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The Hydrocarbon Sector: A comparison of India and China’s strategy
-Priyanka deSouza
Indian Institute of Technology, Bombay
Abstract:
31% of India's primary energy mix comes from oil and natural gas. In 2010, India was the world’s fifth
largest importer of oil, importing 70% of its hydrocarbon requirements. China too, is transitioning from a
coal based economy towards the use of hydrocarbons. From being a net exporter of oil in the early
1990's, it became the second largest importer of oil in the world in 2009. The demand for hydrocarbons
in both countries is steadily increasing.
China is pursuing an aggressive strategy to expand its energy reserves in order to achieve an "ideological
preference for self reliance". India's energy security goal, as defined by the Planning Commission, is to
"supply lifeline energy to all citizens irrespective of their ability to pay for it as well as to meet their
effective demand for safe and convenient energy to satisfy their various needs at competitive prices".
Thus both countries are committed to providing energy at affordable prices and are actively seeking to
diversify and expand their portfolio of reserves by increasing their foreign sources of hydrocarbons
through national oil companies.
They are hence, concerned with their energy sea lines of transport with focus on chokepoints such as
the Strait of Hormuz and the Strait of Malacca. This talk shall highlight the tension that exists between
India and China in the Indian Ocean as well as the conflict in the South China Sea. China has also
identified diverse overland import routes for oil and natural gas such as the Burma-China pipeline. The
lecture will also address China's pipeline dream as well as what this means for India. In short, the talk
will comprise of a comparison between India and China's policies of meeting their growing demand for
oil and natural gas, increasing energy security; and the tensions that have thus arisen.
The Indian Hydrocarbon Sector
Oil, the life blood of any industrialized nation is always in demand. Natural gas too, is gaining in
importance worldwide. It is relatively environmentally friendly and is lower in cost when compared to
oil.
31% of India’s total energy consumption is accounted for by oil and natural gas, (see figure 11
)
Fig 1: Total Energy consumption in India by type (2009).
This is expected to rise. Several future energy scenarios are likely when based on different assumptions,
like, better demand-side management and accelerating the use of renewable energy. In each situation
the share of hydrocarbons in India’s energy basket is predicted to increase due to the steady increase in
population and its economic growth. Reproduced in figure 22
is one of the possible future scenarios
reported in the integrated Energy Policy report of the Expert Committee which is published by the
Planning Commission, Government of India.
1%
24%
7%
42%
24%
2%
Nuclear
Oil
Natural Gas
Coal
Combustible Renewables and Waste
Other Renewables
Source: IEA
Figure 2: 2031-32% share of commercial primary energy resources
Production and Consumption of Oil
In 2010, India consumed roughly 3.2 million barrels per day (bbl/d) of oil and produced roughly 950,000
barrels per day (bbl/d) of total liquids of which 750,000 bbl/d was crude oil. (See figure 33
)
Figure 3: India’s oil production and consumption (1980-2010).
2%
6%
51%
29%
12%
Hydro
Nuclear
Coal
Oil
Natural Gas
Source: Integrated Enegy Policy Report, Planning Commission, GoI
0
500
1000
1500
2000
2500
3000
3500
1980 1985 1990 1995 2000 2005 2010
ThousandBarrelsperday
Year
Production
Consumption
Source: United States Energy Information Administration
In 2006, India’s primary oil consumption was 3% of the world’s total consumption. It is predicted that by
the year 2030 it will increase to approximately 7.5% of the world’s total oil consumption4
.
Production and consumption of Natural Gas
In 2010 India consumed roughly 47.51 billion cubic meters of gas as can be seen in Figure 45
. The gross
production of natural gas in the country was 46.49 billion cubic meters in 2009-2010. This was 44.63%
higher than the production of 32.85 billion cubic meters during 2008-2009.
Figure 4: India’s natural gas production and consumption
In 2006, 2 % of the world’s gas was consumed by India. This is predicted to rise to 5.4% by 2030. Natural
gas accounts for approximately 24% of the world’s primary source of energy. In India it accounts for 7 %
of the primary energy basket (see Figure 1). Demand has outstripped supply in the natural gas sector
and India has been a net importer of gas since 2004. In 2010 India imported 429 billion cubic feet of gas.
Oil Imports
Oil is fast becoming an expensive and scarce commodity. Many countries pay for this commodity by
using their export earnings. The International Energy Outlook (IEO2011) EIA, projects that Indian oil
production will grow at an average annual rate of less than one percent through 2035. Rising oil
consumption and relatively flat production have combined to make India increasingly dependent on
imports to meet its demand for petroleum. In 2010, India was the world’s fifth largest net importer of
oil, importing more than 2.2 million bbl/d or 70% of its hydrocarbon requirements6
Figure 4 shows
India’s imports by source.
0
200
400
600
800
1000
1200
1400
1600
1800
2000
1980 1985 1990 1995 2000 2005 2010
ThousandBarrelsperday
Year
Production
Consumption
Source: United States Energy Information Administration
Fig 4: India’s Oil Imports by source, 2010
International oil prices are steadily increasing. The International price of India’s crude oil basket
comprising of the average of Oman and Dubai for sour grades and Brent (Dated) for sweet grades in the
ratio of 64:37 for 2009-2010, is$69.76/ bbl, while it was $55.72 in 2005-2006 and $26.65/ bbl in 2002-
2003. Table 1 shows the value of imports and exports for the year 2009-20107
. Petroleum products as a
percentage of India’s net exports is 30.5% as of 2009-2010 as seen in the table. The petroleum sector
accounts for about 2.8% of India’s GDP.
Table 1: Imports and Exports of India in 2009-2010.
Table 1: Imports and Exports of India in 2009-10
Units=Rs
(billion)
Crude
Oil LNG
Petroleum
Products Total
Gross Imports 3753.78 93.44 337.53 4184.75
Exports 1440.37 1440.37
Net Imports 3753.78 93.44 -1102.84 2744.38
Source: Basic Statistics of Petroleum and Natural Gas, 2010 published by the Ministry of Petroleum
and Natural Gas
11%
34%
22%
10%
5%
18%
Iran
Other Middle East
countries
Africa
Western Hemisphere
Other
Saudi Arabia
Source: Global Trade Atlas
Sector Organization
State owned companies dominate India’s oil sector. Oil and Natural Gas Corporation (ONGC) and Oil
India Limited (OIL) are the largest exploration companies in the upstream sector. India has tried to
increase exploration and production of oil and gas by attracting international oil majors via a New
Exploration License Policy (NELP). In spite of this international companies currently operate a small
number of fields due to ambiguity in government contracts and pricing.
State owned enterprises also dominate the downstream sector. The Indian Oil Corporation is the largest
state owned company in the downstream sector operating 8 of India’s 21 refineries8
. Government-run
oil marketing companies play a major role in the distribution of fuel.
Petroleum Product Exports
India has excess refining capacity. The country’s biggest export way ahead of gems and jewelry are
refined petroleum products. Figure 5 shows India’s exports sector wise8
. Petroleum products account
for 20% of all exports.
Figure 5: Share of top 5 Commodity Groups in India’s Exports 2010-2011 ( April – September)
According to Oil and Gas Journal, India had 4.0 million bbl/d of crude oil refining capacity at 221 facilities
as of January 1, 2011. India has the fifth largest refinery capacity in the world. Reliance Industries
Jamnagar Complex in Gujarat is the largest oil refining complex in the world, with a total capacity of 1.24
million bbl/d8
.
17%
15%
8%
5%
50%
Petroleum (Crude and
refined products)
Gems and Jewellery
Transport Equipment
Drugs, pharmaceuticals and
fine chemicals
Others
Source: IEA Analysis
Demand Sectors of Oil
India stands sixth among the top ten oil consuming countries of the world. This fact is recorded in the US
Central Intelligence Agency’s (CIA) World fact book. A report published by the Central Pollution Board
2010 also provides the “Status of Vehicular Pollution Control Program in India”.
Data showing average consumption patterns of petroleum products in India are shown in Table 2.
Table 2: Consumption pattern of petroleum products in India.
Table 2: Consumption Patter of Petroleum Products in India
Sr.no Sector
Consumption
(%)
1 Transport (Petrol, Diesel, CNG, Aviation fuel) 51
2
Industry (Petrol, Diesel, Fuel oil, naphtha, Natural
gas 14
3 Commercial and other 13
4 Domestic (LPG and kerosene) 18
5 Agriculture (Diesel) 4
Source: ‘Status of Vehicular Pollution Control Programme in India’, Central pollution board, 2010
Transport alone accounts for more than 50% of the total amount of petroleum in India. Such a high
proportion is unique. In China it is 40%9
, in the USA it is 27.8%10
. Energy efficient vehicles cut down on
consumption of fuel. In the last few years the number of vehicles on the streets in India has grown
dramatically11
. In the past few months there has been a sharp increase for diesel cars because of the
widening gap in prices of diesel and petrol going as much as Rs 25 per liter compared to a price gap of Rs
9 to 9.50 in June 201012
.
An Internal report that has been prepared by the Planning Commission of India shows that personal
(privately owned) cars account for only 0.6% of India’s diesel consumption. This fact is far removed from
the common notion that personal cars are the ones that benefit the most from diesel subsidies. At this
time there is a very high tax on personal cars to make up for the ‘subsidies’ on petroleum products.
Small cars in India attract an excise duty of 10% and big cars are taxed at 22%12
. This high tax is
detrimental to the development of the automotive industry. This report then questions the policy of
imposing a higher tax on diesel as opposed to petrol as personal diesel vehicles are clearly not the
beneficiaries from government subsidies.
Goods vehicles consume the maximum (37.9%) while agriculture accounts for 18.8%. Passenger buses
(another crucial consumer of diesel) accounts for 6%, taxis 2.1%, jeeps and MUV’s 2.5%. The other diesel
consumers are 3 wheelers 3.6%, power 6.8%, railways 3.7%, Industry 5.6% and others 12.5%11
.
Gas Imports
Policymakers have pursued 2 options for meeting shortfalls in gas they are LNG imports and
transnational pipelines13
.
Imports of LNG were put at Rs 93.44billion14
and it appears to steadily increase. The LNG trade was
started in the mid 60s and has thereafter increased rapidly. India imports 28% of its natural gas needs in
the form of LNG13
.
The second longer term import option is piping gas through transnational pipelines. India could thus
receive imports of gas through neighboring countries such as Myanmar, Bangladesh, and Iran and
through Central Asia. There are 2 main geopolitical factors which will determine the success of this
approach. First, is it possible to lay gas pipelines in the northwest in politically volatile nations such as
Afghanistan, and Pakistan? And second, can India compete with the growing energy demand of other
countries such as China for pipelines in the East?13
The Iran-Pakistan- India pipeline (40 MMSCMD) has frequently run into persistent obstacles that remain
unresolved as yet. India lost out to China on the potential Myanmar-Bangladesh -India pipeline. After
close to a decade of negotiations on the Turkmenistan-Afghanistan-Pakistan-India pipeline, a diplomatic
breakthrough occurred in December 2010.13
Construction will begin in 2012 and will end in 2015 for 38
MMSCMD of gas to India13
. However given the political unrest and uncertainties in this area it would be
unwise to rely solely on this modality as a main source of gas13
.
Sector Organization
State owned companies dominate India’s gas sector as well, although their share of production is less
than in the oil sector. ONGC accounted for about half of India’s natural gas production in 2009-10.
Reliance Industries is a major player because of its discovery of gas in the KG basin in 2002. The Gas
Authority of India Limited (GAIL) holds an effective monopoly on natural gas transmission and
distribution8
.
Demand Sectors of Natural Gas.
Demand for natural gas depends totally on the main consuming sectors. The shares of consuming
sectors at the beginning of the eleventh five year plan (2007) were the following. Power (40%),
Fertilizers (29%), Petrochemicals (9%), City Gas (4%), the consumption of LPG and other liquid
hydrocarbons (4%) and other sectors (14%). See Table 315
.
