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Vasily Shikin

Ph.D. in History, RIAC Expert

Amit Bhandari

Gateway House Fellow for Energy & Environment

In 2017, Russia and India celebrate the 70th anniversary of diplomatic relations. Over the years the two states have implemented a wide range of long-term and large-scale joint projects in energy sector, frst and foremost in the nuclear area, making it one of the foundations of their special and privileged strategic partnership. However, in order to boost comprehensive ties and bring them to a new level corresponding to the changing global economic environment Russia and India are in need of innovative approaches in energy sector. The present paper is a result of Russian and Indian experts’ joint efforts to evaluate the potential of new collaboration formats and develop specifc recommendations for enhancing cooperation.

In 2017, Russia and India celebrate the 70th anniversary of diplomatic relations. Over the years the two states have implemented a wide range of long-term and large-scale joint projects in energy sector, frst and foremost in the nuclear area, making it one of the foundations of their special and privileged strategic partnership. However, in order to boost comprehensive ties and bring them to a new level corresponding to the changing global economic environment Russia and India are in need of innovative approaches in energy sector. The present paper is a result of Russian and Indian experts’ joint efforts to evaluate the potential of new collaboration formats and develop specifc recommendations for enhancing cooperation.

Recommendation by RIAC

1. Given the fact that Russia and India have similar views with regard to a more just world order, including the international architecture of energy security, it would be short-sighted to limit the energy partnership to a purely bilateral agenda. Russian and Indian energy companies could operate very successfully outside of their respective countries. There are plans to supply raw materials to Essar oil refneries in India from Venezuela, where a joint venture between Rosneft and Venezuela’s PDVSA is currently extracting. This particular deal is an example of building a global supply chain that will include Rosneft’s foreign production assets, as well as the oil refning capacity of Essar and the well-developed distribution network in India.

When it comes to implementing bilateral projects, Russian and Indian energy companies have already formed strong working relationships. Transforming these ties into a strategic partnership could be benefcial for both sides, helping create mechanisms for the mutualisation of risk in long-term capital-intensive projects. The joint work being carried out by Rosneft and OVL on the Vietnam Shelf could serve as an example of such a partnership.

Partnership with Russia could also give Indian companies a boost in terms of increasing their chances when competing for foreign assets.

For Russian companies, an alliance with partners in India would open up the South Asian, Southeast Asian and East African markets.

2. Russian companies should consider Indian investors as potential partners in the development of the resources on the Continental shelf of Russia and of other hard-to-recover reserves, especially considering the lack of Western fnancing. According to the Ministry of Natural Resources and Environment of the Russian Federation, as of early 2016, Russia had 585 million tonnes of explored oil reserves and 10,489 billion cubic metres of natural gas on the Arctic shelf.

A possible scheme for cooperation between Russian and Indian companies would be for Rosneft and Gazprom to set up a joint venture on the one hand (other Russian companies do not satisfy the criteria established by Russian legislation for the right to carry out operations on the Arctic shelf) and Indian oil and gas companies on the other. The joint venture would act as the operator of the deposit and operate on the basis of an agreement with the Russian license holder for the feld (that is, Rosneft and Gazprom).

However, neither Russian, nor especially Indian companies have the technical capabilities to carry out drilling operations in the Arctic region. A technological partnership with western oil and gas giants is therefore necessary, so only minor shares in joint ventures may be allocated to Indian companies.

3. Nuclear cooperation is also a prospective area of mutual interest. Unlike China, Russia supports India’s efforts to become a member of the Nuclear Suppliers Group. Indian nuclear equipment suppliers will target countries that are closer to home, for example Sri Lanka and Myanmar, where they will compete not so much with Rosatom, but rather with Chinese companies that are getting ready to expand into the international market. Given India’s lack of experience in developing projects overseas and its rich history of nuclear cooperation with Russia, it is likely that Russia could expect to participate in joint projects in third countries. However, taking into account the fact that the decision to admit India into the club of nuclear suppliers should be made on the basis of consensus, Indian companies receiving access to the international market in the near term is unlikely.

