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Improving Greece’s Global Competitiveness

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EU’s directives on Energy and Environment put additional pressure on one of the most productive sectors of a weakened Greek economy.

By Ratish Srivastava (@socialia13)

Eight years since the Sub-Prime Mortgage crisis hit the world economy, Greece still seems to be on a downhill path. EU’s Directives on Energy and Environment are an encumbrance to one of its most productive sectors – refinery. Greece is losing its comparative advantage in the global economy, in turn hampering its ability to find a way out of trouble.

There are two major implications from this – one, the argument for the case of a Greece exit from the EU becomes stronger. Second, if Greece does have a choice to leave the EU then it will be choosing between long-term impact of its refinery sector on the environment or having more flexibility to improve the conditions of its citizens, at least through the refinery sector’s productivity.

The Greek economy has shrunk by a quarter in the past five years and unemployment is as high as 25%. Greece has received three bailouts from the IMF, the proceeds of which have been used to pay off their international debts. This crisis in the Greek economy and Europe’s debt crisis have combined to have a major impact on the refining sector in Greece.

A report by Foundation of Economic and Industrial Research in Greece, estimates that the refining sector has a strong impact on Greek economy. The research took into consideration the direct, indirect and induced effect of the sector on the overall economy. The report further estimated that the refining activity contributes € 3.8 billion and 40,000 jobs to the domestic economy, whereas its contribution to the tax and social security revenues is also significant. Another major contribution the refinery sector has is on reducing trade deficit, as the export of petroleum products amounted to 37.5% of all exports, most of which are going to non-EU countries who have the option to switch suppliers (86%).

In light of EU’s Directives on Energy and Environment, the refinery sector faces significant challenges as high financing and energy costs, lower margins, high cost of crude oil has reduced the competitiveness of Greek refineries in international markets. There is a dramatic shift in fundamental demand and supply trends of the world in refinery, as the refining capacity grew in Asia-Pacific (15%), West Asia (8%) and Russia (6%). The refineries in these economies have a high complexity index, implying that they can produce high value products in addition due to their size; they can achieve economies of scale.

The most complex refineries are able to produce petroleum products with high market value and process most types of crude oil, exploiting its price variations and availability. To achieve this complexity, significant investment needs to be made constantly. The refinery sector in Greece already invests in itself majorly, as the sector’s investment accounts for 26% of total investment in the manufacturing sector (€1.3 billion). This investment intensity comes as a surprise as Greece faces high rates on borrowing, making it expensive for them to borrow. However, this investment is seen as necessary to keep up with the international market for oil products in terms of increasing the complexity of the refinery.

The developing economies of Asia-Pacific, West Asia and Russia are export-oriented economies that are increasing the complexity of their refinery. With the domestic demand for oil products lesser than their capacity to produce them, with fewer compliance costs, lack of environmental regulations and low labour costs, these economies are able to price their goods competitively.

Greece will not be able to compete with these developing economies, due to additional costs imposed on them by the EU’s climate change policies. With the following directives in place – EU Emissions Trading System adopted in 2005 (EU ETS currently in its third phase 2013-2020), the Fuel Quality Directive in 2009 (FQD) and Industrial Emissions Directive (IED) in 2010, the refinery sector will not be able to compete in the international market and their products will face a competitive disadvantage compared to its rivals. These policies come at a time when the Greek economy needs more flexibility for the refinery sector to become competitive globally. However, the EU is hoping to achieve its ‘EU Energy Roadmap 2050’ which was launched in 2011 (which is, during the crisis period of Greece), as compliance with Best Available Technique (BAT) under IED is compulsory for an EU member state. BAT brings about high cost of emissions reduction for the refineries with little to no flexibility on meeting the emission targets. In a report by European Commission in 2014, the refining sector in EU has the highest energy cost worldwide with the cost for Greece the highest among EU member states.

The competitiveness of Greek refineries, which contributes significantly to the domestic economy, is not secured. Current legislations and policies of the EU create more problems and uncertainty for the refining sector in Greece as it is affected by a number of other exogenous factors (price fluctuation in crude oil prices, global economic crisis). The bailouts do not help Greek economy, as the money from them is not used to make necessary structural changes that the domestic economy requires. Yanis Varoufakis, the ex-Finance Minister of Greece resigned after his government accepted the third bailout package, maybe realising that the right steps towards a sound economic policy were not taken with the bailout.

