[Senate Hearing 109-326]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-326

  ENERGY TRENDS IN CHINA AND INDIA: IMPLICATIONS FOR THE UNITED STATES

=======================================================================

                                HEARING



                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE



                       ONE HUNDRED NINTH CONGRESS



                             FIRST SESSION



                               __________

                             JULY 26, 2005

                               __________



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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota              JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio            RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee           BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
LISA MURKOWSKI, Alaska               BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                  (ii)

  


                            C O N T E N T S

                              ----------                              
                                                                   Page

Allen, Hon. George, U.S. Senator from Virginia, prepared 
  statement......................................................    19
Ganguly, Prof. Sumit, professor of political science and director 
  of the India Studies Program, Indiana University, Bloomington, 
  IN.............................................................    47
    Prepared statement...........................................    49
Garman, Hon. David K., Under Secretary for Science and 
  Environment, Department of Energy, Washington, DC..............    12
    Prepared statement...........................................    13
    Written response to question submitted by Senator Lugar......    53
Herberg, Mikkal E., director, Globalization and Asian Energy 
  Security Program, National Bureau of Asian Research, Seattle, 
  WA.............................................................    28
    Prepared statement...........................................    30
Lugar, Hon. Richard G., U.S. Senator from Indiana................     1
Schriver, Randall G., partner, Armitage International, Arlington, 
  VA.............................................................    39
    Prepared statement...........................................    43
Wayne, Hon. E. Anthony, Assistant Secretary for Economic and 
  Business Affairs, Department of State, Washington, DC..........     3
    Prepared statement...........................................     7

                                 (iii)

  

 
  ENERGY TRENDS IN CHINA AND INDIA: IMPLICATIONS FOR THE UNITED STATES

                              ----------                              


                         TUESDAY, JULY 26, 2005

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:33 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Richard G. 
Lugar (chairman of the committee) presiding.
    Present: Senators Lugar, Allen, Coleman, Kerry, and Obama.

 OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM 
                            INDIANA

    The Chairman. This hearing of the Senate Foreign Relations 
Committee is called to order.
    Today, the Committee on Foreign Relations meets to examine 
trends in energy markets and policies of two rising powers, 
India and China. The December 2004 National Intelligence 
Council report, entitled ``Mapping the Global Future in 2020,'' 
states that the single most important factor affecting the 
demand for energy will be global economic growth, especially 
that of China and India.
    To maintain steady rates of economic growth, China 
reportedly will need to boost its energy consumption over the 
next 15 years by about 150 percent. Over the same period, India 
will need to nearly double its energy consumption to maintain 
its growth rates. China, the world's second-largest oil 
importer, receives more than 40 percent of its oil from abroad, 
while India, the sixth-largest energy consumer, fills 70 
percent of its oil demand with imports.
    To cope with their growing energy needs, India and China 
are reorienting their foreign and domestic policies and 
investing heavily in securing supplies from abroad. India's 
state-owned oil and natural gas company has invested about $3 
billion in overseas exploration and energy projects since 2000, 
while China also has invested several billions of dollars 
during the same timeframe. And both countries are creating 
emergency oil reserves and stepping up domestic oil and gas 
exploration.
    This activity has implications for our current 
relationships with China and India, as well as America's own 
energy future. Our Government must devote careful study and 
analysis to the questions raised by recent actions taken by 
China and India to secure greater energy supplies, and we must 
think creatively about the long-term strategic implications of 
the energy-consumption trends of these and other developing 
nations.
    China is the third-largest United States trading partner, 
with total United States/Chinese trade estimated at $232 
billion in 2004. Its consumption of crude oil accounted for 
approximately 34 percent of the increase in world demand last 
year. China surpassed Japan in 2003, to become second to the 
United States in the consumption of primary energy. And after 
the United States and Russia, China is the third-largest energy 
producer in the world. India, with its rapidly expanding 
economy, democratic traditions, and growing presence throughout 
the world, is becoming a significant power in its own right.
    The Bush administration recognized the importance of 
cultivating deeper ties to India and hosted Indian Prime 
Minister Singh for a historic visit last week. During the Prime 
Minister's address to a joint session of Congress, he noted 
common interests between the United States and India and 
pointed to energy as a key area for increased cooperation. 
President Bush and Prime Minister Singh released a joint 
statement last week that included cooperation on nuclear energy 
issues. This committee will review legislative proposals 
submitted by the administration on these important subjects. I 
look forward to working closely with the administration on 
these issues to examine their possible impact on U.S. 
nonproliferation policy and other goals the President and I 
share.
    The energy trends in India and China reinforce the notion 
that the United States should strive to lessen dependence on 
oil through greater investment in energy research and 
development. I recently introduced a renewable fuels bill that 
was incorporated into the comprehensive Senate energy bill 
passed by the Senate last month, and now in conference with the 
House. This legislation would more than double the production 
and use of domestic renewable fuels, including ethanol, 
biodiesel, and fuels produced from cellulosic biomass. These 
fuels must be an important part of our strategy to achieve 
greater energy independence.
    In addition to our domestic efforts, we should explore 
opportunities to cooperate more with India, China, and other 
countries to encourage global energy efficiency and security. 
The December 2004 report of the National Commission on Energy 
Policy calls for increasing collaboration with other countries 
to develop and to deploy alternative energy technologies that 
will not be pursued absent governmental support. The Commission 
also calls for tripling investment in cooperative international 
research, expanding and diversifying worldwide oil production, 
and expanding the global network of strategic petroleum 
reserves. Congress should be active in encouraging such 
measures. Energy experts note the benefits of providing 
incentives to countries such as India and China to employ clean 
coal technologies, and, as a world leader in these 
technologies, the United States would benefit greatly if coal 
gasification plants could be manufactured on a large scale and 
exported to India and China and other nations in need of new 
energy resources. India, in particular, appears open to such 
cooperation.
    In his address to Congress last week, the Indian Prime 
Minister noted the importance of allowing greater access for 
developing countries for clean coal technologies and exploring 
partnerships that encourage more efficient use of hydrocarbon 
resources.
    We're delighted to welcome two distinguished panels today 
to help us interpret the trends that I've described and to 
suggest policy options that can help guide U.S. leaders.
    On the first panel, we welcome Mr. Anthony Wayne, Assistant 
Secretary for Economic and Business Affairs at the State 
Department, and Mr. David Garman, Under Secretary for Science 
and Environment at the Department of Energy.
    On our second panel, we will hear from three experts in the 
field, Mr. Mikkal Herberg, Director of the Globalization and 
Asian Energy Security Program at the National Bureau of Asian 
Research; Mr. Randall Schriver, partner at Armitage 
International; and Dr. Sumit Ganguly, the director of the 
Indian Studies Program at Indiana University.
    We're grateful for all of our witnesses for being with us 
today. We look forward to their insights.
    Let me suggest that your statements will be included in the 
record in full. Please summarize those statements, preferably 
in 10 minutes or less. We will proceed, at that point, 
depending upon our rollcall schedule.
    And if you would proceed, Secretary Wayne.

  STATEMENT OF HON. E. ANTHONY WAYNE, ASSISTANT SECRETARY FOR 
ECONOMIC AND BUSINESS AFFAIRS, DEPARTMENT OF STATE, WASHINGTON, 
                               DC

    Mr. Wayne. Thank you very much, Mr. Chairman. It's a 
pleasure to be here. And these are very important topics. We're 
very happy to have this opportunity to testify before you. And 
I'm very happy to be here with my colleague from the Department 
of Energy, Under Secretary Garman. We have very close 
partnership between the State Department and the Energy 
Department on the international aspects of our energy policy.
    As you well know, China and India have implemented 
significant changes in their economies to allow market forces 
to play a larger role. That has helped result in significant 
economic growth. In China, the economy has grown at an 
astounding 9 percent a year for the past 25 years. And the 
Indian economy has also grown, at about 5 percent annually, 
during this same period. And it's natural that, as economies 
grow, the demand for energy grows with that.
    China's consumption of energy, for example, has grown at 
4.3 percent per year since 1980. And India's has grown at 5.4 
percent. China and India are, thus, understandably concerned 
about their energy security, as is the United States and most 
every other nation in the world.
    Our continued engagement with these two rising economic 
giants is the best means to help shape their energy outlook and 
their policies and to help ensure that world energy resources 
are used in the most efficient, affordable, and environmentally 
sound ways possible.
    Although coal still comprises over 50 percent of each of 
these two countries' primary energy consumption, it's been the 
growing share of oil--and particularly imported oil--in each 
country's energy mix that has captured the attention of the 
world. According to data published by the International Energy 
Agency in early 2005, China consumes about 6.4 million barrels 
of oil per day. That's about one-third the level of the United 
States. China, 25 years ago, was largely energy self-
sufficient; but China, today, imports about 40 percent of its 
oil needs. That's somewhere between 2.5 and 3 million barrels 
per day.
    India hasn't made any major new domestic oil discoveries 
since the mid-1970s. In 1990, Indian domestic supply met about 
60 percent of its oil demand; in 2004, the country was 
importing over 65 percent of its oil.
    This growing demand for both countries' oil has often been 
characterized as the cause of the recent surge in high global 
energy prices. However, demand from China and India is by no 
means the only factor in the tightening markets. Energy prices 
have been impacted by sustained general increases in world 
demand for energy. The United States comprised about 27 percent 
of the total increase in global demand between 2003 and 2004, 
for example. China was about 36 percent, and Indian, only about 
4 percent of that increase.
    Other important factors in the tightening markets included 
the slowing increases in non-OPEC oil production, dwindling 
spare production capacity in OPEC, constrained refinery 
capacity, temporary supply disruptions due to natural 
disasters, and simply the risk of significant disruptions due 
to political instability or acts of terrorism in countries that 
produce, transship, and refine oil and gas.
    Still, the energy demands, and the growing demands of China 
and India, are important. According to the International Energy 
Agency, overall demand for energy in China and India is 
projected to approximately double by 2030; whereas, United 
States demand is expected to grow by only 35 to 50 percent.
    What is notable about the Chinese case is that, while China 
has set a goal of quadrupling the size of its economy in the 
next two decades, it has also set a goal to only double its 
consumption of energy. This will take a massive amount of 
investment--over $2 trillion worth of investment estimated by 
the IEA in the oil sector, the natural-gas sector, and the 
electricity sector, which would be the area of the largest 
investment. That would include the construction of up to 40 new 
nuclear powerplants. And, of course, U.S. companies and firms 
are going to be interested in participating in all of this 
investment and growth.
    Given the projected energy-demand growth, policymakers and 
national oil companies in China and India have begun to develop 
a mix of policies to improve oil security. These include steps 
to diversify energy suppliers, to strengthen oil diplomacy, to 
build strategic oil reserves, to enact conservation and 
efficiency policies, and to develop alternative energy sources.
    Most visible and most commented on, however, has been the 
effort by their respective national oil companies to purchase 
overseas assets and participate in bilateral oil deals. In the 
past 10 years, the Chinese national oil companies have acquired 
interests in upstream oil projects in Burma, Kazakhstan, 
Venezuela, Sudan, Iraq, Iran, Indonesia, Ecuador, Peru, Yemen, 
Oman, Azerbaijan, as well as small projects in Canada and 
Australia.
    But, even so, it's important to remember that China's 
outward investment pales in comparison with that of the United 
States. China's cumulative realized stock in investments 
overseas, in all commercial sectors, totaled approximately $37 
billion for all countries at the end of 2004. By contrast, 
United States direct investment in stock abroad stands above $2 
trillion, including $15 billion in China.
    Oil imports account for almost two-thirds of India's 
consumption, and, like China, it has increased its energy 
diplomacy with states in South Asia, as well as in Central 
Asia, Russia, the Middle East, Latin America, and Africa.
    Driving this strategy of acquiring overseas equity 
investments is a belief among policymakers that, although their 
imports could be met by purchases on the world market, 
physically owning oil-producing assets overseas provides the 
country with greater energy security. As this theory goes, 
equity investments would reduce dependence on oil from major 
oil companies, as well as limit exposure to price volatility by 
reducing purchases of oil on the open market.
    This strategy of intensified acquisition of equity oil has 
met with considerable skepticism from international oil-market 
analysts, and you'll probably hear some of that from your 
second panel, Mr. Chairman.
    Whether purchased on the open market or produced by 
national oil companies, China, for example, will effectively 
pay the world price, either directly or in foregone revenues, 
if China were to ship every barrel of equity oil back home.
    Even if its national oil companies continue their 
acquisition strategy, it's very unlikely that China would 
satisfy its demand or insulate its economy through China-owned 
assets. China will continue to be affected by the world market, 
just like most other countries, including the United States.
    Industry analysts have noted that, in their rush to stake 
claims around the world, Chinese national oil companies have 
accepted terms that would often not be considered commercially 
viable for major Western oil companies. They base their 
investment criteria on assuming a long-term average oil price 
of between $20 and $30 per barrel. If oil continues selling for 
over $50 a barrel, China's oil deals may prove to have been a 
good bet, from a commercial perspective; but if prices drop 
considerably, the results could be quite painful.
    A troubling aspect of the recent surge in overseas energy 
deals by China and India is their willingness to invest in 
countries that are pursuing policies that are harmful to global 
stability. Both Chinese and Indian firms have reportedly been 
involved in oil-gas sector deals in Iran that raise concerns 
under United States law and policy. For example, Indian and 
Pakistani officials are reportedly discussing the possibility 
of building a pipeline that would bring Iranian natural gas to 
Pakistan and India. This is a project that, as Secretary Rice 
has said, raises U.S. concerns. India, and to a larger extent, 
China, also have significant upstream investments in Sudan's 
energy sector. The economic support such investment provides 
regimes such as Iran and Sudan can undermine efforts to 
encourage policy changes that will reduce global instability 
and enhance energy security for us all.
    There are other important trends that the Department of 
State and the Department of Energy are addressing, including 
the environmental challenges of rapid economic development in 
India and China. China and India are expected to account for 85 
percent of the projected rise in coal use in the developing 
world and nearly 70 percent of the total world increment in 
coal demand. However, I think, as you know, many of the two 
countries' coal-fired plants are inefficient and lack adequate 
pollution control equipment.
    As their consumption of fossil fuel accelerates, so will 
India and China's emissions of greenhouse gases, such as carbon 
dioxide. Based on data from our Energy Information 
Administration, India and China contribute, now, about 4 
percent and 14 percent of total global carbon dioxide 
emissions, respectively. However, these figures are projected 
to increase to 5 percent and 18 percent by 2025, roughly 
equalling the level of the United States.
    There are, thus, both opportunities and many challenges for 
China and India in the coming decades. The United States has an 
active policy of engagement, with both countries, to ensure 
that energy interests are pursued in a manner that seeks to 
engender cooperation rather than conflict or confrontation.
    We're engaged with India on energy issues through our 
comprehensive energy dialog. Energy Secretary Bodman launched 
this dialog in May of this year, and I'm sure my colleague will 
give you some more specifics on that broad and comprehensive 
exchange.
    During the recent visit of India's Prime Minister, as you 
noted, Mr. Chairman, he spoke of the importance of building 
energy cooperation between the two countries. There was also 
agreement on the details to try to move forward on civil 
nuclear cooperation. The joint statement released during the 
visit stressed President Bush's desire to achieve full civil 
nuclear-energy cooperation with India as it realizes its goals 
of promoting nuclear power and achieving energy security. The 
President would also seek agreement from Congress to adjust 
U.S. laws and policies. And the United States will work with 
friends and allies to adjust international regimes to enable 
full civil nuclear cooperation and trade with India. India 
would, reciprocally, agree that it would be ready to assume the 
same responsibilities and practices, and acquire the same 
benefits and advantages, as other leading countries with 
advanced nuclear technology.
    India and China are taking a number of other steps to 
increase their energy security. Notably, India decided, in 
early 2004, to set up a strategic petroleum reserve. These 
reserves are to be established gradually; initially, covering 
15 days of domestic consumption, and then moving up, in phases, 
to 45 days.
    China is also working to establish a strategic petroleum 
reserve and is taking steps to build four storage sites on its 
east coast, which would cover up to 23 days of net imports in 
2010, based on IEA projections. Chinese officials say they will 
be able to start filling parts of their SPR later this year.
    The United States conducts a wide range of discussions on 
energy policy matters with China in a number of different fora. 
In the APEC framework, there is an energy working group, which 
brings together China, the United States, and all the other 
members to do a number of very important things, including 
identifying best practices in the energy area. We have a number 
of cooperative technology arrangements with China, including 
clean coal technology and nuclear power issues. China, India, 
and the United States also work together in exciting future-
oriented programs, such as the International Partnership for a 
Hydrogen Economy, the Carbon Sequestration Leadership Forum, 
and the Methane to Markets Partnership.
    The Department of State also engages with China on these--
some of these broad issues in the United States/China economic 
development and reform dialog, which we began in 2003 with the 
Chinese National Development and Reform Commission, the NDRC. 
We've had three sessions so far, and Deputy Secretary Zoellick 
will be conducting the next session of this dialog, which will 
include energy in its agenda, in early August.
    The broadest dialog that we have with China, however, is 
the new energy policy dialog, which former Energy Secretary 
Abraham and NDRC Vice Chairman agreed to in May 2004. Secretary 
Bodman and Vice Chairman Zong launched that dialog on June 30, 
and I'm sure my colleague, Under Secretary Garman, will say a 
bit about it.
    We hope that working closely with India and China will go 
far to increase their energy security, as well as our own. 
Participation by China and India in the recent G-8 Summit in 
Gleneagles, Scotland, was an example of the importance that we, 
and our other G-8 partners, hold for their growing role as 
economic powers and as energy consumers.
    As President Bush has said in recent months, ``We need to 
help India and China become more efficient,'' users of energy. 
We need to discuss ways we can share clean energy technologies 
with them. We need to help them reduce their own demand for 
crude oil and gasoline. And by doing this we can help ease the 
pressure on global supply and, thus, help reduce gasoline 
prices here at home.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Wayne follows:]

    Prepared Statement of E. Anthony Wayne, Assistant Secretary for 
   Economic and Business Affairs, Department of State, Washington, DC