4. Multilateral fnancial institutions such as the BRICS New Development Bank can boost the investment attractiveness of long-term energy projects.

The BRICS Bank was established to fnance energy and infrastructure projects. It is likely that in the future BRICS Bank investments will expand to include the creation and modernization of the electric, oil and gas transport infrastructure, which is of great social importance.

5. The renewable energy sources (RES) market is enjoying a real boom period in India, while it has barely even begun to form in Russia. The government of the Russian Federation has set the goal of increasing the share of renewables in the energy balance up to 4.5 per cent (currently it accounts for circa 1 per cent) and has introduced measures to stimulate the use of green energy. In order to achieve this goal, the Government has adopted a package of incentives that involves holding tenders for Capacity Delivery Agreements (CDAs) guaranteeing a return on investment and even a certain amount of proftability. However, as payment for the CDA, the developer must ensure that equipment for the power generation facility is produced locally (after 2019, the minimum level of localization will be set at 65 per cent). As the Russian RES market is in the initial stages of the development, a certain exchange of experience would be useful for Russian companies and regulatory bodies as to how to organize auctions for the selection of production capacities and then how to integrate these capacities into the network for future operation. With the softening of the requirements of Russian legislation on the localization of RES manufacturing, the Russian market could be of interest to Indian companies – the wind turbine supplier Suzlon, for example.

Recommendation by Gateway House

LNG

1. Indian energy companies, such as Indian Oil and GAIL, can be invited to invest in new/ proposed LNG terminals and associated gas felds in Eastern Russia. Russia’s Pacifc Coast is an ideal location from which to ship LNG to India.

2. Russian gas major Gazprom can be brought in as an investor in India’s LNG import terminals and downstream projects, which will use the gas (such as power, fertilizer and city gas).

Renewable Energy

3. Indian wind energy equipment manufacturers, such as Suzlon, Regen, RRB and Inox, can be invited to invest in Russia, in partnership with local companies. The local partners can be power generation companies with gas-fuelled power plants, of which Russia has plenty.

Natural Gas Vehicles

4. Indian companies, such as Mahanagar Gas and Indraprastha Gas, can be ideal partners to create city gas distribution systems in Russia, in partnership with its utilities. The Russian partners must be companies, set up specifcally to provide city-level services, for clear management focus.

The Russian government can respond with friendly policy measures, such as, shifting public transport of major cities to CNG, as was done in Delhi and Mumbai in India. This will enable other associated Indian companies, which make the equipment for CNG fuelling stations and CNG conversion kits for regular vehicles, to set up operations in Russia.

The final step will be to bring Indian companies such as Tata Motors, Mahindra & Mahindra and Ashok Leyland, which make CNG-fuelled trucks, buses, and cars, to set up manufacturing in Russia. This can happen only after there is sufcient CNG infrastructure and consumer demand for vehicles.

Labour Mobility

5. Russia can open immigration to Indian farmers and agricultural workers to have them work on farms, and skilled workers for sectors such as oil and gas. This can follow the model of Indian workers in West Asia, who can live and work freely, but cannot easily become citizens. This will help circumvent concerns of a demographic shift taking place through migration.

Energy Benchmarks

6. Rosneft and Gazprom can start hedging their India sales on an Indian exchange such as the MCX. Companies, such as Indian Oil and GAIL, which import oil and gas on long-term contracts, can similarly start hedging their purchases. The state-owned companies can help launch this project and will provide the critical mass to succeed.

Oil exporters from West Asia and oil importers from East Asia too can be brought into this exchange to help make it an ‘Asian benchmark’. To be truly representative, this benchmark must be a blend of crudes from Russia and West Asia, corresponding to the import basket of buying countries, such as India, China, Republic of Korea and Japan.

Russia – India Energy Cooperation: Trade, Joint Projects, and New Areas, 1.2 Mb

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