NEW DELHI: China and India’s proposed arrangement to form a buyers’ bloc to bargain collectively for oil supplies has acquired an institutional character with the two strategic rivals moving ahead to set up a joint working group (JWG) on energy.
As part of the emerging playbook that will have a major bearing on the global energy architecture, the scope of the first such group on energy between the Asian rivals will not only be limited to crude oil but will also extend to liquefied natural gas (LNG) and will include cargo swap options.
Some of the other JWGs between the two countries have been set up to settle the boundary question and to cooperate on counter-terrorism.
The two nations wield enormous buying power on the global energy stage with China and India being the world’s second and fourth largest importers of LNG. China and India are the world’s second and third largest oil importers as well, respectively.
The first such structured arrangement on the key issue of energy comes in the backdrop of tightening US sanctions against Iran and Organization of Petroleum Exporting Countries (Opec) production curbs, that have driven oil prices. Higher oil prices stoke inflation and hurt economic growth in India, whose energy needs are primarily met through imports. India imports more than 80% of its oil requirements and around 18% of the natural gas it needs.
“Some competitiveness is inherent given that we have similar sources. With supply becoming a little more adequate generally, that dynamic is shifting gradually. We have decided to set up a joint working group on the oil and gas sector. It will deal with anything to do with the oil and gas sector, be it upstream, midstream or downstream. If both India and China agree on something that we need to discuss, then we will move forward. This is the first time that a JWG has been set up between the two nations on energy," said an Indian government official aware of the development requesting anonymity.
Mint reported on Friday about China and India, nearing an arrangement to form a buyers’ bloc and reduce the influence of the Saudi Arabia-led cartel on oil prices. The two strategic rivals have made progress on joint sourcing of crude oil, with Li Fanrong, deputy administrator of China’s National Energy Administration, visiting New Delhi last month. Fanrong’s visit followed India’s petroleum secretary M.M. Kutty’s visit to Beijing last October.
The detailed energy engagement comes post the Wuhan summit in April 2018, for which Prime Minister Narendra Modi travelled to China for an informal meeting with Chinese president Xi Jinping, set the stage for the two countries to stabilize ties rocked by a 73-day-long military standoff at Doklam in Bhutan in the previous year.
“The other area we are looking at is LNG. The key thing that we are looking at in this collaboration is how can India and China look at LNG swap arrangements," said the first government official cited above.
The proposed partnership may also look at alternative fuels such as shale oil and gas and gas hydrates. Queries emailed to spokespeople of India’s ministries of external affairs and petroleum and natural gas, and the Chinese embassy in New Delhi on late Friday night remained unanswered.
The US’s conditional waiver for Iranian oil imports to eight countries, including China and India, is set to expire on 2 May. China and India are among Iran’s top oil customers. India is in discussions with oil producers in West Asia as well as other producers to procure extra crude over the year to urgently bridge a supply gap that will be caused by the exit of Iran from its energy basket. While there may not be supply-side constraints, pricing is certainly an issue.
“China’s peak LNG demand is in the winter, wherein they have to provide for central heating. Whereas our peak is the summers. So, you could find arrangements by which our companies can work out where we can have a swap. We have initiated dialogue on this. Right now, we are conceptually talking about this and see how can this work?" the first official said.
Indian firms have inked long-term LNG contracts totalling 22 million metric tonnes per annum (mmtpa), with the country consuming around 145 million standard cubic meters a day (mmscmd) of gas. India imported around 73 mmscmd of LNG last year LNG is transported in liquid form by ship and needs to be converted into gas (regasification) before it is used.
“Governments on their own can’t do these things. It is then for the companies to do execute the follow-up acts. We also need to find, what is their (Indian firms) appetite to deal with the Chinese companies and also at the same time we don’t want to lose out on any competitive edge in any manner," the first official added.
India has been trying to stitch together alliances and has also proposed that Japan and South Korea, the world’s fourth and fifth largest oil importers, respectively, join the buyers’ front. However, structured engagements between New Delhi and Beijing are the first off the block.
The focus on LNG also comes at a time when the National Democratic Alliance government is pushing for a gas-based economy. Gas accounts for around 6.2% of India’s primary energy mix as compared to a global average of 24%. The government plans to increase this to 15% by 2030. India’s gas demand is expected to be driven by the fertiliser, power, city gas distribution and steel sectors.