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Squabbling over oil undercuts strength of Sino-Indian joint interests

By  Jeremy Carl (Global Times)

08:30, July 16, 2012

The recent announcement by India's Oil and Natural Gas Corporation (ONGC) and China's China National Petroleum Corp (CNPC) of a wide-reaching pact has led to a renewed optimism in both countries that China and India can put aside their often-unproductive oil exploration rivalry and engage in a useful partnership.

While some find such partnership inherently unstable, with the stronger company, or country, always seeking to marginalize the weaker one, a more measured understanding of the political and economic aspects of oil exploration today would suggest that it is the continued rivalry of these companies, and its attendant economic costs for both India and China, that may prove unsustainable.

China and India have a tangled political history, with very active disputes relating to both their common border and Chinese sovereignty claims in the South China Sea. But the logic behind a tighter alignment, rather than a rivalry, between major Chinese and Indian oil companies, is stronger than ever. With greater global scrutiny than ever, China and India have far better institutional capacity, and incentive, than they once did to live up to international commitments that they sign.

Regardless, most energy economists tend to dismiss the notion of "going out" to secure one's own oil supplies as a strategy doomed to failure. Oil, they argue, trades internationally, and any company paying over the global market price to develop a field will, in the long run, wind up a loser. "Controlling" such resources may help corporate bottom lines but does nothing for China's energy security.

Engaging in a bidding war with India for these resources, to the extent that it is done in the name of national energy security, is a strategic mistake. China and India tend to have countries looking for a financial windfall when they compete with each other in a bid. If they can learn to bid jointly and effectively, they are likely to pay far more reasonable prices to access resources.

China and India both have compelling reasons for cooperation in this sector. State-run Indian oil and gas companies are neither politically, managerially, or strategically as nimble as Chinese oil and gas firms are. Joint projects thus allow them to access supplies they could not have obtained operating alone. India is still a marginal player in the international oil exploration and it is generally ineffective at leveraging the resources of the Indian state to enhance its prospects for winning bids.

Yet the integration of Chinese companies' energy strategies with the wishes of China's government ministries is often exaggerated abroad. China's energy companies are powerful players in their own right and the notion that they will pursue uneconomic projects for political reasons seems to owe more to rhetoric than reality.

Ironically, the biggest threat to an aggressive exploration partnership between Chinese and Indian oil companies comes not from politics but from technology. As the great petroleum geologist Wallace Pratt (1895-1981) observed, "Oil is found in the minds of men." In other words, oil exists not primarily as a physical resource, but one that can be ever-expanded through technological development. This truth can perhaps be best seen in a new report from Harvard University which found, using a bottom-up analysis of major global wells, a potentially massive oil glut in the offing globally over the next decade.

This glut, if it emerges, will occur largely due to the growth of technologies such as horizontal drilling and hydraulic fracturing, along with a decade-long boom in oil exploration, in large part driven by high global oil prices and robust demand. China and India would do well to remember this truth before spending substantial political and financial capital to acquire resources abroad, when the answer to their problems may lie directly under their feet.

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