Despite a lull in the domestic debate over the U.S.-India civil nuclear cooperation initiative, the nuclear deal still commands high-profile press coverage and political debate.

100159 3/13/2007 1:28:00 PM 07NEWDELHI1218 Embassy New Delhi CONFIDENTIAL VZCZCXRO3817OO RUEHBI RUEHCIDE RUEHNE #1218/01 0721328ZNY CCCCC ZZHO 131328Z MAR 07FM AMEMBASSY NEW DELHITO RHEBAAA/DEPT OF ENERGY WASHINGTON DC IMMEDIATERUEHC/SECSTATE WASHDC IMMEDIATE 3842INFO RUEHBI/AMCONSUL MUMBAI IMMEDIATE 8513RUEHCI/AMCONSUL KOLKATA 9009RUEHCG/AMCONSUL CHENNAI 9352RUEHLM/AMEMBASSY COLOMBO 9116RUEHKA/AMEMBASSY DHAKA 9221RUEHIL/AMEMBASSY ISLAMABAD 2413RUEHKT/AMEMBASSY KATHMANDU 9821 C O N F I D E N T I A L SECTION 01 OF 04 NEW DELHI 001218 SIPDIS SIPDIS FOR SECRETARY SAMUEL BODMAN FROM CHARGE PYATT

E.O. 12958: DECL 03/9/2017 TAGS: ENRG, TRGY, EPET, EAID, SENV, PREL, PGOV, IN

SUBJECT: SCENESETTER FOR DEPARTMENT OF ENERGY SECRETARY SAMUEL W. BODMAN'S MARCH 2007 VISIT TO INDIA

Classified by CDA GEOFFREY PYATT FOR reasons 1.4 (b, d)

1. (C) SUMMARY: Secretary Bodman, the members of the Country Team warmly welcome you to New Delhi and Mumbai and look forward to your arrival on March 19. You are visiting at a crucial time in Indo-U.S. relations and are positioned to significantly advance our growing government-to-government, commercial, and investment relationship in the energy sector. The GOI will stress that, in order to sustain the high level of economic growth needed to lift millions out of poverty, India must rapidly expand its energy production, consumption, and imports, while inevitably increasing its carbon emissions and maintaining domestic energy price controls. However, from the perspective of the Indian press and political class, the U.S.-India civil nuclear agreement will take center stage during your visit.

2. (C) Your scheduled meetings in Mumbai with Department of Atomic Energy Secretary Dr. Anil Kakodkar and in New Delhi with Special Envoy Shyam Saran offer an opportunity to highlight the many benefits of U.S.-India civil nuclear cooperation, which could be lost if India does not conclude the 123 Agreement quickly. We hope you can win over the Indian nuclear scientific establishment with the prospect of future-oriented programs like GNEP. We expect that your meeting with Prime Minister Singh will follow the Saran meeting, and he will want to hear your views on next steps toward concluding the 123 Agreement. The Prime Minister will likely tell you that his number one priority is extending the benefits of India's rapid growth to the 700 million Indians - mostly in the rural sector - who continue to live at a near subsistence level. Rising food and fuel prices have particularly hurt the poor, creating a political backlash against the UPA government in recent state elections. Prime Minister Singh and your other interlocutors will be very interested in your ideas on how the United States can help with India's energy needs in the short and long term, particularly with respect to the rural sector.

3. (SBU) Your meeting with Planning Commission Deputy Chairman Ahluwalia provides an opportunity to review India's Integrated Energy Policy and the U.S.-India Energy Dialogue's nearly two years of progress. Aside from the five Energy Dialogue working groups, India and the United States are also active in multilateral projects for commercially-viable reduction of green house gases through the Asia-Pacific Partnership (APP-6) for Clean Development and Climate. You can also promote closer collaboration between USDOE's laboratories and their Indian counterparts. The Mission's USAID programs, particularly in energy efficiency, power distribution, clean coal, and regulatory policy, and South Asia Regional Initiative for Energy (SARI-Energy) have been at the core of our bilateral cooperation, but face severe budget cuts and even zeroing out owing to severe budget constraints. Minister of Petroleum and Natural Gas Murli Deora has close ties to Sonia Gandhi's inner circle and a political base in Mumbai, and he is central to India's international quest for growing petroleum and natural gas imports, and cooperation with the United States in domestic industry development and regulatory policy. You can also engage Power Minister Shinde on India's need to sustain its high GDP growth goals by greatly expanding its power generating capacity, predominately with coal-fired thermal plants, which will require clean-coal technology to keep CO2 emissions in check. END SUMMARY.

CIVIL NUCLEAR NEGOTIATIONS

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4. (C) Despite a lull in the domestic debate over the U.S.-India civil nuclear cooperation initiative, the nuclear deal still commands high-profile press coverage and political debate. Foreign Secretary Shiv Shankar Menon handed Under Secretary Burns a completely inadequate counter-draft to the 123 Agreement --authored by the skeptics in India's nuclear establishment who remain concerned about U.S. efforts to "entrap" India and constrain its strategic program. U/S Burns asked Menon to provide a more workable basis on which the U.S. and India can continue talks, and invited an Indian team with negotiating authority to the U.S. for the next round of discussions.

