Energy security has long been a concern for the United States, the world’s biggest consumer of oil. But the fuel demands of rapidly growing economies in China, India and Japan have altered the market and international politics, influencing debate and policies on everything from national security to economic development.

One study by a German military think tank warned of the potential for a dire global economic crisis in as little as 15 years due to a peak in demand and an irreversible decline in world oil supplies. The German military is not alone in its concern. The British government has also been studying the issue and a report from the U.S. military stated that surplus oil production capacity could end by 2012 and there could be serious shortages by 2015.

Among the Middle East’s oil-producing countries, there are now efforts to control and manage the exploitation of their oil wealth, as government and industry officials seek alternative sources such as nuclear energy. The United Arab Emirates’ decision to invest US$20 billion in nuclear plants supplied by South Korea is a clear indication that the world’s eighth-largest producer of oil is keen to cap production and save for future generations.

As the debate heats up over what would be the best, long-term and durable energy security option — energy independence or energy interdependence — large developing nations are seeking means to satisfy growing domestic demand by tapping new sources of energy.

Nearly 70% of India‘s crude oil imports come from the Middle East and the volume is expected to increase as India’s economy, growing at 9%, faces new challenges. A large chunk of the country’s 1.2 billion people does not have access to commercial energy. Yet if India wants to continue its pace of growth and provide better opportunities for its poor, it needs to find ways to fulfill it rising energy demands. Venu Rajamony, Joint Secretary for Energy Security in the Indian Ministry of External Affairs, spoke to Knowledge at Wharton about India’s energy security concerns and the challenges ahead.

An edited transcript of the interview follows.

Knowledge at Wharton: What are the major energy security concerns for India?

Venu Rajamony: India is a country where a large section of the population does not have access to commercial energy. It is estimated that around 44% of households in India do not have access to electricity and over 90% depend upon biomass [fuel from burned wood, waste or gas]…. Even for those who have access to energy, the quality of energy that they enjoy is poor. India is growing at a rate of 8% to 9%. In order to eliminate poverty and to attain a reasonable level of economic development, the Indian Planning Commission has estimated that we need to grow at 8% to 10% for another 25 years. If we [are] to attain this national goal, we have to significantly step up access to energy — generation of energy within the country as well as the import of energy from the outside. And this has to be done in a sustainable manner, because we do not want to blindly use fossil fuels and pollute the environment even further. On the one hand, India needs to step up its use of energy and on the other it needs to use energy in the most efficient manner possible. It needs to shift from fossil fuels to non-fossil fuels, from conventional to non-conventional and from non-renewable to renewable sources of energy.

Knowledge at Wharton: The Middle East is still the largest source for oil and gas that comes into the country and India spends billions on energy imports. Based on what you just said, do you see this equation changing as India moves towards more eco-friendly, sustainable forms of energy in the years to come?

Rajamony: Not in the short to medium term. I think not just India, but the whole world’s dependence on oil, gas and coal is going to continue for some time. But efforts are under way to tap other sources of energy. India’s energy [sources are a mix of] 52% based on coal, 32% based on oil, 10% based on natural gas, 5% from hydro power and 1% from nuclear energy. It is estimated that by 2032, we would have to import over 91% percent of our oil, [up to 57%] of our coal and [up to 57%] of our natural gas depending upon different degrees of energy intensity. Our dependence on imports of energy in 2032 will be [meeting only a maximum of 67%] of our energy requirements if we are to sustain a 9% annual rate of GDP growth.

Knowledge at Wharton: Is India’s external dependence only going to grow?

Rajamony: Yes, because of the rate at which we are growing economically, our dependence on fossil fuels will continue despite advances in generation of nuclear energy, hydro energy and renewable energy, particularly solar and wind energy. The size of the Indian economy and the needs of our population mean our dependence on fossil fuels will continue. Because almost 56% of the world’s proven oil and 40% of the proven gas resources are located in the Middle East, this region will continue to be the major source for us.

Knowledge at Wharton: How well placed is India in terms of its relations with the Middle East in order to ensure its own energy security decisions?

Rajamony: Our relations with the Middle East, especially the major oil and gas producers, have always been very good. These are countries with which we share civilization links. There are centuries of people-to-people and trading contact. Large Indian populations live [in the Gulf region]. It has been our goal to engage these nations closely, and see what long-term arrangements we can enter into with them; in what manner can we attract them to India to invest in the oil, gas and petrochemicals sectors and take advantage of the opportunities that the Indian market offers; and what are the opportunities available for India in the oil and gas sectors of these countries. One small example is a joint venture fertilizer plant that uses locally available gas, which we have set up in Oman in collaboration with the government. In order to ensure India’s food security, our need for fertilizer is large. Because fertilizer is an energy-intensive industry, we are making an effort to go out into the world and try [to] establish fertilizer industries wherever there is sufficient energy easily available. The second country in which a similar joint venture is being set up is Ghana.

Knowledge at Wharton: You mentioned long-term relations. Does that mean India is looking at long-term contracts at rates that are determined not so much by market movements, but depend more on government-to-government relations?

Rajamony: There are a wide variety of arrangements in place and it is not necessary that they are non-market rates. I think that the problem is that often it is not easy to predict market rates 10 or 15 years down the line. India is open to all arrangements. Even now, the oil and gas that we get is a mixture of long-term, as well as short-term, contracts. When prices are low, we step up our spot buying. At the same time, for long-term security we have arrangements in place with formulas for price adjustment if there is a significant change in international prices. We are also actively looking at acquiring oil assets abroad and investing in prospecting and exploration of oil and gas. We are very happy to partner with countries where resources are available, or partner with countries to go into countries where resources are available.

Knowledge at Wharton: Could you give us some examples of such ventures? There was one in Vietnam that was being discussed and there were a couple of them in Central Asia too.

