India and China should work together6 min read . Updated: 26 Mar 2010, 08:47 PM IST
India and China should work together
India and China should work together
New Delhi: As the energy policy adviser to 28 member countries,Nobuo Tanaka is a man short on time. International Energy Agency, or IEA, apart from being the world’s premier energy monitor, also plays an important role in climate change policies, market reform and energy technology collaboration. Tanaka was recently in New Delhi to participate in the 6th Asia Gas Partnership Summit where he spoke to Mint on issues as varied as Indian government’s attempts to address the issue of subsidy burden, crude oil prices, US interventions in energy-rich countries and the growing competition between India and China for energy resources. Edited excerpts:
India has been talking about reforms in the energy sector for some time now. The intent is to bring down the subsidy burden as they are unsustainable over a long term. What are your views?
Yes, that’s right. When the price of oil is high at certain reference price, it increases the fiscal burden for the government. So in the long term, due to cost of exploration and development, the cost of oil will get higher... So subsidies will be very difficult to sustain. We have been asked by the G-20 (Group of Twenty) countries to make some analysis of subsidies. We are going to report to the G-20 finance ministers meeting which is next month on 23 April in Washington, DC.
We did a similar study in 2007. The total amount then was $320 billion (around Rs14.5 trillion today) globally. Since in 2008 the oil prices were very high, the subsidies should have been much higher, that’s what we guess.
So for India, we are strongly advising to phase out price control and subsidy as it is very important to make price signal from the market directly to the consumer. That is the way to conserve energy or move to an energy-efficient society or economy. We understand that the Indian government is serious about phasing out subsidies and trying their best. It is also politically very difficult, we understand that. In many countries, it is mandatory for the governments to help and to support the poor population. Our advice is—yes, it is necessary to support the poor but don’t undermine the energy sector, because subsidy is wasteful use of energy sources and also adds to the problem of low investment in infrastructure. It (subsidy) prohibits infrastructure investment. So this is not good. In the longer term, I think this (Indian) government is committed to phasing out subsidy but in practical terms it will certainly take some time.
So when this report is ready, would G-20 as a group ask India to take care of the subsidy burden?
G-20 is asking the Indian government to make sure that the phasing out of subsidy happens. We do not have the power to really enforce this phase out. I think that this government clearly understands the necessity and is moving in the direction towards it. Our study tries to help the governments to move in the right direction.
There is still a considerable percentage of population in India which does not have access to energy. How do you see India’s energy demands growing?
That is the point. In China and India, the per capita energy consumption is very low compared to the global average and much more growth is necessary to reach there. On the other hand, if India or China go through the same way as the former developed countries, I mean the OECD (Organization for Economic Cooperation and Development) countries, then the fossil fuel consumption will go so high that the price of oil and price of gas will climb rapidly. World CO2 emissions will increase so much that it will not be sustainable. So the only solution for this economic growth and the CO2 emission is more energy-efficient society, more greener systems of living, using electric vehicles and more efficient housing. So this kind of revolutionary change in lower carbon technology is necessary. We are working with the Indian government on what kind of technology does India need to make this revolutionary change.
Is $100 per barrel of crude the realistic price?
We are not commenting on the level of price. It is always moving. About four-five years ago, $30 per barrel price was seen as a very high price. Now $100 may be a high price but we have seen crude oil prices reaching $147 per barrel, so what is the high price, we can’t tell. In the mid to long term, we know that the cost of investment in exploration, development and production will increase. We will have much more deeper offshore oil fields or oil sands so the cost will increase. Because of the supply-demand situation, the market is tighter, and if the economic recovery is robust as it should be, the prices will get higher.
Given the way that the crude demand has picked up, is the world out of the recession?
That is a good question. I think India, China and Middle East are out of recession, but not necessarily the OECD countries because OECD countries demand is projected to be negative in 2010. The OECD demand will shrink in 2010. On the other hand, macro economists say that OECD countries are on the track of economic recovery. So we call it oil less recovery. In other emerging economies, we see economic recovery happening and the demand for oil is coming back.
When do you see a recovery in OECD demand?
That is a difficult question because the current price levels and current financial troubles in Europe may have a very negative impact.
Is there a way around for energy firms across the globe which want to invest in Iran, Sudan and other countries where the US has imposed sanctions?
This is a very difficult judgement an investor should make because they risk their business chance in the United States if they don’t abide by the sanctions. On the other hand, we want stabilization of the place and as much investment to happen, for decline of the current production level from the existing oil fields is a serious concern. We need a huge investment just to offset this decline.
Isn’t the US policing these resources now? For example, Indian firms have done well in Sudan. It seems that when the US companies can’t get through they impose sanctions, which will also make sure that no one goes there and those resources are well covered for the US?
(Laughs). Well, if Indian companies take some risk and go there and explore and develop, certainly it helps the global market in the demand and supply situation.
So as an organization would you be interested in promoting investments in countries such as Iran or Sudan?
We are not promoting that. Certainly in terms of the global markets, difficult places, not only these geopolitically difficult places, but also in places like the Arctic, very deep offshore, nobody dares to take the risk. If that’s the case, then we have a serious problem. Taking risk is part of the business. The ways of taking risks are different, depending on the way of a country or the way of a corporation.
Given the fact that the demand will come from China and India with the demand slowing down in the West, the two countries are in a quest for securing energy resources overseas. In the process, it inflates the acquisition cost of an asset. What is the way forward?
Yes, to some extent it depends upon how companies from India and China do business. It is obvious that due to high prices you suffer... If you suffer, you change the way of making a deal, consulting more closely with other consuming countries, companies and make a consortium. This is the process.
So the way forward is to collaborate?
Exactly, for example, we always ask the European countries to speak in one voice to the supplier. By doing so you have a huge advantage in negotiations.