Table 3: Demand for gas by consumer sector-Eleventh 5 year plan
(Units = MMSCMD).
Table 3: Demand for Gas by Consumer Sector- Eleventh 5 year plan (Units=MMSCMD)
Sector 2007-8 2008-9 2009-10 2010-11 2011-12
Power 79.7 91.2 102.7 114.2 89
Fertilizer 41 42.9 55.9 76.3 86.8
City Gas 12.1 12.9 13.8 14.8 15.8
Industrial 15 16.1 17.2 18.4 19.7
Petrochemicals & Refineries 25.4 27.2 29.1 31.1 33.3
Sponge iron and steel 6 6.4 6 7.4 7.9
Total 179.2 179.2 225.6 262.2 252.5
Source: Report of Working Group on Petroleum and Natural Gas for the 11th
5 year plan, GoI
The power and fertilizer industries consume the most amount of natural gas. In 2009-2010 the power
sector consumed approximately 45% of the total natural gas. The fertilizer industry was a close second
consuming approximately 28%7
. These are two sectors that are crucial to India’s growth and provide
employment for a large section of people.
The Chinese Hydrocarbon Sector
China is the world’s largest consumer and producer of coal and accounts for half the world’s
consumption of coal. Oil and gas account for 23%16
of China’s primary energy mix. EIA predicts that the
share of coal in China’s energy mix will decline to 59% in 2030, while the share of oil and natural gas will
increase. China’s total coal consumption however, is expected to double by 2030 indicating the steadily
increasing Chinese demand for energy16
Figure 6: China’s Primary Energy Mix,2012
Oil
Production and Consumption
In 1993, China went from being a net exporter of oil to a net importer. It is now the second largest
consumer of oil after the United States accounting for 11% of the world’s total oil consumption. By
2035, Chinese oil consumption is expected to increase by as much as 2/3rd
of the 2011 level16
. The
following figure shows the exponential growth of Chinese oil consumption. Oil production is far behind.
70%
19%
4%
6%
1% 0.3%
Coal
Oil
Natural Gas
Hydroelectricity
Nuclear
Other Renewables
Source: IEA analysis
Figure 7: China’s Oil Production and Consumption
In 2011, China produced an estimated 4.3 million barrels of total oil liquids per day (bbl/day). China’s net
oil imports on the other hand reached 5.5 million bbl/d in the same year. China’s predicted growth, of
over 0.8 million bbl/d between 2011 and 2013, represents 64% of the projected world oil demand
growth in this period16
.
Natural Gas
Production and Consumption
China had 107 Tcf of proven natural gas reserves at the beginning of 2012. It currently consumes 4.6 Tcf
of gas. China became a net natural gas importer for the first time in 2 decades in 2007 with gas imports
jumping to 22% of the share of consumption from only 12% in 201016
.
Oil Imports
China’s crude oil imports reached a record high of 6 million bbl/d in May, 2012. Crude imports outweigh
domestic supply, consisting of over half of the total oil consumption in 2011. EIA predicts that China will
import 75% of its crude oil by 203516
.
0
500
1000
1500
2000
2500
3000
3500
1980 1990 2000 2010 2020
ThousandBarrelsperday
Year
Production
Consumption
Source: EIA statistics
Oil and natural gas imports as a percentage of China’s GDP have doubled between 2009 and 2011.
Sector Organization
The Chinese oil market is dominated by four major National Oil Companies (NOC): China National
Petroleum Company (CNPC); Chinese Petroleum and Chemical Corporation (Sinopec), China National Off
Shore Oil Corporation (CNOOC) and China National Chemicals Import and Export Corporation
(Sinochem)16
.
Onshore oil production in China is on the whole limited to CNPC and CNOOC. International oil
companies (IOCs) have been given greater access to offshore oil projects, mainly through production
sharing agreements and joint ventures. IOCs involved in offshore E&P work in China include: Conoco
Phillips, Shell, Chevron, BP, Husky, Anadarko, and Eni, among others. National Oil companies have to
hold the majority participating interest in a production sharing contract (PSC) and can become operators
once development costs have been recovered. IOCs offer their technical expertise in order to partner
with a Chinese NOC and enter into the Chinese markets16
. China is also investing heavily in foreign oil
fields. This shall be spoken about in detail later.
Strategic Oil Reserves
Strategic Oil Reserves are an important hedge that oil importing nations can use to protect themselves
from price fluctuations and disruptions to energy supply. In 2001, China developed plans to establish its
own national strategic petroleum reserve in three phases to attain a target of 90 days volume of
imports. By 2020, China expects to have 476 million barrels or 123 days of reserves at 2009 import
levels16
.
1005
623
555
395363
276
260
230
224
191
135
134
113
572
Figure 8: China's Crude Oil Imports by
source in 2011 in thousand barrels per
day
Saudi Arabia
Angola
Iran
Russia
Oman
Iraq
Sudan
Venezuela
Source: EIA statistics
In contrast India’s strategic reserve will hold only close to 40 million bbl of oil which represents about 10
days of supply on a refinery throughput basis.
Demand Sectors of Oil
According to IEA statistics, the transportation sector accounts for over 40% of oil demand in 2010.
Further oil demand growth will be the result of increases in the use of these fuels. It is projected that in
2035, the use of oil will grow in the transportation sector and will account for 65% of the total oil
demand16
.
Natural Gas Imports
China imports natural gas through pipelines and LNG imports. China's first import natural gas pipeline is
the Central Asian Gas Pipeline (CAGP), which runs for 1,130 miles, has a capacity of 1.4 Tcf/y, and brings
natural gas to China from Turkmenistan, Uzbekistan, and Kazakhstan. The other proposed pipelines that
could contribute to Chinese natural gas imports in the future are the following16
:
 In 2006, a Memorandum of Understanding came about between CNPC and Russia's Gazprom for
two pipeline proposals. One pipeline would run from Russia's western Kovykta gas field to
northwestern China with a pipeline capacity between 1 and 1.4 Tcf/y by 2015. A second proposed
pipeline, called the Eastern pipeline, would connect Russia's Far East and Sakhalin Island to
northeastern China, and would have 1.1 to 1.4 Tcf/y of capacity. The countries still have to agree on
a price for the gas16
.
 CNPC signed a deal with Myanmar in March 2009 to finance construction of a 1,123-mile, 420 Bcf/y
pipeline from two of Myanmar's offshore blocks to China's Yunnan and Guangxi provinces in the
southwestern region. The project is due to start by mid-201316
The rest of China's natural gas imports are in the form of LNG16
A Quick Comparison Between India and China’s Hydrocarbon Sectors
1) Pricing: Both India and China retain control over the pricing of their hydrocarbon products and offer
high subsidies to domestic oil consumers. In 2009 China went through a series of fuel reforms,
where it loosened control over prices to a degree, and allowed domestic prices of oil to reflect
international prices16
. India on the other hand retains tight control over hydrocarbon prices and in
spite of the huge losses being suffered by the oil marketing companies (OMCs), and shows little sign
of raising prices. This has led to our OMCs facing the threat of bankruptcy.
2) Exploration: India has approximately 5.7 billion barrels of proven oil reserves as of January 2011
according to the Oil and Gas Journal. It is the second largest amount in the Asia Pacific region after
China. However, a mere 40 to 50% of oil exploration is complete18
.
30%
17%
19%
13%
7%
6%
2%
2% 2% 2%
Figure 9: China's LNG import sources,
2011
Australia
Indonesia
Qatar
Malaysia
Yemen
Nigeria
Trinidad
Russia
Egypt
OthersSource: EIA statistics
Indian National Oil Companies have tried to acquire equity stakes in E & P M projects overseas in
recent times but this has not been very successful. The most active company abroad is ONGC Videsh
Limited (OVL). This is the overseas division of ONGC. OVL conducts oil and natural gas operations in
15 countries such as Russia ( Sakhalin Island), Sudan, Vietnam, Colombia and Syria. In October 2011
the OVL announced that it intends to expand its total production levels from150 thousand bbl/d to
560 thousand bbl/ d by March 2014. Essar and Reliance are also conducting small operations
overseas15
. On the other hand, China is doing much better than India on this front.
85% of China’s oil reserves are on shore, and mostly consist of mature fields where production has
peaked. Companies are now focusing on exploring the untapped reserves in the western interior
provinces. The remaining 15% of China’s oil reserves are located off shore in the East China Sea, the
South China Sea and the Bohai Bay region. Territorial disputes in the South China Sea and the East
China Sea have hindered the exploration of these regions16
.
China's increasing dependence on oil imports, the need to secure and diversify its energy supply to
enhance energy security, and the need to develop technical expertise, has driven Chinese NOCs to
invest in international projects and form commercial partnerships with IOCs. Since 2009, NOCs have
purchased assets in the Middle East, North America, Latin America, Africa, and Asia. NOCs have
invested a staggering $18 billion in overseas oil and gas assets in 201116
.
China's overseas equity oil production has grown remarkably over the past decade from 140,000
bbl/d in 2000 to over 1.5 million bbl/d of oil production in 2011. CNPC has been the most active
company, while Sinopec, CNOOC, and other smaller NOCs have also expanded their overseas
investment portfolio16
.
21%
15%
20%
44%
Figure 10: Exploration of Oil in India
Poorly Explored
Unexplored
Well explored
Initiated
Source: DGH ppt
Since 2008, Chinese NOCs have secured bilateral oil-for-loan deals amounting to roughly $100 billion
with many countries such as Russia, Kazakhstan, Venezuela, Brazil, Ecuador, Bolivia, Angola, Ghana,
and a gas-for-loan deal with Turkmenistan.
China’s Energy Transport Routes And Implications for India
Over 80% of China’s oil imports are transported by oil tankers via the sea.
Table 4: Classes of Tankers
Tanker Class
Deadweight
Tons Barrels of Oil
Panamax 60,000-80,000 500,000
Aframax 80,000-120,000 750,000
Suezmax
120,000-
200,000 1,000,000
Very Large Crude Carrier
(VLCC)
200,000-
320,0000 2,000,000
Ultra Large Crude Carrier
(ULCC) 320,000+
up to
4,000,000
Source: Pacific L.A Marine Terminal LLC, Oil Supply Routes in the Asia specific, China’s Stretgic
Calculations-Vivan Sharan and Nicole Thiher
Approximately half of China's oil imports come from the Persian Gulf. Tankers carrying these
imports pass through the Strait of Hormuz and the Strait of Malacca and travel to east China where
the refineries are located.
Figure 11: Route taken by tankers to bring oil to China via the Middle East
Sea Routes: Choke Points
Hormuz Strait
The narrow Hormuz Strait connects the Gulf of Oman with the Persian Gulf. About 20% of the
world’s oil demand (15 million bbl/d) is supplied through ships that traverse this Strait. More than
85% of all these crude oil exports go to Asian markets, with Japan, India, South Korea, and China
being the major destinations. In addition Qatar exports about 2 trillion cubic feet per year of LNG
through the Strait of Hormuz, accounting for 20% of the world’s LNG trade18
.
Navigation is limited to two 3 km wide shipping lanes separated by a 3 km buffer. At the narrowest
point the Strait is 34 km wide. The Strait is deep and wide enough to handle the world’s largest
crude oil tankers. The forced concentration of sea traffic through this Strait qualifies it as a choke
point.
40% of China’s imported oil passes through this body of water. India’s dependence on this strait is
even greater with 70% of its imports passing through the Strait. The Middle East has the world’s
largest proven oil reserves and hence this Strait will be of key importance in the years to come. In
fact it has been predicted that in 2030, one in every 3 barrels of oil consumed in China will have to
pass through the Hormuz Strait18
.
Table 5: Dependence on Oil Imports from the Middle East, 2010
M.E Imports (m of
bpd)
M.E imports as a percentage of total
imports
US 1.73 14.80%
Europe 2.36 19.50%
China 2.38 40%
India 2.61 72.60%
Source: BP Statistical Review of the World Energy, 2011
The Persian Gulf will thus remain crucial for China. In spite of this, China spends very little on
protecting the Middle East region to keep its oil interests safe as compared to the US; even though it
is far more dependent on this region than the United States. Instead it has instead adopted an
aggressive strategy to diversify its oil supply and its energy transport routes.
