India-China: Energy Competition in Nepal

25 Jul, 2014    ·   4580

Prachi Aggarwal talks about the nature of bilateral relations with reference to the availability of energy resources on foreign soil

After Bhutan, Nepal is now preparing itself for Prime Minister Narendra Modi’s visit. In recent times, a ‘trust deficit’ seems to have developed between India and Nepal, with a gradual erosion of the bonhomie and generosity that the two nations displayed earlier. Of the many reasons that can be touted for this ‘hostile-friendly’ exercise, the most distinct are the China factor and energy resources shared by Nepal and India.

With 80 per cent of the population living below the poverty line and the rise of Maosim, Nepal would like to project a stronger image externally and become more assertive in its foreign policy towards India. Its increasing disenchantment with India and rising proximity with China through the suppression of Tibet’s supporters on its boundary, speaks volumes about what can be expected from Nepalese leaders in the coming future.

However, Nepal is restrained in its approach towards both the proverbial ‘elephant’ and the ‘dragon’.  Saddled geographically between its two neighbours, Nepal does not want to turn itself into a political turf. In energy terms, this means that while China builds up Nepal’s infrastructure the latter still relies on India for its energy imports. India already shares a ‘love-hate’ relationship with both its upper riparian states (Nepal and China) in terms of hydroelectricity and is in no mood to give up on its share of renewables as indicated by the recent budget.

To contextuatise the Nepalese perspective, the Indian and Chinese strategies for the acquisition of oil on foreign oil must be discussed.

India usually targets a country by judging the competitiveness of OVL (ONGC Videsh Limited) within it. Major Indian companies like IOC (Indian Oil Corporation Limited), OVL, OIL (Oil India Limited) and GAIL (India) Limited have invested, jointly or sometimes in collaboration, with BP (British Petroleum), Exxon Mobil, SODECO (Japan) NIOC (Iran) etc. Also, India, with its commercial and strategic interests in West Asia, plays the card of a maritime power in the Indian Ocean region. Its surging demand for energy, geographical proximity to the region, and occasional siding with the US has made it increase its stakes in the Persian Gulf.

China aggressively pursues those states that have been isolated by the US. Iran here is a classic example, where each of India’s losses due to US pressure has been China’s gain. It has shifted its focus to Central Asia due to the geographical proximity and the reduced American and Russian influence. It has decided to use the platform of the SCO (Shanghai Cooperation Organisation) to lure Africa and Central Asia, which it believes can help to shift one-third of its imports by 2015 from the Middle East to these regions.

China has built pipelines from Sittwe (Myanmar) to Kunming (China), and also an energy corridor from Gwadar (Pakistan) to Xinjiang (China). These two deals not only avoid all choke points in the Malacca Straits but also act as a bonus for building political alliances. Also, both bring China to India’s direct neighbourhood, acting as military deterrent.

Tug of War in Nepal
Earlier this year, Xinhua reported that China has already surpassed India as the largest FDI investor in Nepal, reaching USD 174 million dollars. Compare this with news released by the Indian media, of India struggling to even finalise the official report on the Pancheswar Multi-purpose Project which was flagshipped in the year 1996, as part of the Mahakali Treaty.

The story is not new, but competition can turn into cooperation in the case of Nepal. While China is spiking its investments in Nepal’s energy sector (reaching up to INR 4.23 billion in 2013), it is still a new entrant. India has a traditional advantage not only in the political and cultural areas but also monetarily, by retaining the top slot as the highest energy investor in Nepal. Moreover, most of the Chinese investments are done in the form of loans rather than grants which make the Nepalese all the more cautious of Chinese intentions towards their economy. It is this juncture of Sino-Nepalese relations that give India an opportunity to play the role it has always promised to Nepal. Nepal cannot win its foreign policy battles on its own - this is a long standing fact, and but the ambiguous position of India is always the cause of concern. When Nepal comes into question, India plays either the ‘hawk’ or the ‘dove’, leaving Nepalese foreign policy in a quandary. If India can avoid the clutches of political quagmires and talk business to China on an equal footing, the situation can be a win-win for all the three nations.

Sino-Indian relations have often been described as ‘walking on two legs’, and this has been the truest in case of energy. Despite being the fiercest competitors in international biddings, both nations have displayed maturity against an aggressive West, environmental threats, vulnerability of SLOCS (Sea Lines of Communication), or the political volatility of energy rich nations. Both have realised that scarce energy can single-handedly crumble their hard earned economic growth, whether they contain each other or not. Hence, for energy, it is imperative for both nations to cash in on the convergence of their interests rather than scramble for power. Whether Nepal can provide a platform for its initiation will be watched keenly.