    Mr. Chairman, distinguished committee members, I am pleased to be 
here today, with Department of Energy Under Secretary Garman to discuss 
the energy trends in China and India and their implications for the 
United States. They, along with the United States, represent three of 
the largest energy consuming countries in the world today.
    The ability to bring economic growth and prosperity to its citizens 
is a key function that defines the legitimacy of any government. 
Economic growth, affordable energy, and environmental stewardship are 
all connected. One of the best ways to help nations develop is to 
promote energy-generating technologies that are clean, affordable, and 
secure.
    In recent years, China and India have implemented significant 
changes that allow market forces to play an increasing role in their 
economies. The leadership in India and China has been successful in 
reducing poverty and delivering better lives for the many of their 
citizens. In China, for example, the economy has grown an astounding 9 
percent per year for the past 25 years. The Indian economy has grown by 
5 percent annually during this same period--still remarkable--putting 
the country in the ranks of what are often termed as the ``rapidly 
industrializing economies.''
    A greater demand for energy is a natural consequence of expanding 
economic activity. To support its recent level of economic growth, 
China's growth rate of the consumption of energy has increased 4.3 
percent per year since 1980; India's has been 5.4 percent. The China of 
25 years ago was largely energy self-sufficient, but in order to fuel 
its growing economic engine, an increasing share of petroleum and 
natural gas inputs must be obtained beyond China's borders. China now 
imports 40 percent of its oil needs, approximately 3 million barrels 
per day.
    To improve the living standards of its citizens, China and India 
are understandably very concerned about energy security, as is the 
United States and every other nation in the world. Our continued 
engagement with these two rising economic giants is the best means to 
shape their energy outlook and policies, helping to ensure that world 
energy resources are used in the most efficient, affordable, and 
environmentally sound ways possible.
    It is important to stress that while I may characterize, as 
similar, some aspects of China's and India's quest for energy security, 
we do not view this as a monolithic policy challenge. The two countries 
are very different, and we will tailor our policies toward each country 
as needed.
    Although coal, sourced largely from domestic supplies, still 
comprises over 50 percent of each country's primary energy consumption, 
it has been the growing share of oil, particularly imported oil, in 
each country's energy mix that has captured world attention. In 2003, 
China replaced Japan as the world's second largest petroleum consumer. 
According to data published by the International Energy Agency (IEA) in 
early 2005, China consumes 6.4 million barrels per day (b/d), or about 
one-third the level of the United States. While domestic production of 
oil has only increased approximately 7 percent between 2000-2004, 
overall demand has increased by 36 percent. Prior to 1993, China was a 
net exporter of petroleum.
    India has not made any major new domestic oil discoveries since the 
mid-1970s. According to the International Energy Agency (IEA), domestic 
production has stagnated in recent years while overall demand for oil 
doubled since 1990 to 2.4 million b/d in 2003 and is expected to double 
again by 2030. Total net oil imports for India were about 1.6 million 
b/d in 2003 with India holding the position of the ninth largest net 
importer worldwide. In 1990, Indian domestic supply met almost 60 
percent of oil demand; whereas the country now imports over 65 percent 
of its oil.
    This growing demand for oil by both countries is often 
characterized as ``the cause'' of the recent surge in high global 
energy prices. However, Chinese and Indian demand growth has by no 
means been the only factor in tightening markets. Indeed, Indian oil 
demand, unlike Chinese oil demand, has not surged in recent years, but 
continued on the historical trend. Energy prices have been impacted by 
a sustained general increase in world demand for energy. The United 
States comprised 27 percent of the total increase in global demand 
between 2003 and 2004; China: 36 percent; and India: 4.0 percent. Other 
important factors include slowing increases in non-OPEC oil production, 
dwindling spare production capacity within OPEC, constrained refinery 
capacity, temporary supply disruptions due to natural disasters and, 
simply, risk of significant disruptions due to political instability or 
acts of terrorism in countries that produce, transship, or refine oil 
and gas.
    While their current economic performance and corresponding demand 
for energy are impressive, we should not overstate the issue. It is 
important to remember that at $1.5 trillion, the GDP of China in 2004 
is only 12 percent of the United States $12 trillion. India's GDP of 
$642 billion is 5 percent. United States per capita GDP for 2004 was 
$40,540 compared to $1,118 for China and $594 for India. In terms of 
oil, each American consumes 28 barrels per year. In China, per capita 
consumption is approximately two barrels per year; and less than one 
barrel per person per year in India.
    More importantly, we must consider the future demands for energy by 
India and China if they maintain their policies of economic expansion.
    According to the IEA, overall demand for energy in China and India 
is projected to approximately double by 2030, whereas U.S. demand is 
expected to grow by only 35-50 percent.
    What is notable about the case of China is that while it has set a 
goal of quadrupling the size of its economy during the next two 
decades, it aims to only double its consumption of energy. This will 
take a massive amount of investment in more modern, efficient energy 
systems. The International Energy Agency estimates that China's oil 
sector alone will require investment of $119 billion by 2030 while 
natural gas will need $100 billion. The electricity sector will require 
an investment of $2 trillion, part of which will be devoted to the 
construction of up to 40 new nuclear powerplants--a field in which U.S. 
companies will compete.
    Energy use for transportation in China is projected to grow by 5 
percent per year between now and 2025. Virtually all of the projected 
increase is for petroleum products; about two-thirds of that is 
expected to be for transportation. Personal travel in China has soared 
in the past two decades, with passenger miles traveled increasing 
fivefold. China had 14.5 million registered vehicles (including 
passenger cars, trucks, and buses) at the end of 2001. According to 
forecasts conducted by the International Energy Agency, this number 
could climb to 130 million by 2030. (There are approximately 230 
million vehicles on America's roads today.)
    India's energy demand for transportation is projected to grow at an 
average rate of 4.4 percent a year, and the transportation sector is 
expected to account for 20 percent of the country's total energy 
consumption in 2025. There were about 12 million vehicles in use in 
India in 2001.
    The challenge before both countries, therefore, is energy 
security--especially oil security--in an expected environment of 
expanded economic growth. Policymakers and the national oil companies 
in China and India have begun to develop a mix of policies to improve 
oil security. These include steps to diversify suppliers, strengthen 
oil diplomacy, build strategic oil reserves, enact conservation and 
efficiency policies, and develop alternative energy sources. But the 
most visible, and commented on, aspect of their energy strategy has 
been the effort by their respective national oil companies to purchase 
overseas assets and participate in bilateral oil deals. China has been 
particularly active in this regard.
    In the past 10 years, Chinese national oil companies have acquired 
interests in upstream oil projects in Burma, Kazakhstan, Venezuela, 
Sudan, Iraq, Iran, Indonesia, Ecuador, Peru, Yemen, Oman, Azerbaijan as 
well as small shares in projects in Canada and Australia. Leading the 
drive among Chinese national oil companies is China National Petroleum 
Corporation (CNPC). It plans to spend $18 billion in overseas oil and 
gas development between now and 2020. China recently became one of the 
largest investors in Indonesia, buying into oil and gas interests worth 
$1.2 billion. The Kazakh and Chinese governments signed an agreement in 
May 2004 for the construction of a $700 million pipeline to export 
Kazakh crude oil into western China. Even so, China's outward 
investment pales in comparison with that of the United States. China's 
cumulative realized stock of investments overseas in all commercial 
sectors totaled approximately $37 billion for all countries at the end 
of 2004. By comparison, U.S. direct investment stock abroad stands at 
over $2 trillion, including $15 billion in China.
    Oil imports account for two-thirds of India's oil consumption. Like 
China, it has increased its energy diplomacy with states in the South 
Asia region; as well as states in Central Asia, Russia, the Middle 
East, Latin America, and Africa. The Indian state-owned Oil and Natural 
Gas Company (ONGC) has invested $3.5 billion in overseas exploration 
since 2000. It has invested in gasfields in Vietnam, as well as energy 
projects in Algeria, Kazakhstan, Indonesia, Venezuela, Libya, and 
Syria. Indian private sector firms have pursued projects in Iran, 
Yemen, and in Africa. India reached agreement in principle with Iran 
this year to purchase a total of 5 million tons per year of LNG for 25 
years beginning in 2009. Pipelines involving Iran, Turkmenistan, Burma, 
and Bangladesh have also been considered in recent years.
    Driving the strategy of overseas equity investments in oil and gas 
ventures is a belief among policymakers that although their oil imports 
could be met by purchases on the world market, physically owning oil-
producing assets overseas provides the country with greater energy 
security. As the theory goes, equity investments would reduce 
dependence on oil from major oil companies from developed countries 
(which dominate global oil production outside oil controlled by 
national oil companies), as well as limit exposure to price volatility 
by reducing purchases of oil on the open market.
    This strategy of intensified acquisition of equity oil has met with 
considerable skepticism from international oil market analysts. They 
argue that overseas investments are unlikely to shelter China from 
volatility in the oil market. Equity investments by China in distant 
producing fields in Africa, Latin America, or the Middle East are not 
likely to improve the physical security of its energy supply. Whether 
purchased on the open market, or produced by its national oil 
companies, China will effectively pay the world market price, either 
directly or in foregone revenues, if China were to ship every barrel of 
equity oil back home. In fact, according to industry press reports, 
most of the oil currently produced by Chinese oil companies abroad is 
not shipped back to China, but instead is sold on markets closer to 
production.
    Crude oil is fungible and the market for this commodity is globally 
integrated. Due to the laws of supply and demand, any oil that is 
pumped from the earth and added to the world market will increase 
supply relative to demand and tend to have a downward effect on price. 
Any increase in demand relative to supply would tend to push prices 
upward. Even if its national oil companies continue their acquisition 
strategy, it is very unlikely that China would satisfy its demand or 
insulate its economy through China-owned assets. China will continue to 
be affected by the world market--just like most other countries, 
including the United States--and its impact on the world oil market, 
and on the global price of oil, is determined by China's level of 
demand, not from where its oil is supplied.
    Industry analysts have noted that in their rush to stake claims 
around the world, Chinese national oil companies have accepted terms 
that would often not be considered commercially viable for major 
Western oil companies, who base their investment criteria assuming a 
long-term average price of oil at between $20 and $30 per barrel. The 
question is how long can China pursue such a strategy? If oil continues 
selling for $50 per barrel or more, it may prove to have been a good 
bet from a commercial perspective, but if prices drop considerably, the 
results could be quite painful. In response to the oil crises of the 
1970s and early 1980s, Japan embarked on a similar policy: Establishing 
the state-owned Japan National Oil Company to lock in equity oil around 
the globe as a way to improve national energy security. After investing 
billions of dollars with lackluster results, the Government of Japan 
abandoned that policy and now plans to dissolve the majority of the 
parastatal and privatize some of its healthier subsidiaries.
    A more troubling aspect of the recent surge in overseas energy 
deals by China and India, is their willingness to invest in countries 
that are pursuing policies that are harmful to global stability. Both 
Chinese and Indian firms have reportedly been involved in oil and gas 
sector deals in Iran that raise concerns under U.S. law and policy. For 
example, Indian and Pakistani officials are engaged in detailed 
discussions on the technical, financial, and legal aspects of building 
a $4 billion pipeline that would bring Iranian natural gas to Pakistan 
and India--a project that, as Secretary Rice has said, also raises U.S. 
concerns. India, and to a much larger extent China, have significant 
upstream investments in Sudan's energy sector. Additional sources of 
oil and gas on the world market are, of course, welcome, and for over 
two decades U.S. international energy policy has promoted the reduction 
of barriers to energy trade and investment around the world as a means 
to enhance global energy security. However, the economic support such 
investment provides regimes, such as Iran and Sudan, can undermine 
efforts to encourage policy changes that will reduce global instability 
and enhance energy security for all.
    Other important trends that the State Department is addressing 
include the environmental challenges that rapid economic development 
will pose for India and China. Both countries intend to rely on their 
plentiful supplies of coal to fuel their expanding industrial and 
electric generation needs. According to the U.S. Energy Information 
Administration (EIA), over the next 20 years, China and India are 
expected to account for 85 percent of the projected rise in coal use in 
the developing world and nearly 70 percent of the total world increment 
in coal demand. However, many of the countries' coal-fired plants are 
inefficient and lack adequate pollution-control equipment.
    In 2003, 63 percent of the 330 Chinese cities being monitored had 
poor air quality. One of the main pollutants is sulfur dioxide, 
resulting in the formation of acid rain, which now falls on about 30 
percent of China's total land area. About 34 percent (6.6 million tons) 
of the country's total sulfur dioxide emissions in 2002 were released 
from powerplants. In addition to point sources (such as powerplants and 
factories), vehicles account for an increasing percentage of the 
country's air pollution especially in urban areas. For instance, city 
planners in Shanghai estimate that about 90 percent of the city's air 
pollution is from vehicle traffic.
    As their consumption of fossil fuels accelerates, so will India's 
and China's emissions of greenhouse gases such as carbon dioxide. Based 
on data from the Energy Information Administration, India and China 
contribute only 4 percent and 14 percent, respectively, to total global 
carbon dioxide emissions. However, these figures are projected to 
increase to 5 and 18 percent by 2025, roughly equaling that of the 
United States. This represents a 3.3-percent annual average percentage 
increase by China over the next 20 years, and a 2.9-percent increase 
for India, compared to a 1.5-percent increase for the United States.
    The opportunities for China and India in the coming decades are 
huge, as are the challenges. The United States has an active policy of 
engagement with both countries to ensure that energy interests are 
pursued in a manner that seeks to engender cooperation rather than 
conflict or confrontation.
    We are engaged with India on energy issues through our 
comprehensive Energy Dialogue. Energy Secretary Bodman launched this 
energy dialogue in May of this year. The Energy Dialogue builds upon 
the broad range of existing energy cooperation between the two 
countries and seeks ways to develop new avenues of collaboration. It is 
organized across five Working Groups with the following key goals: (1) 
Strengthening energy security through increased information and trade 
and investment in the oil and gas sector; (2) advancing understanding 
of efficient generation, distribution and use of electricity; (3) 
enhancing the understanding of coal-related energy issues; (4) 
promoting the development and deployment of clean energy technologies 
and energy conservation practices; and (5) dialogue and action on 
issues associated with safe and secure civil uses of nuclear energy.
    The recent visit of the Indian Prime Minister provided more 
opportunity to reach agreement on the details of this civil nuclear 
cooperation. The joint statement released during the visit stressed 
President Bush's desire to achieve full civil nuclear energy 
cooperation with India as it realizes its goals of promoting nuclear 
power and achieving energy security. The President would also seek 
agreement from Congress to adjust U.S. laws and policies, and the 
United States will work with friends and allies to adjust international 
regimes to enable full civil nuclear energy cooperation and trade with 
India. India would reciprocally agree that it would be ready to assume 
the same responsibilities and practices and acquire the same benefits 
and advantages as other leading countries with advanced nuclear 
technology. These responsibilities, among others, include taking a 
decision to voluntarily place its civilian nuclear facilities under 
IAEA safeguards and signing and adhering to an Additional Protocol with 
respect to civilian nuclear facilities.
    India's decision in early 2004 to set up a strategic petroleum 
reserve was an important step in improving its energy security. The 
Chinese Government is already working to establish four oil storage 
sites on the east coast of China with total storage capacity of about 
100 million barrels. The Chinese Government intends to start filling 
the SPR this year.
    We have also established high-level dialogues with the Chinese 
leadership to improve cooperation on the crucial issue of global energy 
supply and coordination of energy policy. The United States and China 
are expanding cooperation on developing clean and renewable energy 
sources, which has important environmental as well as energy 
implications.
    The United States conducts discussions on energy policy matters 
with China in a number of fora. Both China and the United States are 
active participants in the Asia-Pacific Economic Cooperation (APEC) 
organization's Energy Working Group. Work in the Energy Working Group 
in the recent past has focused on developing and implementing an Energy 
Security Initiative, which includes enhanced data transparency, sharing 
best practices for trade in liquefied natural gas, strategic oil stock 
issues, and a Real-Time Emergency Information System.
    The United States has a number of cooperative technology 
arrangements with China, including clean coal technology and nuclear 
power issues. China, India, and the United States also participate in 
several multilateral agreements to promote the development of 
transformational technologies needed to address climate change. These 
initiatives include the International Partnership for the Hydrogen 
Economy, the Carbon Sequestration Leadership Forum and the Methane-to-
Markets Partnership.
    These multilateral engagements are useful in encouraging Chinese 
behavior in the international economic and energy arenas that are 
consistent or harmonious with Western norms. Together with countries 
that share our sense of market economy and energy security, the USG may 
introduce and promote practices in China that would help it transition 
into the world economy in an effective and undisruptive manner.
    We also work to support American firms from all industrial sectors 
in their efforts to invest and work in China through advocacy by the 
Department of Commerce, USTR, and State as well as our diplomatic posts 
in China.
    The State Department initiated the U.S.-China Economic Development 
and Reform Dialogue in 2003 with the Chinese National Development and 
Reform Commission (NDRC), China's premier economic development agency. 
NDRC has the lead in broad macroeconomic policy and is involved in 
virtually every key sector of the economy. Through the Dialogue--which 
is flexible and informal in format--we have sought to move China toward 
a more market-oriented and rules-based economic system. The discussions 
have focused on long-term structural reform challenges, avoiding 
current bilateral disputes. NDRC puts a high priority on the Dialogue, 
and has recently initiated similar dialogues with the European Union 
and United Kingdom, among others.
    We have held three sessions since 2003, covering a wide range of 
topics, including energy, agriculture, macroeconomic policy, 
investment, and telecommunications. The next session of the Dialogue 
will be chaired by Deputy Secretary Zoellick, and is planned to take 
place in early August in Beijing.
    The United State's broadest dialogue on energy with China is the 
new Energy Policy Dialogue that former Energy Secretary Abraham and 
NDRC Vice Chairman Zhang Guobao agreed to in May 2004. Secretary Bodman 
and Vice Chairman Zhang launched that dialogue on June 30, here in 
Washington, with a session that focused on a general review of energy 
policies, petroleum stockpiling (strategic petroleum reserves), energy 
efficiency, and coal mine safety.
    We hope that working closely with India and China will go far to 
increase their energy security as well as our own. Participation by 
China and India in the recent G-8 Summit in Gleneagles is an example of 
the importance we hold for their growing role as economic powers and as 
energy consumers. Through the newly established ``Dialogue on Climate 
Change, Clean Energy, Sustainable Development,'' the leaders of the G-8 
will invite nations of the developing world and the transitioning 
economies, to join them in building on the progress achieved at the 
summit.
    As President Bush has said in recent months, ``we need to help 
India and China become more efficient'' [users of energy]. We need to 
discuss ways we can share clean energy technologies and help them 
reduce their own demand for crude oil and gasoline. By doing this, we 
will help ease pressure on global supply and thus help reduce gasoline 
prices here at home.
    Many thanks for the opportunity to testify today.

    The Chairman. Thank you very much, Secretary Wayne.
    Secretary Garman.

STATEMENT OF HON. DAVID K. GARMAN, UNDER SECRETARY FOR SCIENCE 
     AND ENVIRONMENT, DEPARTMENT OF ENERGY, WASHINGTON, DC

    Mr. Garman. Thank you. Thank you, Mr. Chairman.
    Let me begin with a caveat. The figures in my testimony are 
from the Energy Information Administration, or EIA. EIA is an 
independent, nonpolitical arm of the Department. And, when 
viewed with hindsight, EIA is sometimes wrong. That's not 
surprising, since forecasting the future is a very imprecise 
science, or art, particularly when dealing with nations such as 
India and China.
    I have the highest regard for EIA, and the estimates in our 
testimony are the very best available to us, but I wouldn't 
want to convey a false sense of precision when saying, for 
instance, that, ``Well, demand will increase by 36.2 million 
barrels per day over the next 20 years,'' because, in truth, 
nobody really knows for sure. So, I begin with that caveat.
    We do know that today the global demand for oil exceeds 80 
million barrels per day. From the early 1990s until 2003, we 
were used to seeing average daily demand rise by roughly 1 
million barrels with each passing year. Meanwhile, over that 
same period, excess production capacity averaged between 3 and 
5 million barrels per day. In other words, we enjoyed modest 
and seemingly predictable demand growth and comfortable 
production margins. Industry made investment decisions with 
respect to exploration, development, and new production 
capacity, accordingly.
    However, in 2003 and 2004, a dramatic increase in demand, 
approximately 4.5 million barrels per day in just 2 years, 
surprised the world. Suddenly, oil production capacity was 
stretched nearly to its limit. At this moment, we find oil 
supply ahead of demand, but supply's lead is small. Currently, 
we estimate something around 1 million barrels per day of 
excess production capacity, most of that located in Saudi 
Arabia. This is clearly a thin cushion, as reflected in the 
price increases and volatility that we've witnessed over the 
last couple of years.
    With that background in mind, consider the fact that, of 
the 4\1/2\-million-barrel-per-day increase in oil demand in 
2003 and 2004, China accounted for roughly 1\1/2\ million 
barrels per day, or nearly double the demand growth in the 
United States over that same period.
    Opinions vary on what China's demand growth will be in 
2005, ranging from the International Energy Agency's forecast 
of 400,000 barrels per day to the Energy Information 
Administration's estimate of 700,000 barrels per day. Over the 
next 20 years, EIA forecasts that world oil demand will 
increase by 36.2 million barrels per day, with developing 
countries around the world, particularly in Asia, accounting 
for most of that growth. India's demand growth is forecast to 
pick up speed over the next several years, adding approximately 
1 million barrels per day by 2015, then another nearly 2 
million barrels per day by 2025. Clearly, we see India and 
China playing a growing role in the global petroleum balance. 
And, as a consequence of this issue, and others, we have 
engaged both of these nations as never before.
    To cite just a few examples, we've been working closely 
with India and China on energy security measures, both 
bilaterally and through the IEA and Asia Pacific Economic 
Cooperation. Both nations have recognized the importance of 
energy security, and both nations have taken action to build 
their own oil reserves. On May 31, 2005, we launched a new 
United States/India energy dialog, encompassing five working 
groups, covering oil and gas, coal, power and energy 
efficiency, new technologies and renewable energy, and civil 
nuclear energy.
    Both China and India are charter members of our 
multilateral technology collaborations, including the 
International Partnership for the Hydrogen Economy and the 
Carbon Sequestration Leadership Forum. These are our signature 
efforts to promote next-generation technologies with the 
potential to sharply reduce oil consumption through the 
development of hydrogen fuel and to sharply reduce carbon 
emissions globally through the development of technologies to 
affordably remove and sequester carbon dioxide from fossil-fuel 
power plants.
    Through these bilateral and multilateral efforts, we will 
communicate and understand, but we also must act. We need to 
advance our own comprehensive energy strategy, and encourage 
others to do the same. Four years ago, the President offered 
his vision of a national energy policy plan, with 105 
recommendations addressing both energy supply and demand 
efforts. And we're most gratified to see progress, in the 
Congress, on comprehensive energy legislation that promotes 
greater energy efficiency, new production, and new technology. 
Passage of a comprehensive energy bill would be a tangible 
demonstration of our belief that all countries have to invest 
heavily in oil--in energy supply, diversification, energy 
efficiency, and infrastructure expansion, as well as new 
technology, in order to meet the world's growing demand for 
energy to sustain economic and social development.
    With that, Mr. Chairman, and knowing of the time and the 
hour, I'll stop now and look forward to the questions, either 
today or in the future, from the committee.
    Thank you.
    [The prepared statement of Mr. Garman follows:]

Prepared Statement of David K. Garman, Under Secretary for Science and 
           Environment, Department of Energy, Washington, DC

    Mr. Chairman and members of the committee, I am pleased to appear 
before you this morning to discuss China's and India's expanding role 
in the global energy market and important energy dialogues taking place 
with these two countries.
    Most recently, when one talks of China's and India's energy growth 
it is often in the context of a tight and volatile world oil market. 
The dramatic increase in world oil demand in 2003-2004 caught the world 
by surprise. Since 1990, annual world oil demand growth had averaged 
approximately 1 million barrels per day (bpd). Investment in production 
capacity expansion was being made on the assumption of the continued 
relatively modest growth. World excess production capacity had been 
averaging between 3 and 5 million bpd since the early 1990s, so supply 
losses from Venezuela, Nigeria, and Iraq in 2002 and 2003 had not 
created undue concern for the world oil market--at least not until it 
became apparent that something extraordinary was happening with demand 
growth.
    In 2003 and 2004, world oil demand rose approximately 4.5 million 
bpd in just 2 years, nearly as much as in the previous 5 years. World 
oil production capacity was stretched nearly to its limit. China's oil 
demand grew 1.5 million bpd in 2003 and 2004, while growth in the 
United States was 800,000 bpd. Opinions vary on what China's demand 
growth will be in 2005, ranging from the International Energy Agency's 
forecast of 400,000 bpd to the Energy Information Administration's 
(EIA) estimate of 700,000 bpd.
    This year finds oil supply still ahead of demand, but supply's lead 
is not all that impressive. Currently there is something around 1.5 
million bpd of excess production capacity, most of that located in 
Saudi Arabia. With such a small margin for error, we can be thankful 
for the supply insurance policy provided by our Strategic Petroleum 
Reserve and our partnership with our allies in the International Energy 
Agency. We have been working closely with China and India on energy 
security measures bilaterally and through the IEA and Asia Pacific 
Economic Cooperation. Both nations have recognized the importance of 
energy security and have both taken action to build their own oil 
reserves.
    Over the next 20 years, EIA forecasts that world oil demand will 
increase by 36.2 million bpd, with developing countries around the 
world, particularly in Asia, accounting for most of the growth. India's 
demand growth is forecast to pick up speed over the next several years, 
adding approximately 1 million bpd by 2015, then another nearly 2 
million bpd by 2025. During that period, the United States is also 
expected to add several million bpd of growth.
    Rising demand has left major consuming countries such as the United 
States, China, and India with the shared goals of diversifying and 
expanding the oil supply sources available to the world market. Both 
China and India have attended the recent meetings of International 
Energy Agency member-country Energy Ministers in Paris where a key 
topic for discussion was how to create a more stable and transparent 
framework for ensuring adequate and timely investment. What is clear is 
that all countries will have to invest heavily in energy supply, 
diversification, energy efficiency, and infrastructure expansion in 
order to meet the world's growing demand for energy to sustain economic 
and social development.