One of the most productive sectors of the Greek economy faces uncertainty, reduced domestic demand, high costs, low margins and a comparative disadvantage in the international market. If Greece hopes to take the right steps to move towards a more stable economy, it needs its refinery sector to become more globally competitive. However, with strong pressure from the EU regarding its ‘Energy Roadmap 2050’, the chances for the Greece economy to improve its situation seem bleak as the potential of the refinery sector is being limited.

Ratish Srivastava (@socialia13) is a research intern at the Takshashila Institution

Featured image: Heiko Prigge/Monocle

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China’s Central Asia Engagements

America’s entanglement in Middle East has given China the perfect ploy to increase its footprint in Asia. The much-hyped Asia Pivot is in doldrums, with no policy framework or strategy to manage China’s rise. China clearly senses that its power projection in the Pacific is limited by the vast US presence and its network of allies, but in Central Asia, a viable power vacuum gives it the opportunity to expand its presence and influence. Central Asia is critical for China in three sectors, mainly trade, energy supplies and the fight against terrorism emancipating from Xinjiang.

 Energy Heaven and Russia’s Backyard-

After the collapse of the Soviet Union, Chinese companies ran into Central Asia to chart out energy deals to secure China’s growing energy demands. Most of Oil and Gas Pipelines run through Caspian Sea, Central Asia and Xinjiang, deep into China. Russia continues to be the main geopolitical player in the region, with negligible US presence. But off late, it has been facing subtle yet stiff competition from China. With economic sanctions in place, it is becoming increasingly difficult for Russia to ward off China’s economic power play. China-Central Asia trade was valued at 50 billion dollars in 2014, a figure exceeding Russia’s for the first time. The China-Central Asia network of pipelines could supply up to 55 billion cubic meters of natural gas to China every year, or more than half of China’s total gas imports.

Xinjiang Factor-

Increasing terrorist activities in Xinjiang has put China on a high alert. Influx of the majority Han Chinese in the region termed as ‘Hanification’, and failure of developmental projects has angered the ethnic Muslim population to rise against Xi’s ‘Strike Hard’ campaign. Since most of the oil and natural gas pipelines pass through this region, China is concerned about the security of its investments, and has in recent years, tried to subvert the religious practices of the people in Xinjiang. Uyghur separatists used to move around the porous borders with other Central Asian states to reach Afghanistan, though in recent years their movements have been highly regulated due to increased Chinese clampdown. China’s domestic law enforcement agencies are coordinating with their counterparts in the region to capture the terrorists and bring them to justice. Stability and security is the buzzword in this region. China maintains a premium on stability, and will go at lengths to protect its trade interest in the region. After the killing of a Chinese hostage by ISIS, China has stepped up its counterterrorism efforts. Pakistan has also played a critical role in assisting China. Andrew Small’s ‘The China Pakistan Axis-Asia’s New Geopolitics’ provides a detailed description of their coordination on selective counterterrorism.

Trade-

Trade is a very important factor in China’s geoeconomic calculus in the region. President Xi Jinping unveiled the ‘One Belt, One Road’ initiative in 2013 to maximize trade and commerce between Europe and China, with Central Asia acting as a critical transit point. EU-China trade is worth around 580 billion dollars, with much of the trade traversing through Central Asia, a replica of the old Silk Road. During ancient times, China had become the most prosperous nation entirely out of trade with Europe and Middle East, and is using the old route to reemphasize its benefits to other nations. Furthermore, China wants to decrease its dependence on the lengthier sea route for trade with Europe, and hence has increased investment in infrastructure projects in the region. For this purpose, China has setup three institutions to fund the vast developmental projects in the region. AIIB, Silk Road Infrastructure Fund and New Development Bank will pool in a total of around 100 billion dollars, with the Silk Road Fund alone providing 40 billion dollars. They will mostly concentrate on connecting China to Europe through railway lines, roads and energy infrastructure. With slowing economic growth and output, OBOR is highly essential for China to succeed and provide the necessary impetus to bolster growth in coming years.

