The Brookings Foreign Policy Studies Energy Security Series India by Tanvi Madan The Brookings Institution November 2006 The Energy EXECUTIVE SUMMARY Security Series The rise of China and India as major A Growing Appetite for Energy global economic powers, the continued growth in U.S. energy demand, and rowth demands energy. It is no wonder that India—with an economy expected instability in key oil-exporting regions to grow at over 5 percent a year for the next twenty-five years—has developed a are dramatically affecting international ravenous appetite for energy. India is the world’s fifth largest consumer of energy, energy markets. Prospects for stable G production are increasingly linked to and by 2030 it is expected to become the third largest, overtaking Japan and Russia. internal political issues and the region- al ambitions of major suppliers. These The country’s demand for oil alone is expected to increase at an average rate of 2.9 per- dynamics will affect the global balance of power, as energy security is becom- cent annually over the next quarter century. Yet India has only 0.4 percent of the world’s ing a more important factor in coun- proven oil reserves, and domestic production is expected to remain constant, if not tries’ national security and economic decline. Absent the discovery of major reserves—which most analysts view as unrealis- development calculations. tic—it is clear that India will remain a net importer of oil. If consumption follows the The Brookings Foreign Policy Studies current trajectory, India is also projected to run out of coal, its primary source of energy, Energy Security Series is examining four in forty years. Its domestic natural gas reserves are limited as well. key energy-consuming nations—China, India, Japan, and the United States— India’s import dependence has intensified concerns that without reliable, affordable and several major producing coun- tries—Russia to start, and then the energy it will be unable to sustain high economic growth. India imports (to varying Gulf States and others as resources degrees) its three major sources of energy, and its dependence on imported oil is become available. The Series will ana- expected to increase even further. The situation is complicated by a number of factors: lyze the implications of these nations’ 1) major oil suppliers are in unstable regions in the Middle East and Africa; 2) oil prices policies for the global energy security environment. Initial funding under this are high, spurring higher gas prices; 3) geopolitical uncertainty stokes fears of a possi- project has supported a set of baseline ble supply disruption and volatility in oil prices; 4) slow market reform has limited papers focused on oil. Future analyses investment; and 5) few or no viable energy alternatives currently exist: India’s civilian on this topic will cover the full spectrum nuclear program has regularly fallen behind schedule and large-scale development of of energy security issues. hydroelectricity generation facilities has been stymied. Development of nonconven- This report, a study of India’s energy tional energy sources has progressed, but their use is currently limited. demands and policymaking, was writ- ten by Tanvi Madan, formerly a senior research analyst at the Brookings Insti- The Search for an Energy Strategy tution and currently a Harrington Doc- toral Fellow at the University of Texas o date, India has developed a cluster of energy policies rather than an overarching at Austin. Brookings Senior Fellow energy strategy. Ideology, politics, and processes have complicated the country’s Stephen P. Cohen also contributed to T quest for energy. Attempts at integrating energy policies have been hindered by this monograph, as did Sidney Kwiram, separate entities overseeing each type of energy source, as well as by stove-piped policy- Johns Hopkins University School of Advanced International Studies, Wash- making on related issues of foreign affairs, economics, and the environment. And the ington, DC, and Arti Trehan of the Uni- realities of domestic politics and socioeconomic concerns have curbed policymakers’ versity of Michigan, Ann Arbor. willingness to make tough, yet necessary, choices. The Brookings Foreign Policy Studies Energy Security Series: India—Executive Summary 1 Now at a critical juncture, India’s policymakers are increasingly aware of the need for an effective and diversified energy strategy—or at least an integrated set of policies to bal- ance foreign policy, economic, environmental, and social issues with the rising demand for energy. While there is little consensus over how best to proceed, there is no doubt To date, India has that India’s need for oil and other forms of energy will continue to grow. Meeting this need will have a decisive impact on the country’s actions not just in the energy sector, but developed a cluster in its efforts to achieve its broader strategic goals at home and abroad. of energy policies This monograph focuses on India’s need for oil and how this demand fits within its broader set of energy policies. The paper is divided into three sections. Part 1 surveys the rather than country’s overall energy demand-supply situation, the “energy security” debate in the country, and the issues, actors, processes, and politics involved in energy policy and deci- an overarching sionmaking. Part 2 focuses on India’s search for oil, including its supply-side policies, such as efforts toward domestic E&P, acquisition of upstream assets abroad, supply and energy strategy. fuel diversification, and the development of strategic oil stocks. It also examines India’s demand-side policies, including regulatory, price and tax reform, fuel conservation, and efficiency measures. The concluding section offers observations about India’s likely actions in the energy sector at home and abroad and suggests further areas for research. A number of key findings result: ■ India is likely to continue to have a set of separate energy policies formulated by dif- ferent entities rather than an overarching energy strategy. Integration of these poli- cies will likely improve over time. ■ Reform of India’s energy sector will continue—but at a slow pace. Implementing policies will be harder than formulating them. ■ Unless there is a non-BJP or non-Congress-led government at the center, India will continue to encourage private participation in its energy sector, as much out of neces- sity as out of choice. he Brookings Institution is a pri- Tvate nonprofit organization devot- ■ India’s energy-related actions in the global arena will reflect its current foreign policy ed to independent research and inno- path of “enlightened self-interest” and maintaining diverse options. It will be cooper- vative policy solutions. Celebrating its ative or competitive, as suits its interests—in acquiring assets or pursuing partners— 90th anniversary in 2006, Brookings when it thinks it needs to be. However, India would much rather cooperate than analyzes current and emerging issues compete. and produces new ideas that mat- ■ ter—for the nation and the world. For India would be more inclined to cooperate with the international community (rather policymakers and the media, Brook- than focusing on a particular country or region) in the energy sphere if it were given ings scholars provide the highest a seat at the decisionmaking table. Global players should find a way to bring India into quality research, policy recommenda- the International Energy Agency (IEA) or at least find a place for it in an "energy tions, and analysis on the full range of half-way house" en route to full membership. public policy issues. ■ For the foreseeable future, however, India will hesitate to rely completely on global markets. As a consequence, its country-by-country energy diplomacy and purchase of overseas assets will continue. However, its energy interests are not likely to trump the country’s larger strategic goals. ■ India’s energy interests are also likely to factor into its military strategy and behavior in the future. For example, India might be willing to take on a greater share of the international security burden related to protecting oil and gas supply lines. The Brookings Foreign Policy Studies Energy Security Series: India 2 The Brookings Foreign Policy Studies Energy Security Series India By Tanvi Madan Contents Executive Summary A Growing Appetite for Energy................................................................................................ 1 The Search for an Energy Strategy............................................................................................ 1 Acronyms ...................................................................................................................................... 5 Introduction.................................................................................................................................. 7 Part 1. Energy: A Snapshot ......................................................................................................... 9 Energy Consumption Patterns................................................................................................... 9 The Energy Mix ......................................................................................................................... 10 Energy Security........................................................................................................................... 13 Policymaking .............................................................................................................................