                   ENERGY IN CHINA AND INDIA TO 2025
    Robust economic growth has led to the steep increase in energy use 
in the developing countries of Asia, particularly China and India. 
While the world, as a whole, will see economic growth of 3 percent 
annually over the next 20 years, developing Asia will see its economy 
expand at a rate of 5.1 percent. To fuel its economic growth, China 
will see its overall energy demand increase by 3.5 percent per year, 
while India will follow at 3.2 percent per year.
    In addition to the expected growth in oil consumption, China and 
India are expected to see among the fastest growth in natural gas use 
worldwide, increasing by an average annual rate of 6.9 percent and 4.8 
percent, respectively, between 2001 and 2025. Gas generation is seen by 
many as a desirable option for electricity, given its relatively short 
deployment time line, efficiency relative to other energy sources, and 
the fact that it burns more cleanly than either coal or oil. Although 
natural gas production is expected to increase in both of these 
countries, natural gas imports are expected to grow faster. In 2001, 
India and China produced sufficient natural gas to meet domestic 
demand, but by 2025, gas production in these two countries will only 
account for around 60 percent of demand. The growing dependence on 
imports occurs despite efficiency improvements in both the consumption 
and the production of natural gas.
    Coal will continue to dominate the energy markets of both India and 
China, accounting for 51 percent and 64 percent, respectively, of total 
energy consumption in both countries. While the share of coal in total 
energy is expected to decline, coal will still account for 41 percent 
in India and 56 percent in China by 2025. These two countries alone 
account for 67 percent of the total expected increase in coal use 
worldwide. These levels of coal consumption are major environmental and 
infrastructure concerns for both countries.
    The largest increase in nuclear generation is expected for the 
developing world, where consumption of electricity from nuclear power 
increases by 4.1 percent per year between 2001 and 2025. Developing 
Asia, in particular, is expected to see the largest increment in 
installed nuclear generating capacity over the forecast period 
accounting for 96 percent of the total increase in nuclear power 
capacity for the developing world as a whole. Of over 50 gigawatts of 
additional installed nuclear generating capacity projected for 
developing Asia, over 30 gigawatts are projected for China, 15 for 
South Korea, and 6 for India. India has stated that they would like to 
have a significantly larger share for nuclear power. While India is a 
nonsignatory of the Nuclear Nonproliferation Treaty, the recent U.S.-
India civil nuclear cooperation agreement will, in the coming years, 
likely increase their ability to access civilian nuclear technology.
    Consumption of electricity from hydropower and other renewable 
energy sources is expected to grow by 1.9 percent per year over the 
projection period. Much of the growth in renewable energy use is 
expected to result from large-scale hydroelectric power facilities in 
the developing world, particularly among the nations of developing 
Asia. China, India, and other developing Asian countries are 
constructing or planning many new, large-scale hydroelectric projects 
over the forecast period, including China's 18.2-gigawatt Three Gorges 
Dam project which is scheduled to be fully operational by 2009. The 
Indian Government has announced plans to add 50 gigawatts of 
hydroelectric generating capacity by 2012.
    In China energy intensity is forecast to improve (decline) by 2.4 
percent per year between 2001 and 2005, falling from 33,000 Btu per 
1997 dollar of GDP to 18,300 Btu per 1997 dollar of GDP. In India, 
energy intensity declines from 24,600 Btu to 15,400 Btu, an average 
annual improvement of 1.9 percent.

                      U.S. ENERGY POLICY RESPONSES
    As we have witnessed and tried to address sharply higher and more 
volatile energy--especially oil prices over the last 5 years, we 
recognize that we indeed participate in a global, integrated energy 
market and that we need to address energy supply, demand, and 
infrastructure here at home as well as abroad. As one of its first and 
highest priorities, this administration initiated a comprehensive 
energy policy. The administration's policy provides a long-term 
strategy to increase the supply and suppliers of petroleum, diversify 
our sources of energy and improve the overall efficiency of energy use. 
We are pleased that Congress has now moved forward as well. In 
addressing our need for adequate supplies of oil we are pursuing 
policies that will enhance domestic oil production, such as exploration 
of ANWR; add new sources into our energy mix, such as nuclear and 
increased LNG imports; stimulate the development of alternative fuels, 
such as ethanol and biodiesel; and increase the efficiency of motor 
vehicles and appliances. We are promoting more efficient use of the 
energy we already generate--believing that the next best source of 
energy is the one we currently waste. Internationally we are working 
with countries to help them put in place fair and transparent legal 
regimes that will attract private investment for the development of oil 
resources while helping the developing countries and growing economies 
to be more efficient producers and consumers of energy. We began 
engaging both India and China more than a decade ago. We realized the 
enormous growth potential in their economies, but at that time saw it 
more as an opportunity for U.S. energy firms, with their unparalleled 
excellence in efficient management and effective technology, to gain 
markets for their equipment, know-how and technology. We still believe 
that cooperation with China, India, and other major developing 
countries can bring us quicker and better solutions.
    Longer term, we believe that breakthrough technologies are needed 
to address our energy security and environmental challenges. To help 
achieve these goals, the Department has implemented two major 
international Presidential initiatives. First, the International 
Partnership for a Hydrogen Economy (IPHE), which the President 
envisions as bringing hydrogen-based vehicles to market in a generation 
to finally ending oil's chokehold on the transport sector. Second, 
involving another potentially transformational technology, is the focus 
of the Department's Carbon Sequestration Leadership Forum (CSLF). Given 
their potential technical contributions as well as the importance of 
their future markets, India and China have been important partners in 
both initiatives. India has been involved in the CSLF since its 
inception. China has been an active member of the CSLF and the IPHE 
since their inceptions. China hosted the IPHE Steering Committee 
meeting in May 2004 in Beijing, and has offered to host the IPHE 
Implementation-Liaison Committee meeting in October 2005 in Shanghai.
    India and China are also active members in the Methane to Markets 
Partnership, an international initiative headed by the U.S. 
Environmental Protection Agency, to reduce methane emissions to the 
atmosphere by recovering the gas and using it for fuel. At the first 
ministerial meeting for the Partnership, India volunteered to be 
cochair and China volunteered to be a vice chair of the Partnership's 
Coal Sub-Committee.

                           ENERGY COOPERATION
India
    Growing concerns about energy security have prompted the United 
States and India to launch a new energy dialogue that reflects the 
transformed strategic relationship between the world's two largest 
democracies. Adequate and reliable supplies of energy at reasonable 
cost are essential to fuel India's rapidly growing economy. Both the 
United States and India are increasingly reliant upon global oil and 
natural gas markets to satisfy their energy needs. Both nations depend 
heavily upon domestic supplies of coal for electric power generation 
and seek to increase their utilization of natural gas, renewable energy 
and nuclear power as well as pursue energy efficient practices to 
ensure a balanced and sustainable energy economy that helps preserve a 
clean environment. The United States and India recognize their mutual 
interests are best served by working together in a collaborative 
fashion to ensure stability in global energy markets.
    DOE's engagement with India stems back a decade to 1994. Efforts 
focused on improving the efficiency of India's coal-fired powerplants, 
promoting the use of clean fuels such as natural gas, wind, and solar 
energy, helping establish public-private partnerships in industrial 
energy efficiency, and improving the investment climate for U.S. energy 
firms. This cooperation went on hiatus due to the imposition of Glenn 
Amendment sanctions in 1998 following India's test of a nuclear weapon.
    Our energy cooperation revitalized in November 2001 when President 
Bush and Prime Minister Vajpayee issued a joint statement establishing 
energy as one of five pillars of the Indo-U.S. Economic Dialogue, with 
the other pillars being trade, investment, commerce, and the 
environment. This enabled the implementation of the President's 
National Energy Policy (NEP) plan's recommendation that DOE work with 
India's Ministry of Petroleum and Natural Gas (MPNG) to enhance 
domestic oil and gas supply.
    There followed a number of activities, including:

   A ``Building Gas Markets in India'' conference in 2002.
   The creation of a Coal Advisory Group in 2002.
   A study mission on Coal Bed Methane to the United States by 
        the Indian Secretaries of Petroleum and Natural Gas, Coal and 
        Labor (January 2003).
   A visit by the Indian Minister of Petroleum and Natural Gas 
        to a Strategic Petroleum Reserve (SPR) site in mid-2003, 
        followed by a technical seminar on strategic oil storage in 
        Washington for an Indian engineering team.

    These activities helped promote the deployment of clean energy 
technologies and fuels, supported reforms in the power sector, enhanced 
India's awareness of steps it needed to take to attract foreign 
investment in the energy sector and bolstered India's energy security. 
In regards to energy security, India has announced plans to develop a 5 
million ton strategic crude oil reserve. Several locations near 
Mangalore on the east coast are being considered. The Indian Strategic 
Petroleum Reserve Ltd. was incorporated on June 16, 2004, to implement 
this project, which is expected to take about 4 years to complete.
    India also supported President Bush's call for a transformed Indo-
U.S. relationship premised upon a new strategic alliance under which 
energy security and energy cooperation are key factors. In addition to 
the recent U.S.-India civil nuclear cooperation announcement, this 
relationship was also reflected in the launch of the new U.S.-India 
Energy Dialogue on May 31, 2005. It established five working groups 
along with a steering committee to provide oversight. The goals of the 
Dialogue are to promote increased trade and investment in the energy 
sector by working with the public and private sectors to further 
identify areas of cooperation and collaboration. Building upon the 
broad range of existing cooperation, it is hoped that this effort will 
help mobilize secure, clean reliable and affordable sources of energy.
    The five Working Groups are: Oil and Gas, Coal, Power and Energy 
Efficiency, New Technologies and Renewable Energy, and Civil Nuclear. 
We hope they will be successful in developing robust work programs to 
achieve the objectives of the Dialogue.
China
    The Department of Energy's engagement with China dates back to 
immediately after the normalization of diplomatic relations between the 
United States and China. Much of the overall cooperation with China 
focused on science and technology cooperation including exchange of 
scientists, training, demonstration programs, and collaborative visits. 
In 1995 the Department initiated bilateral consultations with China's 
State Planning Commission (a predecessor to the National Development 
and Reform Commission--NDRC). The range of bilateral technical 
cooperation includes high energy physics, fusion, peaceful uses of 
nuclear technologies, fossil energy, and energy efficiency.
    China's rising energy demand has become a global concern in recent 
years. Recognizing the strong demand rise as a potential bottleneck to 
its economic development, the Chinese Government has begun looking 
deeply into energy policymaking, seeking advice from other countries 
and reviewing energy issue priorities. Conversely, fast developments in 
Chinese energy demand and supply conditions and energy policymaking 
system have heightened the need for a concrete mechanism to obtain 
accurate facts and information on China's energy policies and plans.
    DOE and the NDRC have agreed to engage in policy-level discussions 
on a range of energy issues, including energy policymaking, supply 
security, power sector reform, energy efficiency, renewable energy, and 
energy technology development options. Through the Energy Policy 
Dialogue, the Department specifically aims:

   To exchange views with China on each side's views of current 
        and future national and international energy markets;
   To better assess the impacts of China's energy policies on 
        U.S. energy security;
   To offer relevant U.S. experiences (positive and negative) 
        in energy and related environmental policies and regulations to 
        assist Chinese energy economic and environmental policymakers 
        as they develop and revise their policy, legal, and regulatory 
        framework; and
   To mitigate environmental affects of China's rising fossil 
        energy consumption.

    The first meeting for Energy Policy Dialogue on June 30 clearly 
emphasized how the United States and China share many common challenges 
and opportunities as the two largest energy consumers.
    Another key bilateral energy engagement is the U.S.-China Oil & Gas 
Industry Forum, established in 1995. U.S. industry continues to be the 
largest investor in China's petroleum sector and they view the forum as 
an important opportunity for facilitating U.S. investment in China's 
oil and gas industry. The Sixth Forum meeting in New Orleans, 
Louisiana, June 28-29, 2005, was attended by over 30 delegates from 
China, including representatives from the NDRC, PetroChina, Sinopec, 
CNOOC, SinoChem, and China United Coalbed Methane Corporation. Key 
topics included deep water/offshore development; coalbed methane 
production; U.S. participation in China's upstream activities; LNG 
infrastructure development and prospects; and risk management issues 
for large energy infrastructure projects in China.
    In addition to these major bilateral initiatives, the Department is 
actively engaged with China through a number of multilateral frameworks 
to enhance our energy security objectives. In the Asia Pacific Economic 
Cooperation (APEC) Energy Working Group, China is an important 
participant in the Energy Security Action Plan that APEC adopted during 
the Bangkok Leaders Meeting at the initiative of President Bush. 
Through International Energy Agency (IEA) workshops, the Department has 
been encouraging the Chinese Government to create or improve a legal 
framework, price regulation, and taxation scheme for the natural gas 
sector, and advising them in addressing technical challenges as China 
has embarked upon a major expansion of its gas infrastructure. Also, 
the Department has steadily encouraged the Chinese Government to 
establish strategic oil stocks.
    With the opening of the Department of Energy Office in Beijing, 
which was announced by Secretary Bodman on June 30, the Department will 
renew its push to seek opportunities to better assess the impacts of 
China's energy policies on U.S. energy security, positively affect 
Chinese energy and economic policymaking, as well as advance commercial 
opportunities for U.S. industry.

                                  IGCC
    The committee has expressed an interest in my addressing 
opportunities for cooperation between the United States and India and 
China on Integrated Gasification Combined Cycle (IGCC) development. Let 
me say the following about our efforts with both countries in this 
regard:

          India--The Department's National Energy Technology Laboratory 
        is managing a $2.5 million engineering study for India funded 
        by the United States Agency for International Development 
        (USAID). The study is expected to be completed by yearend or 
        early next year, but so far initial numbers have indicated the 
        cost of IGCC to be very high relative to the conventional 
        powerplant technology.
          China--In 2003 an ``On-Site IGCC Briefing'' took place for a 
        delegation from China with the purpose of helping to increase 
        China's interest and knowledge in U.S. Clean Coal Technologies 
        and promote their acceptance in China's marketplace. It is 
        hoped that a study of Chinese gasification experiences slated 
        to start in 2006 might be applicable to future IGCC designs for 
        both the United States and Chinese markets.

    In support from Nexant and the Gas Technology Institute (GTI), DOE/
NETL conducted a study of the application of GTI's U-Gas fluidized-bed 
gasification technology. The history of the operation of the U-Gas 
technology has demonstrated significant issues that have resulted in 
limited domestic applications of these systems. The only commercial-
scale application of the U-Gas technology is at Shanghai Chemical and 
Coking (SCC) Corporation outside Shanghai, China, which was of similar 
scale to that being studied. While the U-Gas gasifiers were run by SCC 
for approximately 5 years, they no longer operate owing to design and 
operational difficulties. As part of the study, DOE/NETL, Nexant, and 
GTI engineers visited the SCC facility as well as a second, operating 
fluidized-bed gasification system in Shaanxi Province that is of a 
similar design to the GTI technology. During the visits, the NETL team 
was able to meet with design and operations personnel of the SCC and 
Shaanxi facilities and discuss their past experience with the U-Gas and 
U-Gas similar gasifiers. Their extensive knowledge of past plant 
operations provided insight to critical design parameters. Discussions 
with plant operators and inspection of the changes made or desired for 
plant improvement were key to plant design improvements incorporated in 
the DOE/NETL study.

                               CONCLUSION
    Mr. Chairman and members of the committee, let me conclude by 
acknowledging that economic growth and the inevitable increase in 
energy demand that it entails is steadily shifting--at the margin--from 
the traditional industrialized countries, such as the members of the 
OECD (Organization for Economic Cooperation and Development) to Asia. 
This transformation, like any other, is creating strains in a number of 
areas, and energy certainly is foremost among them. But we cannot 
simply blame China, India, and other developing nations for seeking the 
same levels of affluence that our citizens enjoy. First and foremost 
the United States must address its energy problems at home and, in this 
regard, we are happy to see the progress being made by the conference 
committee on the energy bill and hope that after 4 years the country 
will have comprehensive energy legislation enacted by the end of the 
summer. Second, we believe that we need to continue to engage countries 
like China and India in energy dialogues so that we better understand 
their markets and their motivations, and that we can offer assistance 
in developing market-based regulatory regimes that lead to greater 
energy efficiency and opening of their markets to U.S. trade and 
investment. And finally we are convinced that bilateral and 
multilateral energy cooperation maximizes everyone's energy security.
    Thank you, Mr. Chairman, for the opportunity to address the 
committee on this important subject and I am happy to take any 
questions you or the members may have.

    The Chairman. Well, thank you very much.
    Let me say, to my colleagues, Senator Allen and Senator 
Coleman, we commenced the hearing at about 9:30 in view of the 
fact that the rollcall votes are commencing at 10:15. We can 
proceed with your questions of these witnesses--or with 
testimony from our other three witnesses, and then questioning 
of all of them after we return, probably after an hour and a 
half of recess before we commence the hearing again.
    Senator Allen. Personally, Mr. Chairman--thank you for your 
consideration--I would prefer to ask these two gentlemen 
questions now. And, if we let them do that, then they could 
leave, out of courtesy to them, as well.
    The Chairman. Yes.
    Well, let's do that. Let's proceed with your question, 
Senator Allen, and then Senator Coleman.
    Senator Allen.
    Senator Allen. Thank you. Thank you, Mr. Chairman. I have a 
statement for the record that I'd like to have entered.
    The Chairman. It will be inserted in full.
    [The prepared statement of Senator Allen follows:]

  Prepared Statement of Hon. George Allen, U.S. Senator From Virginia

    Thank you, Mr. Chairman. I am pleased you have convened this 
hearing. I also serve on the Senate Energy and Natural Resources 
Committee and discussed this issue both during committee and floor 
consideration of the energy bill. The Congress needs to consider how 
the substantial and growing demand from China and India for energy 
resources is going to affect our own requirements and the implications 
that will have for our economic and national security.
    China's surging demand for energy is impacting the world. China has 
now emerged as the second largest consumer of energy and demand could 
double by 2020.
    According to the U.S. Energy Information Administration, China is 
consuming 7.2 million barrels of oil per day and this is expected to 
rise to 7.8 million barrels of oil per day by next year. China alone 
has accounted for 40 percent of growth in oil demand over the last 4 
years.
    According to recent studies, China's growing demand for oil is one 
of the significant factors driving oil prices to record high levels. 
With such growth in the Chinese economy, it is understandable why there 
is greater demand for energy in the form of coal, oil, and nuclear 
power as well as materials ranging from cement to steel.
    China in the past year has signed deals for oil reserved in Africa, 
Iran, South America, and now Canada. Most recently, one of China's 
largest state-controlled oil companies made an $18.5 billion 
unsolicited bid for Unocal, a United States oil company.
    It is important to note that this unsolicited bid came from a 
government-owned company that does not operate under free-market 
conditions, thus does not experience the same risks or make decisions 
based on the same motivations as a private sector firm.
    Strong economic growth in India has also substantially increased 
that country's demand for global energy resources. It is the sixth 
largest global energy consumer and has experienced annual economic 
growth of 6.5 percent in recent years.
    India imports approximately 70 percent of its oil, accounting for 
2.5 million barrels per day, and its consumption of natural gas is 
growing rapidly.
    Taken individually, the recent increases of energy consumption by 
China and India would be reason for further study from the United 
States. However, these are the two most populous countries in the 
world. Further, they have recently entered into discussions to 
cooperate on issues of energy security and conservation.
    This does not necessarily provide a direct threat to the United 
States, at least not immediately. But it is a significant development 
that should draw the attention of our Government and prompt a review of 
how we plan on meeting our energy needs in the future.
    The ability to procure energy resources at a reasonable price is 
vital to our economy. From transporting products across our highways, 
to powering manufacturing plants, to flying passengers and cargo around 
the world, our economic well-being largely depends on the price of oil, 
natural gas, and to a lesser extent, coal.
    We need to recognize the impact Chinese and Indian energy demands 
are having on global supply and be ready with policies that mitigate 
the affect on our economy.
    Specifically to China: It is important that we have a comprehensive 
review which would include a full assessment of the types of 
investments China is making in international and United States-based 
companies; a better understanding of the relationship between the 
Chinese energy sector and the Chinese Government; and what we can do to 
ensure a level playing field and flexibility in the global market.
    Perhaps most importantly, we need to understand how we can better 
work cooperatively to pursue energy interests as well as work together 
on conservation, energy efficiency, and technology.
    I am hopeful we will pass an energy bill before we recess at the 
end of this week. That legislation provides a comprehensive roadmap to 
how we will satisfy our energy needs in both the near term and the 
future.
    This hearing highlights another challenge to our energy policies, 
and one the U.S. Government and private sector need to take notice of. 
China and India are growing at an incredible rate. If this continues, 
their energy consumption will also grow, placing a greater demand on 
the global market and affecting how we meet our energy needs.

