needs a secure energy supply. That means getting energy from a diversity of sources. And bringing new nuclear generation capacity back on stream. [ASI]

6 Responses to An Ukrainian lesson (for India)

  1. Chandra Dulam 3rd January 2006 at 01:19 #

    I think the parallels between Ukraine (and Germany) and India are few. First, India would be buying natural gas at market price (not at 80% discount) with only supplies guaranteed by Iran. Second, Iran is not the sole source of gas to India. Myanmar (with or without Bangladesh) and possibly Turkmenistan through Afghanistan (which really wants the cash) and Pakistan may be future sources routes for shipping gas via pipes. India is working on expanding LNG terminal infrastructure on the west coast. Also, India has its own growing gas reserves in Krishna/Godavari basin in the east coast. And third, India and Iran are friendly but one is not under the sphere of influence of the other.

    Obviously, Mr. Aiyar and his babus need to negotiate penalties on Iran and Pakistan if they purposely stop the flow of gas (Pakistan being part of WTO may help). PM Singh and Mr. Shyam Saran have made India’s policy with respect to Iran nuclear issue clear. Despite that Iran wants to move forward. The power of suppliers of oil and gas is largely over blown. But consumers and suppliers lose, suppliers more so if they act against contracts.

    If the objection is moral because of Iranians nutso behaviour, then let’s all hold moral candles and sit in darkness.

  2. Das 3rd January 2006 at 03:26 #

    Excellent post. Yes, the Ukrainian lesson is one of those rare in-your-face demos of what would happen if India takes the “oil from Iran” route. Unfortunately, oil is literally the lifeblood of today’s economy and having a single supplier or a set of inimicable suppliers is taking a risk too high. So, definitely, the Iran-Pakistan oil route is at best a dangerous option to pursue. Iran’s posturing of late is no help either.

    Investing in local resources is an alternative, certainly. However, I’m not quite clear how this “plugging into the supplier chain” would make it any easier for India to get oil from other countries. Someone has to build these oil pipes from Indonesia etc, right? Are there parallels of other countries which are dependent on other countries for oil transforming themselves into a supplier country and consequently getting oil from other countries? I’d like to understand what is the basis of your opinion on pushing for local resources within India.

    Also, investing in local resources is *extremely* financially intensive. Ask Chevron/Exxon etc … finding oil resources is expensive. Is it feasible for India to undertake this? Maybe … long-term. What about short-term needs? I see China trying to *purchase* oil giants abroad – basically becoming a decision-partner in an oil supplying company. Is this an easier or less financially intensive way?

    Are there other alternatives?
    –Das

  3. Nitin 3rd January 2006 at 09:11 #

    Chandra,

    The argument is that the pipeline, once built, will be tied to a single supplier. That’s the similarity. Of course, many pipelines can be built to various countries that have gas; but even if that happens you will find that in every case, you will have a dubious regime supplying it and a dubious regime running the country through which the pipes run.

    Sure, any kind of commercial penalties can be worked out and agreed upon. In case of Iran, a regime change is a real possibility. In the case of Pakistan, those guarantees are not worth the paper they are printed on. Of course, India can go to war to recover its dues… That’s why Prime Minister Manmohan Singh pointed out that such a project is commercially risky.

    Das,

    Plugging in to the global supply chain is not by means of pipelines (although it does not exclude them) (see this link). Essentially, India can procure oil & gas from international suppliers, and here’s the interesting thing, it may not even need to spend as much as it intends to on the pipeline. Given the size of India’s economy, private investors will find it attractive to invest in petrochemical facilities if the government only allows them! The billions of dollars that Mani Shankar Aiyar wants to sink in Iran and Pakistan can be put to better use to build ports, roads and facilities on India’s west coast.

  4. Chandra Dulam 3rd January 2006 at 14:07 #

    Nitin, most countries that have huge reserves of oil and gas have dubious regimes except perhaps Norway. Unfortunately that’s the nature of energy business. Here is a recent news analysis in NYT about how natural gas suppliers have a hard time controlling the market. Repeatedly we can see examples of suppliers losing lot money if they act stupidly. If and when India becomes a big energy market, suppliers would need India to continue to exploit their resources – economic well-being will dictate most energy rich countries future actions.

    http://www.nytimes.com/2006/01/03/business/worldbusiness/03gas.html

  5. Das 4th January 2006 at 13:38 #

    Nitin,
    Good point – oil laden ships are indeed a much better alternative to pipelines.

    Thanks for clarifying.
    –Das

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