REVITALIZING THE US-INDIA ENERGY RELATIONSHIP

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