    Senator Allen. Let me just paraphrase some of my salient 
concerns on this issue. Both Secretaries have made very cogent, 
understandable, logical comments. And it is clear that, with 
growing economies in India and China, they're going to need 
more oil, more natural gas, more coal. We see it in the steel 
and cement prices worldwide, as well. This is so timely, Mr. 
Chairman, that you're holding this hearing, in the midst of the 
energy bill. One of the proposals is to study the impact of 
India and China on our national future energy policy. So, this 
is very timely and clairvoyant, maybe, on your part, as usual, 
Mr. Chairman.
    Now, you all mentioned China is signing deals in South 
America, even Canada, India, and Africa, and trying to claim 
those reserves of energy. Hopefully American companies are 
doing the same. Most recently, one of China's largest state-
controlled oil companies made an $18\1/2\ billion unsolicited 
bid for the United States-owned oil company, Unocal. I think 
it's important to note that this unsolicited bid came from a 
government-owned company that does not operate the way that a 
private company would. And so, private companies competing, who 
may want to acquire that asset, whether it's Unocal or any 
other, would have to compete against the overwhelming resources 
of a large, government-owned company. And it's a large 
government, as well. It's not as if it's some small country of 
1 million people.
    You mentioned how much China's grown and India, as well. 
This whole issue, though, is one of our security and our 
competitiveness. Our economy--for transportation, for aviation, 
for electricity, for manufacturing--all rely on an affordable 
and predictable and reliable source of natural gas and oil. 
That's most important. And, to some extent, coal. The energy 
bill, which we are going to pass this week, while long 
obstructed, I think will be helpful in increasing our 
competitiveness, increasing domestic production, but also 
looking at new technologies, greater efficiencies for the 
future. We need not think that the internal combustion engine 
will be the only means of propulsion from here on out, whether 
they're hybrids, whether they're fuel cells, whether it's other 
approaches--clean coal technology, advanced nuclear--others--
solar photovoltaics, biofuels, and others--are part of the mix.
    Now, let me ask you, both you gentlemen. In view of the 
Chinese Government oil company trying to buy Unocal--just as a 
matter of reciprocity and fairness--could a United States 
private company purchase a controlling interest in a Chinese 
oil and gas firm?
    Mr. Wayne. Senator, first, you raise a number of very 
important points. To answer some of your specifics: In China, a 
foreign investor must partner with one of China's four state-
owned oil companies.
    ExxonMobil, British Petroleum, Shell, Total Elf Fina, 
ConocoPhillips, and Chevron, are present there, and have 
working partnerships. These, however, are minority shares made 
available in China's largest oil and gas firms.
    There are some very active partnerships going on. For 
example, I know that Chevron-Texaco is involved in two major 
offshore projects. ConocoPhillips is involved in developing 
some prospects. Earlier on, ARCO, before it was bought by BP, 
had developed some very profitable natural gas reserves off 
China.
    We do regularly, in our dialog--and my colleague, I'm sure, 
will say more about this--try to explain to the Chinese the 
value of having a purely private-sector approach. I think there 
are signs that they have taken some steps in that direction, 
but, as of right now, as you correctly point out, their major 
oil companies are government-owned, and foreign companies have 
to partner with them.
    Senator Allen. Secretary Garman.
    Mr. Garman. You're correct, Senator, that it is unlikely 
that a United States energy firm could take a controlling 
interest in a Chinese oil company; that is correct. But, 
generally, the United States does not condition foreign 
investment on reciprocity, given our traditional open 
investment policy.
    Senator Allen. If I may just briefly follow up. The 
question on trade and trade agreements, there should be fair 
trade, there should be reciprocity, in my view. I think it is 
difficult for a private company to compete against a big 
government. Moreover, the answer is no, that a United States 
company could not buy a control--purchase a controlling 
interest in a Chinese oil and gas company. When one cares about 
our security, as well as our competitiveness, it would seem to 
me that we need to be cognizant of that inequality and that 
unfairness and the fact that China's markets are closed. At the 
same time we hear them, saying, ``Oh, gosh, this is unfair. Why 
are you treating us this way?''--when you might say, ``Well, 
why do you treat everyone else in the world that way, 
yourselves?'' And, maybe, if they reformed themselves, we 
wouldn't be any more concerned about this than if it was a 
German or a French or a British or a Dutch company wanting to 
purchase Unocal. But it is not fair competition, and I think we 
have a responsibility to make sure there's a level playing 
field, as well as be concerned about our security and 
competitiveness in the future.
    Thank you, Mr. Chairman. Thank you, gentlemen.
    The Chairman. Thank you, Senator Allen.
    Senator Kerry, let me mention that we commenced the hearing 
early, because of the rollcall votes. I would like to recognize 
you.
    Senator Kerry. Thank you, Mr. Chairman. I appreciate that. 
And I understand the complications of the votes. I'm sorry, 
though, to have missed some of the testimony.
    Secretary Wayne, you mention in your testimony that--you 
say a more troubling aspect of the recent surge in overseas 
energy deals by China and India is their willingness to invest 
in countries that are pursuing policies that are harmful to 
global stability. Both Chinese and Indian firms have reportedly 
been involved in oil and gas sector deals in Iran, and that 
raises concerns. And you also point out that additional sources 
of oil and gas in the market has promoted the reduction of 
barriers to energy trade, et cetera.
    Share with us, if you would: What is the United States 
policy on the decision by China and India to invest in energy 
regions such as Venezuela, Myanmar, Iran, and Sudan, where that 
investment, obviously, undermines our interests in those 
particular regions?
    Mr. Wayne. Well, of course, Senator, as you well know, 
broadly, we try to encourage open investment regimes around the 
world. However, in certain countries, as you well know, there 
are other overriding serious concerns. In the case of Iran, we 
have serious concerns about their nuclear policies, their 
support for terrorism, their human rights practices, and 
democracy--or lack thereof. We have a law in place, in the case 
of Iran: The Iran Libya Sanctions Act, which we implement, 
which encourages----
    Senator Kerry. That's unilateral, right? That's a----
    Mr. Wayne. That's a unilateral action.
    Senator Kerry. Which most people believe, you know, just 
pushes other people toward those other markets; it doesn't 
really affect them.
    Mr. Wayne. Well, we have, in line with that, used it to 
engage in very serious policy dialog, not just with the Chinese 
and the Indians, but with several other countries, as you 
implied, that have undertaken interest in exploring the 
opportunities of the Iranian energy market.
    In the case of Sudan, we also engaged in serious dialog 
with the Chinese, both in a bilateral sense, and in the U.N. 
Security Council, where we all worked together to encourage a 
north-south peace agreement in Sudan, which is now going 
forward. We also continue to work seriously on restoring peace 
and security and well-being to the Darfur region.
    In all of these cases, we have worked very hard to explain 
to the Chinese and others why we believe it is troubling. It 
undermines the international community's efforts.
    Senator Kerry. Is there a policy? I mean, in the 20-plus 
years that I've been here now, you know, we've been watching a 
lot of explanations being made to the Chinese, but the policy 
just continues and continues and continues, whether it's in 
trade, piracy, intellectual property, market violations. You 
know, you can explain until you're blue in the face. The 
question is: What's the policy? Is there a policy? Does it 
matter?
    I mean, let me ask you, fundamentally--you said, it's of 
increasing concern, but it is clear that India and China's 
rapidly growing economies are absolutely going to make up the 
majority of the increase in global energy demand in the future. 
Is that not clear, that it will?
    Mr. Wayne. They will be significant contributors to the 
increase over the next----
    Senator Kerry. Well, their economies are growing at the 
most rapid rates and they're the largest, in----
    Mr. Wayne. Right.
    Senator Kerry [continuing]. That sense. People. Not largest 
economies.
    Mr. Wayne. Right.
    Senator Kerry. But China is about to surpass Japan, within 
the next few years, and be the world's second-largest economy, 
and, within about 25 years, will be equal to ours.
    Mr. Wayne. Right.
    Senator Kerry. So, that demand is going to continue. Now, 
that's the most overpowering--I mean, that energy need is 
critical to any economic future and to current stability, 
correct?
    Mr. Wayne. Correct.
    Senator Kerry. So, is there a policy that can prevent them 
from going to every available market? And how does that play 
into the Unocal purchase? And what's the policy of the 
administration with respect to that?
    Mr. Wayne. We do have an overall approach to energy 
relations with China, and that is embodied in a series of 
bilateral, regional, and multilateral dialogs on very concrete 
energy challenges faced by China.
    The Energy Department leads the most comprehensive of 
those, but we have a very active dialog going on in APEC. We 
also have an important relationship with China through the 
International Energy Agency aimed at breaking down their needs 
in various different sectors and helping to address them in a 
responsible way.
    Senator Kerry. Well, I'm still----
    Mr. Wayne. As for----
    Senator Kerry [continuing]. What the policy is, 
specifically, other than, as you said, a dialog.
    Can I just ask one last question, Mr. Chairman?
    With respect to this question; China is obsessed with the 
Strait of Malacca, through which over 80 percent of China's oil 
imports from the Middle East are transported. President Hu 
Jintao has called the vulnerability of China's oil supply lines 
from the Middle East and Africa the ``Malacca dilemma.'' That's 
their term. Other key strategic chokepoints include the Sunda, 
Lombok, and Makassar Straits, and the South China Sea. An 
internal DOD report called energy futures in Asia--it says that 
China is building strategic relationships along the sealanes 
from the Middle East to the South China Sea in ways that 
suggest defensive and offensive positioning to protect China's 
energy interests, but also to serve broad security objectives.
    Question: Given that the majority of Unocal's resources are 
located in Asia, are any of them located in places of strategic 
interest to China or its Southeast Asian neighbors that play 
into the Malacca dilemma, so to speak, and these other 
chokepoints?
    Mr. Wayne. Sir, if I could, I know that the Unocal-CNOOC 
merger is potentially being considered by the CFIUS Committee, 
and that puts restrictions on what any of us can say about that 
in this----
    Senator Kerry. I understand that.
    Mr. Wayne [continuing]. Hearing, but I'd be happy to take 
your question on the straits----
    Senator Kerry. Take it in general terms, in terms of the 
straits.
    Mr. Wayne [continuing]. And get back to you on the straits. 
I mean, the most--in most general, just, response, certainly 
China is interested in improving its energy security. That's 
why it has been reaching out to a number of places where other 
major oil companies had not reached out as vigorously as they 
have. But perhaps I could get back to you in writing on the 
specific question about the various straits.
    Senator Kerry. Fair enough. All right.
    Mr. Wayne. Thank you.
    [The submitted written answer of Secretary Wayne to the 
question by Senator Kerry follows:]

    Question. China is obsessed with the Strait of Malacca through 
which the vast majority of China's oil imports from the Middle East are 
transported. Chinese President Hu Jintao has called the vulnerability 
of China's oil supply lines from the Middle East and Africa the 
``Malacca Dilemma.'' Other key strategic chokepoints include the Sunda, 
Lombok, and Makassar Straits and the South China Sea. An internal DOD 
report titled ``Energy Futures in Asia'' says that ``China is building 
strategic relationships along the sealanes from the Middle East to the 
South China Sea in ways that suggest defensive and offensive 
positioning to protect China's energy interests, but also to serve 
broad security objectives.''

   Given that the majority of Unocal's resources are located in 
        Asia, are any of them located in locations of strategic 
        interest to China or its Southeast Asian neighbors?
   Other than the physical presence necessary to access 
        Unocal's oil and gas resources, what strategic benefits would 
        China gain in Southeast Asia or elsewhere by owning Unocal?

    Answer. The Strait of Malacca is a key sealane through which passes 
approximately 35 percent of the world's cargo traffic and about half 
the world's oil shipments--about 600 ships per day. Approximately 90 
percent of Japan's, and 80 percent of China's, oil imports pass through 
the international strait. Maintaining free and unfettered access, to 
and through it and other straits, is of considerable concern to the 
United States as well as all nations dependent upon international 
seaborne trade.
    Unocal's oil and gas assets are widely dispersed throughout 
Southeast Asia on both sides of the straits. While the productivity of 
some of these assets would be affected by an interruption of flow 
through the straits, others would not. Most of the gas produced by the 
Unocal assets is under long-term contract to the host nations from 
which it is sourced and is consumed locally. For example, all of 
Unocal's gas production in Thailand is committed to a single Thai 
buyer, and gas sourced in Bangladesh is generally reserved for 
Bangladeshi consumption.

    The Chairman. Thank you, Senator Kerry.
    Senator Kerry. Thank you, Mr. Chairman.
    The Chairman. Senator Coleman.
    Senator Coleman. Thank you, Mr. Chairman.
    First, Mr. Chairman, thank you for holding this hearing. 
First, a statement, and then I want to follow up on a question 
that Senator Kerry asked that I don't think he got the answer 
to, and I have a similar question.
    My hope is that what happens here with the reality of the 
increased demand is that it simply spurs our own efforts. We 
have an energy bill now. I was in Brazil not too long ago. 
Fifty percent of all the new cars in Brazil run on flex fuel. 
The major manufacturer of cars in Brazil is General Motors--an 
American manufacturer producing flex-fuel cars. And we, in the 
United States, just have a long way to go. So, I hope we start 
to get there with renewables, with some of the technologies 
that my colleague, Senator Allen, mentioned. In this energy 
bill, we've got a coal gasification technology. There's a 
project in Minnesota. Clearly, India has long-term needs with 
coal, and perhaps things that we're doing here will spur them 
on. So, I think we know where we have to go, and hopefully this 
will spur us to move a little more aggressively.
    Let me ask the question that Senator Kerry asked, that was 
mentioned, Secretary Wayne, in your testimony, about the 
concerns about, particularly China, investing in countries that 
are pursuing policies harmful to global stability. In 
particular, I have a question about Venezuela, in Latin 
America. And I'm not sure that I heard the response. One, what 
kind of tools do we have available to us, the United States, to 
deal with this concern that you raise? In particular, I know 
we're deeply concerned about where Venezuela is heading 
politically. Do we have tools at our disposal to have any 
impact on the Venezuelan oil situation, investment issues that, 
in the end, certainly raise a lot of concerns here?
    Mr. Wayne. Well, we do certainly have the traditional tools 
of dialog. And, of course, we have a significant commercial 
presence in Venezuela. A number of major and minor U.S. 
companies are involved there, and Venezuela does have a 
commercial presence in the United States. We do retain a 
discussion of energy issues with Venezuela.
    I think it's important to keep in mind that Venezuela sells 
primarily heavy oils that sell at a very steep discount in 
Asia. There are very few Chinese refineries that are properly 
tooled to take Venezuelan crude. And, to date, the volumes 
going to China are quite small.
    It's a very long way from Venezuela to China. There would 
have to be work done to expand or bypass the Panama Canal in 
order to make that a better prospect and this would take a lot 
of investment.
    The Chinese are still relatively minor investors in the 
Venezuelan oil sector. It is possible that that, of course, may 
increase. I can't predict in which way it will go.
    We do benefit in Venezuela, as elsewhere, from an open, 
transparent, and fair investment regime. Venezuela has 
benefited from investment by U.S. companies and from its own 
investments in the United States. And we continue to believe 
that this is the way that, not only Venezuela, but other 
countries should maintain their oil regimes.
    Therefore, we're going to continue to give this, not only 
close attention, but it will be an important part of our 
ongoing dialog with Venezuela, on both the commercial front and 
in other official discussions.
    Senator Coleman. Mr. Chairman, I believe, at an earlier 
hearing, you had indicated you were going to ask the GAO to 
look at the possibility of Venezuela cutting off its oil 
exports to the United States. And I don't know where we're at 
in that, but I would hope that we would see that report, at 
some point in time.
    What I'm hearing from you, Secretary Wayne, is that the 
prospect of Venezuela diverting significant amounts of oil 
exports from the United States to China is still in, kind of, 
an early stage, that there are economic factors that make that, 
at least for the short term, somewhat difficult. Is that a fair 
assessment?
    Mr. Wayne. Yes, sir.
    Senator Coleman. When I was in Venezuela, I had a long 
conversation with President Chavez. At one point, he said to 
me--he said, ``I could close down CITGO tomorrow.'' My response 
to him was, ``You could also cut your left arm off tomorrow. 
Would that feel good?''
    What are the prospects of Venezuela closing down CITGO or 
cutting off oil exports to the United States?
    Mr. Wayne. Well, I think the best response is the fact that 
the United States market allows Venezuela to place some 1.4 
million barrels of oil a day here with refineries that can 
accept that oil and can pay the market price for it. And--but I 
can't predict the actions of decisionmakers in another country.
    Senator Coleman. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Coleman.
    Senator Obama, we're having a 5-minute round. Please 
proceed.
    Senator Obama. Thank you. Thank you, Mr. Chairman.
    Why don't I restrict myself to two questions? They're both 
relatively broad, and--answer them as you will.
    The first, I guess, is, in terms of China pursuing its 
energy strategy, it strikes me that, at times, it operates as a 
conventional market player; at other times, it is pursuing, 
sort of, a neomercantilist strategy of trying to capture and 
corner certain energy sources. And I guess, as you project out 
China's energy demand in the future, can you give me some sense 
as to whether it is going to feel obligated to take the latter 
approach in order to meet its energy needs, or is it going to 
be in a position where, as just one additional player in the 
energy market, that it's going to be able to buy what it needs 
in order to maintain its current growth?
    Mr. Garman. It is my view, Senator, that, over time, China 
will see the value of open markets, stable regulatory regime, 
transparent business practices, and a global, liquid oil 
market. I don't believe any nation has the capacity to corner 
the market. And I'm not so sure that equity oil really helps a 
nation enhance its own security in the face of the prospect of 
the global oil market.
    In a sense, I guess I would say that we have an oil 
dependency codependency, of sorts. We're all more or less in 
the same boat, where we must invest in new supply, new 
technology, alternatives to oil over the long term. And I don't 
think there's any other way to proceed. And I think most all 
the nations of the world, once they garner further experience 
in the oil markets, will come to the same conclusion.
    Senator Obama. Are there any ways that we can encourage 
cooperation with the Chinese to move in that direction, beyond 
what, I think, at least should be apparent, and that is the 
need for us to get a handle on our own energy usage? Beyond 
that, though, are there specific steps that you think we might 
take, in working with China, so that they recognize that, 
rather than engaging in a fierce competition that could put 
strains on our relationship, that we cooperatively try to 
figure out how to reduce overall consumption?
    Mr. Garman. I'll cite just one example, and then, I'm sure 
Under Secretary Wayne will jump in. But something that--where 
I'm personally involved in a multilateral activity that 
includes the Chinese, as well as India, is the International 
Partnership for the Hydrogen Economy. China and India are both 
charter members of this multilateral effort, which is designed 
to get us to affordable hydrogen fuel-cell vehicles that need 
no petroleum and emit no pollutants by 2020 or so. They've 
signed up to that vision, and we are working fervently with 
them to--on these technologies and methods of producing a 
common hydrogen fuel that every nation of the world could 
produce from a variety of domestically available primary energy 
resources. That would make, ultimately, these issues and 
concerns that are expressed here today moot, which has got to 
be our vision and our approach, going ahead. That's just one 
example. There are many, many others that we're engaged in.
    Senator Obama. Okay. Thank you.
    Mr. Wayne. I might just add another specific example: It is 
the ongoing work in the carbon sequestration and clean coal 
technologies. If we think that both China and India will 
continue to obtain 50 percent of their energy from coal, it's 
very important that they have clean technologies, and then that 
they invest, also, in transmission lines and in other 
infrastructure that make the energy system more efficient. And 
we're working with them on these questions, both bilaterally, 
and through organizations such as in APEC and the International 
Energy Agency. And it's through this network of involving them 
in the broader discussions--helping them see ways forward to 
meet their own energy needs--that we can encourage a more 
responsible approach to energy security. And that's part of our 
broader approach, economically, with China. As you know from 
working through the WTO membership, to implementation of the 
WTO commitments, to the Joint Commission on Commerce and Trade 
that we have, through the dialog that the Department of State 
has with the NDRC on broader economic development and reform 
questions, what we're trying to do, in fact, is point out the 
advantages of having a private-sector-based approach, not just 
in the energy sector, but in their whole economy. And I think 
we have seen significant changes. It's not yet as much as any 
of us would like to see, but they are rethinking the way 
they're doing things.
    Senator Obama. Thank you.
    The Chairman. Thank you very much, Senator Obama.
    Gentlemen, we thank you very much for your testimony. There 
are so many more questions we would like to ask, and perhaps 
we'll do so at future hearings. But thanks for your papers, and 
we'll proceed now to the second panel.
    And if the panel members would approach and be seated: Mr. 
Mikkal Herberg, Mr. Randall Schriver, and Professor Sumit 
Ganguly.
    [Pause.]
    The Chairman. Gentlemen, we thank you for coming today. Let 
me mention, as I addressed the first panel, that your full 
statements will be included in the record, and we will ask you 
to summarize your testimony prior to questions from Senators.
    Mr. Herberg.

  STATEMENT OF MIKKAL E. HERBERG, DIRECTOR, GLOBALIZATION AND 
    ASIAN ENERGY SECURITY PROGRAM, NATIONAL BUREAU OF ASIAN 
                     RESEARCH, SEATTLE, WA

    Mr. Herberg. Thank you, Chairman Lugar. It's a pleasure and 
honor to be here, and thank you for inviting me. This is a 
subject I've spent a lot of time thinking about and working on, 
so it's a pleasure to get a chance to talk about it with such 
an important audience.
    In the interest of time, I'm going to skip some of the 
broad issues of Asia's energy demand, because they've been 
mentioned quite a bit. Just a few metrics, I think I'll 
mention, and then shift to some of the geopolitical issues that 
are being raised by Asia and China and India's energy demand, 
particularly oil demand.
    I think you can capture some of this by looking at the fact 
that Asia's oil demand is likely to grow by 20 million barrels 
a day over the next 15 to 20 years. All of that, effectively, 
will be imported from outside the region. Today, Asia already 
imports, depends on two-thirds of its total oil consumption, on 
oil imported from out of the region. Two-thirds of that import 
today, roughly, comes from the Persian Gulf, alone. So, for 
perspective, that 20-million-barrel-a-day increase in Asian oil 
demand is equivalent to today's total production from the 
Persian Gulf--Saudi Arabia, Iran, Iraq. The entire Persian Gulf 
today produces about 20 million barrels a day. So, the 
incremental demand equals Persian Gulf demand.
    So, I think that has created--and add to that a fact that 
Malacca Straits--today, 11 million barrels a day goes through 
the Malacca Straits. In 15 years, that'll be 22 million barrels 
a day--double--aggravating their sense of insecurity, as well.
    They're worried, as we are, about unstable supply regions. 
They're worried about scarcity in world oil supplies that we 
see today, with $50 and $60 oil prices, terrorism aimed at oil 
production facilities. And that's all animated, also, by 
regional mistrust within Asia and the lack of institutions 
regionally on a whole range of geopolitical issues. So, we see 
a series of geopolitical rivalries in Asia, and that's being 
overlapped, or overlaid, onto energy insecurities.
    To talk for just a second about China and India in the 
context of the United States and their perception of the United 
States in that insecurity.
    China sees the United States--and if I can generalize for a 
minute--but I think much of the leadership sees the United 
States as an obstacle to its efforts to securing its future 
energy security in a whole series of--way. And that really 
relates to the overall sense of rivalry, antagonism that we see 
today, and tensions that we see today, in United States/China 
relations. They see that as part and parcel of their vision of 
their energy security, in that the United States has the 
ability to frustrate their efforts to secure the sealanes, to 
secure their supplies in the Taiwan crisis, for example, and to 
frustrate their activities in places like Sudan and Iran and 
other places where they believe commercial relations makes 
sense.
    So, for China, the United States is potentially a major 
obstacle. For India, they don't see us as a serious obstacle to 
their energy security, except insofar as collateral policies 
affect that. And that would be, most importantly, our sanctions 
policy.
    India is already involved in the oil and LNG side, 
potentially, in Iran, they're a partner with China in Sudan, 
but a couple of recent examples show how they're concerned. 
Proposals for an Iranian gas pipeline across Pakistan to India. 
India desperately needs gas supplies for the future. It'll be 
100 percent dependent on imported LNG for imports, with a 
series of issues there. They also are talking about a Burma 
pipeline from Burma, for natural gas, to India, as well. Burma 
has large supplies of gas. It makes good commercial regional 
sense to have a pipeline. The United States is obviously 
opposed to those kinds of measures, because those two states 
are involved in our policies of problem states. So, for India, 
it's more a matter of collateral damage to their efforts, as 
opposed to seeing the United States as an obstacle.
    Some of the other speakers have talked about what the Asian 
states are doing to try to secure those supplies. Equity oil 
deals. They've taken this mercantilist, antique view of the oil 
market. And as much as we talk to them about markets, open 
markets, prices, it's simply their--the prism through which 
they look at these issues convinces them that equity oil is 
more secure than contract oil. And, frankly, it's a delusion. 
There's no more security in an equity barrel than a contract 
barrel. But it still is deeply part of their vision of the way 
this process works. A series of other things, which I won't 
mention.
    I think, for Asia--and I'll just talk about a couple of 
these issues--for Asia, energy is spilling over into the 
geopolitical rivalries in the region. And the geopolitical 
rivalries are spilling over into preventing regional energy 
solutions. And the most obvious case of this is Japan/China. 
They're in shoving matches over East Siberian oil pipelines. 
They're in shoving matches over East China gas field. And 
that's the kind of thing that's likely to worsen over time. So, 
that, in itself, is also aggravated by Russia's erratic 
policies on supplying Asia. Policy is being centralized, 
nationalized, but, in fact, it's becoming more inexplicable, 
more erratic as Kremlin infighting influences policy more than 
rational commercial decisions.
    The risk, I think, for the United States over time, energy 
will become a destabilizing force in Asian politics at a 
particular critical time of China's rise and a very delicate 
20-year period we're facing in Asia. That's one key issue. 
Destabilizing oil markets. Asian demand will drive oil markets 
in the next 20 years. There's no doubt about that.
    The problem I have, or I think the key issue, is their 
tendency to horde, taking oil off the market. We've been 
talking about this, equity barrels that they want to stream 
directly to their own economies. Their demand impact, overall, 
can be managed, it's the investment and supply side we have to 
worry about. But, to the extent they try to effectively horde 
barrels, which is what they're doing with these kind of equity 
policies, that creates rigidity in the marketplace, it creates 
the potential for competition for barrels when the markets are 
tight, and I think it's particularly pernicious. We need to try 
to discourage that kind of thing. It's going to feed into naval 
strategies, sealane issues in the Indian Ocean, South China 
Sea. We've already had a little bit of commentary on that.
    And we are going to face a great deal more competition, 
particularly from China, in influence in places like the 
Persian Gulf in the future. China is going to be a major player 
in global energy geopolitics, particularly in the Persian Gulf. 
There's no doubt about it. So, the only question is whether 
they work at cross-purposes to the United States or whether we 
can work collaborative. That's the key question. Clearly, they 
impact U.S. sanctions policies. And they're changing the 
competitive landscape for big U.S. oil companies. There's been 
some discussion of that, as well.
    What should we be doing? I'll just mention a couple--what I 
think are the key things here.
    We need to engage at the very highest level with each of 
these governments, bilaterally. We're beginning to do that. But 
it has to be raised--at the level of the Premier in China, 
Prime Minister in India--repeatedly. I think that's the only 
way we can begin to have some influence.
    Second, we need to be helping to encourage regional energy 
cooperation institutions. Asia has nothing like that. 
Particularly, China and India feel excluded from the major 
institutions of global oil management, like the IEA. They are 
excluded. And they feel excluded. And they feel that they're 
very weak in position, vis-a-vis the global oil industry. 
They've got these--they feel like they're the 98-pound weakling 
facing Exxon, Chevron, Total, some huge companies with 50 and 
80 years of experience out there. So, they feel like they're 
behind the curve having to play catchup. We need to pull these 
Asian states into a regional cooperation energy institution, or 
encourage that, which will help relieve a lot of these other 
issues--a sense of competition over supplies, competing for 
barrels, and other sets of problems.
    So, I have other things, but in the interest of time I 
think I'll just leave it at that and let the others speak.
    [The prepared statement of Mr. Herberg follows:]

