C O N F I D E N T I A L SECTION 01 OF 05 NEW DELHI 001824

SIPDIS

FOR SECRETARY BODMAN FROM AMBASSADOR MULFORD

E.O. 12958: DECL: 02/14/2015
TAGS: ENRG EPET ECON ETTC PREL KNNP TRGY IN US NSSP
SUBJECT: REVITALIZING THE US-INDIA ENERGY RELATIONSHIP

REF: A. NEW DELHI 1707

B. NEW DELHI 1261/1263/1264

C. NEW DELHI 1175

D. NEW DELHI 750

Classified By: Ambassador David C. Mulford, Reasons 1.4 b,d


1. (C) Secretary Bodman, now that you have had a few weeks
to settle into your new role, I want to share with you some
thoughts and ideas on our relationship with India. You
already know from our meeting last November my views on the
emerging India, a vibrant, multi-faceted democracy that is a
growing and increasingly confident regional power with
legitimate global ambitions. A decade of economic reforms
has raised GDP growth to the 7-8 percent range and has
created growing public support for continuing reforms.
Successive governments are moving these reforms forward,
albeit within the political constraints imposed by India's
vigorous and sometimes frustrating democratic system. Most
big players here predict several decades of sustained robust
economic growth, thanks in part to India's youthful
population, which will lift India into the top ranks of
global economic and political powers. Energy is at the heart
of the Indian agenda because there is consensus that India
will not be able to achieve its aspirations without secure
and reliable energy supplies. The Indians realize that we
are critical to their energy agenda, which gives us
considerable leverage in influencing their developing energy
policies.

A Comprehensive Relationship
--------------


2. (C) President Bush's 2001 directive to transform the
strategic agenda with India has borne good results in the
last four years. The bilateral relationship has strengthened
on virtually every front. Today we consult regularly at the
highest levels on political, economic, security, and global
issues. Secretary Rumsfeld visited Delhi in January.

Secretary Rice is expected next week. She will be followed

SIPDIS
by Secretary Mineta in April and Secretary Snow in the fall.
Foreign Minister Natwar Singh is scheduled to be in
Washington in April. We hope there will be other cabinet
visits this year, including by you. We also expect the
President to visit India sometime later this year.


3. (C) These high-level exchanges are a sign of how far our
relationship has changed. Where once there was doubt and
suspicion, today there is greater candor and cooperation.
Our close coordination in responding to the December Tsunami
and the ongoing Nepal crisis are cases in point. Even when
we disagree, as we did over Iraq, we are generally able to
deal constructively with our differences, and move on. The
announcement of the "Next Steps in Strategic Partnership
(NSSP)" last year was an important signal that both sides
want the relationship to grow closer in the years ahead and
to leave behind the sanctions-focused era of US-India
diplomacy.


4. (C) The bilateral economic relationship, which once was
a laggard, is beginning to expand. In the 9 months it has
been in power, the United Progressive Alliance (UPA)
government has moved on several issues of importance to us:
it has finalized an Open Skies policy with us; it has
strengthened its IPR regime; it has raised foreign direct
investment limits in several areas; and it has lowered tariff
rates in sectors of importance to our industry. Another
highly symbolic FDI legacy issue, the Dabhol dispute, which
was complicated by the Enron collapse, is moving closer to
resolution. We hope Boeing will soon be awarded a $8.5
billion contract for sale of commercial aircraft to Air
India, which has not bought new planes since the 1980s. The
United States is India's biggest export market and its
largest foreign investor. Although a large trade imbalance
remains, India is becoming an increasingly important
destination for U.S. exports. Last year our exports grew by
21 percent, with prospects of a similar increase this year.
The growing Indian market offers extraordinary potential for
U.S. exports and investment in the decades ahead.