 

India is slowly engaging itself in Central Asia with oil deals and gas pipelines, the most notable being TAPI. But it continues to lag behind China in terms of investment and influence. India-Central Asia trade pegs at 800 million dollars, which would have been higher, if not for Pakistan. Lack of direct access to Central Asian region continues to be a hindrance in terms of trade, energy security etc for India. And as the Chinese say, India is still 2 decades behind them, more so in this region. Let’s see if India will be able to better engage itself in Central Asia, with its growing economic clout and energy demands. Prime Minister Modi visited all 5 Central Asian states in order to increase security cooperation and trade. As the TAPI pipeline finally materializes for India, another option for India is to let the pipelines pass from Xinjiang region through the disputed territory of Aksai Chin, though it is very less likely to get traction among policy makers on both sides. In choosing lesser of the two devils, China is a better option than Pakistan for energy trade.

Piyush Singh is Junior Research Associate at Takshashila Institution and a student of law at Hidayatullah National Law University, Raipur.He tweets at @Piyushs7

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What’s driving India’s Iran crude oil rush?

Summary: The interim nuclear deal last year loosened the noose around Iran’s exports but concerns over a volatile Iraq are now spurring purchases back to pre-2013 levels

Reports earlier this month indicated that in comparison to last year, India took 46 percent more oil from Iran between the months of January and July. So far this year, India has received about 270,600 barrels per day (bpd) with the month of July registering an average of 210,300 bpd.

Today India is Iran’s second best customer of its crude oil after China. India was briefly #1 in 2012 after sanctions levied by the United States and the EU saw competitors China, Japan and South Korea race to cut back more ‘significantly’ than it. Despite the waiver from Washington, India drastically curbed imports the following year, cutting back even further than the targeted 15 percent reduction mark. This saw Iran plummet from second largest supplier of crude to seventh place.

A quick glance at where imports stood since 2011 shows that we are currently inching toward pre-2013 levels that existed before the ‘American squeeze’.

Source: Reuters (Thomson Reuters Oil Analytics)

Source: Reuters (Thomson Reuters Oil Analytics)

How did this come about?

1. Relief from Interim Nuclear Deal

The first reason of course being the breakthrough interim deal struck between Iran and the P5+1 (US, UK, Russia, France, China plus Germany) nations in November 2013 as they began trudging down the long road of negotiating a nuclear agreement. The interim agreement kicked into force in January and allows Iran to keep its oil export levels to 1 million bpd (less than half of pre-2012 levels). Today the country maintains levels at approximately 1.1 million bpd, a little more than the cap, but American officials aren’t exactly complaining.

Indian players, private refiner Essar Oil Ltd and state-owned Mangalore Refinery and Petrochemical Ltd (MRPL), are the only two regular importers of Iranian crude (other irregular importers include Indian Oil Corp, Hindustan Petroleum Corp and HPCL-Mittal Energy Ltd). Essar Oil, the biggest Indian buyer of Iranian crude, more than doubled shipments from January. They rose from 54, 200 bpd in December to 141,900 bpd in January and crossed 231,000 bpd by end of March this year. A wary MRPL, however, plans to keep its annual purchases from Iran around last year’s levels of about 80,000 bpd in spite of the interim relief. Because it fears that’s exactly what the relief is – “interim.”

The Iranian nuclear negotiations have not had a very smooth ride since January. The talks failed to meet the initial July deadline but with neither party (read US and Iran) willing to give up just yet, the negotiations have now been extended till November.

Despite this narrow window of opportunity and high degree of uncertainty, the mood on Iranian crude imports remains positive.

“This year, we plan to restart Iran oil purchases. We are already talking to the re-insurers for this, and we are getting positive responses so far.”

— S. Venkataramana, MD, Chennai Petroleum Corp. (MRL) to Bloomberg News

After a two-year gap, Chennai Petroleum Corp. (MRL) , a unit of India’s largest refiner Indian Oil Corp (IOCL), plans to resume crude imports from Iran (Naftiran Inter Trade Co., the Swiss-based subsidiary of National Iranian Oil Co., also holds a 15.4 percent stake). This change of heart has primarily come about because the European Union eased its sanctions on insuring cargoes after the interim deal and insurers are now returning to the market, albeit cautiously.

2. Urgent Need for Diversification: The Iraq Crisis

A second and increasingly concerning reason is the instability in parts of the Middle East, in particular Iraq. The country overtook Iran in 2012 to become India’s second largest supplier of crude oil. The Islamic State (IS) may not yet have taken southern Iraq where the Basra oilfields are located, but the instability spreading through the country has New Delhi already mulling over contingency plans.