Currently, only Saudi Arabia, Iraq and UAE have pipelines to transfer oil out of the Gulf and bypass
the Strait of Hormuz. In case of a disruption in the Strait of Hormuz, China, India and the other
countries dependent on Persian Gulf oil imports will become dependent on the existing pipelines
present in the Middle East. The following figure depicts the pipelines in the region19
.
Figure 12: Sea Routes and Pipelines in the Middle East
Source: EIA statistics
It has been estimated that about 5 million bbl/d of oil, or about one third of all oil transported by
ships globally can be exported from the Persian Gulf region via pipelines avoiding the strait.
Pipelines such as the Habshan-Fujairah Pipeline and the East-West pipeline allow ships to access the
Persian Gulf at alternate ports but do not reduce dependency on sea routes. This is because
shipping is far less expensive than the use of pipelines19
.
The Strait of Malacca
The Malacca strait is the longest and busiest strait in the world. A third of the world’s trade and half
of the world’s oil flows through it. It connects the Indian Ocean to the South China Sea. It is about
800 km long and lies between the Malaysian peninsula and Sumatra20
.
Figure 13: Strait of Malacca
Source: EIA
The narrowest point is 2.7 km wide and the shallowest part is less than 30 m deep. Thus VLCC (Very
Large Crude Carriers) are the largest tankers that can navigate this stretch. China requires 2 VLCC
tankers to go through the strait daily, to bring it the oil it requires from the Persian Gulf18,19
.
The alternatives to Malacca are the following as given in the paper, ‘Mapping Chinese Oil and Gas
Pipelines and Sea routes’ by P.K Gautam19
, are
1) A channel through Thailand. This project has been shelved.
2) A pipeline from the coast in the Bay of Bengal to Kunming: Work has already started on the
construction of a dual pipeline of gas and oil from Myanmar to Yunnan.
Figure 14: Burma-China Oil Pipeline Proposed Route and Associated Facilities
Source: China’s Oil Security Pipeline Dream-Erickson and Collins
CNPC is financing the bulk costs for these pipelines19
.
Table 6: Time for Oil to Reach China by Sea and the Burma-China Pipeline
Pipeline under construction
(in Phases)
Days exceeding time taken by
normal sea route
Total days per trip (including
shipping time to Burma)
Sino-Burmese pipeline
(capacity 0.24m bpd) 6.3 17.6
Sino-Burmese pipeline
(capacity 0.4 mbpd) 3 14.3
Based on VLCC carrying 2,000,000 barrels of oil (maritime connector)
Estimated at a speed of 14 knots
Source:, China’s Stretgic Calculations-Vivan Sharan and Nicole Thiher
From an economic perspective, such a pipeline might be feasible. This is because the cost of
piping crude oil to inland refineries in south west China and the distributing of refined products
through the pipeline network will almost equal tanker costs of shipping crude oil to east China
for refining, and then transferring it to west China for distribution. However, from a security
perspective, this pipeline does not seem feasible due to ethnic conflicts in the Burmese
hinterlands through which the pipelines pass19
.
3) Iran and China: The building of a huge refinery at Gwadar and the subsequent selling of oil
products to Iran in exchange for Iranian crude oil has been postulated. The oil would be made
available to China through a pipeline passing through Turkmenistan, the Kyrgyz republic and
Tajikistan. This will enable China to avoid the Malacca strait altogether19
.
4) A pipeline from the Gwadar port in Pakistan to Xinjiang (An “Energy Corridoor”): This is the
shortest, but most technologically complex route to bring oil from the Middle East to China. In
addition, the pipeline would have to pass through the Karakoram Highway in the disputed
territory between India and Pakistan. Pakistan has been touting this idea for a long time, but
China has been significantly silent on this issue. This is because in addition to serious security
problems, there are major financial barriers. If a Chinese company chose to move 200,000 bpd
through the energy corridor it could well lose a billion dollars a year compared to shipping it19
.
Figure 15: Pakistan-China Proposed Pipeline
Source: China’s Oil Security Pipeline Dream-Erickson and Collins
5) A pipeline from Iran through Pakistan, India and Myanmar to China: Work is in progress on this.
6) A pipeline through northern Malaysia: This has been shelved
7) The maritime hedges are through the Sunda strait and through the Lambok strait. The Sunda
strait is very shallow and narrow and treacherous for vessels like VLCCs. The Lambok strait is
more navigable but is a much longer route18
.
Debate is raging in China about how to ensure adequate oil supplies. Should China cooperate with
international institutions, or should it seek unilateral military solutions? Should it look to expanding its
maritime power and creating a blue water navy or should it trust in the liquid international oil market?
Whoever controls the Strait of Malacca effectively grips China’s strategic energy passage and can
threaten China’s energy security at any point in time. This is how China is justifying its building of
pipelines to act as bypasses19
.
Pipelines
China currently obtains 500,000 bpd of oil through pipelines from Kazakhstan and Russia. However, the
oil it obtains via these pipelines is very low. To put this in perspective, Eriksen and Collins said that if
Chinese oil import growth is conservatively estimated to be 2.5% annually over the next 5 years,
Beijing’s imports will increase by 650,000 bpd which is more than the combined volume of oil that is
imported from Russia and Kazakhstan21
.
The Kazakhstan-China pipeline is the only overland oil pipeline currently operational. This pipeline was a
win-win deal for both China and Kazakhstan. This is because China obtains secure oil supplies and
Kazakhstan gains a crude oil export route independent of Russia as well a new market for its oil21
Figure 16: Kazakhstan-China Oil Pipeline
Source: China’s Oil Security Pipeline Dream-Erickson and Collins
China views Russia as a rich and secure oil source capable of delivering crude oil far away from the
purview of the US navy. Pricing disputes however have hindered Russia’s exports to China via pipelines
for more than a decade. An agreement has recently been reached and construction is currently
underway21
.
Figure 17: Russia-China Oil Pipelines
Source: China’s Oil Security Pipeline Dream-Erickson and Collins
It is the author’s opinion that China’s pipeline vision will remain a dream. This is because pipelines
can be sabotaged very easily, while it is much more difficult to wage a maritime attack. In addition
pipelines are more expensive than maritime shipping. It is the author’s belief that oil companies in
China are playing upon the danger of maritime warfare to obtain funding to set up pipelines which
will allow them to grow.
It is also the author’s view that China is exaggerating the risks of an attack by sea. The international
energy market is mature, liquid and unbiased, and the implication of stopping supplies energy for a
day is so strong, that it has long term cascading effects on the perceived reliability of the supplier.
However, the buildup of pipelines also involves the setting up of new infrastructure such as ports
and military bases to obtain a foot hold in nations like Pakistan and Burma. This has a greater
significance.
Securing the route along the Indian Ocean and the South China Sea also serves the motive of
establishing military dominance in the region. The heavy naval posturing acts a counterpoint to
other maritime forces in the region (eg. Indian and US fleets). China has always relied on a mode of
government spending to drive economic growth. The development of a blue water navy fleet fits in
well with China’s economic and strategic logic.
The String of Pearls Approach and its implication to India
“The “String of Pearls” describes the manifestation of China’s rising geopolitical influence through
efforts to increase access to ports and airfields, develop special diplomatic relationships, and modernize
military forces that extend from the South China Sea through the Strait of Malacca, across the Indian
Ocean, and on to the Persian Gulf.
—Christopher Pehrson
India views China’s creeping encirclement of it and it’s burgeoning bilateral ties with South Asian-Indian
Ocean Region (SA-IOR) nations with deep apprehension.
Figure 18: String of Pearls
Source:http://4.bp.blogspot.com/6tBDYUSKXyI/T0EE3bplhzI/AAAAAAAAAF4/KQpkXsNhGbo/s1600/
Chinese_string_of_pearls.jpg
John Garver retells the story of a frog swimming comfortably and safely in a pot of lukewarm water
in his paper, “Diplomacy of a Rising China”. The frog does not notice the temperature of the water
rising slowly and in sometime is thoroughly cooked and dies. Garver then explains how this tale
captures Chinese strategy for dealing with an apprehensive India. Beijing is slowly but surely forming
ties with all countries in the SA-IOR zone and has built a string of military bases encircling India.
The SA-IOR region has vast geo-political and economic significance with 85% of the world’s oil
consumption passing through this ocean. China is trying its best to control this region by wooing all
the littoral nations with loans and aid money. It is vitally important that China does not get control
of the sea lanes and disrupt the heavy trade in the ocean. Traditionally due to its geographic
position, India has always viewed the SA-IOR region as an area of Indian special interest. Now, China
threatens this view point.
A typical example of Chinese policy to crush India’s fears, is advocating a high sounding principle like
the ‘5 Principles of Peaceful Coexistence’. Indian objection to an aspect of cooperation between
China and say, Pakistan would then be touted by China as unacceptable interference in the
sovereign affairs of China and its neighbors and a violation of the ‘5 Principles of Peaceful
Coexistence”. This then places the burden on India to prove that it is not ‘anti-China’ or insincere22
.
Each pearl in the string is a nexus of Chinese geopolitical influence or military presence, which stretches
from Hainan Island to Gwadar. Each pearl was examined and analyzed in the following paper
http://www.americanessays.com/study-aids/free-essays/economics/china-string-of-pearls-policy.php.
The salient points of this analysis are detailed below.
Gwadar, Pakistan: China plans to build a huge oil refinery in Gwadar in partnership with Pakistan.
 It can serve as a Chinese Naval Base.
 It can serve as an energy transport center to carry oil from Gwadar to Xinjiang in west China by an
oil pipeline as mentioned previously
 It benefits by having access to international trade routes.
 It also provides Beijing with a listening post from where it can monitor US, India and US-India
Maritime cooperation.
As Admiral (retd) Sureesh Mehta said" It has a serious strategic implication for India, being only 180 Nm
from the exits of Strait of Hormuz, would enable Pak to take control over the world energy jugular &
interdiction of Indian tankers."
Hambantota, Sri Lanka: China aims on developing the following infrastructure at Hambantota
 Developing a container port
 Developing a bunkering system
 Establishing an oil refinery
 Setting up an airport and other facilities
The possible reason for China’s investment of 1 Billion in this port is that it could be used by the navy as
port of call for refueling purposes. In addition it could provide China with a listening post to monitor
India’s nuclear, space and naval activities in the south of India.
Chittagong, Bangladesh: It is the largest seaport in Bangladesh. China is developing a container port
facility a Chittagong. However, there has been no further news on this development perhaps because of
the change in governance in Bangladesh which is India friendly.
Sittwe, Myanmar: China has several plans for this pearl; the following two are the most important:
 The gas pipeline from Myanmar's West Arakan state to Yunnan province.
 Using Sittwe Port as a sea gateway.
China has undertaken several projects in Myanmar in return for the right to use Myanmar’s Coco
islands. For example, China is building a deep sea port at Kyaukpyu. Once the ports are developed fully,
Chinese oil tankers from the Middle East and Africa will be able to cross the Bay of Bengal and anchor at
Myanmar's Sittwe and Kyaukphyu ports from where their cargo will be transported via pipelines to
Yunnan. The transport time of fuel that bypasses the Malacca Strait in this way will be cut by a week.
China has given a greater priority to Arakan- Yunnan pipeline as compared to the Gwadar- Xinjiang
pipeline proposed by the Pakistan government.
Indian policy makers believe that a Chinese presence in the Bay of Bengal may allow it to interdict
regional SLOCs. Due to this, Myanmar is being perceived as the single largest threat to Indian strategic
interests in SE Asia.
Coco Islands, Myanmar: The Coco islands are a pair of strategically important islands located in the East
Indian Ocean. The Great Coco Islands and Small Coco Islands are separated from each other by the
Alexandra Channel. They are separated from the Andaman by Coco Channel. These islands were
supposedly leased to the People's Republic of China since 1994, according to various amateur sources.
