The Viewpoint: Collaboration between India and Russia in the oil and gas sector

Zoya Burbeza

In 2017, Russia and India celebrated the 70th anniversary of establishing diplomatic relations. Throughout this period, Russia and India have always had warm relations on the government level as well as between their people and business circles. As Russia and India continue to develop relations, both countries have deep common interest in strengthening their collaboration in the oil and gas sector and taking it to the new strategic level.

India is the third largest energy consumer in the world. It has a steadily growing energy demand and it is a major energy importer. India relies on imports for 80% of its petrol and 50% of its natural gas demand. Russia is the key global producer and exporter of oil and gas. Thus, the strategic needs and requirements of both countries coincide. Already strong cooperation in the energy sector can significantly extend to new sources such as Liquefied Natural Gas (LNG).

Since India has a fast-growing energy demand, it needs to secure energy imports at a reasonable price. By 2040, India’s oil demand is expected to rise to 10 million barrels/day (bpd) from 4 million bpd at present. This is the equivalent of the entire oil export of Russia or Saudi Arabia and it is not clear that either of these major oil exporters can increase their exports as fast as India’s growing oil demand will increase by 2040 (and there is a long list of other countries whose energy demands are growing fast). By 2040, gas consumption is projected to increase to 175 billion cubic meters (bcm) up from ~50 bcm at present.

The only way to meet this demand is through imports and, quite importantly, at the price which would not slow down India’s economic growth. India’s annual energy consumption has grown at a compounded rate of 6% over the last decade.

The Gulf countries and Nigeria are important suppliers of petrol globally and to India in particular. However, these countries are susceptible to internal or external shocks and instability. Armed conflicts, social unrest and terrorist attacks in a major oil or gas exporting country or region can cause supply shocks and price spikes. This has happened many times in the recent past. Therefore, it is critically important for India to diversify its energy sources not only to secure required supplies but also to hedge against major disruptions in any one energy producing country or region on which it depends.

India also needs to urgently improve its energy mix in favour of cleaner types of energy. Currently, coal has a 60% share in India’s energy mix. This is double the global average. Poor quality of urban air and global warming require India to reduce its reliance on coal which is one of the dirtiest but also one of the cheapest types of fuel available. India has abundant sources of clean energy. However, its supply is not sufficient to satisfy India’s energy demand and it is also intermittent. The most logical option is to increase imports of natural gas which would both replace coal and complement clean energy supplies smoothing out peaks and troughs so characteristic of clean energy supply. Natural gas can also be used in vehicles. This would both decrease reliance on expensive oil and reduce air pollution.

From the Russian point of view, at present Russia’s primary export market for its energy is the European Union (EU). Although Europe accounts for around 80 per cent of Russia’s gas exports and 65 per cent of its oil exports and Europe heavily depends on Russian energy imports, imposition of Ukraine-related sanctions have clearly demonstrated how dangerous it is for Russia to have such heavy dependence on the EU market.

However, the main threat to Russian exports to Europe is not the sanctions, which theoretically can be lifted, but the major changes that have taken place in the energy market over the last 15 – 20 years (especially in Europe).

First, the shale revolution which started in the U.S. is having significant and increasing impact on the EU energy market. The shale revolution has only not increased production of oil but also of natural gas. First shipments of the U.S. LNG have already started to arrive in Europe. This trend is only likely to accelerate as the cost of producing and transporting LNG continues to drop significantly and as other countries besides the U.S. such as Qatar, Australia continue to increase their LNG production and export capacity. This trend of diversification away from Russian energy supplies is also fuelled by the strong desire of most European governments to reduce their dependence on Russian energy supplies.

Second, European market has followed the Asian market with a fierce competition between oil producing counties trying to offset losses suffered during the period of low prices by increasing their market share. The first delivery of Saudi oil to Poland in September 2016 was a direct consequence of this.

Third, growing popularity and improving technology enables EU to turn to renewable energy. This represents if not an immediate but certainly a medium and long-term threat to Russian dominance of the EU energy market. European countries are reducing hydrocarbon consumption, including through introduction of renewables and energy efficient technologies.

It is almost exclusively developing countries that account for the growing energy demand, with China and India alone making up half of that growth. India is increasing its oil imports faster than any other country in the world, including China.

As a result, Russia needs to acquire new customers for its oil and gas exports to urgently diversify its export markets and reduce its dependence on the EU export market. Investing in downstream assets in energy importers such as India is a good way to secure new long-term strategic customers.

At present, energy collaboration between Russia and India is focused on nuclear energy and oil investments. However, Russia accounts for less than 1% of India’s energy imports which represents a significant opportunity for growth. India’s energy imports from Russia are less than $1 billion. Collaboration in new areas such as LNG, natural gas mobility and financial markets for energy could represent a particularly effective way to develop partnership between Russia and India in the energy sector. Indian oil companies have several investments in Russian oil fields which exceed $10 billion.

Collaboration in the LNG sector represents a particularly vibrant, logical and mutual beneficial area. On one hand, Russia needs to find new markets for its gas as the EU seeks alternative sources of supply and the U.S. becomes a gas supplier. Building infrastructure to convert Russian natural gas into LNG and exporting it via tankers would open up the world market for Russian gas exports. So far, Russia has only one operational LNG terminal in Sakhalin with another one under construction. On the other hand, for India, LNG is the only viable way to increase imports of natural gas required to fuel its economic growth. India has four operational LNG import terminals with nine more proposed or under construction. These terminals can become the destination for Russian LNG exports.

From the legal point view, the vast majority of contracts between Russian and Indian companies have been signed under the English law with the London Court of International Arbitration (LCIA) being by far the most preferred venue for dispute resolution. In addition to the English law being the golden standard of legal practice worldwide, Indian business circles have a long history of commercial and cultural ties to the UK. They are extremely comfortable concluding business transactions under the English law. Many Indian business people have established second homes in London or have even moved their primary residence to London even if they continue to have strong business ties and business activity in India.

In a similar fashion, in the last three decades since the collapse of the USSR, many Russian business figures have established their residencies and business operations in London. In the process of doing so, they have become very familiar and comfortable with concluding international business transactions under the English law. Despite all the media coverage and publicity, recent deterioration of political and government relations between Russia and the UK has had little impact on the appetite of the Russian business community to continue living and operating out of London.

This makes the English law a natural and preferred legal framework for concluding deals between Russian and Indian companies. When it comes to corporate disputes or litigation, London and the English law certainly remain the main venue and vehicle.

Both Russia and India have very distinct and ancient cultures. This certainly carries over and translates into very distinct business culture in both countries which places a lot of emphasis on personal relationship, trust, mutual respect, traditions and informal verbal agreements. Therefore, when it comes to dispute resolution and litigation, in addition to having competent solicitors with the deep knowledge and experience of the English law, it is important to have firms with both strong Russian and Indian desks which can help to smooth out relations and find a common ground. There are very few law firms in London which combine very strong knowledge of the English law and strong Indian and Russian desks in the same firm.

Having this mixture of legal and cultural knowledge is often the most critical factor and the “secret ingredient” which allow to successfully resolve disputes and settle litigation cases at the right stage in the process and, thus, avoid exorbitant cost and publicity of protracted legal battles which often drag for many years and costs tens of millions if not hundreds of millions of pounds.

Zoya Burbeza is Head of Russia & CIS Desk at Zaiwalla & Co LLP law firm, London