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The New Dynamic Duo

Written by Brian Hicks
Posted January 13, 2006

In the Hindu faith, the god Krishna is also known as Jagganath. In religious processions, a statue of Krishna is placed on a large wagon, and devotees sometimes through themselves in front of the wagon in order to subject themselves to Krishna.

From this south Asian ritual the English word "juggernaut" was derived, bearing the meaning of an overwhelming, advancing force that will crush anything in front of it.

After reading the January/February issue of Foreign Policy magazine, I could not think of a better example of what China and India's memoranda of understanding will spell for the world's petroleum reserves and markets.

In an article titled "India Outsmarts China", the article highlights some of the key areas in which India surpasses China's own massive growth.

These include number of qualified young professionals set to enter the workforce in 2008, service industry sector growth, and percentage of urban households owning automobiles.

China expects to increase domestic auto demand to 15 million per year by 2008. That's a quarter of projected world demand.

India, for its part, experienced December passenger car sales growth of 8.8% over the same month last year.

With ascendant middle classes in each country and massive feeder populations, the thirst for fuel will grow at a rapid pace - widespread estimates hold that Asia will account for half of the world's increase in fossil fuel consumption in the coming 20 years.

As you can imagine, peak supply of world oil to fuel the rise of each country has touched off a bilateral bidding war for hydrocarbons in locales far and wide.

Now, India and China are teaming up.

When Our Powers Combine...

Yesterday, the Chinese and Indian national oil and gas concerns announced that from this point on, they would consider each other strategic partners, rather than competitors.

Indian Petroleum Minister Shankar Aiyar, a longtime advocate of amicable Sino-Indian ties, said in Beijing, "We cannot endanger each other's security in our quest for energy security."

Despite Aiyar's rose-colored glasses, however, it will be tough to revise the modus operandi of China when it comes to energy bidding wars, i.e. raise the ante until the other guy folds.

So, we can safely say that this "strategic partnership" helps India, with less cash on hand, than China, who can easily shell out the dough for any property.

Just last week, China scored one over India when CNOOC landed a 45% stake in Nigeria's Akpo oil field, which would give China access to its largest reserves outside of China.

China paid 2.3 billion USD for their lot, which has yet to begin significant production. India had bid successfully for Akpo, but the government blocked the deal because it deemed the benefit insufficient for the amount of cash required.

Add Nigeria to China's outbidding of India's Oil and Natural Gas Corporation in Kazakhstan, Ecuador, and Angola over the past two years.

India had also been dealt a stinging blow by Myanmar, which this week turned its back on India for a natural gas deal in favor of China's deep pockets. Myanmar is in the process of relocating its entire government to the country's interior, a heavily expensive project.

Last month, China and India jointly purchased concessions on Syrian oil fields from PetroCanada, and we can expect future collaboration in exploration in the Himalayas along the China-India border, and elsewhere.

How Strong is the Handshake?

China and the United States are in disagreement over India's quest to improve its nuclear energy deterrence capabilities against Pakistan. The balance of power in the region is an extremely delicate issue, especially given Pakistan's alliance with the US War on Terror and humanitarian catastrophes such as the recent Kashmir earthquake which caused India and Pakistan to collaborate in the normally embattled region.

India and China will only jointly pursue their individual interests as long as they see the situation as mutually beneficial and are able to maintain a pragmatic outlook for their own energy security. That term, in itself, dictated the US blocking of China's acquisition of bankrupt California company Unocal last summer, with the addition of "energy security" to Congress' legal right to limit overseas purchases of American firms.

As oil becomes more costly and less bountiful, yet no less essential to economic growth, countries like India and China are wise to cultivate as many strategic partnerships as possible. This newsletter has shown you the Chinese leadership's extensive travels to secure those friendships and guarantees of future cooperation.

The Sino-Indian partnership will serve to keep worldwide prices closer to a reasonable level by eliminating two key bid escalators through their own joint will. The next step will be to watch exactly how this Asian amity develops once the black gold starts flowing and it becomes time to decide how much goes where.

- Sam Hopkins


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