China has carried out a number of activities in Coco Islands such a building a maritime base there as well
as developing an air field.
The postulated strategic importance of this 'pearl' for China is:
1. Ability to monitor the Indian Navy and other ships between the Bay of Bengal and the Strait of Malacca
2. It can also be used to monitor the activities at the launch site of ISRO at Sriharikota and DRDO at
Chandipur.
According to Indian analysts, this may pose a threat to Indian tri-service command at Port Blair (190 Nm
away).
Strait of Malacca: The importance of this strait to China has been dwelt upon at length earlier. China
issued a statement indicating that it would use its naval might to ensure that these sea lanes remain
open. In President Hu Jintao's own words, "The Malacca dilemma is the key to China's energy security".
India's naval base in the Andaman and Nicobar islands puts India at a geographic advantageous position
with respect to the Chinese in this region and thus may explain the Chinese fear and the importance of
the pearls of the Coco islands and Kra canal to the Chinese.
Kra Canal/Thai Canal: China has planned to construct an enlarged channel through Southern Thailand to
improve transport. This plan is posited to extend over a period of ten years with an estimated cost of
$20-25 Bn. However, initially the plan seemed to have been dropped owing to environmental concerns
but recently there have been signs of revival of this plan because of economic benefits for China and a
threat of piracy in the Strait of Malacca. The plan was tentatively approved in 2007 but Singapore and
US showed their dissent. This plan is currently on hold again.
South China Sea: The South China Sea is located south of China and Taiwan, west of Philippines, North
West of Malaysia, North of Indonesia and East of Vietnam. The region is supposed to have significant oil
and natural gas reserves. Because of this reason, China has claimed the South China Sea for its own.
More about the conflict in the South China Sea shall be covered later.
Woody Islands: These Woody Islands are a part of the Paracel Islands in the South China Sea occupied
by China. This pearl serves as an artificial harbour and is a Chinese Emergency Rescue Center. It also has
an airfield. The centre was occupied in 1956 and also has oil tanks, gun emplacements and ammunition
storage bunkers.
Hainan Islands: These 200 islands form the smallest province of China and are home to a strategic
nuclear submarine naval harbour that is capable of hiding upto 20 nuclear submarines from spy
satellites. The harbour houses nuclear ballistic missile subs and is large enough to accommodate aircraft
carriers.
It is important that China’s String of Pearl’s strategy doesn’t become a Circle of Pearls. Chinese
companies already have extensive ties with Africa and have emerged as ruthless competitors in African
markets. China-Africa trade has grown significantly in a very short time. To put this in perspective, the
trade between China and Africa has grown from $55 billion in 2006 to $73.3 billion in 2007. The surge in
trade has been mainly due to China's import of oil and other commodities from Africa and the sale of
low cost manufactured products. China follows a policy whereby the profit motive surpasses all other
concerns such as democracy, good governance and human rights and pursues a strategy of non
interference with states in their internal matters in its dealing.
Indian companies like ONGC, Indian Oil and Reliance have been active in seeking prospects for
exploration in Africa. However, if we compare India with China in terms of economic relations with the
African continent, the former appears to have missed the opportunities offered by the huge untapped
natural resources of oil, gas and minerals that the African continent is endowed with.
South China Sea Conflict
Figure 19: Territorial Claims of the South China Sea
Source: UNCLOS and CIA
Dispute between China, Taiwan and the five Southeast Asian countries over conflicting claims over
islands and maritime zones in the South China Sea (SCS) has been a longstanding security issue. The
disputes originally arose after World War 2 when the littoral nations: China, Indonesia, Malaysia and the
Philippines (as well as Vietnam which joined in later) hastened to occupy the islands in the SCS. What
started as a territorial dispute which might have been got around with negotiations escalated when in
the 1990’s, access to the sea’s oil and gas reserves and fishing resources complicated the picture. As
energy demands increased, conflict worsened especially between China and Vietnam23
.
China and Vietnam claim the entire South China Sea area and the islands within it. Malaysia, the
Philippines, Indonesia and Brunei have laid out contiguous claims. The United Nations Convention on
the Law of the Sea (UNCLOS) laid down the rules to decide claims to resources based on exclusive
economic zones (EEZs) and continental shelves. China’s claims go against the principles laid down in
UNCLOS. China’s claim also fails to hold water even when one looks at them in context of the “effective
occupation” principle. Though China has occupied the Paracel islands-an archipelago of 30 islands
equidistant from China and Vietnam, this principle goes against their claims to the Spratlay Islands, an
archipelago off the coasts of Philippines and Malaysia. China’s claim based on ‘history’ is very weak23
.
Resource estimates for oil and gas reserves in the South China Sea vary greatly. In 1994, the Chinese
Ministry of Geology and Mineral Resources estimated oil and gas resources in the SCS as high as 225
billion barrels of oil, although it remains unclear whether this number represents reserves for only the
Spratly Islands proper or the entire South China Sea23
China’s optimistic predictions on the energy potential of the South China Sea are not shared by most
non-Chinese analysts23
. A 1993-1994 projection by the U.S. Geological Survey estimated that the sum
total of discovered and undiscovered resources in the offshore basins of the South China Sea at only 28
billion barrels (or one tenth of most Chinese estimates) 23
This difference could be explained on the basis that governments and speculators tend to give very
optimistic estimates of the potential of an unexplored region in order to attract foreign investment. Oil
companies, on the other hand, tend to downplay the potential of a region in order to obtain maximum
aid from the government. This may explain the difference in views between Chinese estimates and the
more pessimistic estimates of oil companies. However, a few non regional scientific institutions, such as
Lamont Doherty Geological Observatory and the German Geological Survey, are optimistic about the
potential.23
The following table shows the proven reserves in the SCS and compares them with other
regions
Table 7: Oil and Gas in the South China Sea Region
Proven Oil Reserves
(Billion Barrels)
Proven Gas Reserves
(Trillion Cubic Feet)
Oil Production
(Barrels/Day)
Gas Production
(Billion Cubic Feet)
Brunei 1.4 13.8 200,612 334
Cambodia 0 0 0 0
China 1 (est) 3.5 (est) 273,000 141
Indonesia 0.2 (est) 30.5 215,000 12
Malaysia 3.9 81.7 668,922 1,437
Philippine
s 0.3 2.8 3,000 <1
Singapore 0 0 0 0
Taiwan <0.01 2.7 1,300 33
Thailand 0.4 11.8 169,346 565
Vietnam 0.6 6.8 282,463 19
Total Est 7.8 Est 153.6 1,921,734 2,542
Source: United States EIA
Table 8: Oil and Gas in the South China Sea- Comparison with other Regions
Proven Oil
Reserves (Billion
Barrels)
Proven Gas Reserves
(Trillion Cubic Feet)
Oil Production
(Million
Barrels/Day)
Gas Production
(Trillion Cubic
Feet/Year)
Caspian
Sea 18.4-34.9 236-337 1.3 4.3
North
Sea
Region 16.1 148.2 6.7 9
Arabian
Gulf 672 1800 21.4 6.8
South
China
Sea Est 7.8 Est 153.6 1.9 2.5
Source: EIA
This brings us to the question: Can the region supply oil in quantities of any significance? An answer to
this question can only be obtained after detailed surveys. However, the limited data available indicates
that the commercial oil and gas potential of the Spratlys is modest at best. There is insignificant
evidence, outside of Chinese claims to support the hypothesis that the region holds extensive oil
reserves. Nevertheless, China and Vietnam are currently batting their claims out.
Vietnam is a major oil producer in the SCS region, with the state owned company Petro Vietnam
producing 24.4 million tons or 26% of Vietnam’s total production in 2010, from 3 fields in the SCS> Petro
Vietnam has concluded 60 oil and gas exploration contracts with foreign companies in order to exploit
new fields. China has consistently opposed Vietnam’s efforts. On March 26, 2011, 2 Chinese maritime
surveillance vessels cut off the exploration cables of a Vietnam oil survey ship in Vietnam’s EEZ a mere
120 km off the coast of Vietnam. The Philippines also have faced Chinese harassment. Despite China’s
objection, both nations are planning on going ahead with gas exploration companies involving foreign
companies23
.
India got embroiled in this conflict when ONGC signed a 3 year agreement for cooperation in oil and gas
exploration with PetroVietnam on Oct 12, 2011, despite Chinese opposition. The Indian vessel, the INS
Airavat, which was moving towards southern Vietnam in July 22, 2011, was warned by Chinese radio to
keep out of Chinese waters. The Indian Foreign Ministry refused to accept China’s claim. This region is of
great economic and strategic significance to India and it has a strong interest in keeping the sea lanes in
the South China Sea open23
.
India has the status and power to resist China. Moreover, it views China’s other activities, such as its ‘all
weather friendship’ with Pakistan with wariness. It has thus entered into joint maritime exercises with
the other South East Asian countries in order to act as a counterpoint to China. It has helped Malaysia
build up it’s coast guard23
and it is hoped that it will extend such ties to the other nations. In addition,
the United States has also started posturing in the SCS in order to check China’s rise.
Arctic Meltdown
Global warming may lead to the possibility of offshore oil and gas reserves becoming commercially
available in the Arctic. Russia, Norway and Greenland (offshore reserves have already been discovered
in Greenland) will become important energy suppliers of these reserves. The Arctic meltdown is
expected to open up new sea routes via the Arctic o the east coast of Asia.
Figure 20: Alternate Route via the Arctic
Source: Mapping Chinese Oil and Gas Pipelines and Sea Routes by P.K Gautam
The North East passage opens up several new sea routes of trade. For instance, it shortens the shipping
route between Asia and the US by 5000 miles. Current predictions indicate that this passage will become
navigable in 10 years time and the direct North polar route in 30-40 years time. China has been investing
a lot of money in research in the North pole since 2000. The consequences of an Arctic route will lead to
a reduction in volume of traffic at the choke points such as the Strait of Malacca. It is therefore
worthwhile to consider and keep track of this source of hydrocarbon reserves as well.
Conclusions
An overview of the Indian and Chinese hydrocarbon sectors has been presented and comparisons have
been drawn between Indian and Chinese hydrocarbon policy. China has been going all out to diversify
its energy sources and sea routes. It is raising a hue and cry about maritime security and is investing
heavily in several pipeline projects. As pointed out in this paper, this could well be to throw sand in the
world’s eyes and deflect attention from its creeping encirclement of India and its taking control over the
South Asia-Indian Ocean region.
India has to pursue a more aggressive policy in this region to prevent China from usurping its traditional
position of dominance in this region. It also needs to become more proactive in investing in foreign oil
fields in places such as Africa. This is because our national oil companies need to be kept afloat and
possess sufficient reserves to sustain themselves.
To sum up, this paper has tried to provide a big picture of Chinese strategy in the hydrocarbon sector
and the implications of this for India.