 Prepared Statement of Mikkal E. Herberg, Director, Globalization and 
   Asian Energy Security Program, National Bureau of Asian Research, 
                              Seattle, WA

    Senator Lugar, members of the committee, thank you for this 
opportunity to appear before the committee today, to discuss energy 
security concerns in China and India and the implications for Asia and 
the United States. It is an honor to be here.
    Energy demand in Asia is mushrooming to fuel the region's dynamic 
economic growth. As a result, dependence on energy imports is rising, 
particularly for oil, and governments are scrambling to meet booming 
consumption and to prevent energy from becoming a bottleneck 
undermining economic growth and social stability. Looking forward, 
there is every indication that Asia's import dependence will accelerate 
over the next two decades.
    The result is a deepening sense of energy insecurity in Asia that 
promises to have important implications for the region and for the 
United States. China and India are the two largest energy consuming 
economies in the region and have the fastest growing energy demand. In 
the case of oil, most of China and India's rising future oil imports 
must inevitably come from politically turbulent and unstable regions, 
most importantly the Persian Gulf, and be transported along potentially 
vulnerable sealanes and/or complex pipeline routes crossing several 
national borders. Although both China and India have traditionally been 
self-sufficient in natural gas, a growing volume of their future gas 
supplies also is likely to come from the Persian Gulf, Russia, Central 
Asia, and, in India's case, South Asia. And the need to satiate 
relentlessly rising electricity demand in the face of oil and natural 
gas supply constraints is forcing heavy reliance on coal and growing 
reliance on nuclear power in both China and India that is aggravating 
future environmental and nuclear proliferation risks.
    For China and India both, as well as the other Asian powers, energy 
is becoming a matter of ``high politics'' of national security and no 
longer just the ``low politics'' of domestic energy policy. Governments 
in both countries have decided that energy security is too important to 
be left entirely to the markets as their economic prosperity 
increasingly is exposed to the risks of global supply disruptions, 
chronic instability in energy exporting regions, and the vagaries of 
global energy geopolitics. Both governments are responding to their 
growing sense of insecurity with a broad range of similar strategies, 
regionally and globally, to try to guarantee greater supply security 
and reduce their vulnerability to potential supply and price shocks. 
These efforts are growing in scale and scope and they range from 
largely cooperative and market-oriented strategies to those that are 
deeply neomercantilist and competitive. Both China and India are 
accelerating their efforts to gain more secure national control of 
overseas oil and gas supplies by taking equity stakes in overseas oil 
and gas fields, promoting development of new oil and gas pipelines to 
feed their booming markets, developing broader trade and energy ties, 
and following up with diplomatic ties to cement relations with the 
major oil and gas exporting countries.
    The events of 9/11, the Global War on Terrorism, and the wars in 
Afghanistan and Iraq have heightened both China and India's sense of 
insecurity and vulnerability. Both governments are increasingly 
concerned about the risks of possible terrorist attacks on oil 
production and export facilities in the Persian Gulf and attacks on key 
maritime transit points, such as the Straits of Hormuz and the Straits 
of Malacca.\1\ Both governments are concerned that the aggressive U.S. 
response to the attacks on America risks further destabilizing the 
Persian Gulf and Central Asia and increasing the risks of supply 
disruptions, worsening Islamic extremism, and political instability. 
And both governments sense they are excluded from the major 
institutions that govern global oil cooperation, such as the IEA, and 
feel largely excluded from the global oil industry they feel is 
dominated by the large oil companies from the industrial countries. 
Both feel they are playing ``catchup.''
---------------------------------------------------------------------------
    \1\ The two major chokepoints for Asia's supplies are the Straits 
of Hormuz exiting the Persian Gulf and the Malacca Straits between 
Indonesia and Malaysia entering the South China Sea. In 2003 roughly 16 
million barrels of oil per day (MMBD) passed through the Straits of 
Hormuz, with around 11 MMBD of that headed to Asia through the Straits 
of Malacca. Another one MMBD passes through the Straits of Malacca from 
Africa. As a result, more than 50 percent of Asia's daily oil supplies 
must transit the narrow Malacca Straits.
---------------------------------------------------------------------------
    Nevertheless, the difference in each country's relationship with 
the United States defines their different perceptions of how U.S. 
policies might impact their efforts to secure their future energy 
needs. China views the United States largely as an increasingly 
aggressive strategic competitor and, therefore, the deeper extension of 
U.S. military power and influence in Central Asia and the Persian Gulf 
aggravates underlying fears of ``encirclement,'' fears over U.S. global 
``hegemony,'' and increases Beijing's sense of vulnerability to U.S. 
control over oil and gas flows vital to China's strategic room for 
maneuver, its economy, and its social stability. India's views toward 
the United States are more ambivalent reflecting the gradual 
improvement in traditionally contentious United States-India relations 
since the end of the cold war but also the controversial issue of 
India's nuclear weapons program. Unlike China, India does not view the 
United States as a fundamental obstacle to its search for energy 
security but there are elements of U.S. foreign policy that 
collaterally impact India's energy efforts. For example, U.S. 
opposition to India's nuclear program and its links to its nuclear 
weapons program has been seen by India as an obstacle to efforts to 
meet booming electricity demand. In addition, recent Indian discussions 
about possible future large natural gas pipelines from Iran and Burma 
to meet rapidly expanding natural gas demand, have run up against U.S. 
pressure to isolate these two unsavory regimes.
    As the traditional guarantor of stability in Asia, the United 
States has major strategic stakes in how China and India respond to 
their energy insecurity and how this impacts the region and global 
energy geopolitics. Energy needs will transform both countries into 
major players in the world's major oil and gas exporting regions and 
global energy geopolitics. This is likely to fuel a much more complex 
web of diplomatic ties and alliances that could either complicate or 
complement the United States own energy and security interests. For 
example, both countries' rapidly growing involvement in helping Iran 
develop its energy sector is already helping to undermine U.S. efforts 
to isolate Iran. Moreover, as both countries court Russia in hopes of 
accessing its large energy supplies, they are inexorably drawing Russia 
back into Asia as a key strategic and commercial player with a range of 
potentially important implications for U.S. interests in Asia and for 
future U.S. relations with Russia.
    Second, the growing potential for an increasingly mercantilist 
competition between China and India over control of energy supplies and 
transport routes risks fueling tensions between the two. Although Sino-
Indian relations have improved recently, each country clearly sees the 
other as a major long-term regional rival and potential future 
strategic threat. Moreover, as a region, Asia lacks institutions to 
manage regional conflict and already faces a sensitive transition to 
accommodate China's rising power over the next several decades. There 
are several recent examples where China and India came head-to-head 
over energy supplies. Moreover, each is warily assessing the other's 
future intentions regarding building naval power and control of the 
vital sealanes in the Indian Ocean and control of the Malacca Straits. 
Nevertheless, competition doesn't necessarily have to dominate the 
energy relationship between China and India. Some recent developments 
and trends suggest that energy needs may have the potential to 
reinforce cooperation between the two.
    It is vitally important for U.S. policymakers to understand the 
linkages between China and India's energy insecurity and a much broader 
range of important U.S. geopolitical, energy, and environmental 
interests. The balance of my testimony will discuss China and India's 
energy security dilemmas and the potential for impacting U.S. long-term 
geopolitical and energy interests in the post-9/11 era. First, will be 
a survey of the linkages between each country's energy situation and 
its energy security strategies and assess prospects for future 
cooperative or competitive efforts. This will be followed by suggesting 
a range of potential implications for the United States, in terms of 
future oil markets and prices, Asia's geopolitical future, and U.S. 
strategic interests in key energy exporting regions of the world. I 
will conclude with a series of policy recommendations.

                   ENERGY INSECURITIES AND STRATEGIES
    Asia's overall regional energy dilemma reflects a set of consistent 
trends, but conditions vary substantially in each country depending on 
a variety of resource, energy policy, and historical factors. These 
individual circumstances and policy frameworks largely shape the 
evolution of national energy security strategies. China and India 
represent a large share of Asia's current and future energy needs, 
future import needs, and both will also be major actors in the region's 
future geopolitical evolution.

                                 CHINA
    China is the second largest energy consumer in the world, after the 
United States, and has traditionally been largely self-sufficient in 
energy supplies. Large domestic supplies of coal have dominated 
domestic energy use and coal continues to account for two-thirds of 
China's overall consumption. However, strong economic growth since the 
early 1980s has fueled oil demand growth and the government's decision 
to expand the use of natural gas promises to boost future gas 
consumption. These developments will boost China's future energy import 
dependence and fuel growing energy security concerns.
    China has been Asia's largest oil producer since the mid-1960s, in 
recent years producing well over 3 MMBD. However, the acceleration in 
oil demand during the economic boom of the 1980s and early 1990s 
rapidly outran production during the 1990s. Oil demand doubled between 
1985 and 1995 from 1.7 million barrels per day (MMBD) to 3.4 MMBD and 
doubled again by 2005 to reach an expected 6.8 MMBD for 2005. By 2003 
China surpassed Japan to become the world's second largest oil consumer 
behind the United States and the third largest importer. China now 
imports roughly 40 percent of its total oil needs and this import share 
is rising rapidly.
    China's leadership has responded with both domestic reforms and 
aggressive global energy security policies. Nevertheless, given limited 
resource prospects and high costs, domestic oil production is unlikely 
to rise significantly while oil demand and oil imports are very likely 
to continue growing relentlessly. The IEA forecasts that China's oil 
imports will rise five-fold by 2030, from slightly less than 2 MMBD in 
2002 to 10 MMBD, when imports will account for 80 percent of China's 
total oil needs. China's leadership now faces the long-term realization 
that oil import dependence is unavoidable and will grow. Moreover, 
China will become heavily dependent on the Persian Gulf for future 
supplies and its oil will increasingly have to transit a series of 
vulnerable maritime chokepoints. It is likely that by 2015, 70 percent 
of China's oil imports will come from the Middle East. Other 
significant shares of China's oil imports will come from Russia by 
pipeline and rail, from Central Asia by pipeline, and from Africa.
    Government policies aimed at substantially increasing the use of 
natural gas, while indispensible in environmental terms, promise to 
accentuate China's import dependence and long-term energy security 
concerns. Beijing has embarked on an aggressive policy to increase gas 
use to help replace coal to generate electricity, diversify overall 
energy use, and provide cleaner burning fuel for environmental needs. 
Current plans call for gas to make up 8 percent of total energy demand 
by 2010. But, although China does have significant domestic gas 
reserves, beyond 2010 demand is likely to begin to outrun domestic 
production and a growing share of gas needs will need to be met through 
imports. The DOE forecasts that imports will account for 40 percent of 
China's gas needs by 2025.
    While China's gas use will grow, rising electricity demand will 
also force continued growth in coal consumption along with efforts to 
expand nuclear and hydroelectricity production. China is the largest 
producer and consumer of coal in the world and coal still makes up 
roughly two-thirds of total energy use. Driven by relentlessly rising 
electricity demand, China's coal consumption is expected to double over 
the 2001-2025 period. As a consequence, China is also expected to 
account for one-quarter of the world's CO2 emissions over that period. 
China may become a net importer of coal as early as 2015. Electricity 
needs also are driving China's future nuclear power development. China 
has the largest planned increase in nuclear power globally over the 
next two decades, with plans to add 40 large new nuclear powerplants by 
2020. Electricity demand will also drive strong hydroelectric 
development although, ultimately, this can only meet a small fraction 
of China's electricity needs.
    In sum, despite wide-ranging and strenuous efforts, China faces an 
inevitable trend toward greater energy import dependence to fuel its 
dynamic economic growth. This trend will be most acute for oil but will 
become a growing concern over the longer term for natural gas supplies. 
Hence, energy security has become a central concern for Beijing and the 
thrust globally to secure future energy supplies has taken on great 
urgency.
    In response, China has launched an aggressive strategy to secure 
its future energy supplies globally and regionally. With economic 
growth becoming the central focus of China's national agenda, the 
country's leadership increasingly fears that exposure to energy 
shortages and volatile world energy prices could threaten social 
stability and undermine the main claim to authority and legitimacy of 
the Communist Party. China's strategy has become increasingly coherent 
and wide-ranging over the past decade and is growing in reach and 
sophistication. For China's leaders, energy security clearly is too 
important to be left to the markets and so far its approach has been 
decidedly neomercantilist and competitive.
    Globally the program has been dubbed the ``Going Out'' strategy and 
it is based on three major concerns. First, has been the fear that 
sudden global oil supply disruptions could trigger serious energy 
shortages and sharp price spikes, that would be difficult to insulate 
the economy from, as was possible in the past when China was self-
sufficient in oil. Second, China faces a growing vulnerability for the 
majority of its oil needs on tanker flows from the chronically unstable 
Persian Gulf and other potentially unstable exporting regions such as 
Central Asia and Africa. Third, China has felt increasingly threatened 
by U.S. strategic dominance in the Persian Gulf and other key oil 
exporting regions and U.S. control of critical transportation routes 
giving the United States the power to deny vital oil supplies to China 
in the event of a confrontation, particularly over Taiwan. These 
concerns have been further aggravated by deeper extension of U.S. power 
into the Persian Gulf and Central Asia in the wake of 9/11, the GWOT, 
and the Afghanistan and Iraq wars.
    China has pursued its energy security on a wide range of fronts. 
First, it has sought to strengthen its supply relationships in key 
areas, such as the Persian Gulf, while diversifying the geographic 
distribution of its crude oil suppliers and transportation routes. For 
example, Chinese state oil companies have broadened their crude sources 
by increasing imports from West Africa, and even Latin America, to 
offset a heavy dependence on the Persian Gulf and Southeast Asia. In 
the Persian Gulf the Chinese have rapidly expanded their role in 
various phases of Iran's oil industry while boosting long-term crude 
supply contracts with Saudi Arabia, Oman, and Yemen. In the longer run, 
China is seeking to increase pipeline supplies from Russia's East 
Siberia and Western Kazakhstan through long-distance pipeline projects, 
which would have the added advantage of reducing vulnerability to 
disruptions in tanker flows from the Persian Gulf and Africa. Second, 
state oil companies CNPC, Sinopec, and CNOOC have been aggressively 
buying equity stakes in many existing or prospective oilfields around 
the globe. In the mid-1990s China scrambled to buy stakes in a mixed 
bag of fields and countries, including Kazakhstan, Sudan, Venezuela, 
Iraq, and Peru. Inexperience led to overpayments in some cases but 
buying has become more selective and competitive with later experience. 
China has now established fairly strong positions in its largest 
operation, Sudan, including production, pipelines, and refineries, as 
well as a growing position in western Kazakhstan. They recently are 
focusing on broadening their equity stakes into North Africa, Southeast 
Asia, especially Indonesia, Latin America, and most recently in North 
America, where they have acquired stakes in Canada's western oilsands 
developments, and in the controversial bid by CNOOC to acquire Unocal. 
Small stakes have been acquired in the Caspian Sea area in Azerbaijan 
and Turkmenistan. Another element of this equity strategy is to target 
countries subject to unilateral U.S. sanctions which improves the 
competitive landscape and offers China better opportunities, but also 
works to undermine U.S. sanctions policies. Current estimates are that 
the three companies have managed to establish control over about 300 
MBD of crude production, which could reach up to 600 MBD by 2008. China 
has also pursued a similar equity strategy, regarding natural gas 
imports, by demanding and getting upstream equity stakes in LNG 
projects destined to bring LNG to China beginning in 2007 from 
Australia and Indonesia.
    The third leg of the strategy involves extensive cross-investment 
and commercial ties between China and key exporting countries in order 
to cement stronger long-term ties. China's state oil companies and 
related construction and oil services companies have aggressively bid 
for oil field development contracts, pipeline contracts, and refinery 
projects in Iran, Sudan, Kazakhstan, Kuwait, and a growing list of 
countries. Conversely, the Chinese Government and oil companies have 
invited the state oil companies in key exporting countries to invest in 
downstream oil and petrochemical projects in China. For example, China 
recently finalized plans for a large joint refining investment in 
Fujian province in partnership with Saudi ARAMCO and ExxonMobil.
    The fourth leg of the strategy involves Beijing's active oil and 
gas diplomacy, which serves to strengthen the oil supply contracts, 
equity stakes, and cross-investments with deeper and broader diplomatic 
and trade ties. China now has signed some form of ``Strategic Energy 
Partnership'' with nine countries, including Russia, Sudan, Iran, 
Venezuela, Brazil, Angola, and Kazakhstan. Beijing's leadership has 
followed up with a long list of high-level diplomatic visits to cement 
stronger diplomatic, energy, and trade ties. China has also used state 
diplomacy to secure future LNG supplies in contracts with Australia, 
Indonesia, and Iran. China's leadership sees the development of broader 
diplomatic and trade ties and alliances as a key element in securing 
its access to future oil and gas supplies. This also includes military 
sales and cooperation, sales of nuclear equipment, and other 
potentially problematic trade ties.
    A fifth strand of the strategy has been China's continuing active 
pursuit of its territorial claims in the maritime region surrounding 
China, both to assert Chinese sovereignty more generally, but also to 
assert China's control over potential oil and gas resources in these 
areas. China has repeatedly asserted its maritime territorial interests 
in disputes over control of exploration and licensing blocks with 
Vietnam, Indonesia, and Japan over the past decade. Increasing military 
and fishing activity in the South China Sea in staking China's claims 
to the Spratley and Paracel Islands goes hand in hand with these energy 
interests. China also continues to assert its sovereignty over the 
Senkaku/Diaoyu Islands in the East China Sea against Japanese claims 
and is embroiled in a bitter dispute with Japan over an East China Sea 
gasfield. China has no ``Blue Water'' naval capability to secure these 
areas in the face of U.S. naval supremacy in the region but it has 
begun to realign its naval strategy to these needs by emphasizing 
submarine development and port-access agreements in the South China Sea 
and along the coast of the India Ocean.
    Finally, China has recently decided to follow the example of the 
industrialized countries and neighbors, Japan and South Korea, in 
beginning construction in 2004 of a Strategic Petroleum Reserve to 
establish state-controlled stocks of crude oil that would be available 
in the event of a supply disruption. Supplies will begin to flow to the 
first of these locations in August 2005.
    Beyond this, China's willingness to promote regional solutions to 
Asia's energy security concerns has been very limited. It has been 
involved in discussions with Russia, led largely by South Korea, on 
proposals to build a large regional natural gas pipeline from East 
Siberia, southeast through China and across the Yellow Sea to South 
Korea, to link Russian gas supplies to both markets. It also has been 
involved, as a member of APEC, in recent discussions and proposals to 
improve Asia's energy security.
    In sum, China's energy security strategy is wide-ranging and 
increasingly sophisticated. It is deeply state-centric and 
mercantilist, built on coordination between senior government 
policymakers and China's state oil companies and it is increasingly 
linked to broader diplomatic relations and alliances. Through its 
search for energy security China also is on the way to becoming a major 
geopolitical player in the Persian Gulf, Central Asia, and Russia, with 
a growing capability to complement or complicate U.S. interests in 
these regions.

