India-US: Energy Can Charge Bilateral Relationship – Analysis

Cooperation in the energy sector offers a chance for India and the U.S. to build on a mutually beneficial and complementary relationship. The U.S. will gain from having a large, long-term market while India will benefit from cheaper and more diversified energy sources.

By Amit Bhandari

The fifth India-U.S. Strategic Dialogue was the first cabinet level meeting between the new Indian government and the U.S. administration. Accompanying the U.S. secretary of state John Kerry, were two other senior members of the U.S. government, Secretary of Commerce Penny Pritzker and Deputy Secretary of Energy Daniel Poneman.

Since economic diplomacy has always been central to U.S. foreign policy, Secretary Pritzker’s visit was followed with great interest. But given the irritants that the bilateral relationship has suffered in the business relationship, it is possible that energy diplomacy and not economic diplomacy will revive the partnership.

Energy is one of the five key areas of the strategic dialogue (the others are Strategic Cooperation; Education & Development; Economics, Trade & Agriculture and Science & Technology, Health & Innovation.) The energy dialogue is the oldest, having begun in 2005[1]well before the Strategic Dialogue started in 2009. This dialogue has continued despite the ups and downs in the relationship. Now, even as India and the U.S. continue to have differences in other areas, energy sector throws up possibilities of collaboration – it is an area where the interests of the two countries are aligned and complementary.

The U.S. is set to become an important exporter of natural gas in form of LNG (Liquefied Natural Gas) in the coming years. It is already building its export infrastructure. India of course needs LNG and will import more at the right price. The U.S. Department of Energy has already granted permission for export of 5.8 million tonnes/annum of LNG to public sector firm GAIL[2]. This will be benchmarked to the U.S. domestic gas price, currently around $3.8/mmbtu[3] and much cheaper than the current international LNG price of $10/mmbtu. Imports from U.S. terminals are expected to commence by end-2015[4] – and India already has the facilities needed at home to bring in this gas.

The U.S. Department of Energy currently has applications for building LNG export terminals with the potential for 288 million tonnes. This will significantly add capacity to the global supply of LNG which was 325 million tonnes in 2013.[5] The extra supply will push down global LNG prices, especially to the benefit of importers such as India. Also, the additional supply will enable Indian companies to purchase higher volumes. U.S. exporters will gain because they will have a large, long-term buyer in place to help them recover the massive investments they have made in LNG export terminals. They are expensive to build – a 6.9 million tonne capacity LNG project has just been completed in Papua New Guinea at a cost of $19 billion.

Importing more LNG is in line with India’s Hydrocarbon vision 2025, which sees the Indian economy shifting away from its dependence on crude oil and towards natural gas. It is a cleaner and cheaper fuel compared with crude oil. It will also diversify our energy dependence which otherwise currently banks on West Asia, a region in turmoil that accounts for nearly 70% of India’s oil imports. Expanding the LNG trade between India and the U.S. will benefit both.

Secondly, the U.S. is one of the few countries where foreign companies can own oil and gas resources. This is also an opportunity for Indian public sector companies which are trying to purchase energy assets across the world – a difficult task given that India has entered the game very recently and energy dependent China is a formidable competitor. Most petroleum rich countries don’t allow foreign ownership of energy assets and many of those that do face problems such as civil unrest or insurgency, like Sudan and South Sudan.

So the U.S. is an opportunity for Indian public sector companies which are trying to purchase energy assets across the world – a late play for them and one where China is a formidable competitor.

The gas export of the U.S. will come from the shale gas fields in that country, many of which are available for purchase and some Indian companies have already bought. Private sector major Reliance has made three large investments in shale gas projects in 2010, and has invested a total of $7.36 billion in these so far. Two of these assets are in the Eastern United States in a formation called Marcellus Shale, while the third is in Texas, at Eagle Ford. Public sector major Gail has made a less grand investment of $95 million in a smaller project, also in Eagle Ford. India’s state-owned energy exploration companies – ONGC and Oil India- too should explore this possibility. They have the necessary finance, and the experience they develop here can come in handy when India eventually develops its own shale gas projects.

Given that India and the U.S. don’t see eye-to-eye on issues such as WTO, IP protection and geostrategic issues such as Crimea and Gaza, energy offers a scope for cooperating to mutual benefit and building a stronger relationship. The just-concluded meeting in Delhi, part of the current dialogue between Daniel Poneman and Dharmendra Pradhan, Minister of State (Independent Charge), Ministry of Petroleum & Natural Gas is a case in the point.

Important issues that came out of the discussion were India’s appreciation of the U.S. permitting LNG exports to India and the U.S. in turn seeking investments from Indian companies in its own assets. The U.S. doesn’t yet have a free trade agreement with India, and gas exports need clearance from the Department of Energy on a case-by-case basis. Other issues discussed included participation of U.S. firms in oil and gas exploration in India, U.S. technical assistance in improving India’s oil refineries and strategic oil storage and joint R&D in emerging areas such as gas hydrates. If these discussions and investments prove fruitful and smooth, energy could be the beacon that lights up the bilateral.

Amit Bhandari is Fellow, Energy & Environment Studies, Gateway House.

This article was written  Gateway House: Indian Council on Global Relations, which can be accessed here.

References

[1] Ministry of External Affairs, Government of India, <http://www.mea.gov.in/press-releases.htm?dtl%2F23055%2FIndiaUS+Energy+Dialogue+Meeting>

[2] GAIL. (2013). Annual report 2012-13. Retrieved from http://www.gail.nic.in/final_site/pdf/GAIL_AR_2012-13.pdf

[3] NASDAQ, End of day Commodity Futures Price Quotes for Natural Gas (NYMEX), <http://www.nasdaq.com/markets/natural-gas.aspx>

[4] Cheniere Energy. (n.d.). Sabine Pass liquefaction project. Retrieved fromhttp://www.cheniere.com/lng_industry/sabine_pass_liquefaction.shtml and Dominion Energy. (n.d.). Dominion Cove Point. Retrieved fromhttps://www.dom.com/business/gas-transmission/cove-point/index.jsp

[5] BP. (2013). BP statistical review of world energy. Retrieved fromhttp://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-energy-2013.html