References
1) International Energy Agency Reports
2) Integrated Energy Policy Report, Planning Commission, GoI
3) EIA country brief of India
4) BP Statistical Review of World Energy
5) EIA statistics
6) Report of the expert group on a viable and sustainable system of pricing of petroleum
products
7) Basic Statistics of Petroleum and Natural Gas, 2010, published by the Ministry of Petroleum
and Natural Gas
8) EIA statistics
9) Characteristics and Trends of China’s Oil Demand by Haibo Wang of CNPC research institute of
economics and technology
10) US Department of Energy, “US Primary Energy Consumption by Source and Sector, 2008”
11) Status of Vehicular Pollution Control Programme in India published by the Central Pollution
Board in March, 2010
12) Uncertain Diesel Pricing policy hits expansion plans of several car makers, including Maruti
Suzuki and Hyundai India-The Economic Times, Nov 30th
, 2010
13) Natural Gas in India: An Analysis of policy by Anil Jain and Anupama Sen
14) EIA statistics
15) Report of Working Group on Petrol and Natural Gas published by the Ministry of Petroleum
and Natural Gas, 2010
16) EIA: Country Brief of China
17) DGH ppt
18) Oil Supply Routes in the Asia Pacific: China’s Strategic Calculations by Vivan Sharan and Nicole
Thiher
19) Mapping Chinese Oil and Gas Pipelines and Sea routes, PK Gautam
20) EIA statistics
21) China’s Oil Security Pipe Dream: Erickson and Collins
22) Diplomacy of a Rising China: Garver
23) China’s energy security and the South China Sea- Stephen Ruscheinski
24) Mapping Chinese Oil and Gas Pipelines and Sea routes, PK Gautam

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HC_China_India

  • 1. The Hydrocarbon Sector: A comparison of India and China’s strategy -Priyanka deSouza Indian Institute of Technology, Bombay Abstract: 31% of India's primary energy mix comes from oil and natural gas. In 2010, India was the world’s fifth largest importer of oil, importing 70% of its hydrocarbon requirements. China too, is transitioning from a coal based economy towards the use of hydrocarbons. From being a net exporter of oil in the early 1990's, it became the second largest importer of oil in the world in 2009. The demand for hydrocarbons in both countries is steadily increasing. China is pursuing an aggressive strategy to expand its energy reserves in order to achieve an "ideological preference for self reliance". India's energy security goal, as defined by the Planning Commission, is to "supply lifeline energy to all citizens irrespective of their ability to pay for it as well as to meet their effective demand for safe and convenient energy to satisfy their various needs at competitive prices". Thus both countries are committed to providing energy at affordable prices and are actively seeking to diversify and expand their portfolio of reserves by increasing their foreign sources of hydrocarbons through national oil companies. They are hence, concerned with their energy sea lines of transport with focus on chokepoints such as the Strait of Hormuz and the Strait of Malacca. This talk shall highlight the tension that exists between India and China in the Indian Ocean as well as the conflict in the South China Sea. China has also identified diverse overland import routes for oil and natural gas such as the Burma-China pipeline. The lecture will also address China's pipeline dream as well as what this means for India. In short, the talk will comprise of a comparison between India and China's policies of meeting their growing demand for oil and natural gas, increasing energy security; and the tensions that have thus arisen. The Indian Hydrocarbon Sector Oil, the life blood of any industrialized nation is always in demand. Natural gas too, is gaining in importance worldwide. It is relatively environmentally friendly and is lower in cost when compared to oil. 31% of India’s total energy consumption is accounted for by oil and natural gas, (see figure 11 )
  • 2. Fig 1: Total Energy consumption in India by type (2009). This is expected to rise. Several future energy scenarios are likely when based on different assumptions, like, better demand-side management and accelerating the use of renewable energy. In each situation the share of hydrocarbons in India’s energy basket is predicted to increase due to the steady increase in population and its economic growth. Reproduced in figure 22 is one of the possible future scenarios reported in the integrated Energy Policy report of the Expert Committee which is published by the Planning Commission, Government of India. 1% 24% 7% 42% 24% 2% Nuclear Oil Natural Gas Coal Combustible Renewables and Waste Other Renewables Source: IEA
  • 3. Figure 2: 2031-32% share of commercial primary energy resources Production and Consumption of Oil In 2010, India consumed roughly 3.2 million barrels per day (bbl/d) of oil and produced roughly 950,000 barrels per day (bbl/d) of total liquids of which 750,000 bbl/d was crude oil. (See figure 33 ) Figure 3: India’s oil production and consumption (1980-2010). 2% 6% 51% 29% 12% Hydro Nuclear Coal Oil Natural Gas Source: Integrated Enegy Policy Report, Planning Commission, GoI 0 500 1000 1500 2000 2500 3000 3500 1980 1985 1990 1995 2000 2005 2010 ThousandBarrelsperday Year Production Consumption Source: United States Energy Information Administration
  • 4. In 2006, India’s primary oil consumption was 3% of the world’s total consumption. It is predicted that by the year 2030 it will increase to approximately 7.5% of the world’s total oil consumption4 . Production and consumption of Natural Gas In 2010 India consumed roughly 47.51 billion cubic meters of gas as can be seen in Figure 45 . The gross production of natural gas in the country was 46.49 billion cubic meters in 2009-2010. This was 44.63% higher than the production of 32.85 billion cubic meters during 2008-2009. Figure 4: India’s natural gas production and consumption In 2006, 2 % of the world’s gas was consumed by India. This is predicted to rise to 5.4% by 2030. Natural gas accounts for approximately 24% of the world’s primary source of energy. In India it accounts for 7 % of the primary energy basket (see Figure 1). Demand has outstripped supply in the natural gas sector and India has been a net importer of gas since 2004. In 2010 India imported 429 billion cubic feet of gas. Oil Imports Oil is fast becoming an expensive and scarce commodity. Many countries pay for this commodity by using their export earnings. The International Energy Outlook (IEO2011) EIA, projects that Indian oil production will grow at an average annual rate of less than one percent through 2035. Rising oil consumption and relatively flat production have combined to make India increasingly dependent on imports to meet its demand for petroleum. In 2010, India was the world’s fifth largest net importer of oil, importing more than 2.2 million bbl/d or 70% of its hydrocarbon requirements6 Figure 4 shows India’s imports by source. 0 200 400 600 800 1000 1200 1400 1600 1800 2000 1980 1985 1990 1995 2000 2005 2010 ThousandBarrelsperday Year Production Consumption Source: United States Energy Information Administration
  • 5. Fig 4: India’s Oil Imports by source, 2010 International oil prices are steadily increasing. The International price of India’s crude oil basket comprising of the average of Oman and Dubai for sour grades and Brent (Dated) for sweet grades in the ratio of 64:37 for 2009-2010, is$69.76/ bbl, while it was $55.72 in 2005-2006 and $26.65/ bbl in 2002- 2003. Table 1 shows the value of imports and exports for the year 2009-20107 . Petroleum products as a percentage of India’s net exports is 30.5% as of 2009-2010 as seen in the table. The petroleum sector accounts for about 2.8% of India’s GDP. Table 1: Imports and Exports of India in 2009-2010. Table 1: Imports and Exports of India in 2009-10 Units=Rs (billion) Crude Oil LNG Petroleum Products Total Gross Imports 3753.78 93.44 337.53 4184.75 Exports 1440.37 1440.37 Net Imports 3753.78 93.44 -1102.84 2744.38 Source: Basic Statistics of Petroleum and Natural Gas, 2010 published by the Ministry of Petroleum and Natural Gas 11% 34% 22% 10% 5% 18% Iran Other Middle East countries Africa Western Hemisphere Other Saudi Arabia Source: Global Trade Atlas
  • 6. Sector Organization State owned companies dominate India’s oil sector. Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) are the largest exploration companies in the upstream sector. India has tried to increase exploration and production of oil and gas by attracting international oil majors via a New Exploration License Policy (NELP). In spite of this international companies currently operate a small number of fields due to ambiguity in government contracts and pricing. State owned enterprises also dominate the downstream sector. The Indian Oil Corporation is the largest state owned company in the downstream sector operating 8 of India’s 21 refineries8 . Government-run oil marketing companies play a major role in the distribution of fuel. Petroleum Product Exports India has excess refining capacity. The country’s biggest export way ahead of gems and jewelry are refined petroleum products. Figure 5 shows India’s exports sector wise8 . Petroleum products account for 20% of all exports. Figure 5: Share of top 5 Commodity Groups in India’s Exports 2010-2011 ( April – September) According to Oil and Gas Journal, India had 4.0 million bbl/d of crude oil refining capacity at 221 facilities as of January 1, 2011. India has the fifth largest refinery capacity in the world. Reliance Industries Jamnagar Complex in Gujarat is the largest oil refining complex in the world, with a total capacity of 1.24 million bbl/d8 . 17% 15% 8% 5% 50% Petroleum (Crude and refined products) Gems and Jewellery Transport Equipment Drugs, pharmaceuticals and fine chemicals Others Source: IEA Analysis
  • 7. Demand Sectors of Oil India stands sixth among the top ten oil consuming countries of the world. This fact is recorded in the US Central Intelligence Agency’s (CIA) World fact book. A report published by the Central Pollution Board 2010 also provides the “Status of Vehicular Pollution Control Program in India”. Data showing average consumption patterns of petroleum products in India are shown in Table 2. Table 2: Consumption pattern of petroleum products in India. Table 2: Consumption Patter of Petroleum Products in India Sr.no Sector Consumption (%) 1 Transport (Petrol, Diesel, CNG, Aviation fuel) 51 2 Industry (Petrol, Diesel, Fuel oil, naphtha, Natural gas 14 3 Commercial and other 13 4 Domestic (LPG and kerosene) 18 5 Agriculture (Diesel) 4 Source: ‘Status of Vehicular Pollution Control Programme in India’, Central pollution board, 2010 Transport alone accounts for more than 50% of the total amount of petroleum in India. Such a high proportion is unique. In China it is 40%9 , in the USA it is 27.8%10 . Energy efficient vehicles cut down on consumption of fuel. In the last few years the number of vehicles on the streets in India has grown dramatically11 . In the past few months there has been a sharp increase for diesel cars because of the widening gap in prices of diesel and petrol going as much as Rs 25 per liter compared to a price gap of Rs 9 to 9.50 in June 201012 . An Internal report that has been prepared by the Planning Commission of India shows that personal (privately owned) cars account for only 0.6% of India’s diesel consumption. This fact is far removed from the common notion that personal cars are the ones that benefit the most from diesel subsidies. At this time there is a very high tax on personal cars to make up for the ‘subsidies’ on petroleum products. Small cars in India attract an excise duty of 10% and big cars are taxed at 22%12 . This high tax is detrimental to the development of the automotive industry. This report then questions the policy of imposing a higher tax on diesel as opposed to petrol as personal diesel vehicles are clearly not the beneficiaries from government subsidies.
  • 8. Goods vehicles consume the maximum (37.9%) while agriculture accounts for 18.8%. Passenger buses (another crucial consumer of diesel) accounts for 6%, taxis 2.1%, jeeps and MUV’s 2.5%. The other diesel consumers are 3 wheelers 3.6%, power 6.8%, railways 3.7%, Industry 5.6% and others 12.5%11 . Gas Imports Policymakers have pursued 2 options for meeting shortfalls in gas they are LNG imports and transnational pipelines13 . Imports of LNG were put at Rs 93.44billion14 and it appears to steadily increase. The LNG trade was started in the mid 60s and has thereafter increased rapidly. India imports 28% of its natural gas needs in the form of LNG13 . The second longer term import option is piping gas through transnational pipelines. India could thus receive imports of gas through neighboring countries such as Myanmar, Bangladesh, and Iran and through Central Asia. There are 2 main geopolitical factors which will determine the success of this approach. First, is it possible to lay gas pipelines in the northwest in politically volatile nations such as Afghanistan, and Pakistan? And second, can India compete with the growing energy demand of other countries such as China for pipelines in the East?13 The Iran-Pakistan- India pipeline (40 MMSCMD) has frequently run into persistent obstacles that remain unresolved as yet. India lost out to China on the potential Myanmar-Bangladesh -India pipeline. After close to a decade of negotiations on the Turkmenistan-Afghanistan-Pakistan-India pipeline, a diplomatic breakthrough occurred in December 2010.13 Construction will begin in 2012 and will end in 2015 for 38 MMSCMD of gas to India13 . However given the political unrest and uncertainties in this area it would be unwise to rely solely on this modality as a main source of gas13 . Sector Organization State owned companies dominate India’s gas sector as well, although their share of production is less than in the oil sector. ONGC accounted for about half of India’s natural gas production in 2009-10. Reliance Industries is a major player because of its discovery of gas in the KG basin in 2002. The Gas Authority of India Limited (GAIL) holds an effective monopoly on natural gas transmission and distribution8 . Demand Sectors of Natural Gas. Demand for natural gas depends totally on the main consuming sectors. The shares of consuming sectors at the beginning of the eleventh five year plan (2007) were the following. Power (40%), Fertilizers (29%), Petrochemicals (9%), City Gas (4%), the consumption of LPG and other liquid hydrocarbons (4%) and other sectors (14%). See Table 315 .