                                 INDIA
    India is now the sixth largest energy consumer in the world. Much 
like China, coal dominates the energy picture in India accounting for 
51 percent of total energy use with most of that going into the 
production of electricity where demand has been growing at extremely 
high rates. India has large indigenous supplies of coal, most of it 
relatively low in heat value and high in sulfur and ash, and given 
limited domestic availability of oil and natural gas, coal is likely to 
remain the dominant fuel in the economy for the foreseeable future. The 
DOE expects Indian coal consumption to rise by 70 percent over the next 
25 years to meet booming electricity demand which is expected to rise 
by 150 percent. India alone is likely to account for over 106 of the 
entire world's increase in coal consumption.
    As in the rest of Asia, oil is looming as the key import concern. 
Oil demand in India grew by over 6 percent annually during the past 
decade, more than three times the world average, while at the same time 
oil production rose barely at all. Consequently, imports jumped from 
500,000 barrels per day to 1.3 million barrels per day by 2004, or from 
42 percent of consumption to 62 percent of total consumption. Roughly 
one-half of India's current oil imports come from the Middle East. Over 
time India's import dependence will grow. Both the DOE and IEA expect 
Indian oil demand to be among the fastest growing in the world, along 
with China, at nearly 4 percent annually to 2025, rising from 2.1 to 
5.3 MMBD. Combined with essentially flat or declining oil production, 
this suggests that imports will account for 85 percent of total oil 
demand by 2025, most of which will have to come from the Middle East, 
with the balance from Central Asia and Africa.
    India has been self-sufficient in natural gas, historically, but 
given limited domestic gas resources and rising demand, this will 
change rapidly in the future. Gas demand is expected to continue 
increasing making India a major importer in the form of LNG and 
possibly pipeline supplies. The DOE expects Indian gas consumption to 
triple from 0.8 trillion cubic feet (TCF) in 2001 to 2.5 TCF by 2025 
driven by the growing need for electricity and the need to substitute 
for dirty coal. At the same time domestic gas production is likely to 
rise more slowly, meaning that 40 percent of India's gas needs are 
likely to be imported by 2025. India is already moving to develop the 
infrastructure to boost imports. India's first LNG import terminal 
Petronet, a joint venture between India's state oil and gas companies 
ONGC, GAIL, and IOC, along with Gaz de France, began operation in late 
2003 and is importing gas from Qatar. Another Shell-sponsored terminal 
is planned for 2005 in Gujarat to bring LNG from Oman. In all, the 
government has approved plans for 12 possible import terminals in the 
future. Recently, there has been new progress on natural gas pipeline 
proposals to bring gas from Iran via Pakistan, and from Burma via 
Bangladesh. Each of these proposals has serious geopolitical problems 
and the outlook for pipeline supplies will depend on resolving key 
regional geopolitical rivalries and constraints. The large majority of 
India's future gas imports will necessarily come as LNG from the 
Persian Gulf, with some increment possible from Burma and Iran.
    Like the other Asian energy importers, India is also looking to 
nuclear power development as an important source of electricity 
generation. Nuclear now accounts for less than 5 percent of electricity 
needs in India but five to eight new plants are planned which would 
triple nuclear generation from 3 to 9 gigawatts (GW). Even so, nuclear 
will only be able to meet a small fraction of India's energy and 
electricity needs.
    India's rapidly growing dependence on imported oil supplies has 
recently catalyzed a more aggressive strategy to secure supplies 
overseas and India seems to be emulating China in its overseas energy 
security strategy. ONGC, India's major state-owned oil exploration and 
production company, is beginning to stake out new overseas oilfield 
investment plans through its international subsidiary, ONGC Videsh Ltd. 
India's largest oil stakes, to date, are its 25-percent share in the 
Greater Nile Oil Project in Sudan, ironically in partnership with 
China's CNPC, which it bought into for $750 million and its 20-percent 
share of the ExxonMobil-led Sakhalin 1 project in Russia, which it 
bought for $1.7 billion. ONGC is also beginning to source large 
supplies of LNG from the Persian Gulf through deals with Qatar and 
Oman. ONGC also recently signed a preliminary deal with Iran to buy LNG 
later in the decade for which ONGC would get the option to develop a 
large Iranian oilfield. Videsh has been bidding for Cairn Energy assets 
in Bangladesh, been awarded exploration blocks in Syria, and has been 
negotiating with Myanmar, Iran, Iraq, Libya, Kazakhstan, and United 
States for exploration blocks. With more than 50 percent of its total 
oil supplies now sourced from the Middle East, India has announced 
plans to build a strategic oil stockpile but has not moved very far in 
doing so yet.

                          GEOPOLITICAL ISSUES
    Both China and India are scouring the globe to secure better access 
to oil and gas supplies and are building broader diplomatic and trade 
ties that serve to strengthen these energy links. While they are 
ranging widely around the globe, their most important efforts have been 
focused largely on three key petroleum rich regions where growing 
energy ties are likely to have a significant impact on future 
geopolitical developments.
    Not surprisingly, the primary area of focus for both China and 
India is the Persian Gulf. The region holds two-thirds of the world's 
proven oil reserves and already accounts for two-thirds of India oil 
imports and more than one-half of China's. In the longer run, the gulf 
is likely to account for 80 percent of each country's oil imports and 
50 percent of their natural gas imports. Both countries are building 
long-term energy ties but also are rapidly building diplomatic, trade, 
and military ties in the region. The main focus so far has been on Iran 
and, to a lesser extent, Saudi Arabia. The rapid development of ties 
between China and India and the Persian Gulf also is a two-way street 
and both countries are taking on great importance from the gulf oil and 
gas exporters' perspective. Currently, two-thirds of the gulf's oil 
exports go to Asia and this will grow sharply in the future. The 
growing nexus of diplomatic, trade, and military ties with China and 
India appeals to the gulf producers who are looking to diversify their 
economic and geopolitical base beyond traditional dependence on the 
United States and European markets and diplomatic relationships. All 
these trends suggest that energy will propel China and India into 
becoming major players in the Persian Gulf and broader Middle East in 
the future.
    Russia is the second key area where China and India are jockeying 
for position and where energy will have important geopolitical 
implications. The natural complementarity between Russia's huge surplus 
supplies of oil and gas with China and India's huge deficit contains 
the seeds of a growing set of energy, trade, and geopolitical 
relationships. Russia's importance to China and India arises from its 
potential to, at least, partly offset reliance on the Persian Gulf and 
other tanker supplies that must transit a vulnerable series of maritime 
chokepoints. The ability to diversify supplies sources, as well as 
diversifying transport routes, is vitally important in their respective 
energy security calculations. India has a big position in the Sakhalin 
2 oil and LNG project, while China is deeply involved in proposals to 
bring East Siberia oil and gas supplies to China. Both are busy 
upgrading and broadening their political ties with Russia to support 
future energy ties. This complementarity extends to the Russian side as 
well. Vladimir Putin and the Kremlin would like to diversify Russia's 
growing energy export base away from total dependence on European 
markets for both oil and gas exports. The Kremlin has become quite 
explicit under Putin's newly statist orientation toward the energy 
export sector about their desire to use oil and gas as strategic 
diplomatic and commercial tools to return to becoming a major player in 
East Asia. Interestingly, China and India's heavily mercantilist 
approach to energy security concerns matches well with Putin's 
increasingly mercantilist objectives for Russia's energy sector.
    The third key area of energy resource competition and growing ties 
and where the geopolitical overlay is likely to take on increasing 
importance, is in the Central Asia and Caspian Sea region. The 
attraction of diversifying imports away from the Persian Gulf and 
toward overland pipeline supplies is irresistible. China is in the best 
geographical position to benefit and is moving to make Kazakhstan a key 
oil supply source for the future through its growing equity investments 
in oilfields in western Kazakhstan and promises to build a long-
distance pipeline to western China. A pipeline would also give the 
Kazakhstan Government stronger incentives to help stabilize the 
potentially restive Islamic region along China's border, something that 
China is increasingly concerned about in the wake of growing Islamic 
unrest on the Chinese side of the border. As part of this effort, China 
has been active in developing broader diplomatic alliances with 
Kazakhstan and in the broader region. The Shanghai Cooperation 
Organization, which China has spearheaded to build broader ties with 
Central Asia and Russia clearly also is aimed at boosting energy 
cooperation. India has fewer options to access Central Asian resources 
due to geographical limitations, although they have been involved in 
long-running proposals to bring oil and gas from Central Asia via 
pipelines across Afghanistan and Pakistan.
   geopolitical and energy market implications for the united states
    China and India's responses to their deepening energy insecurity 
have a range of important implications for the region and for the 
United States across a broad swath of geopolitical, energy, and 
environmental issues.
    First, as the key stabilizing and balancing force in Asia, the 
United States has a vital stake in how energy insecurity impacts future 
relations between China and India, whether energy issues aggravate and 
reinforce Sino-Indian rivalries or provide a basis for greater 
cooperation. The Sino-Indian relationship is one of the most critical 
dimensions in Asia's future geopolitical architecture. The marked 
inclination toward a relatively narrow, zero-sum, neomercantilist 
approach to energy security by both China and India clearly holds the 
risk that energy could become a major source of future tension between 
the two countries. There have been several cases of direct competition 
for the same oilfield assets, for example in Angola, that have provoked 
a sense of direct competition between the two. India has been very 
vocal, recently, about having to compete with China for oil and gas 
resources and has, at least publicly, appealed to China for discussions 
to promote greater bilateral cooperation on energy. Moreover, both 
China and India are relying on bilateral approaches that link energy, 
trade, strategic, and often military, cooperation rather than 
multilateral and regional approaches to linking energy and security 
interests. Bilateral approaches clearly risk reinforcing the potential 
for competitive outcomes.
    Also, zero-sum approaches to energy security increase the risk of 
spillover into competition over maritime energy transport routes in the 
India Ocean and Straits of Malacca. China is increasingly wary of 
India's naval capabilities in the Indian Ocean and its ability to 
interdict tanker traffic headed for China. This has been heightened 
recently by India's improving naval cooperation with the Southeast 
Asian states and the United States. India, on the other hand, is 
increasingly wary of China's growing efforts to acquire port access 
along the Indian Ocean coast, with new port-access arrangements in 
Pakistan, Bangladesh, and Myanmar.
    A second set of issues for the United States, concerns the impact 
of the growing long-term role of China and India in key oil and gas 
exporting regions. Their role will inevitably grow in these regions. 
The only question is how this could impact U.S. interests and policies. 
Foremost here is the Persian Gulf and Middle East. On one hand, China 
and India's growing dependence on Persian Gulf oil suggests that their 
growing interests in Persian Gulf stability will converge with our own. 
Consequently, it would seem unlikely that China or India would see it 
in their interest to do things likely to seriously destabilize the 
region, such as stepping up arms and missile sales or contributing to 
nuclear proliferation, and would be more likely to free ride on U.S. 
efforts to maintain stability in the region. Moreover, while the 
conservative Persian Gulf states may welcome the opportunity to 
diversify their strategic, energy, and trade relationships with the 
growing presence of the Asian players, only the United States can 
provide the military and strategic umbrella to protect them in this 
very volatile region and provide the strategic naval and air power 
projection to protect vital tanker routes and chokepoints like the 
Straits of Hormuz. From this perspective, it seems unlikely that the 
United States will see a wholesale challenge to its traditional 
military hegemony in the Persian Gulf.
    However, conflicting visions among China and India, on the one 
hand, and the United States on the other, over the conditions that are 
conducive to long-term stability in the gulf and Middle East are likely 
to introduce a more complex and challenging situation for the United 
States. One telling example is the willingness of both China and India 
to become deeply engaged with Iran in energy and broader economic and 
diplomatic ties despite the U.S. embargo and the U.S. contention that 
Iran is a major source of regional terrorism, nuclear weapons 
development, and a threat to its neighbors. China has seen it in its 
interest to be a major arms supplier to Iran consistently over the past 
decade, frequently including potentially very destabilizing missile 
sales, much to the chagrin of the United States. Neither has supported 
the U.S. war in Iraq, which was strongly opposed by China. Depending on 
how the Iraq post-war transition goes, there may be new and potentially 
divisive issues regarding how to deal with an unstable and potentially 
fractured Iraq as China and India step up their efforts to access Iraqi 
oil supplies. Asia has not been particularly supportive of U.S. policy 
on the Palestinian-Israeli conflict, historically. So, as the Sino-
Indian-Middle East nexus grows rapidly over the next two decades, it 
seems inevitable that the range of potentially significant 
disagreements over how to ensure the stability of the gulf region will 
grow and with it will grow the complications for U.S. policy in the 
region.
    There is a potential for some of the same issues regarding U.S. 
energy diplomacy and influence in the Caspian Sea/Central Asia region 
but they do not look to be as pointed at is the case in the Persian 
Gulf. In many ways, United States, Chinese, and Indian energy interests 
in the region converge somewhat more closely. The United States has 
reason to support pipeline proposals to move Central Asian oil and gas 
to China and India to promote the Eurasian states' independence from 
Russian control and to promote regional energy cooperation. The one 
potential source of problems from this perspective is the U.S. effort 
to isolate Iran. The most commercially viable means to get Caspian and 
Central Asian oil and natural gas to India and the rest of Asia is by 
pipeline south through Iran. For both China and India, Central Asian/
Caspian oil represents a potentially important alternative to Persian 
Gulf oil, whether it moves by pipeline or by tanker. In fact, China has 
already been instrumental in building pipeline infrastructure that 
currently allows oil swaps to occur between Turkmenistan and Iran that 
effectively allow exports through Iran. United States opposition to 
Indian proposals for a major natural gas pipeline from Iran across 
Pakistan to India is already a source of friction in United States-
Indian relations. Similarly, Indian proposals to build a gas pipeline 
from Burma to India would create problems for U.S. efforts to isolate 
Burma.
    China is concerned about the increased U.S. presence and power in 
Central and Southcentral Asia in the wake of the Afghan war because it 
aggravates their broader worries about security along a key border 
region in Central Asia. This is part of the thrust behind the Shanghai 
Cooperation Organization to reorganize its security space to the West 
in the post-cold-war era. Clearly China desires to get the United 
States to leave the region as soon as possible but it is not clear how 
and whether this could affect their policies toward energy development 
in the region.
    Another set of future issues are related to how growing energy ties 
with China and India could feed Russia's reemergence as a major player 
in Northeast Asian geopolitics. On the one hand, there is a strong 
argument that development of an extensive regional network of oil and 
gas pipelines and energy trade linking Russia with the major powers in 
the region could expand all the players interests in broader regional 
cooperation and stability. It could also help support Russian economic 
development in this thinly populated part of Russia and reduce the 
Kremlin's fears of eastern Russia being overrun by dynamic economic and 
trade forces and population momentum emanating from China. However, the 
Kremlin also is trying to use energy as a key instrument of diplomacy 
and influence with China and India. The impact of Russia's growing 
energy role will depend heavily on how Russia, China, and India manage 
their energy ties, either fueling competition or cooperation.
    Another area of concern involves a range of impacts of China and 
India's booming oil demand as well as the impact of their implied 
strategy of ``locking up'' national control of certain oil supplies to 
fuel their own economies, in effect, ``taking oil off the market.'' 
Both countries clearly aim to lock up their own national oil supplies 
with many of their investments in places like Sudan and this practice 
is likely to contribute to higher oil prices and price volatility by 
reducing global market flexibility to handle tight markets, shortages, 
and supply disruptions. The recent controversy over CNOOC's bid to 
acquire Unocal is partly driven by concerns among many U.S. politicians 
that China is attempting to ``steal'' U.S. oil supplies to send to 
China. Second, many in the United States feel that China and India are 
``competing'' in open global oil markets with the United States for 
scarce global oil supplies and driving up world prices. Nevertheless, 
the fact is that growing U.S. demand for imported oil has been as 
important in driving global prices as China or India. A more important 
problem revolves around Asia's lack the regional institutions to manage 
supply crises on a regional cooperative basis and key buyers in the 
region are prone to panic buying during crises, fueling market 
instability. Both China and India were key factors in panic buying 
globally in the runup to the Iraq war in January and February 2003. The 
lack of effective demand policies or policies to manage supply 
disruptions makes the combined demand impact of the two a growing 
potential source of instability in global oil markets.
    It is also quite apparent that China and India's growing 
consumption of coal and the air quality impact of booming 
transportation consumption have grave environmental implications 
regionally in terms of air quality and health, and globally in terms of 
raising the risks that carbon emissions could be fueling global 
warming. Concerns over long-term global carbon emissions simply cannot 
be effectively addressed without greater involvement from China and 
India. This needs to be addressed both on the demand side, by slowing 
the rise in electricity demand growth in Asia, as well as improvements 
in clean coal technology and government policies regarding the 
preparation, handling, and transportation of coal.
    A final serious and obvious area for concern is the growing role 
for nuclear energy in both China and India and the resulting risks of 
nuclear proliferation and safety problems. This will create strong 
pressures for improving the global regime to contain proliferation 
pressures and research on improving safety and disposal technology. The 
recent agreement between the United States and India on nuclear 
technology and proliferation shows the importance of these issues. As 
in the case of coal, there is vital need to improve the electricity 
demand side and pricing reforms to slow the rate of growth in 
electricity demand.

                         POLICY RECOMMENDATIONS
    China and India's growing energy insecurity has broad ramifications 
for the region and for the United States across a wide range of 
geopolitical, energy, and environmental issues. There is a high degree 
of interconnectedness between energy and these other issues. Booming 
energy demand is likely to deeply impact the roles of China and India 
in Asia and globally.
    There are several general policy areas that U.S. policymakers need 
to begin thinking about. First, U.S. policymakers need to step up 
efforts to help both China and India improve energy efficiency and slow 
the rise in consumption which is driving their insecurity. Each 
govermnent needs to be engaged at the highest level on the importance 
of managing energy demand to reduce the near panic emphasis on 
acquiring global supplies that is likely to be the source of serious 
future geopolitical problems. Second, the United States needs to look 
for ways to bring China and India into the global emergency oil-sharing 
system currently dominated by the IEA, which, since it can only include 
members of the OECD, by definition excludes them. Both China and India 
feel excluded from these global energy management institutions and this 
aggravates their zero-sum view of global energy trade and politics. 
This again requires senior policy-level engagement. China is presently 
beginning to build its own strategic oil reserves in four locations 
along the eastern coast. India has announced plans to do the same. But 
it is vital that their efforts to build and use strategic reserves be 
coordinated with IEA and Western strategic reserves to maximize their 
effectiveness during any supply crisis. At a minimum, the United States 
should be encouraging some form of regional Asian oil-sharing 
mechanism. Third, the United States needs to aggressively seek ways to 
encourage building regional energy cooperation institutions in Asia, 
that would include China and India, in order to facilitate 
multinational energy projects and encourage cooperation and markets 
over competition and mercantilism. APEC is not an effective forum for 
this; it is too large and heterogeneous and India is not a member. Nor 
is the ASEAN Regional Forum (ARF) likely to be effective in this 
regard. New institutions need to be built, but without U.S. 
involvement. The risks are rising that nationalistic competition for 
energy supplies and naval control over transit routes could lead to 
serious political and military tensions among Asia's key powers, 
especially China and India. Fourth, related to the issue of 
cooperation, U.S. policymakers need to find ways to discourage China 
and India from seeking to ``lock up'' global equity oil supplies in a 
futile, mercantilist effort to monopolize those supplies for their own 
economies, i.e., ``take oil off the market.'' Global oil markets and 
long-term supply contracts can provide as much security as any equity 
oil supplies, i.e., markets work. At the same time, the United States 
cannot preach markets convincingly while at the same time blocking 
CNOOC's possible acquisition, Unocal, in what is largely a market-
driven transaction. Fifth, U.S. policymakers need to begin planning for 
managing and channeling China and India's growing diplomatic and 
economic influence in the world's key energy exporting regions, most 
importantly the Persian Gulf and Middle East. A dialogue on forging 
some consensus on the fundamentals of stability in these key regions is 
vital to avoiding problems in the future. Sixth, the United States 
needs to become more active in helping both China and India find 
alternatives to rising coal consumption to meet their electricity 
needs. There needs to be strong U.S. support for clean-coal technology 
development and the transfer of this technology to China and India to 
burn coal more efficiently and cleanly. Moreover, assistance in 
developing natural gas-fired power generation and safe nuclear 
generation are vital in the electricity equation.
    Asia's booming energy consumption will be the driver for a number 
of interrelated energy, environmental, and diplomatic challenges in the 
future for the United States. It is vital that U.S. policymakers at the 
highest level begin to engage China and India on these issues and seek 
creative ways to avoid a growing set of looming challenges outlined 
here.

    The Chairman. Thank you very much, Mr. Herberg.
    The Chairman. Mr. Schriver.