5. (C) The right for India to reprocess U.S.-origin spent fuel remains the most contentious issue in the 123 talks. The nuclear scientists also have the lead on negotiating a safeguards agreement with the IAEA and here too are wary of anything that would constrain India's vision of Thorium-based power. Despite assurances from the Indian government that an IAEA safeguards agreement would be easy to complete, little progress has been evident. A safeguards agreement is necessary for the Nuclear Suppliers Group to adjust the Guidelines to allow civil nuclear commerce with India. Led by Special Envoy

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Shyam Saran, the Indian government has made some progress in tempering the concerns of traditionally nonproliferation-minded countries like Ireland, South Africa, Norway and Japan. Saran plans to visit Australia and New Zealand at the end of March. We expect Foreign Minister Pranab Mukherjee will discuss the nuclear deal during his March 22-23 visit to Tokyo.

INTERNAL POLITICS UNDERSCORE VULNERABILITIES

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6. (C) The politics around India's energy policy reflects a struggle between needed economic reform and political impediments to change. Prime Minister Singh and Deputy Chairman Ahluwalia are well aware of what economic reforms are needed to enhance India's long term growth. They realize that reasonable regulation and market-based pricing of electricity, petroleum products, natural gas, and coal would be most conducive to encouraging investment, reliable revenue streams, energy efficiency, and rational choice among projects and energy sources. However, the political imperatives of middle-class and poor voters' resistance to price increases, particularly with consumer inflation recently exceeding 6%, have induced the GOI to maintain price controls and government subsidies. Similarly, although the GOI privately doubts Iran's reliability as a potential source of natural gas by pipeline or of liquefied natural gas, it continues negotiations with Iran to appease Muslim and left-wing voters and Members of Parliament.

7. (C) The ruling coalition remains dependent on the Communists and other left wing members of parliament to stay in power. Following a string of recent local-level electoral defeats in Mumbai, Uttarakhand, and Punjab, Sonia Gandhi and her personal advisors are very concerned that the impending Uttar Pradesh (UP) elections will turn out horribly for Congress. As a result, some are advocating that she jettison Prime Minister Singh -- whose message of rapprochement with Pakistan has been criticized by the BJP -- and put a more saleable political face at the head of the government. Others are urging that the Congress hunker down and play it safe on the budget, inflation, economic reform, and foreign policy -- including the nuclear deal -- to minimize the negative impact on UP voters, many of whom are Muslim and take a dim view of the United States.

8. (C) What seems clear in the aftermath of recent polls is that the reform cadre of Manmohan Singh, Montek Singh Ahluwalia, and Finance Minister Chidambaram are politically diminished, Sonia Gandhi's inner coterie is deeply worried, and the old line Congress and their Communist fellow-travelers are empowered. Politics in India are a mess right now for Congress, and while the GOI is publicly optimistic about the nuclear deal, it is clearly caught in a domestic political eddy.

U.S.-INDIA ENERGY DIALOGUE AND INDIA'S DEVELOPMENT

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9. (SBU) Building on the momentum of President Bush's return visit to India in March 2006, the President's signing of the Henry J. Hyde U.S.-India Peaceful Atomic Energy Cooperation Act on December 18, 2006 was an important step forward in fulfilling the commitments of the July 2005 Joint Statement and in transforming the dynamics of U.S.-India relations after decades of estrangement.

10. (SBU) USDOE Under Secretary David Garman co-chaired the Energy Dialogue's Steering Committee meeting in New Delhi during his visit February 8-9, 2006. The White House's Council on Environmental Quality's (CEQ) Chairman James L. Connaughton visited India to promote the Asia-Pacific Partnership on Clean Development and Climate in August 2006, including meetings with Deputy Chairman Ahluwalia and several ministers.

11. (SBU) In addition to India joining the International Thermonuclear Experimental Reactor (ITER) project, key activities and agreements reached in 2006 under the Energy Dialogue included:

-- India joining the FutureGen clean-coal power project;

-- MOU on a Coal Bed Methane and Coal Mine Methane Information Clearing House;

-- MOU on safety between the Minerals Management Services and India's Oil Industry Safety Directorate;

-- DOE/EIA Information Sharing Agreement with the Ministry of Petroleum and Natural Gas;

-- Agreement for USTDA Gas Grid Feasibility Study;

-- Carbon Sequestration Leadership Forum and APP-6 projects for clean and safe coal development;

-- Energy Efficiency and Green Buildings Cooperation;

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-- Natural Gas Conference and cooperation on India's new oil and gas regulatory frameworks;

-- International Partnership for the Hydrogen Economy (IPHE);

-- Renewable Energy cooperation on wind and solar resource mapping;

-- Offshore Exploration for Natural Gas Hydrates; and

-- Orientation Visit for Petroleum Refining.

