India-Nepal: Disparate Partners in Fuel Diplomacy

29 Jan, 2015    ·   4821

Kalpana Jha provides Nepal's perspective vis-a-vis Kathmandu's uneasiness over the new terms in its energy deal with New Delhi

Kalpana Jha
Kalpana Jha
Research Intern
At a time when developed countries are expanding fuel diplomacy and exploring alternative options for fuel, Nepal is completely dependent on India for the supply all kinds of fuel such as petrol, diesel, domestic LPG and jet fuel. This issue of energy dependency goes beyond traditional trade and economic relations and has wide-ranging effects on economic growth, peace negotiations, and regional power status.

Therefore, when Indian Prime Minister Narendra Modi agreed to the construction of a new oil pipeline between India and Nepal, it raised new hopes in Nepal for improvement not only in the existing trade relationship but also in the overall bilateral relationship.

However, the plan took a back seat when differences over the tenure of the agreement emerged. What were the factors that laid obstacles to the process for the deal that otherwise appeared to be a win-win solution? How did a simple trade deal rein become a question of Nepal’s independence and sovereignty?

The construction of the oil pipeline has been in discussion for 15 years in the Nepalese sphere. Yet, it was proposed to the Indian government only in 2006, and took momentum only after Modi's Nepal visit when a task-force was formed to decide the operational model of this agreement. A 41-kilometer long pipeline from Raxaul in Bihar, India, to Amlekhjung in Nepal has been planned with the investment of Rs. 200 crore; and an extension of the pipeline to Kathmandu in the second phase. The construction of pipeline will be of great advantage to Nepal. This would not only mean reduction of petroleum products’ costs but also a regulated supply and reduction of adulteration and wastage – an inevitability during transportation via roads.  

Problems emerged in this much-awaited venture when the Indian Oil Corporation (IOC) proposed that Nepal should commit to buying petroleum for 15 years from the IOC and the Nepal Oil Corporation insisted on continuing with the provision of the currently existing five-year renewable pact. Since 1974, Nepal has imported fuel from the IOC under a broad five-year supply pact that is renewed on the basis of mutual understanding. The recent update of the pact – effective until 31 March, 2017 – states that the IOC will be the sole exporter of petroleum products to Nepal. Apart from the land-locked geographical status, Nepal’s small market size too is a key factor that determines Kathmandu’s limited or no choice vis-à-vis petroleum trade with any third country except India. The experience of the past four decades is illustrative of this assessment.

In that context, the current proposal that demands that Nepal pledge 15 years of commitment to buy petrol from India alone enunciates the continuity of the long-term monopoly that the IOC has enjoyed in exporting petroleum products to Nepal. Fuel being a political commodity and Nepal being an important part of India's security framework, for New Delhi, this issue isn’t mere about trade. This is also an issue of strengthening India’s influence in Nepal. However, such terms of agreement only has a stifling effect on Nepal's already constricted freedom of choice in energy supply sources. The IOC’s proposed terms not only explains the business environment that exists between the two nations but also reflect the power relations the two nations share. As a result, any pact signed between the two nations automatically translates into an issue of prestige for both sides. For Nepal especially, it is directly related to the sense of autonomy – that it has struggled to retain against its giant neighbours. In such a situation, tying itself with India via one more treaty not only makes Nepal further vulnerable, but any such attempt is perceived as a threat to the country's sovereignty.

India's increased concern is apparent with China’s expanding presence in Nepal. Although China has been supplying fuel to Tibet at nominal rates, the prospects of fuel trade between Nepal and China appear bleak at present. However, China’s rapidly-changing foreign policy is not favourable for India's security interests. Besides, Beijing has taken interest not just in Kathmandu’s constitution-drafting process but also in other areas such as infrastructure, tourism and hydro-power; this has essentially opened up new avenues of interaction between the two nations, including fuel.  Energy is the most important requirement for any country's advancement. Kathmandu therefore views New Delhi’s new terms as just another way for India to assert direct control on energy – by curtailing prospects of exploring alternate energy sources for a substantial period of time.

Given the disparity in market sizes, for India, the energy deal with Nepal is more about asserting influence than about business. Conversely, Nepal, while seeking India’s cooperation to review past treaties and seeking more sovereignty, views the new terms as adding ambiguity to the relationship. This uneasy existence of disparate neighbours manifests serious issues that extend beyond trade, to a dynamic interplay of sentiments of power, prestige and freedom.