Oil Train near Tengger desert, China. Photo courtesy AdamCohen/flickr.com

June, 2009

For most, it is a no-brainer that China and India are natural rivals. They are routinely described as strategic competitors with similar policy ambitions that set them on a long-term path towards inevitable conflict, diplomatic or otherwise. They have already been to war once in the past few decades, took differing sides during the Cold War, and continue trying to outmanoeuvre each other in areas ranging from space to trade relations. Clearly, it is just a matter of time before the respective power-plays of these two Asian giants manifest into direct confrontation. The suspense is palpable but unlikely to be realised. This rather simplistic view of China-India relations ignores the significant progress that both sides have made in recent years towards normalizing their relationship. It fails to recognize both governments’ pragmatism, and ignores the complexity of the issues at hand. Energy relations are a microcosm of these broader trends and skew the often accepted, but questionable, premise that the two countries are and will continue to be rivals.

The Problem with Perceived Wisdom

Perceived wisdom asserts that India and China are natural energy rivals, a reading that appears to stem from three main areas. The first is the historical animosity between the two nations, epitomized by the 1962 border war, which completely wrong-footed an India that had long prided itself on peaceful relations with its huge neighbour. The Chinese-Indian border is dotted with areas of disputed territory, many of which emerged as a result of colonial-era activities. In these areas, the short war, which began in June 1962 and ended in November 1962, saw Chinese troops attack their Indian counterparts north of the McManon Line, which demarcated India from Tibet. The conflict quickly escalated and fighting broke out in the Aksai Chin region, which the British had once given to China in a decision that it later reversed in India’s favour. China still regards Aksai Chin as part of its territory. Once Chinese forces had retaken Aksai Chin, China’s leaders declared a ceasefire that brought the war to a close. Notably, the conflict remains unresolved. More than four decades later, China continues to lay claim to territory in India's northern states of Jammu and Kashmir as well as all of Arunachal Pradesh.

Secondly, China’s long-standing alliance with Pakistan, India’s nemesis, creates a sense of natural antagonism. Worse, China has an ongoing history of lending considerable support to Pakistan's energy programme. Seemingly in response to India's landmark nuclear deal with the United States, China last October announced its decision to fund the construction of two nuclear power plants in Pakistan. Beyond this, China has been instrumental in key construction projects in Pakistan, notably the port at Gwadar on the south coast. China is contemplating a long-term agenda: using the port among other things as a key supply route for crude oil supplies to its western region.

Thirdly, the regular bidding by Chinese and Indian companies for exploration and production projects overseas has been used to buttress the ‘strategic competition’ argument. The example that is currently most commonly cited is the decision in February by Myanmar's ruling junta to award a key gas project to China's China National Petroleum Corporation (CNPC). In 2004, India's Gas Authority of India Ltd (GAIL) was named the preferred bidder. Following years of negotiation, the outcome for India was in many respects unsurprising but also disappointing. Looking beyond the headlines, it is possible to argue that commercial concerns rather than political considerations may have motivated changes in the outcome. To elaborate, it is worth just spending a moment to consider what happened in this particular bid.

China's desire to tap Myanmar's Shwe gas field underlines a key strategic need. The project is expected to pipe gas supplies to Yunnan, one of the under-developed provinces that China has had difficulty supplying due to Yunnan’s distance from the main terminals and pipelines. This new pipeline project would fill an obvious gap in China's growing gas transmission network. For Myanmar, the choice was straightforward: although increasingly courted by both China and India, its relations in a range of areas with the former are stronger. Politically, it is important for Myanmar to work with China, which due to its veto powers in the UN Security Council can serve as a counterweight to the United States’ and other nations’ pursuit of UN Resolutions against Myanmar’s ruling junta. Economically, ties between Myanmar and China have strengthened. In recent years, China has invested increasing amounts into Myanmar’s energy sector: China’s energy-sector investment into Myanmar in the first ten months of 2008 rose by 190 percent year-on-year. This has become all the more important in recent months. The global economic slowdown has adversely affected gas supply prospects with Myanmar’s main client in this area, Thailand. With Thai demand for Myanmar’s gas stagnant, Myanmar is keen to secure a new large and growing market. In addition, Myanmar changed the parameters of the Shwe gas project mid-way through: calling for domestic use of whichever pipeline was subsequently laid. A pipeline to China will necessarily be longer and traverse more of Myanmar’s territory, allowing it to send gas supplies to a larger area of Myanmar. Given these issues, India's bid suffered from the current economic climate and Myanmar's priorities.

Can't Beat Them, So Join Them?

Chinese success at outbidding India in overseas energy acquisition, then, buttresses the Sino-Indian competition analysis. To be fair, China is an old hand at this, since it began buying up oil and gas blocs overseas much earlier than India. This analysis, however, overlooks the growing instances of co-operation between the two countries.

As early as 2002, China and India showed signs of cooperation: ONGC bought a stake in Sudan’s CNPC-operated Greater Nile oil field. It was not until November 2005 that fuller co-operation blossomed, when India's Oil and Natural Gas Company Videsh Ltd (OVL) jointly bid with CNPC for Petro-Canada's Syrian assets. Observers suggest that China's massive outbidding of India in Angola the previous year swayed altered conceptions about cooperation, though this has been debated. India bid US$600 million for a 50 percent stake in one of Shell's Angola blocks, which China upped to US$2 billion. This appeared to set relations on a new trajectory, and in January 2006 the two governments signed five Memorandums of Understanding (MoUs) in energy relations, in a move described as “full-scope co-operation extending across the entire hydrocarbon chain.” That said, India's then-petroleum and natural gas minister Mani Shankar Aiyar admitted at the time that there would still be competition for resources, showing an unusually frank sense of realism and pragmatism about the situation.