The Economic Dialogue
--------------


5. (C) The principal tool we have used to strengthen the
economic relationship is the US-India Economic Dialogue (ED).
Last October, following the Prime Minister's visit to New
York, we agreed that the ED, which had yielded uneven
results, needed to be revitalized. The leadership of the ED
has been elevated so that key issues can be lifted to the
White House/Prime Minister's Office level. National Economic
Advisor Al Hubbard and the Prime Minister's principal
economic advisor Montek Singh Ahluwalia will serve as overall
coordinators. The five existing tracks of the ED -- Finance,
Environment, Trade, Energy, and Commerce -- will remain
because they are useful. A new CEO's forum will be added to
advise policy makers on what is required to remove structural
impediments to greater trade and investment ties. I believe
American energy companies should be represented at this
forum.


6. (C) For the five tracks of the ED to yield tangible
results, it is essential that there be support from the
relevant Departments in Washington and Ministries in Delhi.
The Energy track of the ED has historically been its most
active track, with numerous cooperative activities across a
broad spectrum of energy-related areas ranging from clean
energy and energy efficiency to cooperative activities on
natural gas and coal. These activities, however, have
drifted somewhat in recent times. The Foreign Ministry has
told us that launching a revived energy dialogue -- similar
to what India has with the EU -- will be a priority for
Foreign Minister Natwar Singh's April 5 visit to Washington.
I hope you will give your personal attention to revitalizing
the energy pillar because of its great potential to move our
broader economic relationship forward. The four areas that I
believe hold the greatest potential are cooperation on energy
security, civil nuclear activities, natural gas, and clean
and efficient energy.

Energy Security
--------------


7. (C) India imports about 70 percent of its oil and gas
needs, primarily from the Middle East. It is among the
fastest growing importers of oil and gas in teh world. In
the decades ahead, India (along with China) could be
competing with the United States for access to limited
supplies. For this UPA government, as with the previous
National Democratic Alliance (NDA) government, energy
security is a high national security priority -- in many ways
it is the tail that is driving Indian foreign policy.
Petroleum and Natural Gas Minister Mani Shankar Aiyar is
widely regarded as the brightest and most successful of the
UPA ministers. He has significantly raised his Ministry's
profile, usurping the international role that the Foreign
Ministry earlier monopolized. The state-controlled oil and
gas companies have been directed to aggressively seek out oil
and gas properties offshore and overseas. India has
transformed its position on participating in trans-Pakistan
gas pipelines to take advantage of energy supplies in Iran
and Turkmenistan.


8. (C) It is important for these reasons that we engage in
an energy security dialogue. We could influence Indian
energy policy such that it follows a path conducive to U.S.
economic, political, security, and global environmental
interests. We have reported on India's growing oil and gas
relationship with Iran (Ref C). A renewed and invigorated
high level exchange could allow us to exert some influence on
this Indo-Iran energy relationship and to encourage forays in
other directions, such as the burgeoning India-Qatar ties.
It will also make the Indians more attentive to resolving
investment disputes some of our companies face (Dabhol, Tamil
Nadu), and yield significant opportunities for U.S. business.
The idea of an energy security exchange was first broached
by us in 2002, when Under Secretary of State Al Larson
suggested to the GOI that discussion could move along two
tracks: fuel and supply diversification; and energy
preparedness in the event of a major supply disruption. The
GOI was enthusiastically receptive to this proposal, in part
because it resonates well politically within this highly
energy import-dependent economy. The GOI, which was in the
process of creating its own strategic stockpile, also felt it
could benefit from American expertise in this area.
Subsequently, DOE hosted several visits by GOI officials,
including one by then-Indian Petroleum and Natural Gas
Minister Ram Naik, to share our experience in creating the
National Petroleum Reserve. The GOI participated in DOE's
Strategic Oil Stockpiling Conference in November 2004.


9. (C) We believe that our energy security exchanges should
be revitalized and broadened beyond an occasional meeting or
site visit at the margins of some event. The process should
get high level (i.e., Secretarial and Ministerial) support.
We should institutionalize meetings at regular intervals
between experts in areas such as alternative strategic
petroleum reserve storage methods, tripwires for tapping the
reserve, agriculture-based fuel additives, alternative fuels
and reductions in oil intensity. As we have done previously,
we should support the Indian road shows, such as Minister
Aiyar's January presentation in Houston, which are designed
to elicit interest in India's exploration and production
leasing program. An MOU on information exchange between the
Energy Information Agency and the GOI, which has taken eight
years for us to finalize, should be signed immediately.