  • 9. Table 3: Demand for gas by consumer sector-Eleventh 5 year plan (Units = MMSCMD). Table 3: Demand for Gas by Consumer Sector- Eleventh 5 year plan (Units=MMSCMD) Sector 2007-8 2008-9 2009-10 2010-11 2011-12 Power 79.7 91.2 102.7 114.2 89 Fertilizer 41 42.9 55.9 76.3 86.8 City Gas 12.1 12.9 13.8 14.8 15.8 Industrial 15 16.1 17.2 18.4 19.7 Petrochemicals & Refineries 25.4 27.2 29.1 31.1 33.3 Sponge iron and steel 6 6.4 6 7.4 7.9 Total 179.2 179.2 225.6 262.2 252.5 Source: Report of Working Group on Petroleum and Natural Gas for the 11th 5 year plan, GoI The power and fertilizer industries consume the most amount of natural gas. In 2009-2010 the power sector consumed approximately 45% of the total natural gas. The fertilizer industry was a close second consuming approximately 28%7 . These are two sectors that are crucial to India’s growth and provide employment for a large section of people. The Chinese Hydrocarbon Sector China is the world’s largest consumer and producer of coal and accounts for half the world’s consumption of coal. Oil and gas account for 23%16 of China’s primary energy mix. EIA predicts that the share of coal in China’s energy mix will decline to 59% in 2030, while the share of oil and natural gas will increase. China’s total coal consumption however, is expected to double by 2030 indicating the steadily increasing Chinese demand for energy16
  • 10. Figure 6: China’s Primary Energy Mix,2012 Oil Production and Consumption In 1993, China went from being a net exporter of oil to a net importer. It is now the second largest consumer of oil after the United States accounting for 11% of the world’s total oil consumption. By 2035, Chinese oil consumption is expected to increase by as much as 2/3rd of the 2011 level16 . The following figure shows the exponential growth of Chinese oil consumption. Oil production is far behind. 70% 19% 4% 6% 1% 0.3% Coal Oil Natural Gas Hydroelectricity Nuclear Other Renewables Source: IEA analysis
  • 11. Figure 7: China’s Oil Production and Consumption In 2011, China produced an estimated 4.3 million barrels of total oil liquids per day (bbl/day). China’s net oil imports on the other hand reached 5.5 million bbl/d in the same year. China’s predicted growth, of over 0.8 million bbl/d between 2011 and 2013, represents 64% of the projected world oil demand growth in this period16 . Natural Gas Production and Consumption China had 107 Tcf of proven natural gas reserves at the beginning of 2012. It currently consumes 4.6 Tcf of gas. China became a net natural gas importer for the first time in 2 decades in 2007 with gas imports jumping to 22% of the share of consumption from only 12% in 201016 . Oil Imports China’s crude oil imports reached a record high of 6 million bbl/d in May, 2012. Crude imports outweigh domestic supply, consisting of over half of the total oil consumption in 2011. EIA predicts that China will import 75% of its crude oil by 203516 . 0 500 1000 1500 2000 2500 3000 3500 1980 1990 2000 2010 2020 ThousandBarrelsperday Year Production Consumption Source: EIA statistics
  • 12. Oil and natural gas imports as a percentage of China’s GDP have doubled between 2009 and 2011. Sector Organization The Chinese oil market is dominated by four major National Oil Companies (NOC): China National Petroleum Company (CNPC); Chinese Petroleum and Chemical Corporation (Sinopec), China National Off Shore Oil Corporation (CNOOC) and China National Chemicals Import and Export Corporation (Sinochem)16 . Onshore oil production in China is on the whole limited to CNPC and CNOOC. International oil companies (IOCs) have been given greater access to offshore oil projects, mainly through production sharing agreements and joint ventures. IOCs involved in offshore E&P work in China include: Conoco Phillips, Shell, Chevron, BP, Husky, Anadarko, and Eni, among others. National Oil companies have to hold the majority participating interest in a production sharing contract (PSC) and can become operators once development costs have been recovered. IOCs offer their technical expertise in order to partner with a Chinese NOC and enter into the Chinese markets16 . China is also investing heavily in foreign oil fields. This shall be spoken about in detail later. Strategic Oil Reserves Strategic Oil Reserves are an important hedge that oil importing nations can use to protect themselves from price fluctuations and disruptions to energy supply. In 2001, China developed plans to establish its own national strategic petroleum reserve in three phases to attain a target of 90 days volume of imports. By 2020, China expects to have 476 million barrels or 123 days of reserves at 2009 import levels16 . 1005 623 555 395363 276 260 230 224 191 135 134 113 572 Figure 8: China's Crude Oil Imports by source in 2011 in thousand barrels per day Saudi Arabia Angola Iran Russia Oman Iraq Sudan Venezuela Source: EIA statistics
  • 13. In contrast India’s strategic reserve will hold only close to 40 million bbl of oil which represents about 10 days of supply on a refinery throughput basis. Demand Sectors of Oil According to IEA statistics, the transportation sector accounts for over 40% of oil demand in 2010. Further oil demand growth will be the result of increases in the use of these fuels. It is projected that in 2035, the use of oil will grow in the transportation sector and will account for 65% of the total oil demand16 . Natural Gas Imports China imports natural gas through pipelines and LNG imports. China's first import natural gas pipeline is the Central Asian Gas Pipeline (CAGP), which runs for 1,130 miles, has a capacity of 1.4 Tcf/y, and brings natural gas to China from Turkmenistan, Uzbekistan, and Kazakhstan. The other proposed pipelines that could contribute to Chinese natural gas imports in the future are the following16 :  In 2006, a Memorandum of Understanding came about between CNPC and Russia's Gazprom for two pipeline proposals. One pipeline would run from Russia's western Kovykta gas field to northwestern China with a pipeline capacity between 1 and 1.4 Tcf/y by 2015. A second proposed pipeline, called the Eastern pipeline, would connect Russia's Far East and Sakhalin Island to northeastern China, and would have 1.1 to 1.4 Tcf/y of capacity. The countries still have to agree on a price for the gas16 .  CNPC signed a deal with Myanmar in March 2009 to finance construction of a 1,123-mile, 420 Bcf/y pipeline from two of Myanmar's offshore blocks to China's Yunnan and Guangxi provinces in the southwestern region. The project is due to start by mid-201316 The rest of China's natural gas imports are in the form of LNG16
  • 14. A Quick Comparison Between India and China’s Hydrocarbon Sectors 1) Pricing: Both India and China retain control over the pricing of their hydrocarbon products and offer high subsidies to domestic oil consumers. In 2009 China went through a series of fuel reforms, where it loosened control over prices to a degree, and allowed domestic prices of oil to reflect international prices16 . India on the other hand retains tight control over hydrocarbon prices and in spite of the huge losses being suffered by the oil marketing companies (OMCs), and shows little sign of raising prices. This has led to our OMCs facing the threat of bankruptcy. 2) Exploration: India has approximately 5.7 billion barrels of proven oil reserves as of January 2011 according to the Oil and Gas Journal. It is the second largest amount in the Asia Pacific region after China. However, a mere 40 to 50% of oil exploration is complete18 . 30% 17% 19% 13% 7% 6% 2% 2% 2% 2% Figure 9: China's LNG import sources, 2011 Australia Indonesia Qatar Malaysia Yemen Nigeria Trinidad Russia Egypt OthersSource: EIA statistics
  • 15. Indian National Oil Companies have tried to acquire equity stakes in E & P M projects overseas in recent times but this has not been very successful. The most active company abroad is ONGC Videsh Limited (OVL). This is the overseas division of ONGC. OVL conducts oil and natural gas operations in 15 countries such as Russia ( Sakhalin Island), Sudan, Vietnam, Colombia and Syria. In October 2011 the OVL announced that it intends to expand its total production levels from150 thousand bbl/d to 560 thousand bbl/ d by March 2014. Essar and Reliance are also conducting small operations overseas15 . On the other hand, China is doing much better than India on this front. 85% of China’s oil reserves are on shore, and mostly consist of mature fields where production has peaked. Companies are now focusing on exploring the untapped reserves in the western interior provinces. The remaining 15% of China’s oil reserves are located off shore in the East China Sea, the South China Sea and the Bohai Bay region. Territorial disputes in the South China Sea and the East China Sea have hindered the exploration of these regions16 . China's increasing dependence on oil imports, the need to secure and diversify its energy supply to enhance energy security, and the need to develop technical expertise, has driven Chinese NOCs to invest in international projects and form commercial partnerships with IOCs. Since 2009, NOCs have purchased assets in the Middle East, North America, Latin America, Africa, and Asia. NOCs have invested a staggering $18 billion in overseas oil and gas assets in 201116 . China's overseas equity oil production has grown remarkably over the past decade from 140,000 bbl/d in 2000 to over 1.5 million bbl/d of oil production in 2011. CNPC has been the most active company, while Sinopec, CNOOC, and other smaller NOCs have also expanded their overseas investment portfolio16 . 21% 15% 20% 44% Figure 10: Exploration of Oil in India Poorly Explored Unexplored Well explored Initiated Source: DGH ppt
  • 16. Since 2008, Chinese NOCs have secured bilateral oil-for-loan deals amounting to roughly $100 billion with many countries such as Russia, Kazakhstan, Venezuela, Brazil, Ecuador, Bolivia, Angola, Ghana, and a gas-for-loan deal with Turkmenistan. China’s Energy Transport Routes And Implications for India Over 80% of China’s oil imports are transported by oil tankers via the sea. Table 4: Classes of Tankers Tanker Class Deadweight Tons Barrels of Oil Panamax 60,000-80,000 500,000 Aframax 80,000-120,000 750,000 Suezmax 120,000- 200,000 1,000,000 Very Large Crude Carrier (VLCC) 200,000- 320,0000 2,000,000 Ultra Large Crude Carrier (ULCC) 320,000+ up to 4,000,000 Source: Pacific L.A Marine Terminal LLC, Oil Supply Routes in the Asia specific, China’s Stretgic Calculations-Vivan Sharan and Nicole Thiher Approximately half of China's oil imports come from the Persian Gulf. Tankers carrying these imports pass through the Strait of Hormuz and the Strait of Malacca and travel to east China where the refineries are located.
  • 17. Figure 11: Route taken by tankers to bring oil to China via the Middle East Sea Routes: Choke Points Hormuz Strait The narrow Hormuz Strait connects the Gulf of Oman with the Persian Gulf. About 20% of the world’s oil demand (15 million bbl/d) is supplied through ships that traverse this Strait. More than 85% of all these crude oil exports go to Asian markets, with Japan, India, South Korea, and China being the major destinations. In addition Qatar exports about 2 trillion cubic feet per year of LNG through the Strait of Hormuz, accounting for 20% of the world’s LNG trade18 . Navigation is limited to two 3 km wide shipping lanes separated by a 3 km buffer. At the narrowest point the Strait is 34 km wide. The Strait is deep and wide enough to handle the world’s largest crude oil tankers. The forced concentration of sea traffic through this Strait qualifies it as a choke point. 40% of China’s imported oil passes through this body of water. India’s dependence on this strait is even greater with 70% of its imports passing through the Strait. The Middle East has the world’s largest proven oil reserves and hence this Strait will be of key importance in the years to come. In
  • 18. fact it has been predicted that in 2030, one in every 3 barrels of oil consumed in China will have to pass through the Hormuz Strait18 . Table 5: Dependence on Oil Imports from the Middle East, 2010 M.E Imports (m of bpd) M.E imports as a percentage of total imports US 1.73 14.80% Europe 2.36 19.50% China 2.38 40% India 2.61 72.60% Source: BP Statistical Review of the World Energy, 2011 The Persian Gulf will thus remain crucial for China. In spite of this, China spends very little on protecting the Middle East region to keep its oil interests safe as compared to the US; even though it is far more dependent on this region than the United States. Instead it has instead adopted an aggressive strategy to diversify its oil supply and its energy transport routes. Currently, only Saudi Arabia, Iraq and UAE have pipelines to transfer oil out of the Gulf and bypass the Strait of Hormuz. In case of a disruption in the Strait of Hormuz, China, India and the other countries dependent on Persian Gulf oil imports will become dependent on the existing pipelines present in the Middle East. The following figure depicts the pipelines in the region19 .