      STATEMENT OF RANDALL G. SCHRIVER, PARTNER, ARMITAGE 
                  INTERNATIONAL, ARLINGTON, VA

    Mr. Schriver. Good morning, Mr. Chairman and Senators. 
Thank you for giving me the opportunity to appear here today.
    I think previous witnesses in the previous discussion well 
covered the energy trends in China, and the surge in demand for 
oil, in particular. What I'd like to do, given the time 
limitations, is talk more directly about the implications on 
Chinese foreign policy and then what I believe are, therefore, 
the implications for the United States, and maybe a few 
thoughts on policy for the United States.
    Given this incredible surge in demand from China and what 
will likely be a trend line that will continue out, for the 
foreseeable future, of extreme appetite for energy resources, 
China perceives that it has energy vulnerabilities and risks, 
and it's taking steps to mitigate those risks. In the most 
straightforward terms, they're seeking diversification of its 
sources of energy, as well as trying to, as others have pointed 
out, obtain equity share assets and decisionmaking equity 
shares in assets abroad.
    With regard to the first point, in diversification, I'd 
offer one data point. As recently as 1996, China imported 
roughly half its oil from two countries, Oman and Indonesia. 
And if you add a third country, Yemen, close to 70 percent of 
its oil was imported from just three countries. By 2004, they 
had significantly expanded their commercial relations to a 
point where they were much more diverse. Saudi Arabia is now 
their largest source of oil, at roughly 16 percent; Iran is 
right behind it, 15-16 percent. And so, they've, in a very 
short period of time--that's an 8-year period--have diversified 
to a point where I think they have mitigated their risk, to 
some extent. Certainly, a major disruption with a country like 
Saudi Arabia, it would have an impact on the Chinese economy, 
but they've been fairly successful at this goal of 
diversification.
    In terms of acquiring assets and equity shares abroad, this 
has been addressed. I would offer a couple of data points. 
China began investing in Sudan in the mid-1990s. The oil was--
the oil that is now reaching China wasn't even pumping until 
1999. By 2004, Sudan had become the sixth-largest source of oil 
for China. So, again, a very short period of time. And, in this 
case, this wasn't solely a commercial relationship; this 
relationship began with China investing in the infrastructure, 
sending engineers, sending construction teams, and owning a lot 
of that infrastructure as assets. In Uzbekistan, we're seeking 
a similar development underway right now with a very 
significant Chinese investment in infrastructure there in 
associated oil deals equaling, roughly, about 700 million U.S. 
dollars.
    So, these two trends are very much a part of Chinese 
foreign policy. Their exploration and investment is not only 
onshore, it's on the seas. The bulk of this is in territorial 
waters, but, as was previously mentioned, they are interested 
in exploring other areas where there could be territorial 
disputes involved. In some cases, this could actually lead to 
greater stability. They've reached agreements with some 
countries for joint exploration; notably, Vietnam. But, in 
other cases, we see this as a potential source of great 
tension. And I think Japan was already mentioned.
    There are also, I think, more subtle linkages we need to 
think about, in terms of Chinese foreign policy. This notion of 
having a secure logistics train involves not only pipelines, 
but secure ports, maritime security. I think the previous 
discussion about the Malacca Straits was on point with respect 
to this point. And so, this will also animate and motivate 
Chinese foreign policy.
    And, finally, I think another subtle effect, but extremely 
important, is how this will motivate the People's Liberation 
Army in its modernization efforts. Even owning oil, owning 
assets, even having secure commercial contracts doesn't 
ultimately guarantee the energy will arrive in the time of a 
crisis, so the PLA has included in its future projections the 
mission of trying to secure the delivery of energy resources 
from abroad. And this has a whole range of implications for 
their military modernization and for the United States.
    So, let me briefly touch upon what I see are the major 
implications for the United States
    As has already been mentioned, of course, this will be a 
major driver in increases to oil prices. That affects our 
economy directly. As also was previously mentioned, given that 
this is a national-level goal from the Chinese Government, 
their willingness to subsidize commercial deals puts, 
potentially, United States companies and those of other 
countries at a disadvantage.
    But I think what concerns most in the United States would 
be under the header of complicating our foreign policy and 
security interests abroad in some key areas, and I think three 
countries leap to mind. I'll just touch on them briefly, 
because I think they've all been mentioned--Sudan, Iran, and 
Venezuela.
    In Sudan, as we and others were working on the humanitarian 
situation in Darfur, the Chinese were concluding major 
commercial deals, but also selling arms to the Government in 
Khartoum, I think, very much complicating our efforts to 
address the humanitarian situation there.
    In Iran, a similar kind of dynamic as the EU-3 and others 
were working on the nuclear challenge there. Again, very 
lucrative commercial deals being cut, possibly some political 
assurances delivered, as well, in saying that China would 
protect Iran's interests in equities in the United Nations if 
the EU-3 or others decided to take action there.
    And then, of course, in Venezuela--this has already been 
addressed--as Chavez has promoted his anti-Americanism and this 
ideology in the region, China is working to secure, for Chavez, 
what he most desires, and that is lesser dependency on the 
United States market for Venezuelan oil. So, again, this could 
complicate our foreign policy.
    Again, with respect to offshore exploration--this has 
already been touched upon--if there are major tensions between 
China and Japan in this regard, Japan is a treaty ally, and the 
United States has serious obligations there, and, if forced to 
take a position, we will stand with our treaty allies, so there 
are major implications for the United States if that were to go 
in an adversarial direction.
    I didn't mention coal. I think, in terms of implications 
for the United States, China continues to the largest producer 
and consumer of coal in the world. At this juncture, although 
the numbers are changing, it still accounts for about 65 
percent of their energy consumption. This has major 
implications for the environment. And these are problems that 
will not be contained within China's borders. The environmental 
degradation is extreme in China. I think the WHO says 7 out of 
10 of the most polluted cities in the world are in China. But 
these problems are of a nature that they won't be contained 
within China's borders, and they'll quickly become problems for 
all of us.
    And then I think the--again, to shift to some of the more 
subtle implications--we're not sure how our relationship with 
China will unfold. We hope that China chooses a path of benign 
integration and peaceful competition, but there is a potential 
future out there where China makes a different kind of choice 
and we end up in a different kind of relationship, not where we 
want to be. So, I think these questions related to competition 
over energy are playing into this larger question, about the 
direction of our relationship. Are we veering toward 
competition or even an adversarial relationship, depending on 
the choices that China makes? And so, this is something that 
would also need to be considered as we look at these questions.
    And, finally, if I might, just very briefly, a few thoughts 
on policy, and I'll make four very quick points.
    First of all, we do need to continue our broad and 
comprehensive engagement of China. Our relationship is broader 
than this burgeoning competition over energy. There are plenty 
of things we need to continue to work on with China. And so, 
this should not be a disruption to that engagement policy.
    Second, I think it's also the case that China's growing 
demand for energy could also drive us closer together in some 
important ways. And I can think of a few. I think this should 
make China see our point of view on nonproliferation and export 
controls, I think, on maritime security, stability in key oil-
producing regions. So, I think there's an opportunity here, if 
it's nurtured and brought along by U.S. policymakers, to 
actually promote these aspects of what is happening in China 
and these energy trends.
    Third, I do think, as has been discussed, there is a need 
to talk about this in a multilateral environment, but at a 
sufficiently senior level so that it's meaningful. This could 
be in existing multilateral fora, such as APEC, but some 
consideration might be given to creating new modalities to talk 
about these issues. They are serious enough that it may merit 
some creative thinking and perhaps a new initiative to look at 
these questions. Again, it has to be at a senior level.
    And then, finally, I think the United States does need to 
be prepared for a relationship with China that goes in the 
direction we don't want. And so, there's a range of 
implications with that. I think, as we're trying to work 
cooperatively with China, we still need to strengthen our 
bilateral alliance with Japan, we still need to work on our 
relationships in Southeast Asia, we still need to have a 
military presence that is appropriate in Asia for 21st-century 
challenges. And China's uncertainties, I think, are very much 
included in that.
    So, these are a few thoughts on the policy side, as well. 
Thank you, again, for the opportunity to be here.
    [The prepared statement of Mr. Schriver follows:]

     Prepared Statement of Randall G. Schriver, Partner, Armitage 
                      International, Arlington, VA

                              INTRODUCTION
    Chinese foreign policy has changed dramatically over the course of 
the last decade. China pursues its interests today through a more 
creative and proactive diplomacy. In addition, China has greater 
capabilities and a widening ``tool box'' available as the means to 
pursue its foreign policy goals. The net effect is that China is 
choosing deeper engagement and involvement with the outside world, and 
is increasingly effective at promoting its interests--even in the cases 
where its interests clash with the United States and other established 
powers.
    One of the key drivers to Chinese foreign policy is a requirement 
to establish secure, reliable access to energy resources that lay 
beyond China's borders. China's domestic economic growth has led to a 
surge in demand for energy. The increased demand is primarily for oil, 
and it well-exceeds China's domestic production capacity. Sustaining 
China's economic growth is a vital to the regime, and thus there is a 
growing perception among Chinese leaders that increasing reliance on 
foreign energy creates vulnerabilities and risks. In order to secure 
the energy required to support China's domestic demand, China has 
embarked on an effort to promote supply diversification as well as 
overseas equity investment.
    The United States will be impacted by China's surging demand for 
energy. Some of the impact will likely be negative--higher prices for 
foreign crude, for example. It may also be the case, however, that 
China's increasing reliance to the outside world presents the United 
States and our friends with foreign policy opportunities. My statement 
will address the following: Observations on energy trends in China; 
impact on China's foreign policy; consequences and opportunities for 
the United States; and thoughts on U.S. policy response.

                 OBSERVATIONS ON ENERGY TRENDS IN CHINA
    The top priorities for Chinese leaders are to continue to develop 
the country and to increase comprehensive national power. The largest 
element associated with those goals is to sustain China's domestic 
economic growth. This reality links China to the outside world in a 
variety of ways, but none more evident than China's need to import oil 
for the purposes of literally fueling economic development at home.
    China became a net oil importer in 1993. It is now the second 
largest importer of petroleum in the world, surpassing Japan in 2003. 
The demand continues to surge. As recently as 1996 China imported 22.8 
million tons of crude. By 2004, the number reached 122.7 million tons 
of crude. In all, China accounts for over 40 percent of world oil 
demand growth over the last 4 years.
    Equally important, economists and energy specialists forecast that 
China's requirements for importing crude will continue to grow at a 
fast clip. The International Energy Agency predicts that China may need 
to import close to 80 percent of its oil by 2030. The primary driver 
will continue to be individual energy consumers (more and more cars on 
the road), and energy required to support industrial growth.
    China has embarked on an effort to mitigate its risks associated 
with its growing reliance on foreign sources for energy. Efforts aimed 
at developing supply diversification and acquiring equity investments 
abroad are driving China's foreign policy and diplomacy in tangible 
ways. It should be noted here that China is also pursuing efforts to 
reduce demand (e.g., new vehicle efficiency standards, national fuel 
tax), develop alternate sources (natural gas and nuclear), as well as 
to develop a strategic petroleum reserve. None of these efforts, 
however, change the fact that the Chinese economy and associated 
infrastructure are being developed in a manner consistent with a 20th 
century, petroleum-based development model. In other words, China will 
continue to need more and more oil if it continues on its current 
growth and development path despite other attempts to mitigate risk.
    Coal deserves special mention. China is the world's largest 
producer and the world's largest consumer of coal. Coal still accounts 
for 65 percent of China's primary energy consumption. Its coal 
consumption is roughly 27 percent of the world total. What is important 
to understand, with respect to future needs, is that although coal's 
share of overall Chinese energy consumption is projected to fall 
(replaced primarily by oil), coal consumption will likely continue to 
grow in absolute terms. This links China to the outside world in a 
different way as compared to oil. China's coal burning takes a heavy 
toll on China's environment. But, in fact, the environmental 
degradation will not be contained within China's borders as there will 
be increasing fallout in the region, and in the global environment if 
the trend lines continue.

                    IMPACT ON CHINESE FOREIGN POLICY
    In the simplest and most straightforward terms, China's surging 
demand for oil imports lead China to seek diversification in its supply 
sources, and greater ownership of overseas assets that relate to energy 
production and export. However, there are other foreign policy 
implications as well. The logistics train also needs to be secure to 
ensure minimal risk of the delivery of energy to China. And China is 
also aware that even owning oil and pipelines does not completely 
mitigate risk of disruption unless China has the military capability to 
protect assets abroad--thereby requiring power projection capability.
    The goal of greater source diversification has led China to develop 
not only stronger commercial relations with a greater number of oil 
producing countries, but stronger political relations as well. As 
recently as 1996 (3 years after becoming a net oil importer), China 
imported roughly half its oil from two countries--Oman and Indonesia--
and nearly 70 percent from three countries combined (add Yemen to Oman 
and Indonesia). A short 8 years later, by 2004, China had developed 
significant import sources from Iran, Sudan, Angola, Russia, and Saudi 
Arabia. While a disruption, associated with one of its major sources of 
crude oil (its largest being Saudi Arabia at 16 percent), would still 
have a major impact on the Chinese economy, its fair to observe that in 
less than a decade China has succeeded in spreading its risk through 
diversification efforts.
    China is also acquiring assets, and becoming decisionmaking equity 
investors in oil producing countries overseas. According to a Jamestown 
Foundation China brief in April 2005, China enjoyed early success on 
the African Continent in Sudan. Initial investment in the mid-1990s 
included sending large numbers of Chinese engineers and construction 
teams. The oil began pumping in 1999, and by 2004 Sudan was the 6th 
largest supplier of oil being imported by China. These efforts are 
mirrored globally in other developing countries. In Central Asia, 
according to the Eurasia Daily Monitor, China has made initial 
investments in Uzbekistan of approximately 106 million U.S. dollars. 
Chinese investments may reach 600 million U.S. dollars in Uzbekistan 
over a longer period.
    China's increasing demand for oil lead to greater exploration 
efforts at home, as well as investment in exploration in developing 
countries. However, they are not limited to onshore exploration. China 
is also investing in offshore exploration which carries potential 
foreign policy consequences. Although major efforts, to date, have 
occurred in Chinese sovereign waters (the Bohai Sea in the largest 
project funded by China), others in the region have concerns that 
China's appetite might be larger. In some cases a larger appetite for 
offshore exploration may lead to greater stability in Asia (e.g., China 
and Vietnam reached agreement for joint exploration in areas previously 
under dispute), but it may also tempt China to push its claims on other 
disputed territories. Understandably, this makes some in Japan feel 
uneasy after several incursions by Chinese vessels into Japanese 
territorial waters.
    In addition to the aforementioned linkages between China's growing 
dependency on foreign oil and its foreign relations, there are 
additional effects on Chinese approaches to the outside world which, 
though perhaps more subtle, are nonetheless significant. China not only 
needs oil, it needs assurance that the oil can be delivered efficiently 
and safely to China. This means pipelines, secure port facilities, and 
maritime security. But it also means stability on China's periphery. 
China has secured a stunning number of border agreements on its 
periphery over the last decade. This also helps explain China's 
treatment of President Karimov a few days after the bloody crackdown in 
Andijon. China values stability in its neighborhood even when achieved 
by virtue of heavy-handed tactics.
    Finally, even owning oil and pipelines does not completely mitigate 
risk of disruption unless China has the military capability to protect 
assets abroad. Thus some in China may believe that the ultimate 
guarantor of energy security is the People's Liberation Army. China's 
military modernization has been aggressive, and quite effective. 
Chinese military leaders have placed an emphasis on developing a ``blue 
water navy'' and associated power projection capability. The U.S. 
Department of Defense report on China's military capabilities released 
this month states, ``China's military modernization remains ambitious. 
In the recent past moreover, military responses, in support of Chinese 
claims of disputed territory or resource rights, have produced crises 
and conflicts with China's neighbors including India, Japan, the 
Philippines, the then-Soviet Union, and Vietnam. In the future, as 
China's military power grows, China's leaders may be tempted to resort 
to force or coercion more quickly to press diplomatic advantage, 
advance security interests, or resolve disputes.''

                   IMPLICATIONS FOR THE UNITED STATES
    The trends associated with China's development, its surging demand 
for energy, and its more proactive foreign policy, all carry 
implications for the United States--some direct, some more subtle, and 
probably some yet to be determined.
    The most direct impact on the United States and our friends and 
allies relates to world oil prices. The health of the U.S. economy does 
bear some direct relationship to the price of crude. As China accounts 
for over 40 percent of world oil demand growth over the last 4 years, 
they are part of the reason we are facing high costs for oil imports in 
the global market. Though world reserves and production capacity 
suggest the market can account for China's surging demand, in the near 
term we are unlikely to see significant reduction in oil prices.
    There may also be direct effects on U.S. and other foreign oil 
companies. A national-level goal to secure foreign access to oil for 
China will likely motivate the Chinese Government to support the 
efforts of ``semiprivate'' Chinese companies in their respective 
commercial dealings. If the net effect is subsidized commercial bids, 
U.S. companies could be greatly disadvantaged.
    There are other direct effects that are likely negative for the 
United States in the near term. These effects may fall under the header 
of ``complicating U.S. foreign and security policy interests.'' In this 
regard, three countries leap to mind--Sudan, Iran, and Venezuela. China 
typically does not address human rights and nonproliferation in its 
relations with other countries. But the net effect in the three 
aforementioned countries is not simply benign neglect where 
irresponsible behavior is concerned. Rather, China is likely engaged in 
relationship-building that enables continued irresponsible behavior, 
and complicates the efforts of the United States and other countries to 
promote different outcomes. In Sudan, as we've worked with other 
countries to address the genocide in Darfur, China has continued to 
support the regime in Khartoum with lucrative oil deals and even arms 
sales. In Iran, as the EU-3 have attempted to address the nuclear 
challenge through diplomacy, China has continued to support Tehran with 
oil purchases and assurances that China won't support action in the 
United Nations against Iran. And in Venezuela, as Chavez has endeavored 
to spread anti-Americanism throughout the hemisphere, China has given 
Chavez what he so desperately needs in order to sustain his efforts--
lesser reliance on the U.S. market for Venezuela's oil exports.
    The growing interest in exploring disputed offshore areas could 
certainly impact U.S. interests in a direct way. Many of China's 
existing disputes are with friends of the United States, but in some 
cases, with treaty allies. If tensions continue to mount between China 
and Japan (and surely energy would only account for a part of the 
story), the United States may very well be placed in a position where 
we must stand up for our treaty ally. While our generic response to 
matters of maritime territorial disputes is legalistic and 
noncommittal, it's not inconceivable we could choose a more robust 
response if our ally were faced with more aggressive actions from 
China.
    The special mention of coal in the previous section should be 
mirrored in this section addressing impact on U.S. interests. According 
to the World Health Organization, 7 out of 10 of the world's most 
polluted cities are in China. China already accounts for 13.5 percent 
of world carbon dioxide emissions. While we, in the United States, 
remain the greatest contributor to greenhouse gas emissions, as a 
developed, modern economy, we also have a greater likelihood of 
implementing policies and developing new technologies to make ourselves 
greener. China's stated interest in sustainable development has not 
seen associated national level efforts to deal with a growing problem 
of severe environmental degradation in China. And these problems, as 
mentioned above, will not be completely contained within China's 
borders.
    The more subtle impact on the United States relates to how China's 
emergence as a more proactive and influential global player--very much 
driven by growing energy needs--will affect United States-China 
bilateral relations in the general. In other words, if the United 
States and China are lurching toward a classic great power rivalry, how 
will China's activities in oil producing regions and oil producing 
countries impact our overall ability to get along with one another? As 
the U.S. Department of Defense report on the Chinese Military states 
``China faces a strategic crossroad. It can choose a pathway of 
peaceful integration and benign competition. China can also choose, or 
find itself upon, a pathway along which China would emerge to exert 
dominant influence in an expanding sphere . . . the future of a rising 
China is not yet set immutably on one course or another.'' This is 
distinct from the point above about China's potential to impact 
discrete foreign policy goals. This is to say, China's activities--even 
if viewed as negative on their own merits--will be viewed in a 
completely different light if we believe China is determined to choose 
an adversarial, competitive course with the United States.
    There are many uncertainties and unknowns associated with China's 
energy trends as well. It is not inconceivable that China's growing 
reliance on the outside world for energy, could actually drive us 
toward closer cooperation rather than competition. I would argue that 
China should come closer to our view on nonproliferation and export 
controls, closer to our view on maritime security, and closer to our 
view on the need to promote stability in key oil producing regions. The 
United States and China may be singled out as the greatest culprits in 
global greenhouse gas emissions, and may find common ground in 
addressing global concerns in ways that aren't too burdensome to our 
respective economies. All of this remains to be determined, however, as 
it is not clear that China has developed sufficient trust that the 
United States will be a reliable partner in these efforts. Instead, 
China seems to have adopted a zero-sum mentality with respect to 
foreign energy at this juncture. Perhaps this is temporary as they work 
to improve their position in the near term.
    Finally, the United States may ultimately see advantage in China's 
efforts to develop alternate sources for energy. There is likely a 
lucrative market awaiting those clever enough to exploit the openings. 
Some opportunities are closer at hand--such as the chance to build 
nuclear power plants in China. Some may be in the near future as China 
will be compelled to seek greener technologies.

                          U.S. POLICY RESPONSE
    From a U.S. perspective, I believe our orientation to the 
challenges associated with China's energy trends should consist of 
several elements. First, the United States should continue to promote 
comprehensive and sophisticated engagement of China. Energy is a major 
determinant of Chinese foreign policy, but it is not the only one. 
Second, we should begin to address energy security challenges in a 
direct, head-on manner in our bilateral relationship. There are genuine 
opportunities for the United States to use these trends to promote 
better United States-China relations--but the opportunities need to be 
harvested. Third, we should explore the creation of new modalities to 
address energy security at a sufficiently senior level in multilateral 
fora. And finally, the United States must hedge against the potential 
for a negative, adversarial relationship with China if the Chinese 
leadership chooses such a course.
    Regarding the first element mentioned, it should be noted that 
although this statement primarily addresses energy, United States-China 
relations are much broader than the burgeoning competition over energy. 
The core elements to the policy chosen by every administration over the 
course of the last 35 years are sound. To critics, a policy of broad 
engagement of China is more descriptive of a ``process'' rather than an 
actual ``policy.'' But it remains true that broad, comprehensive 
engagement of China allows the United States to pursue our interests in 
areas where the United States and China agree, while minimizing the 
chance of conflict resulting from areas where we disagree. There is 
also sufficient evidence that our broad engagement of China has 
contributed, on the margins, to internal change in China for the 
better. Finally, China is not only reliant on the outside world for 
energy--the health and well-being of the Chinese economy is absolutely 
tied to foreign direct investment and for ready markets to which it can 
export. These are potentially sources of stability even if the drive 
for energy causes unease.
    With respect to the second element, as stated before, China's 
growing reliance on the outside world for energy could actually drive 
us toward closer cooperation rather than competition. But this 
framework needs to be nurtured, and it requires proactive efforts to 
build confidence, and build a productive dialogue. A senior-level 
global dialogue with China--as envision by the U.S. State Department--
should include energy security. This topic was not on the Chinese wish 
list for the global dialogue, but the State Department should insist 
upon its inclusion. Areas such as nonproliferation, maritime security, 
and stability in the Middle East should be on the agenda.
    Third, it is insufficient if the United States and China are 
cooperating on energy security, but China is still experiencing tension 
with Japan and the rest of Asia. These issues by their very nature 
require multilateral consultation and cooperation. The United States 
should seek to promote an energy security agenda, either in an existing 
multilateral forum, such as APEC, or seek the creation of a new forum 
for this purpose. Some have suggested that a Northeast Asia energy 
security dialogue should be constituted and sustained at a senior 
official level. I believe there is great merit to this proposal.
    Finally, the United States must be sufficiently prepared to operate 
in an environment of growing competition with China. Our approach to 
China should be rooted in a clear vision for Asia, and a commitment to 
sustaining a strong bilateral alliance with Japan. It is essential that 
the United States adopt a force posture that is appropriate for 21st 
century challenges in Asia--the uncertainties related to China's 
strategic direction very much included. It is also essential that 
others in Asia, and in particular, Southeast Asia, see us as a 
dependable, reliable friend. We would make a mistake if we treated 
China as an enemy today, but we'd be equally negligent if we weren't 
adequately prepared to deal with the consequences of a Chinese decision 
to choose an adversarial path.

    The Chairman. Thank you very much, Mr. Schriver.
    We will hear from Professor Ganguly.
    Professor.