Civil Nuclear Cooperation
--------------


10. (C) India has established an ambitious civil nuclear
power program, which will be a small but increasingly
important part of the country's energy mix. Its efforts,
however, are being stymied because it is now encountering a
critical shortage of natural uranium fuel. The GOI seeks
more collaboration with the United States in the civil
nuclear area, but believes that U.S. policy does not
accommodate realities on the ground. Foreign Secretary Saran
has suggested there should be a comprehensive review of the
US-India civil nuclear relationship and a need to move the
nuclear relationship forward even within the constraints
imposed by our NPT and NSG obligations. This presents us an
opportunity where we can leverage flexibility on our part to
move Indian policy in other issues of importance to us, and
fold civil nuclear issues into the broader matrix of
cooperative efforts with an emerging economy as important as
India.


11. (C) We have been impressed, as was NRC Commissioner
Jeffrey Merrifield during his February 8-11 visits to various
nuclear power stations in India (Ref B), at the maturity and
sophistication that the Indian civil nuclear establishment
has achieved as a power generating utility. There ought to
be activities that DOE and its labs could conduct which would
be comply fully with current law and with NSG obligations but
still respond positively to Indian requests for a broader
civil nuclear power relationship. We should explore
cooperative activities that encourage the Indian civil
nuclear sector to pursue responsible policies that are
consistent with international best practices. India's
current nuclear fuel crunch is pushing the GOI to move in
unproven and potentially dangerous directions, such as use of
MOX fuel in their boiling water reactors and developing a
complex fast breeder reactor. We should use this
cooperation to assure that U.S. interests are clearly
understood and recognized as the Indian civil nuclear
industry comes of age.


12. (C) For example, the United States could support nuclear
safety at the aging Indian reactors by permitting the plants
to acquire U.S. safety-related equipment under the NSG's
safety exception. We could consider reviewing our policy of
blocking India's efforts to acquire uranium for civil nuclear
power from other countries, as long as it is consistent with
NSG obligations. Both these steps could be used to leverage
placement of additional Indian facilities under IAEA
safeguards. We could also pursue additional US-India
cooperation on fusion research and safe reactor designs. We
could support Indian participation in events sponsored by the
nuclear power industry within the United States. Although
there are may be difficulties with responding positively to
the GOI's interest in becoming a member of the International
Tokomak Engineering Reactor (ITER), DOE could make a
concerted effort to bring Indian plasma physicists on board
U.S. plasma physics efforts just as they are on board high
energy physics collaborations (Ref B and D). We could
continue to support Indian participation in the World
Association of Nuclear Operators peer review process where
members benchmark safety practices and conduct peer reviews
of power plant operations. We could also support Indian
participation in INPRO, a forum for exploring the next
generation of proliferations resistant reactors (Ref A).

Natural Gas
--------------


13. (C) The natural gas market in India is expected to grow
robustly in the years ahead as its share in India's energy
mix increases from 8 percent to over 20 percent by 2020. The
Indian Petroleum and Natural Gas Minister told the Ambassador
(Ref B) that current Indian supplies of 90 million cubic
meters per day (mmcmd) is about ten times higher than in the
1980s. It falls far short of demand, however, which is
estimated at 150 mmcmd and projected to increase to 400 mcmd
in 20 years. The 2003 discovery by Reliance in the
Krishna-Godavari basin and subsequent discoveries by Cairns
and ONGC further have induced aggressive exploration in the
Bay of Bengal. Meanwhile, India has begun to lock in long
term supplies of LNG. There are at least half a dozen
proposals for building LNG terminals along India's coasts.
It is also exploring ideas for pipelined gas from Iran,
Turkmenistan, Burma, and Bangladesh.