  • 19. Figure 12: Sea Routes and Pipelines in the Middle East Source: EIA statistics It has been estimated that about 5 million bbl/d of oil, or about one third of all oil transported by ships globally can be exported from the Persian Gulf region via pipelines avoiding the strait. Pipelines such as the Habshan-Fujairah Pipeline and the East-West pipeline allow ships to access the Persian Gulf at alternate ports but do not reduce dependency on sea routes. This is because shipping is far less expensive than the use of pipelines19 . The Strait of Malacca The Malacca strait is the longest and busiest strait in the world. A third of the world’s trade and half of the world’s oil flows through it. It connects the Indian Ocean to the South China Sea. It is about 800 km long and lies between the Malaysian peninsula and Sumatra20 .
  • 20. Figure 13: Strait of Malacca Source: EIA The narrowest point is 2.7 km wide and the shallowest part is less than 30 m deep. Thus VLCC (Very Large Crude Carriers) are the largest tankers that can navigate this stretch. China requires 2 VLCC tankers to go through the strait daily, to bring it the oil it requires from the Persian Gulf18,19 . The alternatives to Malacca are the following as given in the paper, ‘Mapping Chinese Oil and Gas Pipelines and Sea routes’ by P.K Gautam19 , are 1) A channel through Thailand. This project has been shelved. 2) A pipeline from the coast in the Bay of Bengal to Kunming: Work has already started on the construction of a dual pipeline of gas and oil from Myanmar to Yunnan.
  • 21. Figure 14: Burma-China Oil Pipeline Proposed Route and Associated Facilities Source: China’s Oil Security Pipeline Dream-Erickson and Collins CNPC is financing the bulk costs for these pipelines19 . Table 6: Time for Oil to Reach China by Sea and the Burma-China Pipeline Pipeline under construction (in Phases) Days exceeding time taken by normal sea route Total days per trip (including shipping time to Burma) Sino-Burmese pipeline (capacity 0.24m bpd) 6.3 17.6 Sino-Burmese pipeline (capacity 0.4 mbpd) 3 14.3 Based on VLCC carrying 2,000,000 barrels of oil (maritime connector) Estimated at a speed of 14 knots Source:, China’s Stretgic Calculations-Vivan Sharan and Nicole Thiher
  • 22. From an economic perspective, such a pipeline might be feasible. This is because the cost of piping crude oil to inland refineries in south west China and the distributing of refined products through the pipeline network will almost equal tanker costs of shipping crude oil to east China for refining, and then transferring it to west China for distribution. However, from a security perspective, this pipeline does not seem feasible due to ethnic conflicts in the Burmese hinterlands through which the pipelines pass19 . 3) Iran and China: The building of a huge refinery at Gwadar and the subsequent selling of oil products to Iran in exchange for Iranian crude oil has been postulated. The oil would be made available to China through a pipeline passing through Turkmenistan, the Kyrgyz republic and Tajikistan. This will enable China to avoid the Malacca strait altogether19 . 4) A pipeline from the Gwadar port in Pakistan to Xinjiang (An “Energy Corridoor”): This is the shortest, but most technologically complex route to bring oil from the Middle East to China. In addition, the pipeline would have to pass through the Karakoram Highway in the disputed territory between India and Pakistan. Pakistan has been touting this idea for a long time, but China has been significantly silent on this issue. This is because in addition to serious security problems, there are major financial barriers. If a Chinese company chose to move 200,000 bpd through the energy corridor it could well lose a billion dollars a year compared to shipping it19 .
  • 23. Figure 15: Pakistan-China Proposed Pipeline Source: China’s Oil Security Pipeline Dream-Erickson and Collins 5) A pipeline from Iran through Pakistan, India and Myanmar to China: Work is in progress on this. 6) A pipeline through northern Malaysia: This has been shelved 7) The maritime hedges are through the Sunda strait and through the Lambok strait. The Sunda strait is very shallow and narrow and treacherous for vessels like VLCCs. The Lambok strait is more navigable but is a much longer route18 . Debate is raging in China about how to ensure adequate oil supplies. Should China cooperate with international institutions, or should it seek unilateral military solutions? Should it look to expanding its maritime power and creating a blue water navy or should it trust in the liquid international oil market? Whoever controls the Strait of Malacca effectively grips China’s strategic energy passage and can threaten China’s energy security at any point in time. This is how China is justifying its building of pipelines to act as bypasses19 .
  • 24. Pipelines China currently obtains 500,000 bpd of oil through pipelines from Kazakhstan and Russia. However, the oil it obtains via these pipelines is very low. To put this in perspective, Eriksen and Collins said that if Chinese oil import growth is conservatively estimated to be 2.5% annually over the next 5 years, Beijing’s imports will increase by 650,000 bpd which is more than the combined volume of oil that is imported from Russia and Kazakhstan21 . The Kazakhstan-China pipeline is the only overland oil pipeline currently operational. This pipeline was a win-win deal for both China and Kazakhstan. This is because China obtains secure oil supplies and Kazakhstan gains a crude oil export route independent of Russia as well a new market for its oil21 Figure 16: Kazakhstan-China Oil Pipeline Source: China’s Oil Security Pipeline Dream-Erickson and Collins China views Russia as a rich and secure oil source capable of delivering crude oil far away from the purview of the US navy. Pricing disputes however have hindered Russia’s exports to China via pipelines for more than a decade. An agreement has recently been reached and construction is currently underway21 .
  • 25. Figure 17: Russia-China Oil Pipelines Source: China’s Oil Security Pipeline Dream-Erickson and Collins It is the author’s opinion that China’s pipeline vision will remain a dream. This is because pipelines can be sabotaged very easily, while it is much more difficult to wage a maritime attack. In addition pipelines are more expensive than maritime shipping. It is the author’s belief that oil companies in China are playing upon the danger of maritime warfare to obtain funding to set up pipelines which will allow them to grow. It is also the author’s view that China is exaggerating the risks of an attack by sea. The international energy market is mature, liquid and unbiased, and the implication of stopping supplies energy for a day is so strong, that it has long term cascading effects on the perceived reliability of the supplier. However, the buildup of pipelines also involves the setting up of new infrastructure such as ports and military bases to obtain a foot hold in nations like Pakistan and Burma. This has a greater significance. Securing the route along the Indian Ocean and the South China Sea also serves the motive of establishing military dominance in the region. The heavy naval posturing acts a counterpoint to other maritime forces in the region (eg. Indian and US fleets). China has always relied on a mode of government spending to drive economic growth. The development of a blue water navy fleet fits in well with China’s economic and strategic logic.
  • 26. The String of Pearls Approach and its implication to India “The “String of Pearls” describes the manifestation of China’s rising geopolitical influence through efforts to increase access to ports and airfields, develop special diplomatic relationships, and modernize military forces that extend from the South China Sea through the Strait of Malacca, across the Indian Ocean, and on to the Persian Gulf. —Christopher Pehrson India views China’s creeping encirclement of it and it’s burgeoning bilateral ties with South Asian-Indian Ocean Region (SA-IOR) nations with deep apprehension. Figure 18: String of Pearls Source:http://4.bp.blogspot.com/6tBDYUSKXyI/T0EE3bplhzI/AAAAAAAAAF4/KQpkXsNhGbo/s1600/ Chinese_string_of_pearls.jpg John Garver retells the story of a frog swimming comfortably and safely in a pot of lukewarm water in his paper, “Diplomacy of a Rising China”. The frog does not notice the temperature of the water rising slowly and in sometime is thoroughly cooked and dies. Garver then explains how this tale captures Chinese strategy for dealing with an apprehensive India. Beijing is slowly but surely forming ties with all countries in the SA-IOR zone and has built a string of military bases encircling India. The SA-IOR region has vast geo-political and economic significance with 85% of the world’s oil consumption passing through this ocean. China is trying its best to control this region by wooing all
  • 27. the littoral nations with loans and aid money. It is vitally important that China does not get control of the sea lanes and disrupt the heavy trade in the ocean. Traditionally due to its geographic position, India has always viewed the SA-IOR region as an area of Indian special interest. Now, China threatens this view point. A typical example of Chinese policy to crush India’s fears, is advocating a high sounding principle like the ‘5 Principles of Peaceful Coexistence’. Indian objection to an aspect of cooperation between China and say, Pakistan would then be touted by China as unacceptable interference in the sovereign affairs of China and its neighbors and a violation of the ‘5 Principles of Peaceful Coexistence”. This then places the burden on India to prove that it is not ‘anti-China’ or insincere22 . Each pearl in the string is a nexus of Chinese geopolitical influence or military presence, which stretches from Hainan Island to Gwadar. Each pearl was examined and analyzed in the following paper http://www.americanessays.com/study-aids/free-essays/economics/china-string-of-pearls-policy.php. The salient points of this analysis are detailed below. Gwadar, Pakistan: China plans to build a huge oil refinery in Gwadar in partnership with Pakistan.  It can serve as a Chinese Naval Base.  It can serve as an energy transport center to carry oil from Gwadar to Xinjiang in west China by an oil pipeline as mentioned previously  It benefits by having access to international trade routes.  It also provides Beijing with a listening post from where it can monitor US, India and US-India Maritime cooperation. As Admiral (retd) Sureesh Mehta said" It has a serious strategic implication for India, being only 180 Nm from the exits of Strait of Hormuz, would enable Pak to take control over the world energy jugular & interdiction of Indian tankers." Hambantota, Sri Lanka: China aims on developing the following infrastructure at Hambantota  Developing a container port  Developing a bunkering system  Establishing an oil refinery  Setting up an airport and other facilities The possible reason for China’s investment of 1 Billion in this port is that it could be used by the navy as port of call for refueling purposes. In addition it could provide China with a listening post to monitor India’s nuclear, space and naval activities in the south of India. Chittagong, Bangladesh: It is the largest seaport in Bangladesh. China is developing a container port facility a Chittagong. However, there has been no further news on this development perhaps because of the change in governance in Bangladesh which is India friendly. Sittwe, Myanmar: China has several plans for this pearl; the following two are the most important:  The gas pipeline from Myanmar's West Arakan state to Yunnan province.
