Nepal’s oil diplomacy could hurt India

Breaking its four-decade-long record of dependency on India for fossil fuel, Nepal entered into an oil trade agreement with China on October 28. A memorandum of understanding was signed between the Nepal Oil Corporation (NOC) and China National United Oil Corporation (PetroChina) in Beijing. While confirming the deal China reportedly indicated that it “could well become a long-term fuel supplier to Nepal”.

The agreement was signed while Nepal was passing through a serious oil crisis due to the blockade by people living in the Terai region (read Madhesis) since September 22. However, a large number of Nepalese people perceive the internal blockade as an “unofficial embargo by India”. Media reports indicate that the agreement with China provided a framework for future cooperation between the two countries on oil trade.

Break in tradition?

In fact, Indian Oil Corporation (IOC) has been supplying petroleum products, diesel and kerosene to Nepal at Indian market rates for the last 40 years. There has been an official contract between IOC and NOC for this trade. According to the revised trade and transit agreement of 2006, India allowed 26 trading points, including six points for transit purposes, for both bilateral and transit trade through Indian territory.

The Birgunj-Raxaul trading point is responsible for about 60 per cent of the total (bilateral and transit) Nepalese trade. Oil products from India are carried by both Nepalese (roughly 30 per cent) and Indian (70 per cent) tankers from the nearest oil depots of India to the India-Nepal border.

This arrangement was paralysed after the stir in the Madhesi region gathered momentum following the finalisation of the Nepalese constitution on September 20. The Madhesis felt betrayed by the way the constitution was adopted by the majority in the constituent assembly in clear disregard of their concerns. The response from India was one of concern over the way the majority parties ignored its suggestions to generate a consensus.

The entire Terai belt witnessed violence and mayhem after the constitution was adopted. This inevitably impacted on the trade flow from India as private players felt it was against their interest to continue with their transport services.

In an interesting turn of events, the external affairs ministry voiced the security concerns of Indian transporter associations carrying goods to Nepal due to intensification of the anti-vonstitution agitation in the Terai region by the Samyukta Loktantrik Madhesi Morcha (SLMM) and other groups. . Essential items such as oil could not be transported. Nepal witnessed a severe oil crisis because of the tactic adopted by the SLMM agitators to impose a blockade on major trading points. Shortage of oil severely affected normal life, the healthcare system, public transportation and business in Nepal. Most importantly, earthquake reconstruction work was also affected.

Strain in India-Nepal ties

Bilateral and track-II level interactions between India and Nepal failed to normalise supply of oil from India. Even the visit of the newly appointed foreign minister Kamal Thapa to Delhi failed to improve the situation. A week after the visit, Thapa was reported to have told the Nepalese parliament that “India did not facilitate the supply as per its commitment”.

The Nepalese side looked upon the MEA’s press statement about self-imposed restrictions by the Indian transport association not to carry goods to Nepal for security seasons as an indirect effort by the government to impose a blockade on Nepal. Other examples of Indian insensitivity being cited by many Nepalese observers are: India’s cold response towards Nepal’s request to re-route movement of the tankers; non-cooperation from the Indian side to take action against the agitators for using no-man’s-land to stop movement of transport vehicles; and undue delay being caused at customs and security check points on the Indian side to slow down the movement of oil tankers into Nepal (10 tankers per day as against over 1,000 earlier).

Strategic gain for China?

Two days after Thapa’s visit, the new Nepalese government explored an alternative arrangement for oil supply. In this regard, a high level meeting was organised on October 23 under Maoist leader Narayan Kaji Shrestha, who visited Beijing after the formation of the new government in Kathmandu. It was decided to send an eight-member team to negotiate with China for exploring an alternative arrangement for oil supply. The move was later endorsed by the Nepalese cabinet.

Although India has not officially responded to the bilateral oil trade agreement between Nepal and China, the IOC chairman and managing director stated in a media interaction that they would soon increase the volume of oil supply to Nepal. He also expressed his concerns about the possible loss of IOC’s share in its business volume with Nepal after Chinese entry into the scene. It would surely affect the business of hundreds of Indian transport companies associated with the IOC.

Until the SLMM blockade came into effect, the IOC used to supply around 1.3 million tonnes of petroleum products worth around ₹9,000 crore annually to Nepal. Moreover, even if there is scepticism about the sustainability of Chinese supply of oil to Nepal, China’s entry may dramatically alter the strategic bilateral relationship between India and Nepal.

Optimists in India would hold that the IOC will continue to play a dominant role in Nepal’s fuel supply given the unfavourable terrain and absence of infrastructure for passage of heavy cargo through the Himalayas to bring bulk goods from China. But some analysts in India would argue that India has lost some strategic space to China. So far, China had sought to create a space for itself in the region on the sly. For the first time, perhaps, it has stepped in to reduce Indian influence in Nepal quite openly, and encouraged leaders in Nepal to ignore Indian concerns more confidently.

Therefore, the political and strategic message that flows from this deal is more relevant for India than the volume or sustainability of Chinese supply of oil to Nepal. The entire episode has also left a deep scar in the minds of policymakers in India and Nepal.

This article was originally published in BusinessLine.