Tectonic shifts in global geopolitics are fostering a radical rewiring of energy sector partnerships. Prominent among them are the U.S.'s crippling sanctions against Iran, a festering trade war between the U.S. and China, and mounting regional tensions in the Middle East.
Energy-hungry and import-reliant Asian economic giants China and India are weakening some of their decades-old alliances with major oil and gas producers, strengthening others and creating brand-new dependencies.
Meanwhile, the shale-driven U.S. oil and gas production and export boom is offering succor to consumers just as they become nervous over their supplies from the Middle East.
The reshuffling underway, with billions of dollars of investments flowing in new directions and bold long-term commercial commitments being forged with new partners, may appear politically and commercially prudent in the current world order. However, it would be dangerous for Asian governments to mistake it as a cure-all for ensuring long-term national energy security.
On September 21, India's largest liquefied natural gas importer, Petronet, signed a landmark $7.5-billion preliminary deal with U.S. company Tellurian. Petronet will have the right to up to 5 million metric tons of LNG annually from Tellurian's proposed Driftwood project in Louisiana for a period of 40 years -- an unusually long commitment.
Tellurian, which hopes to begin construction on the project in early 2020, is following an unorthodox funding strategy, with upfront equity payments from would-be buyers.
India, a highly price-sensitive gas market, has also learned hard lessons from state-run gas utility Gail's recent difficult renegotiations of its long-term LNG purchase deals with Qatar, Russia and the U.S. A fall in international gas prices left it holding expensive contracts, out of sync with market conditions.
Nonetheless, the Petronet-Tellurian deal is likely to be pushed through, with the Indian government's backing. The signing of the memorandum of understanding was a much-trumpeted event, witnessed by Indian Prime Minister Narendra Modi during his high-profile visit to Houston in September.
India is also raising its bets on U.S. crude. State-owned refining giant Indian Oil signed the country's first-ever deal to buy U.S. crude on a long-term basis in February this year.
U.S. crude exports arrived in India as recently as 2017 and became regular a year later. In the first eight months of 2019, they had captured a 5% share of the Indian crude import market.
Under the U.S.-India Strategic Energy Partnership agreed at a summit between Modi and U.S. President Donald Trump in June 2017, India may further boost its imports of American crude. While that is a sound diversification strategy for the next few years, it may not yield much dividend in the longer term as the U.S. shale boom is expected to die down in 10-15 years.
Iran is another area of change. India put an end to its crude imports from Iran starting in June after the U.S. ended waivers for its sanctions against the Islamic Republic and vowed to crack down on entities trading with Iran.
Meanwhile, even as Iran finds itself isolated on the world stage over its alleged sponsorship of terrorism in the Middle East and its suspected role in the devastating aerial attacks on major Saudi oil facilities on September 14, China is doubling down on its strategic partnership with the country.
Beijing recently committed to a huge $400 billion investment in Iran's oil and gas sector as well as transportation and manufacturing infrastructure under a 25-year deal. In return, Chinese companies will get right of first refusal in all petrochemical projects in Iran.
In contrast to India, some Chinese companies have maintained surreptitious purchases, shipping and stockpiling of Iranian crude even after the end of U.S. sanction waivers, and have been blacklisted by Washington.
China, Russia and Iran are reportedly planning a joint naval drill in the international waters of the Sea of Oman and northern Indian Ocean. The move could further polarize the Middle East, especially after the U.K., France and Germany recently joined the U.S. in blaming Tehran for the attacks on Saudi oil facilities.
In the meantime, Chinese companies are shunning U.S. crude and LNG imports and have pulled out of U.S. LNG project investments due to the trade war between the two countries.
However, if an enduring resolution of the long-running regional conflicts continues to elude the Middle East in our lifetime, it is hard to see how China's deepening ties with Iran will help secure its energy needs in the long run, given the potential for continued disruption and weak growth in the latter's energy sector.
China and India, the world's second and third largest users of oil, cannot allow supply assurances from transient political alliances to muddy their long-term energy security planning.
That strategy needs to remain on course with a combination of accelerated diversification of the country's energy mix, a push for energy efficiency in oil and gas from production all the way to retail and maintaining enough strategic stockpiles to tide over major supply shocks.
Vandana Hari is founder of Singapore-based Vanda Insights, which tracks energy markets. She has two decades of experience providing intelligence on the energy sector.