Rajamony: Today, Indian Public Sector Units [government-owned corporations] have oil assets in around 24 countries. The leading agency in this regard is the ONGC Videsh Limited (OVL), and it has invested altogether US$11 billion in oil and gas assets abroad. OVL is one of the largest investors abroad from India. Overseas production from OVL doubled from 7.23% of the total production of its parent, Oil and National Gas Corporation, in 2002-2003 to 15.42% in 2007-2008. Today, OVL’s equity oil assets account for 9% of India’s total oil import requirements. OVL alone is present in 15 countries and has 40 projects. In the private sector, Reliance Industries Ltd. has been making some major purchases of shale gas assets in the U.S.

Knowledge at Wharton: And that is likely to go up, given the thrust that the government is giving.

Rajamony: Absolutely. The government is determined to expand the scope of its acquisitions outside [India]. It is supporting our oil companies’ efforts to go out and acquire these assets by giving them necessary resources when required. Our missions across the world have a clear mandate to look for opportunities in host countries in the field of energy and when they find them, to immediately alert concerned Indian companies. The government provides whatever diplomatic support is required. Diplomatic intervention becomes essential because many of the oil and gas assets are with nationally owned companies. There have been fears expressed that China, India and others competing for resources [creates] a kind of new mercantilism. India is very clear that however much we may go out and acquire such assets, it is never going to meet all our requirements. More important is the need for us to step up exploration within the country and utilize every opportunity available. There are important, new sources of energy, like shale gas, coal bed methane, etc., which need to be exploited. For natural gas, we have had a major find in the Krishna-Godavari basin [in southwestern India]. Recently, we found oil in [the northeastern Indian state] Rajasthan. We are hoping we will be able to discover more oil and gas within the country. We are also introducing important efforts to improve energy efficiency within the country. Internationally, we closely work with producing nations as well as consuming nations to ensure that there is a dialogue between the two and that international prices remain at an optimal level. The quest for overseas oil assets is with the understanding that ultimately the world has to follow an interdependence model rather than an independence model in the field of energy.

Knowledge at Wharton: Another country that is very concerned about its energy security is China. There have been instances where India and China have ended up competing over assets in another country. There have also been occasions when China and India have worked jointly. How do you see that going? There is of course one view that given China’s financial muscle, India doesn’t stand a chance when it comes to stating a price for an asset. How do you see this panning out?

Rajamony: I would say that there is both cooperation as well as competition in the quest for assets abroad between Indian companies and Chinese companies. We don’t see this as a zero sum game. China is concerned about its energy security and will take the necessary measures to protect it and similarly, India is also concerned about its energy security and will take the necessary steps. As you mentioned, there are cases where we have collaborated together. For example, in Syria and Sudan, we have invested jointly with Chinese companies. At the same time, there are areas where we compete. Because the Chinese economy has been growing at a rate of over 10% for over three decades, its companies are cash-rich and they have been able to acquire considerable assets. But if you look at the performance of the Indian economy and at the acquisitions Indian companies have made, you will find that oil and gas is one area where India has done quite well in terms of overseas investment. Indian companies take a close look at what are the assets being offered, study their prospects, look at international price trends and then determine whether the asset is worth the price. There is no blind acquisition of assets. All transactions are undertaken after due diligence and with caution. For a democratic country like India, where there is a great deal of transparency and public accountability, this will continue to be the working norm for Indian companies, especially the public sector units.

Knowledge at Wharton: Can there be a possibility of looking at, say, South America and more of Africa in terms of identifying places where Indian companies can go and find either gas or oil?

Rajamony: Absolutely, we are looking at every country in the world. No region is excluded. We recently acquired a very important asset in Venezuela. The quantity of oil that comes into India from Latin America has gone up very significantly. We have important assets in Sudan, Nigeria, Libya and Egypt. Angola and Nigeria are major suppliers of crude. In Sudan, we have investments in a pipeline also. So no region is really excluded. An important part of our strategy is to diversify our import basket.

As for the rest of the world, Saudi Arabia remains our principal supplier of oil, but the percentage that Saudi Arabia has among all our supplier countries has come down from 24.96% to 19.9% from 2004-2005 to 2008-2009. Our imports from Latin America have increased to 5.48% in 2008-2009 as compared to 0.46 % in 2004-2005. Our imports from Africa have shown a decreasing trend for the last four years. It had come down from 22.81% in 2004-2005 to 15.68% in 2008-2009. But in the last financial year, which is 2009-2010, in the first ten months, our imports from Africa were around 20.62% of total crude imports.

OVL is now working in 15 countries: Vietnam, Russia, Sudan, Myanmar, Cuba, Colombia, Syria, Iran, Iraq, Libya, Brazil, Venezuela, Nigeria Sao Tome and Principe JDZ, Nigeria and Egypt. And other than OVL, we also have other oil companies like Hindustan Petroleum and Bharat Petroleum who have invested in assets abroad. We also have our private sector companies like Reliance and Essar Group that have invested abroad. Recently we set up a company called Coal Videsh Limited to try and acquire coal mines. A number of private companies are investing in coal assets abroad, particularly in Indonesia.

Knowledge at Wharton: You mentioned Iran. A gas pipeline from Iran to India through Pakistan has been under discussion for a long time. How is it going to help, or not help, if it or if it doesn’t come through?

Rajamony: The gas pipeline is something we consider very important as far as our energy security is concerned. Iran, with its huge oil and gas resources, located in relative proximity to India, is a country from which India would like to continue to source oil and gas. We have been discussing with the governments of Iran as well as Pakistan the subject of the pipeline. We would like to see the pipeline materialize. There are, however, issues of price and security associated with the pipeline. These need to be addressed as we go forward.