14. (C) We recognized the potential growth of the Indian
natural gas market early. In 2002, DOE co-sponsored with the
GOI a "Building Natural Gas Markets" conference in Delhi.
And we have funded through the U.S. Trade and Development
Agency a feasibility study for a national gas grid. We need
to do more. We should follow up this year with another
natural gas conference and related seminars and workshops on
regulation, pricing, transportation, LNG, transparency and
competition. As it is doing in other sectors, the GOI wants
to establish an independent regulatory body for the
hydrocarbon sector. We should share our experience and
knowledge about regulatory best practices with them. At the
conference, we should help secure the attendance of
recognized international experts on such regulatory
practices. We should seek out opportunities to help upgrade
the office of Indian Director General of Hydrocarbons, the
primary GOI technical agency for the oil and gas sector.
Engaging early in this sector could yield signficant
commercial opportunities for U.S. business.

Clean/Efficient/Renewable Energy
--------------


14. (SBU) India is one of the world largest users of coal
and a major emitter of greenhouse gases. The country has
embarked on an ambitious reform program in the power sector
in an effort to help achieve its Power on Demand plan by

2012. This translates to expanding rural power access to
over 100,000 villages and connection to 10 million
households. Through DOE, USAID and EPA, we have in place a
robust set of cooperative activities that can be loosely
grouped together under the clean, efficient, renewable energy
heading. These activities have generally been quite
successful, although we need support to raise the profile and
broaden and deepen our efforts in such areas as energy
efficiency, demand-side management, and distribution reform.
We seek support in Washington to enhance the funding levels
of these programs. We would use high-level interest in these
programs to showcase their success and build support for
them.


15. (SBU) Such activities include the Coal Advisory Group,
which has been a successful forum for sharing experiences and
discussing science and economic issues relating to coal.
India is a one of the 14 founding members of the
International Partnership for the Hydrogen Economy. It is
also a charter member of the 2004 "Methane to Markets"
initiative. The EPA and U.S. Trade and Development Agency
have proposed funding a Coal Bed Methane clearing house
project. USAID has a number of ongoing energy-related
programs, some in collaboration with DOE. These programs
provide an excellent foundation for DOE to contribute its
impressive technical, advisory and policy expertise. DOE and
USAID have a long-term relationship under the Greenhouse Gas
Pollution Prevention project. At $39 million, this is
USAID's largest climate change initiative.


16. (SBU) USAID is implementing a very effective $25 million
Energy Conservation and Commercialization project aimed at
building institutional capacity among Indian utilities and
state and local governments to promote energy efficiency and
demand-side management. USAID also has a multi-year $20
million Distribution Reforms Upgrades and Management (DRUM)
program, designed to promote power distribution reforms at
the state and local level and efficiency improvements in
India's creaking last mile distribution networks. USAID's
$10 million Water-Energy Nexus Activity aims enhances
cross-sectoral solutions and investment opportunities. For
the past two years, USAID has been assisting the GOI is
assessing the relevance of key US-developed Integrated Coal
Gasification Combined Cycle (IGCC) technology operating on
high ash content India coal. Since 2001, India has been
participating in USAID's South Asia Regional Initiative on
Energy (SARI/E), which seeks to promote mutually beneficial
energy linkages among the South Asian countries.

Conclusion
--------------


17. (C) I hope this conveys the fertile menu of existing and
potential cooperative energy-related activities that have
great promise. I would like to suggest that you personally
take charge of our Energy relationship with India and in
doing so make an early visit here. It is important we engage
at high levels with a country that will play an important
role in the global energy markets in the future. In my
recent meeting with Petroleum and Natural Gas Minister Aiyar
(Ref B), it was clear that he wants to greatly expand
cooperation with the U.S. public and private sector. A visit
by you would move our relationship firmly in a direction
conducive to U.S. interests and the strengthening of our
bilateral relations. It would also inject momentum into the
rich palette of ongoing activities and help launch new ones.
I plan to be in Washington in late April and, if your
schedule permits, hope to have the opportunity to discuss how
we might advance our agenda.
MULFORD