In June, the government instructed public sector oil companies to draw up long and medium term plans with emphasis on diversifying India’s oil import basket. India ideally wants to reduce its dependence on a volatile Iraq and, at the same time, not increase its dependence on Saudi Arabia. Given these circumstances, both the government and refiners believe that Iran offers an immediate, proximal solution with lower transportation costs than say Latin America or Africa.

It is a tight window of opportunity till November after which the outcome of the Iran-P5+1 nuclear negotiations will decide if this upward trend for Iranian crude continues.

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How India made its mark in Sudan and South Sudan

The breakout of ethnic violence in South Sudan over the past month has seen hundreds of civilians killed. Yesterday, two Indian soldiers serving in in the country as part of the United Nation’s peacekeeping force died after their base was ambushed by rebels. New Delhi has close relations with Juba, and much before its independence, had impeccable and historic relations with Khartoum. Sudan was India’s first oil and gas homerun abroad.

In the mid-1990s, India seriously started mooting investing in the energy sector abroad as its newly liberalised economy and its new designers realised that for successful and uninterrupted economic growth for a country of this size, it was vital to organise uninterrupted supply of fuel.

Prior to this India, which has always been a net importer of crude, had invested in Russia which provided more than favourable conditions.  Now, things were changing and decision making on the issue at the Prime Minister’s Office was changing. One of the earliest signs of India’s intensions for overseas investments in oil and gas came with the then much publicised idea of the Central Asia Gas Pipeline Project (CAGPP), an idea first put forward by the company Bridas from Argentina. Indian diplomats at the time in Baku, the capital of Azerbaijan, had started pressurising the Indian government to seriously look into the prospects of bringing natural gas from central Asia into India, but avoiding Afghanistan and Pakistan. Alternates included building pipelines through parts of China.

As politics over the central Asian pipeline continues even today, in 2013, India’s plans to invest in energy assets abroad took it elsewhere. Africa is a continent rich in natural resources and while not much of Western interest prevailed there in the 1990s, due to various reasons, the developing world started to look at the continent as a viable and comparatively economical region to invest in.

However, there was considerable dissent within the multi-layered political circles on Delhi whether India should invest in assets such as these abroad or not, specifically in Africa. Such an investment was unprecedented in a post-90s India and possibility of this happening, while challenging, was eventually unavoidable.

When BJP’s Atal Bihari Vajpayee became Prime Minister in 1998, Indian oil and gas sector started to work towards applying (previously failed) pressure on the Prime Minister’s Office to start investing in energy assets abroad. During lobbying for this, many involved from the industry realised that some of Prime Minister Vajpayee’s Cabinet ministers were dead against investing in a project in Sudan. ONGC Videsh (OVL) had already managed to win the country’s first big foreign energy project in Russia’s Sakhalin-1 field in 2001. However, Sudan was a different, challenging, risky and unconventional bid.

One of the main reasons why powerful people such as Arun Shourie and the late Pramod Mahajan were advising Vajpayee against this “adventure” was the fact the stake India was looking to buy also involved China. This was looked upon as against India’s national interest within the cabinet and the trust factor with Beijing was not the strongest, making it a risky venture.

Ram Naik, who was the Oil Minister at the time, was spearheading these acquisitions knowing that Vajpayee was interested in this direction. Bureaucrats, oilmen and others including ministers had managed to correctly guide Naik in accepting that these bids are necessities and not luxuries. The dissent, nonetheless, continued within the cabinet. It is known that Mahajan had said: “hum gareeb desh hain. Sudan mein itna paisa lagane ki kya zaroorat hai? (we are a poor country, why do we need to put so much money in Sudan?). Arun Shourie reportedly added weight to Mahajan’s views.

However, Vajpayee and now L K Advani, who had gotten involved, were not convinced by Mahajan’s apprehensions. A meeting was organised where bureaucrats and oil industry leaders were called in to offer further convince the cabinet. By this time, the people gunning for the Sudan deal had managed to get some newspapers to back the bid, with articles favouring the deal. However, not many made it into print since time was limited. Multiple copies were printed of these few articles which were then taken into the meeting and presented as though many articles backing the bid had been published across the spectrum of the print media.

The oil industry also highlighted the fact that India had invested over $1 billion in the Sakhalin-1 project in Russia successfully. This was presented as another feather in the cap of Oil Minister Ram Naik’s accomplishments. After listening to all the details including both Mahajan and Shourie making their concerns known assertively, Vajpayee decided to overrule all opposing viewpoints after L K Advani convinced him that the deal should go ahead along with risk insurance, which was organised by a British bank. He (Vajpayee) gave ONGC Videsh a historic unconditional nod for the deal.

