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India's recent failure to bid for an oil company in Kazakhstan due to China underlines the former's vulnerability in competing in the international energy market. It also opens up a larger debate over Petroleum and Natural Gas minister Mani Shankar Aiyar's argument that Asia's two emerging economic giants should cooperate rather than compete in securing international energy deals. It also reminds Indian energy policymakers that they need to re-evaluate their international energy policies.

One of the largest foreign energy companies operating in Kazakhstan, PetroKazakhstan, a Canadian oil company with proven and probable oil equivalent reserves of approximately 550mn barrels, accounts for about 12 per cent of oil production in the country. PetroKazakhstan produces 150,000 barrels per day. More importantly, it owns the best (Shymkent refinery) of the only three oil refineries in Kazakhstan. In June 2005, PetroKazakhstan announced that it had been approached for possible takeover or merger. The most frequently mentioned suitor was India's ONGC Mittal Energy (OME), who offered around $3.9 billion against China National Petroleum Corporation's (CNPC) bid of $3.6 billion. On 22 August the company declared that CNPC has won the race with its revised bid offer of $4.18 billion.

However, CNPC did not outbid India in a 'fair auction' as, "rules were changed mid-way through the bidding for the Canadian-based company, which helped CNPC win control of the group." More importantly, China won despite initial Kazakh inhibitions of a Chinese takeover. What clearly underlined the event is that Indian diplomacy failed to clinch this important deal, despite India and its partner having a significant presence in Kazakhstan. China went ahead with the deal after signing an agreement with the Kazakh government whereby around 30-33 per cent of the equity would be transferred to the state-owned KazMunaiGas after the sale was completed by end-October.

India's failure clearly marked a 'low point' for Aiyar, who for some time now has been strongly advocating closer cooperation between India and China to secure energy supplies in the international market. Kazakhstan is not the first instance where India was beaten by China. It had lost oil bids to China in Sudan, Angola, Indonesia and more recently, Ecuador. The minister should know that international deals, especially energy deals are now closely associated with national security and hence purely guided by self interest. Aiyar is among the few who believe that Chinese companies would reveal their business plans to their rival Indian counterparts. It is worth mentioning that China's desperation to acquire foreign oil resources, a recent example is CNOOC's exorbitant bid for Unocal, goes beyond the issue of energy security. Energy cooperation with China will not guarantee securing international energy deals jointly, since India has to compete against China in some energy areas where China's interests are supreme and it does not want to collaborate with India.

In such cases, what are India's options? Can't India collaborate with other countries? India has energy partnerships with Japan that could be built upon. Similarly, India has energy cooperation agreements with the US, South Korea and Australia, which can be exploited in cases where it has to compete against China.

What clearly was lacking in the Kazakhstan episode was that India's energy policy was not fully backed by its foreign policy. When securing international energy sources the government needs to be proactively involved in clinching such deals, and has to do more on the domestic front. There are severe bottlenecks in the domestic energy sector that need sorting out. Similarly, India's bidding capacity is very poor compared to China and other countries. Until 2003, India's international spending on oil rights was a mere $3.5 billion against over $40 billion by CNPC. To improve its bidding capacity several energy entities - both private and public - have to come together to form a large-equity based company to compete successfully in the international market.

CNPC won PetroKazakhstan from under the nose of an Indian company despite its initial higher first round bid. The defeat is not about cooperation/competition, but the problems inherent in its policy-making. The concerned minister should keep this firmly in mind while dealing with the Chinese authorities. If these problems are not sorted out, many PetroKazakhstans will follow. Unfortunately, oil reserves are finite. India and China, energy-hungry neighbours that they are will compete against each other for rapidly dwindling resources.