Impacts, Prospects, Opportunities China in the Indian Ocean Region: Impacts, Prospects, Opportunities Client: U.S. Government, Office of South Asia Analysis Nathaniel Barber Kieran Coe Victoria Steffes Jennifer Winter Prepared by:

Outline Impact Analysis Trends and Prospects Opportunity Analysis Regional Security Energy Issues Non-Energy Economic Relations Trends and Prospects “Expansionist” China “Non-Expansionist” China Opportunity Analysis Trends to Obstruct or Encourage Opportunities for Future Action

Impact Analysis: Regional Security New Chinese partnerships with South Asian states come at India’s expense Construction of port facilities Hambantota, Sri Lanka Chittagong, Bangladesh Sittwe, Burma Gwadar, Pakistan Economic and military aid

Impact Analysis: Regional Security

Impact Analysis: Energy Security Definition of energy security: Availability Reliability Affordability China and India face three primary energy security risks High proportion of oil imports Reliance on dominant oil exporting countries Dependence on vulnerable sea lanes 1. Energy Security Definition: The consensus definition of energy security requires that resources are available in sufficient quantities to facilitate economic growth, energy supplies are uninterrupted, and prices are affordable. By this standard, both China and India face broadly similar risks to the security of their energy supply and infrastructure. 2. Risks: Right now China imports about 50 percent of its oil needs, while India imports 70 percent of its oil needs. Moreover, nearly 70 percent of India's crude oil imports come from the Middle East, primarily from Saudi Arabia, followed by Iran. The Indian government expects this geographical dependence to rise in light of limited prospects for domestic production. China imported 4 million bbl/d of crude oil in 2009, of which approximately 2 million bbl/d (50 percent) came from the Middle East, 1.2 million bbl/d (30 percent) from Africa, 184,000 bbl/d (5 percent) from the Asia-Pacific region, and 686,000 bbl/d (17 percent) came from other countries. In 2009, Saudi Arabia and Angola were China's two largest sources of oil imports, together accounting for over one-third of China's total crude oil imports.   3. Both Chinese and Indian oil imports are highly vulnerable to blockages of key sea transit choke points, namely the Suez Canal, Bab-el Mandeb, the Strait of Hormuz, and the Strait of Malacca. 

Impact Analysis: Energy Security 1. Upstream Oil Equity Pursuit: China outbid India for $12.5 billion in equity oil contracts. The direct beneficiaries of these contracts were smaller regional players holding the oil resources.   2. Pipeline Projects: China has successfully negotiated or completed several international pipeline projects in Kazakhstan, Myanmar, and Russia. India has failed to complete any overland pipelines, primary due to tensions with Islamabad. Whenever pipelines are built through the territory of a smaller regional player, the smaller player receives beneficial transit payments. For instance, Myanmar can expect $14 million per year in transit payments 3. Investing in pariah states: China and India have courted relationships and made investments in several troubled states, including Iran, Sudan, and Myanmar. If either China or India acted alone in courting pariah states, they would be subject to international censure. By violating the rules at the same time, both countries have safety in numbers and reduce the chance that they can be singled out for criticism. Smaller regional pariah states obviously benefit from both China and India's patronage. 4. SPR China has already constructed one of the worlds largest SPRs and has plans to double it in size. India currently has no SPR, but plans to deploy one by the end of this year. Both India and China win as they construct SPRs, because they reduce vulnerability to loss of imports, and increase their trust in the international market system, which may lead to more cooperative outcomes. Construction of SPRs leads to mixed results for smaller regional players, because oil demand goes up in the short term as India and China buy oil to fill the SPR, but in the long term oil exporters will have less power and influence.

Impact Analysis: Non-Energy Economic Relations Increasing Chinese Trade in the Indian Ocean region India’s Trade Deficit with China Foreign Direct Investment by China and India

Impact Analysis: Non-Energy Economic Relations

Prospects and Trends: Assumptions “Expansionist” China “Non-Expansionist” China Likelihood Scale Very unlikely Unlikely Somewhat unlikely Plausible Somewhat likely Likely Very likely

Prospects and Trends: Regional Security

Prospects and Trends: Energy Security Meager outlooks for domestic energy production in China and India will increase import dependence. China and India are projected to import over 70 percent and 90 percent of their oil respectively in 20 years. Competition for international equity oil and pipeline projects will increase as resources dwindle. This will compel both China and India to seek control over as many equity oil and pipeline projects as possible. China's underlying global political strategy may help determine the relative incidence of cooperation, competition, or military conflict over energy resources If China is expansionist, then both India and China will be less likely to seek cooperation on energy security projects and less likely to trust the global market and join international energy organizations.

Prospects and Trends: Non-Energy Economic Relations

Opportunity Analysis: Trends Trends to Obstruct Chinese FDI to regional states Chinese-financed and built ports   Trends to Encourage U.S.-India relationship India’s relationship with regional states Indian and Chinese acquisition of energy resources Chinese-Indian trade Membership in international energy organizations

Opportunity Analysis: U.S. Action Strengthen U.S. relations with India   Expand relations with Chinese-courted regional states Maintain naval superiority in the Indian Ocean Ensure energy security for South Asian states Pursue a less unequal trade balance with China

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