  • 28.  Using Sittwe Port as a sea gateway. China has undertaken several projects in Myanmar in return for the right to use Myanmar’s Coco islands. For example, China is building a deep sea port at Kyaukpyu. Once the ports are developed fully, Chinese oil tankers from the Middle East and Africa will be able to cross the Bay of Bengal and anchor at Myanmar's Sittwe and Kyaukphyu ports from where their cargo will be transported via pipelines to Yunnan. The transport time of fuel that bypasses the Malacca Strait in this way will be cut by a week. China has given a greater priority to Arakan- Yunnan pipeline as compared to the Gwadar- Xinjiang pipeline proposed by the Pakistan government. Indian policy makers believe that a Chinese presence in the Bay of Bengal may allow it to interdict regional SLOCs. Due to this, Myanmar is being perceived as the single largest threat to Indian strategic interests in SE Asia. Coco Islands, Myanmar: The Coco islands are a pair of strategically important islands located in the East Indian Ocean. The Great Coco Islands and Small Coco Islands are separated from each other by the Alexandra Channel. They are separated from the Andaman by Coco Channel. These islands were supposedly leased to the People's Republic of China since 1994, according to various amateur sources. China has carried out a number of activities in Coco Islands such a building a maritime base there as well as developing an air field. The postulated strategic importance of this 'pearl' for China is: 1. Ability to monitor the Indian Navy and other ships between the Bay of Bengal and the Strait of Malacca 2. It can also be used to monitor the activities at the launch site of ISRO at Sriharikota and DRDO at Chandipur. According to Indian analysts, this may pose a threat to Indian tri-service command at Port Blair (190 Nm away). Strait of Malacca: The importance of this strait to China has been dwelt upon at length earlier. China issued a statement indicating that it would use its naval might to ensure that these sea lanes remain open. In President Hu Jintao's own words, "The Malacca dilemma is the key to China's energy security". India's naval base in the Andaman and Nicobar islands puts India at a geographic advantageous position with respect to the Chinese in this region and thus may explain the Chinese fear and the importance of the pearls of the Coco islands and Kra canal to the Chinese. Kra Canal/Thai Canal: China has planned to construct an enlarged channel through Southern Thailand to improve transport. This plan is posited to extend over a period of ten years with an estimated cost of $20-25 Bn. However, initially the plan seemed to have been dropped owing to environmental concerns but recently there have been signs of revival of this plan because of economic benefits for China and a threat of piracy in the Strait of Malacca. The plan was tentatively approved in 2007 but Singapore and US showed their dissent. This plan is currently on hold again. South China Sea: The South China Sea is located south of China and Taiwan, west of Philippines, North West of Malaysia, North of Indonesia and East of Vietnam. The region is supposed to have significant oil and natural gas reserves. Because of this reason, China has claimed the South China Sea for its own. More about the conflict in the South China Sea shall be covered later.
  • 29. Woody Islands: These Woody Islands are a part of the Paracel Islands in the South China Sea occupied by China. This pearl serves as an artificial harbour and is a Chinese Emergency Rescue Center. It also has an airfield. The centre was occupied in 1956 and also has oil tanks, gun emplacements and ammunition storage bunkers. Hainan Islands: These 200 islands form the smallest province of China and are home to a strategic nuclear submarine naval harbour that is capable of hiding upto 20 nuclear submarines from spy satellites. The harbour houses nuclear ballistic missile subs and is large enough to accommodate aircraft carriers. It is important that China’s String of Pearl’s strategy doesn’t become a Circle of Pearls. Chinese companies already have extensive ties with Africa and have emerged as ruthless competitors in African markets. China-Africa trade has grown significantly in a very short time. To put this in perspective, the trade between China and Africa has grown from $55 billion in 2006 to $73.3 billion in 2007. The surge in trade has been mainly due to China's import of oil and other commodities from Africa and the sale of low cost manufactured products. China follows a policy whereby the profit motive surpasses all other concerns such as democracy, good governance and human rights and pursues a strategy of non interference with states in their internal matters in its dealing. Indian companies like ONGC, Indian Oil and Reliance have been active in seeking prospects for exploration in Africa. However, if we compare India with China in terms of economic relations with the African continent, the former appears to have missed the opportunities offered by the huge untapped natural resources of oil, gas and minerals that the African continent is endowed with.
  • 30. South China Sea Conflict Figure 19: Territorial Claims of the South China Sea Source: UNCLOS and CIA Dispute between China, Taiwan and the five Southeast Asian countries over conflicting claims over islands and maritime zones in the South China Sea (SCS) has been a longstanding security issue. The disputes originally arose after World War 2 when the littoral nations: China, Indonesia, Malaysia and the Philippines (as well as Vietnam which joined in later) hastened to occupy the islands in the SCS. What started as a territorial dispute which might have been got around with negotiations escalated when in the 1990’s, access to the sea’s oil and gas reserves and fishing resources complicated the picture. As energy demands increased, conflict worsened especially between China and Vietnam23 . China and Vietnam claim the entire South China Sea area and the islands within it. Malaysia, the Philippines, Indonesia and Brunei have laid out contiguous claims. The United Nations Convention on the Law of the Sea (UNCLOS) laid down the rules to decide claims to resources based on exclusive economic zones (EEZs) and continental shelves. China’s claims go against the principles laid down in UNCLOS. China’s claim also fails to hold water even when one looks at them in context of the “effective occupation” principle. Though China has occupied the Paracel islands-an archipelago of 30 islands equidistant from China and Vietnam, this principle goes against their claims to the Spratlay Islands, an archipelago off the coasts of Philippines and Malaysia. China’s claim based on ‘history’ is very weak23 . Resource estimates for oil and gas reserves in the South China Sea vary greatly. In 1994, the Chinese Ministry of Geology and Mineral Resources estimated oil and gas resources in the SCS as high as 225 billion barrels of oil, although it remains unclear whether this number represents reserves for only the Spratly Islands proper or the entire South China Sea23
  • 31. China’s optimistic predictions on the energy potential of the South China Sea are not shared by most non-Chinese analysts23 . A 1993-1994 projection by the U.S. Geological Survey estimated that the sum total of discovered and undiscovered resources in the offshore basins of the South China Sea at only 28 billion barrels (or one tenth of most Chinese estimates) 23 This difference could be explained on the basis that governments and speculators tend to give very optimistic estimates of the potential of an unexplored region in order to attract foreign investment. Oil companies, on the other hand, tend to downplay the potential of a region in order to obtain maximum aid from the government. This may explain the difference in views between Chinese estimates and the more pessimistic estimates of oil companies. However, a few non regional scientific institutions, such as Lamont Doherty Geological Observatory and the German Geological Survey, are optimistic about the potential.23 The following table shows the proven reserves in the SCS and compares them with other regions Table 7: Oil and Gas in the South China Sea Region Proven Oil Reserves (Billion Barrels) Proven Gas Reserves (Trillion Cubic Feet) Oil Production (Barrels/Day) Gas Production (Billion Cubic Feet) Brunei 1.4 13.8 200,612 334 Cambodia 0 0 0 0 China 1 (est) 3.5 (est) 273,000 141 Indonesia 0.2 (est) 30.5 215,000 12 Malaysia 3.9 81.7 668,922 1,437 Philippine s 0.3 2.8 3,000 <1 Singapore 0 0 0 0 Taiwan <0.01 2.7 1,300 33 Thailand 0.4 11.8 169,346 565 Vietnam 0.6 6.8 282,463 19 Total Est 7.8 Est 153.6 1,921,734 2,542 Source: United States EIA Table 8: Oil and Gas in the South China Sea- Comparison with other Regions Proven Oil Reserves (Billion Barrels) Proven Gas Reserves (Trillion Cubic Feet) Oil Production (Million Barrels/Day) Gas Production (Trillion Cubic Feet/Year) Caspian Sea 18.4-34.9 236-337 1.3 4.3 North Sea Region 16.1 148.2 6.7 9 Arabian Gulf 672 1800 21.4 6.8
  • 32. South China Sea Est 7.8 Est 153.6 1.9 2.5 Source: EIA This brings us to the question: Can the region supply oil in quantities of any significance? An answer to this question can only be obtained after detailed surveys. However, the limited data available indicates that the commercial oil and gas potential of the Spratlys is modest at best. There is insignificant evidence, outside of Chinese claims to support the hypothesis that the region holds extensive oil reserves. Nevertheless, China and Vietnam are currently batting their claims out. Vietnam is a major oil producer in the SCS region, with the state owned company Petro Vietnam producing 24.4 million tons or 26% of Vietnam’s total production in 2010, from 3 fields in the SCS> Petro Vietnam has concluded 60 oil and gas exploration contracts with foreign companies in order to exploit new fields. China has consistently opposed Vietnam’s efforts. On March 26, 2011, 2 Chinese maritime surveillance vessels cut off the exploration cables of a Vietnam oil survey ship in Vietnam’s EEZ a mere 120 km off the coast of Vietnam. The Philippines also have faced Chinese harassment. Despite China’s objection, both nations are planning on going ahead with gas exploration companies involving foreign companies23 . India got embroiled in this conflict when ONGC signed a 3 year agreement for cooperation in oil and gas exploration with PetroVietnam on Oct 12, 2011, despite Chinese opposition. The Indian vessel, the INS Airavat, which was moving towards southern Vietnam in July 22, 2011, was warned by Chinese radio to keep out of Chinese waters. The Indian Foreign Ministry refused to accept China’s claim. This region is of great economic and strategic significance to India and it has a strong interest in keeping the sea lanes in the South China Sea open23 . India has the status and power to resist China. Moreover, it views China’s other activities, such as its ‘all weather friendship’ with Pakistan with wariness. It has thus entered into joint maritime exercises with the other South East Asian countries in order to act as a counterpoint to China. It has helped Malaysia build up it’s coast guard23 and it is hoped that it will extend such ties to the other nations. In addition, the United States has also started posturing in the SCS in order to check China’s rise. Arctic Meltdown Global warming may lead to the possibility of offshore oil and gas reserves becoming commercially available in the Arctic. Russia, Norway and Greenland (offshore reserves have already been discovered in Greenland) will become important energy suppliers of these reserves. The Arctic meltdown is expected to open up new sea routes via the Arctic o the east coast of Asia.
  • 33. Figure 20: Alternate Route via the Arctic Source: Mapping Chinese Oil and Gas Pipelines and Sea Routes by P.K Gautam The North East passage opens up several new sea routes of trade. For instance, it shortens the shipping route between Asia and the US by 5000 miles. Current predictions indicate that this passage will become navigable in 10 years time and the direct North polar route in 30-40 years time. China has been investing
  • 34. a lot of money in research in the North pole since 2000. The consequences of an Arctic route will lead to a reduction in volume of traffic at the choke points such as the Strait of Malacca. It is therefore worthwhile to consider and keep track of this source of hydrocarbon reserves as well. Conclusions An overview of the Indian and Chinese hydrocarbon sectors has been presented and comparisons have been drawn between Indian and Chinese hydrocarbon policy. China has been going all out to diversify its energy sources and sea routes. It is raising a hue and cry about maritime security and is investing heavily in several pipeline projects. As pointed out in this paper, this could well be to throw sand in the world’s eyes and deflect attention from its creeping encirclement of India and its taking control over the South Asia-Indian Ocean region. India has to pursue a more aggressive policy in this region to prevent China from usurping its traditional position of dominance in this region. It also needs to become more proactive in investing in foreign oil fields in places such as Africa. This is because our national oil companies need to be kept afloat and possess sufficient reserves to sustain themselves. To sum up, this paper has tried to provide a big picture of Chinese strategy in the hydrocarbon sector and the implications of this for India. References 1) International Energy Agency Reports 2) Integrated Energy Policy Report, Planning Commission, GoI 3) EIA country brief of India 4) BP Statistical Review of World Energy 5) EIA statistics 6) Report of the expert group on a viable and sustainable system of pricing of petroleum products 7) Basic Statistics of Petroleum and Natural Gas, 2010, published by the Ministry of Petroleum and Natural Gas 8) EIA statistics 9) Characteristics and Trends of China’s Oil Demand by Haibo Wang of CNPC research institute of economics and technology 10) US Department of Energy, “US Primary Energy Consumption by Source and Sector, 2008” 11) Status of Vehicular Pollution Control Programme in India published by the Central Pollution Board in March, 2010 12) Uncertain Diesel Pricing policy hits expansion plans of several car makers, including Maruti Suzuki and Hyundai India-The Economic Times, Nov 30th , 2010 13) Natural Gas in India: An Analysis of policy by Anil Jain and Anupama Sen 14) EIA statistics 15) Report of Working Group on Petrol and Natural Gas published by the Ministry of Petroleum and Natural Gas, 2010 16) EIA: Country Brief of China 17) DGH ppt 18) Oil Supply Routes in the Asia Pacific: China’s Strategic Calculations by Vivan Sharan and Nicole Thiher
  • 35. 19) Mapping Chinese Oil and Gas Pipelines and Sea routes, PK Gautam 20) EIA statistics 21) China’s Oil Security Pipe Dream: Erickson and Collins 22) Diplomacy of a Rising China: Garver 23) China’s energy security and the South China Sea- Stephen Ruscheinski 24) Mapping Chinese Oil and Gas Pipelines and Sea routes, PK Gautam