India went ahead and bought 25% stake in the Greater Nile Petroleum Operating Company (GNPOC) from Canadian major Talisman Energy for a staggering sum of $750 million in 2003. The China National Petroleum Company (CNPC) owns 40 per cent in GNPOC, Petronas of Malaysia has 30 per cent and the Sudanese national oil company 5 per cent.

This successful deal, passed thanks to political foresight and smart and intense lobbying by both diplomats and oil industry leaders, opened in a way many doors for other Indian businesses to grow in Africa. Even after the carving out of South Sudan from Sudan, New Delhi has managed to keep close relations with both Juba and Khartoum, even though the near war conditions between the two states do keep India’s Foreign Ministry on its toes. Last year, India had invited high level delegations from both countries to try and ease the tensions.

A lot of the troubles between Sudan and South Sudan have occurred due to the new international border separating them. Most of the rich oil and gas regions are around the border and the basins in the region are now shared by both countries. For many months Sudan had blocked routes for South Sudan, a land-locked country, to export its oil as the pipeline required for this runs via Sudan. Juba, as a response, asked India to come and build a new pipeline via Kenya, hence bypassing its problem in dealing with Khartoum and restoring its crucial funds received from oil and gas. However, India till now has not accepted due to concerns on both political (angering Khartoum which could have then got closer to China) and economic (cost of the project and the transit fees due to Kenya would have been too high).

Both Sudan and South Sudan are great examples of governance with vision, which managed to get both in the bigger business of owning energy assets abroad and getting a good foot hold in Africa, a continent on the cusp of an economic boom.

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Growing relations between India and Canada

Olivia Gagné

The Canadian Prime Minister Stephen Harper landed in India for his longest trip in a foreign country since his election victory of 2006. This reflects the growing interest Canada has been showing towards India over the last few years, keeping in mind its objective to diversify it’s trading partners and thus secure its future prosperity.

The current bilateral relations have great potential to be strengthened in many areas. A Comprehensive Economic Partnership Agreement (CEPA) is likely to be concluded next year between India and Canada, which would help reach the annual common fixed target of $15 billion in bilateral trade from the current $5 billion.

Canadian businesses clearly size the growing Indian market as a not-to-be-missed opportunity. In turn, India considers all that Canada has to offer with respect to the several challenges it is increasingly facing. Canada is an emerging energy superpower and could start exporting oil and liquefied natural gas to an energy-deprived India as soon as the required infrastructures to do so are installed. 99 percent of the Canadian hydrocarbons are sold to the United States of America, at a ridiculously cheap price. Canada has an obvious economic advantage selling it at higher prices, closer to the international ones and India is willing to pay this price to get Canada as a reliable supplier. Nuclear energy is also on the cards as both the countries signed a civil nuclear agreement two years ago.

Apart from the Indian conquest for energy security, the education of the current and future generations of Indians is a major challenge that could find part of the solution in better cooperation with the Canadians. Last year, 13000 Indian students went to Canada for education. Canada is seriously interested in welcoming more in the coming years for their intellectual capabilities. The Canadian post-secondary education is one of the best in the world as showed in a recent OECD report. The Canadian expertise could greatly benefit the Indian authorities on planning and managing public education. Canada also has extraordinary know-how in the environment protection field from which India has a lot to learn. In sum, the Canadian private sector is looking avidly at all the infrastructure needs in India and could help in achieving the considerable government spending of this sector.

The Canada-India relationship can also be strengthened if both countries engage together in other parts of the world for joint cooperation. For example, the aid sector in Africa offers many opportunities for this. Canada seriously needs to improve its image in this region as it failed to gain a seat in the United Nations Security Council (UNSC) in 2010 partly because it lost credit with the continent over the last few years. India is similarly seeking the African support for its bid for a UNSC permanent seat, and is obviously interested in accessing the resources of the area. The share of Canada’s development experience in Africa could help make India’s “new role” as a global donor much more effective. Together they could even plan triangular cooperation projects, which are an innovative approach to development, seen as highly effective and which would benefit each of the three committed parties.

The previous items of the bilateral possibilities might be part of the agenda on the prime minister Stephen Harper’s second official visit to India from November 3rd to 9th.

Olivia Gagné is a graduate student at the Université Laval and currently doing an internship at The Takshashila Institution.

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