India’s daily consumption of oil totals to 4.8 million barrels per day, and is projected to increase to 8.7 million barrels per day by 2040, according to International Energy Agency data. India already relies on imports for 85% of its oil requirements. That makes Russia, the world’s third largest oil producer and second largest exporter, a natural partner for India. Energy investments in each other’s energy sectors would enable India to protect itself against spikes in energy price, while giving Russia long-term access to buyers.
The recently concluded COP26 meeting in Glasgow has reaffirmed the belief that developing countries will remain reliant on fossil fuels for some time to come. This is complicated by the decreasing space for financing of fossil fuel-related projects. Twenty countries, including the U.S. and Canada have pledged to stop funding fossil fuel energy projects and focus on clean energy projects. This is likely to create market distortions and volatility.
India’s problem in the case of oil and natural gas is price spikes and short-term fluctuations caused by geopolitical factors. For Russia, the problem is low oil prices denting the government’s income. These issues can be resolved through investments – upstream Indian investment in Russian energy supplies and downstream Russian investment in Indian energy markets.
Indian Investments in Russia: Current and Future
Indian oil companies already have multibillion-dollar investments in Russian oil fields at Sakhalin, Vankorneft and Taas-Yuryakh. However, these investments cover only a small part of India’s oil requirements and need to be scaled up. A partial solution to India’s energy problems would be to invest directly and acquire a 5-10% stake in Rosneft and Gazprom. These are both dividend paying companies—a spike in oil and gas prices would increase the profits of these companies, and the dividend flow to shareholders (including India), would partly offset the higher import bill.
India has taken a positive step towards increasing its engagement in the Russian energy industry by opening the India Energy Office (IEO) in Moscow which houses five large Indian Public Sector Units (PSUs). IEO, inaugurated in March 2021, aims at finding new business opportunities in Russia, building capacity and import and export petroleum products.
Investments from India will also benefit Russia. West European nations, which have been long-time buyers of Russian oil and gas, have seen their energy needs decline as their populations age and consumption becomes more efficient. The increasing reliance on renewable energy contributes further to the decline in their use of oil and gas. China, which is an important market for Russian oil and gas, is expected to follow a similar trend. Investment by Indian energy companies in Russia can help secure access to newer markets.
Russian Investments in India
Russia’s Rosneft has already acquired a controlling stake in the 20-million tonne per annum Essar Refinery, in a bid to secure future market access for its oil. But this investment covers only oil, not natural gas. Russia is now facing competition for gas export markets from the U.S., which is exporting shale gas to Western Europe, a traditional Russian market. So Russia needs to look at other markets such as India for its gas. Just as Rosneft has invested in an oil refinery, Gazprom can partner with Indian public firms that plan to build at least ten Liquefied Natural Gas (LNG) terminals. Further, India wants to bring piped gas to 70% of its population—which will require dozens of city gas distribution networks—which can also be an investment opportunity. Apart from securing market access, these investments will also protect Russia in case of a downturn in energy prices since margins in the retail business are much more stable than raw material prices.
Navigating Geopolitics by Investments
Large investments in each other’s economies will give both, India and Russia an even bigger stake in each other’s long-term welfare. This will provide ballast if the two countries have to negotiate with each other over the complex geopolitical dynamic of the region. There are increasing concerns in India about Russia’s proximity to China, and some concerns in Russia about India’s partnership with the U.S. Mutually beneficial energy investments can alleviate these concerns. President Putin’s December visit to India saw both sides reiterating their commitment for long-term supplies of crude oil and LNG to India and increased Russian stake in India’s petrochemical market through investments. The two countries also welcomed the proposal to set-up a Gas Task Force to identify areas of mutual benefit, like investments in gas distribution projects and its use in fuels like hydrogen to deepen their energy cooperation.
This article was first published in Russia Digest.
Amit Bhandari is Fellow, Energy and Environment Studies Programme, Gateway House.
Saeeduddin Faridi is Researcher, Gateway House.