   STATEMENT OF PROF. SUMIT GANGULY, PROFESSOR OF POLITICAL 
  SCIENCE AND DIRECTOR OF THE INDIA STUDIES PROGRAM, INDIANA 
                  UNIVERSITY, BLOOMINGTON, IN

    Mr. Ganguly. Thank you, Chairman Lugar. I am delighted at 
this opportunity to be able to testify on this important 
subject. And thank you, Senators, for this opportunity, also.
    In the interest of time, I will not read my formal remarks. 
I would simply summarize and highlight some of the more 
contentious areas in my remarks. And let me turn to those 
directly.
    To begin with, as several speakers have already alluded to, 
there is little question that India's energy needs over the 
years are going to burgeon. With the growth rate averaging 
between 6 to 7 percent annually, one can expect that India's 
energy needs are not going to shrink anytime in the foreseeable 
future. Currently, just to highlight a few figures, India 
imports more than 60 percent of its oil needs, or slightly more 
than 1.4 million barrels of oil a day. At current rates of 
economic growth, this figure is likely to rise as high as 5 
million barrels per day by the year 2020. Unless India obtains 
or develops alternative sources of energy in the next 15 years, 
it will have to import close to 90 percent of its petroleum 
needs, obviously having a significant impact on the global oil 
market.
    India is not only in competition with the United States for 
oil, but also with the People's Republic of China and the 
relationship--the Sino-Indian relationship still remains 
acutely fraught. India sees China as its principal competitor 
in this global quest for energy. Indian officials are loathe to 
publicly admit the existence of such competition, to avoid 
possible political friction with their behemoth northern 
neighbor.
    This public silence, however, masks a number of private 
misgivings that persist despite an apparent improvement in 
bilateral relations in the past decade. India is investing in 
very much the same places that China has been investing in, and 
the competition is quite acute. And it is outlined in some 
detail in my formal remarks, which I shall not go over at this 
stage.
    Let me turn to two of the more contentious issues, 
particularly as far as the United States is concerned.
    India is in the midst of extensive discussions with Iran 
and with Myanmar, formerly Burma, for the development of oil--
of gas pipelines from both these two countries. As has been 
alluded to by previous speakers, this brings India into 
conflict with the United States, particularly in the case of 
Iran, where there is actually American legislation which India 
would run afoul of.
    I would submit that it is highly unlikely that American 
job-owning is going to make a fundamental difference to Indian 
policy. Indo-American relations have dramatically improved in 
the last decade, particularly after India abandoned its failed 
policies of import substituting industrialization and also has, 
for the most part, at least in practical terms, abandoned its 
hoary commitments to nonalignment.
    The transformation of Indo-United States relations has been 
nothing short of dramatic in the last several years, and the 
current administration deserves considerable credit for having 
taken it to a new stage.
    Under these circumstances, it strikes me as being rather 
parochial to focus inordinately on these two relationships that 
India has with Myanmar and with Iran. The Indian leadership has 
little or no fondness either for the regime that is in Iran or 
the regime in Myanmar. These are purely pragmatic relationships 
geared toward ensuring India's energy security. It has little 
or nothing to do with an embrace of these two regimes, or any 
particular regard for the character of these two regimes. This 
point is elaborated in considerable detail in my presentation; 
and so, I shall not go into it any further.
    Let me turn to a couple of other contentious areas, 
particularly the most recent decision of the administration to 
provide India with civilian nuclear technology, which is, 
obviously, an extraordinarily fraught question in American 
politics, given that India is not a formal member of the 
nuclear nonproliferation regime. But, as everyone on this 
committee is more than well aware of, India was never a part of 
the regime to begin with, and, consequently, to harp on India 
adhering to the terms of the regime strikes me as being, at 
least, mildly unfair. More to the point, India has already 
agreed to full-scope safeguards; thereby ensuring that any 
technology that is transferred to India will be confined to the 
civilian sector and will be carefully sequestered from India's 
nuclear weapons program, which we--about which we can discuss 
with India on a separate basis and need not conflate these two 
issues.
    Turning to another extremely contentious area--I could say 
much more about the nonproliferation issue, but I will not, in 
the interest of time--let me turn to a domestic impediment 
which India has to confront, and confront rather forthrightly, 
something that a series of Indian regimes have shied away from 
doing, and this is where an American role is critical, and this 
has to do with what are called the state electricity boards in 
India. These are the most antiquated systems for the production 
and the delivery of electricity. They are corrupt, they are 
venal, they are poorly run, they are subject to rampant 
political interference, and they are a tragic legacy of India's 
strategy of state-led economic growth.
    Since 1991, India has taken important strides, in terms of 
embracing the market, but the state electricity boards--and if 
you'll forgive the poor pun--constitutes the third rail of 
Indian politics. Most regimes would suffer electrocution if 
they tried to forthrightly tackle this particular nettle, to 
mix my metaphors. But this nettle has to be tackled over the 
long term, because it constitutes a critical drag on India's 
economic growth and contributes to significant power losses 
within India.
    To turn to another area where the United States can play an 
important role is--that has to do with coal, which supplies 
India close to 70 percent of its current energy needs. India is 
the third-largest producer of coal. But much of Indian coal is 
of extremely poor quality and, thereby, contributes to 
significant amounts of pollution. Here, as the individuals from 
State and Energy pointed out, American technology can make a 
world of difference, in terms of ensuring that the coal that is 
utilized in India is used in a more efficient fashion and also 
does not contribute to global pollution, not merely to the 
pollution of India's atmosphere, because this is not a national 
problem, but, indeed, a global problem.
    To summarize, one is at the threshold--the United States is 
at a threshold of a significant breakthrough, in terms of its 
relations with India. It would be unfortunate, and most 
infelicitous, in my view, if the minor contentious issues that 
exist in the energy sector were to hold hostage the overall 
relationship with India, which is poised for a breakthrough 
which has been carefully nurtured for the last several years. 
And my plea to you is to see if one could work, in terms of a 
constructive dialog with India, to address the more contentious 
issues that exist, and not let these issues come to the fore 
and, thereby, torpedo a relationship with a growing Asian 
power.
    Thank you very much.
    [The prepared statement of Mr. Ganguly follows:]

   Prepared Statement of Prof. Sumit Ganguly, Professor of Political 
Science and Director of the India Studies Program, Indiana University, 
                            Bloomington, IN

    Senator Lugar, Senator Biden, and distinguished members of the 
Senate Foreign Relations Committee, it is an honor and a pleasure to be 
asked to testify before this committee today. The following constitutes 
my prepared remarks. I will be happy to address other issues or 
elaborate further on these points during the question-and-answer 
session.

                               BACKGROUND
    As a rapidly developing country, India's energy needs are likely to 
balloon over the coming decades. How and in what areas these needs 
materialize will depend on five major factors. First, these energy 
needs will be driven by India's quest to maintain the high levels of 
economic growth (around 6 to 7 percent annually) that it has enjoyed 
since 1994. Second, much will depend on India's ability (or lack 
thereof) to locate and use existing domestic gas and petroleum 
reserves. The third factor will be the ability of the Indian political 
system to address certain structural inefficiencies which contribute to 
significant loss and wastage. Fourth, it will also depend on its 
ability to adopt new and more energy efficient technologies. And fifth, 
much depends on India's ability to secure external sources of energy.
    Already India is the world's sixth-largest consumer of energy. Most 
estimates suggest that to sustain its current average annual growth 
rate it will need to increase its energy consumption by about 4 percent 
annually.
    Currently, domestically mined coal meets close to 70 percent of 
India's total energy needs; after China and the United States, India is 
the world's third-largest producer of hard coal. Oil supplies about 
another 30 percent of the country's energy. Currently, India imports 
more than 60 percent of its annual oil needs, or slightly more than 1.4 
million barrels of oil per day. At current rates of economic growth, 
this figure is likely to rise to as much as 5 million barrels per day 
by the year 2020. Unless India obtains or develops alternative sources 
of energy, in 15 years it will have to import close to 90 percent of 
its petroleum needs.
    India is working on securing alternative sources of energy in 
cooperation with other countries. These efforts are focused on oil, 
natural gas, and nuclear energy. But each of these potential sources 
presents complicated geopolitical challenges.

                THE GEOPOLITICS OF INDIA'S ENERGY NEEDS
China
    As India has entered the global energy market, it has encountered 
an important competitor: The People's Republic of China, one of the 
fastest-growing economies in the world, a rising military power with a 
vast appetite for oil and other raw materials--and the financial 
resources to satisfy that appetite.
    India sees China as its principal competitor in this global quest 
for energy. Indian officials are loath to admit, publicly, the 
existence of such competition, to avoid possible political friction 
with their behemoth northern neighbor. This public silence, however, 
masks a number of private misgivings that persist despite apparent 
improvement in bilateral relations in the past decade. First, despite 
significant efforts, the two sides have made glacial progress on their 
long-standing border dispute. Second, Indian policymakers remain wary 
of China's close ties to India's bete noire: Pakistan. Third, the 
Indians have become increasingly concerned about China's significant 
diplomatic and military relations with Myanmar (Burma) in recent years. 
Fourth, and finally, both India and China see themselves as great 
powers in Asia and would like to extend their influence beyond their 
respective shores. Although some analysts in India's strategic 
community do harbor hopes of potential cooperation between India and 
China in their global quest for energy resources, these hopes represent 
the triumph of fond wishes over harsh realities. India is in a 
fundamentally competitive, if not conflictual, relationship with China.
    China is already well ahead of India in the search for new energy 
sources. Since 2000 the China National Petroleum Corporation (CNPC) has 
invested $45 billion in this search, while India's Oil and Natural Gas 
Commission (ONGC) has invested just $3.5 billion. The vast foreign-
exchange reserves available to China's state-owned oil firms have 
enabled them to undercut India's efforts to obtain oil beds. For 
example, in 2004, the Chinese firm SINOPEC edged out ONGC Videsh (the 
international arm of ONGC) to acquire an oil-exploration block from 
Shell Oil in Angola. Furthermore, as recent events underscore, the 
Sino-Indian competition for new energy sources in Central Asia is well 
underway. In early July 2005, India was granted observer status in the 
Shanghai Cooperation Organization (SCO)--a forum for meetings and 
consultations between China, Russia, Kazakhstan, Kyrgyzstan, 
Tajikistan, and Uzbekistan. New Delhi was keen on obtaining this status 
to increase its access to, and influence in, the oil-producing states 
of Central Asia. Kazakhstan, the host of the 2005 meeting, is one of 
the states in which New Delhi has considerable interest, not least 
because of the vast Tengiz and Kashagan oilfields and the Kurmangazy 
and Darkhan exploration blocks. ONGC Videsh has formally bid for 
participation in all four areas. Yet, just as India was granted 
observer status in the SCO, the group, at China's behest, also invited 
Iran and Pakistan to participate as observers. The inclusion of 
Pakistan, in particular, is fraught with considerable significance for 
India, as it gives Pakistan further ability to exert influence in the 
region.
Iran
    India's emergent role in Central Asia may lead to an 
intensification of the Sino-Indian rivalry, but it is highly unlikely 
to bring India into conflict with the United States. India's attempts 
to obtain natural gas from Iran, however, are far more contentious from 
the American perspective.
    India has had extensive discussions with Iran about the 
construction of an undersea and overland pipeline to carry natural gas 
to India from Iran's South Pars field. This pipeline would be about 
2,700 kilometers long (about 1,687 miles) and would cost about $4 
billion to build. Some 760 kilometers (475 miles) of this pipeline 
would pass through Baluchistan in southern Pakistan. Once operational, 
it could transfer as much as 90-95 million standard cubic meters of gas 
per day.
    Despite strong interest by both Iran and India in building this 
pipeline, it is by no means a done deal. Indian security analysts have 
expressed misgivings about having such a strategic asset pass through 
the territory of a long-standing adversary: Pakistan. Moreover, it is 
far from clear that Pakistan is going to acquiesce to the construction 
of the pipeline through its territory. In an effort to address these 
concerns, India has proposed that Iran and Pakistan be responsible for 
the construction, maintenance, and safety of the pipeline until it 
reaches the Indo-Pakistani border. That way, both countries not only 
would stand to gain from its operation but would lose, substantially, 
from any sabotage or cessation of its operation. In any event, India 
and Iran have yet, even, to reach an accord on the unit price of the 
gas to be delivered.
    Even though this project is only under discussion, the United 
States had made its displeasure about it known to India. The U.S. 
concern, it appears, is that Iran would use the substantial gas 
revenues generated to fuel its ongoing nuclear weapons program. Such a 
concern, though reasonable from the American standpoint, will have 
little or no resonance in India, especially if the United States cannot 
offer India a viable alternative. In the end, the Indians may choose 
not to pursue the pipeline but to, nevertheless, import natural gas 
from Iran using tankers. At this stage, it is for U.S. policymakers to 
decide whether it is worth making this issue so prominent as to impede 
the steady and dramatic improvement that has taken place in Indo-U.S. 
relations over the past few years.
Burma and Bangladesh
    The other contentious issue in Indo-U.S. relations related to 
energy involves the possible construction of another natural gas 
pipeline--this one bringing gas from Myanmar (Burma) and Bangladesh 
into the Indian State of West Bengal. India has sought to build this 
pipeline not merely to address its energy needs but also to counter 
Beijing's growing influence with the military junta in Yangon 
(Rangoon). For well over a decade India chose to isolate the Burmese 
junta, but faced with a growing Chinese presence in Burma, India has 
begun to reverse its course. This change does not imply any fondness 
for the State Peace and Development Council's brutal form of rule in 
Burma; it is merely a pragmatic attempt to ensure that the Chinese 
presence in Burma does not seriously impinge, any further, on India's 
regional strategic interests. India, however, has yet to persuade the 
paranoiac Bangladesh Nationalist Party-led regime in Bangladesh to 
allow this pipeline to be built. Bangladesh's anxieties stem from its 
overall distrust of India and its obsession with husbanding its one 
major natural resource, natural gas.
    Once again, it would behoove the United States not to hobble the 
construction of this pipeline. Bangladesh desperately needs the 
revenues that the pipeline would generate, and the project might grant 
India some leverage with the Burmese. That said, it is far from clear 
that the current government in Bangladesh will be able to break its 
mindset and agree to the development of its natural gasfields and the 
building of a pipeline across its territory. In the face of this 
attitude, and after years of negotiation, the American energy firm, 
Unocal, recently withdrew its proposals for the development of 
Bangladesh's gasfields.

                  DOMESTIC BOTTLENECKS AND IMPEDIMENTS
    In addition to handling these international difficulties about 
energy, India will also need to address a series of domestic 
bottlenecks that place constraints on meeting its energy needs. These 
bottlenecks are the unfortunate legacies of India's erstwhile economic 
policies of state-led development, which the state began to reform only 
in 1991. In the intervening years, India has sought to unknot the 
labyrinthine regulations that so strangled its economic growth for 
nearly 5 decades. However, some of these regulations and government-run 
entities have proven more difficult than others to dismantle.
    In the energy sector, this problem is most manifest in the State 
Electricity Boards (SEBs), which are responsible for the production and 
distribution of electricity in all but 3 of India's 28 States. (The 
States of Delhi, Orissa, and Maharashtra have moved to privatization of 
electricity.) The SEBs preside over antiquated equipment and are 
bloated with huge numbers of inadequately trained personnel. Worse 
still, they are subject to rampant political interference. Thanks to 
choices based on politics rather than sound economics, households, and 
the agricultural sector are provided electricity at rates well below 
cost. Ironically, the industrial sector pays the highest electricity 
rates. These skewed political priorities have led to overconsumption on 
the part of the subsidized sectors, contributing to widespread fiscal 
indiscipline.
    The reform of these bodies, a critical economic priority, still 
lacks political momentum. Thanks to the power of organized labor in 
India and their links to all the major political parties, reform of the 
SEBs has been limited and fitful. The situation is so dire that a range 
of industries has chosen to build independent, proprietary (captive) 
powerplants because of the endemic unreliability of state and national 
power grids. The SEBs, in their current state, not only constrain 
economic growth but pose a significant fiscal drag on the Indian 
treasury.
    Whether the present coalition regime can tackle this ongoing, but 
longstanding, problem remains unclear. However, without fundamental 
reform of the SEBs, India is likely to face chronic energy shortages, 
thereby hobbling its economic growth.

                      RECOMMENDATIONS AND CHOICES
Electricity
    India's future economic growth, among other factors, crucially 
depends on the formulation and implementation of a coherent energy 
strategy. One component of that strategy must involve the reform of the 
electricity sector, the problems of which I have just described. 
India's success in securing supplies of oil and natural gas, as well as 
in expanding the role of hydroelectric power and nuclear energy, will 
all be undermined if the electricity sector remains in a shambles. 
Without external prodding, however, it is unlikely that India's 
policymakers will tackle the structural problems of the SEBs. Domestic 
politics plays too great a role in the electricity sector. To that end 
the United States could influence major multilateral lending 
institutions to stipulate that all further investments in the Indian 
power sector conform to market norms. Additionally, American companies 
seeking to invest in the electricity sector would also be wise to avoid 
the temptations that enticed Enron--which sought substantial 
counterguarantees from both the state and the central governments in 
India during its negotiations to build the largest ever foreign-built 
electricity-generating plant in the country. Enron's experience has 
made both foreign firms as well as state-level governments in India, 
wary of large-scale foreign investments in the energy sector.
Nuclear Power
    As the visit of Prime Minister Manmohan Singh to Washington last 
week made clear, India's policymakers are keen on expanding the role of 
nuclear power to meet the country's growing appetite for energy. 
India's unwillingness to accede to the nuclear Nonproliferation Treaty 
(NPT) has long constrained its ability to upgrade and expand its 
nuclear-power infrastructure. Consequently, at the present time, 
nuclear energy contributes a paltry 3 percent of India's power needs.
    Without significant international cooperation, the situation is 
unlikely to improve. In light of this situation the decision of the 
administration to pursue civilian nuclear cooperation with India is of 
enormous significance. Although deliberation on such a change in policy 
is appropriate, I urge you, your Senate colleagues, and your colleagues 
in the House of Representatives, to pass the necessary enabling 
legislation to make such bilateral cooperation possible.
    The arguments against supplying India with civilian nuclear 
equipment are well known. Briefly stated, they hold that if the United 
States makes an exception for India, the fabric of the nonproliferation 
regime is likely to start unraveling; that such an action would 
encourage both North Korea and Iran to speed up their nuclear weapons 
programs, possibly to the point of testing; that Pakistan, now a major 
non-NATO ally, is likely to make similar requests for access to 
civilian nuclear technology; and that such cooperation would reward a 
state that is not a formal member of the carefully constructed 
nonproliferation regime. Though seemingly compelling, all of these 
arguments merit more careful scrutiny and reexamination.
    Such scrutiny reveals each of these arguments to be flawed. First, 
since India was never part of the global nonproliferation regime, the 
question of India's unraveling that regime is really moot. Even before 
the NPT went into effect in 1970, India had made clear its explicit 
reservations about its lopsided expectations. Second, the choices that 
Iran and North Korea are likely to make about their ongoing nuclear 
weapons programs will be made regardless of what the United States does 
or does not offer India. Their leaders will make choices based on 
assessments of what is best for their own countries. Furthermore, it 
needs to be underscored that both Iran and North Korea blatantly 
violated the solemn international obligations inherent in their 
membership in the NPT--and thus if that regime is on the verge of 
unraveling, it is because of their actions, not those of India. Third, 
despite Pakistan's present robust relationship with the United States, 
it cannot be allowed to constrain American policy toward India. More to 
the point, India, unlike Pakistan, has an excellent export-control 
system and has not allowed technology seepage. It has also maintained a 
strict and effective separation between its civilian and military 
nuclear establishments. And fourth, India has stated that it is willing 
to accept full-scope safeguards on all its civilian nuclear reactors; 
thus it will be submitting to the requirements of the NPT regime even 
without being a formal member--a stark contrast to existing signatories 
that refuse to submit to the requirements of the regime. Finally, as a 
practical matter, nonproliferation must be seen as just one of the many 
interests that the United States has in its dealings with India. A 
single issue, however important, should not become the determinant of 
American policy toward one of the most significant states in Asia and a 
potential global power.

                   ENVIRONMENTALLY SOUND ALTERNATIVES
    Apart from investing in and upgrading its nuclear infrastructure, 
India will have to continue to tap its substantial coal reserves. 
Interestingly, this sector offers another important avenue for Indo-
U.S. cooperation. Indian coal is extremely high in ash content and 
thereby highly polluting. The United States has developed clean-coal 
technology that could be used to alleviate the environmental effects of 
this crucial source of energy, and this technology should be made 
commercially available to India.
    Finally, India has a modest renewable-energy program, and the plans 
for its expansion are ambitious. According to the government's Policy 
Statement on Renewable Energy, India hopes to obtain as much as 10 
percent of its new power capacity from renewable sources--wind, 
biomass, hydroelectric, and solar--by 2012. If the country even hopes 
to approximate this goal, however, it will require both external 
funding and technological expertise. Once again, American firms, which 
have considerable expertise in the development of alternative and 
renewable energy sources, could play a vital role in energizing the 
Indian market.

                           CONCLUDING REMARKS
    Despite some ongoing differences, Indo-U.S. relations have rarely 
been as cordial as they are today. In the present climate, it behooves 
both sides to try and circumvent the remaining differences and broaden 
the arenas of cooperation. The rapidly expanding Indian energy market 
offers substantial opportunities for Indo-U.S cooperation. Much of this 
cooperation could be accomplished under the aegis of the newly 
initiated India-U.S. Energy Dialogue.
    India's appetite for energy is unlikely to be curbed anytime soon. 
That said, it lacks the necessary technological expertise, financial 
resources, and global reach to address its energy needs. Cooperating 
with the United States in a gamut of energy-related projects offers the 
possibility of addressing these critical needs.

    The Chairman. Thank you very much, Professor Ganguly.
    We thank the panel. Your full statements, as well as this 
dialog, will be made part of the record and made available to 
our colleagues. We thank you so much for coming.
    And the hearing is adjourned.
    [Whereupon, at 11 a.m., the hearing was adjourned.]
                              ----------                              


       An Additional Question and Answer Submitted for the Record


 Response of Assistant Secretary Garman to a Question by Senator Lugar

    Question. India's nuclear power generation currently accounts for 
less than 3 percent of the country's total. Given this sector's current 
small contribution to India's aggregate energy needs, is it realistic 
to expect that New Delhi will rely on nuclear power in a significant 
way within the next 10-15 years?

    Answer. Since nuclear power's share of the energy mix in India is 
currently quite small, it will take many years for nuclear power to 
garner a sizable share of their energy market. In the Energy 
Information Administration's ``International Energy Outlook 2005,'' 
nuclear power's share of India's total energy consumption is projected 
to increases from about 2 percent in 2002 to 5 percent in 2025.