INDIA'S ENERGY SCENE

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12. (SBU) ENERGY NEEDED FOR GDP GROWTH: For India to achieve its goals of sustained rapid annual GDP growth of 8%-9% through 2032, alleviation of widespread poverty, and modernization of its stagnant agricultural sector, which employs 65% of its population, India must increase its energy consumption by at least 6.4% to 7.2% annually through higher energy production, imports, and efficiency. India's per capita commercial energy consumption is 1/3 of the world's average and only 1/15 that of the United States. Energy intensity would probably have to increase for India to improve growth rates in the manufacturing and agricultural sectors of its services-oriented economy. India's primary commercial energy mix consists of Coal (54%); Oil (30%); Natural Gas (9%); Hydropower (5%) and Nuclear (2%), according to BP statistics in 2006. For electricity generation, as of January 2007, India had over 128,000 MegaWatts (MW) of installed generation capacity, consisting of: Hydro (26.5%); Thermal-Coal (54.2%); Thermal-Natural Gas (10.5%); Thermal-Diesel (0.9%); Thermal- Total (65.7%); Renewable (4.8%), and Nuclear (3.0%).

MEETING WITH OIL AND GAS MINISTER DEORA

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13. (C) MPNG Minister Murli Deora has close ties to Sonia Gandhi and the Congress Party's inner circle, and his own strong political base in Mumbai, where his son now holds his previous parliamentary seat. Deora has been a key interlocutor with Ambassador Mulford on the dynamics between India's Parliament and the U.S. Congress on bilateral legislation issues. The MPNG has control over the several central government oil and gas companies that continue to dominate India's exploration, production, and distribution. Secretary Srinivasan has been the GOI's main negotiator on the proposed 2,600-kilometer Iran-Pakistan-India natural gas pipeline, but the MPNG has told us that they do not expect a final agreement to be reached due to Iranian unreliability and Iran changing the terms of the June 2005 agreement to sell India LNG from its South Pars field for 25 years. The MPNG increasingly sees LNG from Qatar and Australia as a more viable option than several proposed pipeline projects. India obtained 12.6% of its crude oil imports from Iran in 2006.

14. (SBU) U.S. oil and gas companies interested in India have been concerned about:

-- the lack of a level playing field in bidding for petroleum exploration blocks, including the GOI not enforcing work programs;

-- the new Petroleum and Natural Gas Regulatory Board (PNGRB)'s lack of sufficient independence from the GOI and MPNG;

-- price controls on petroleum projects, natural gas, and electricity acting as a disincentive to marketing; and

-- the GOI's delay in paying $100 million owed to McDermott after the Supreme Court's final ruling in October 2006.

15. (SBU) Secretary Srinivasan, as co-chair of the Energy Dialogue's Oil and Gas Working Group, would like to see deeper bilateral cooperation on:

-- CMB/CMM exploration and production;

-- natural gas hydrates;

-- oil & gas regulatory information exchanges between FERC and PNGRB;

-- in situ coal gasification;

-- petroleum refinery enhanced production;

-- hydrogen economy; and

-- world oil and gas outlook.

MEETING WITH MINISTER OF POWER SHINDE

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16. (SBU) Power Minister Sushil Kumar Shinde -- a key figure on clean coal technology and carbon emissions -- will update you on India's ambitious plans for power capacity expansion at about 9% annually through 2031, with coal-fired and hydropower as the mainstay, but with rising shares of nuclear, gas-thermal, and wind. India burns 9% of the world's coal today -- a figure that might rise to over 30% in the next 25 years, with accompanying carbon dioxide emissions. To achieve its GDP growth rates, the GOI aims to add over 67,000 MW in

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new capacity during 2007-2012 -- almost twice its past volume of annual expansion. Controlled prices to residential consumers, theft, non-payments, and transmission and distribution losses act as deterrents to private investment. Coal-fired thermal power accounts for 54% of India's power generation capacity.

17. (SBU) Shinde will discuss plans to build seven "Ultra-Mega Power Projects," each of 4,000-Megawatts based on super-critical technology and using either mine-site domestic coal or imported coal. Two projects have been bid so far, with price terms per kilowatt-hour considered unrealistically low by U.S. power production experts. U.S. industry has been reluctant to bid on these projects, citing many uncertainties about common carrier transmission access, revenue streams, consent for coal mine related activities (coal mining is a state monopoly in India), and conflict resolution mechanisms.

USAID and SARI: KEY ENERGY DIALOGUE PROGRAMS FACE CUTS

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18. (SBU) You will address USAID's South Asia Regional Initiative for Energy (SARI/Energy)'s Conference on "Investment Opportunities in South Asia's Power Section," on March 21. SARI/Energy is an eight-country program that promotes regional energy security through energy market development, cross-border energy trade, and increased access to clean energy. SARI/Energy countries include: Afghanistan, Pakistan, India, Nepal, Bhutan, Bangladesh, Sri Lanka and the Maldives. Successes have included: an agreement for electricity interconnections between Sri Lanka and India, Nepal and India; the announcement of an India power exchange; and a pre-feasibility study on the Bangladesh-India interconnection. USAID SARI/Energy has been in operation since 2000 with annual funding levels averaging $8M. However, recent severe budget cuts threaten our track record of success, with FY08 funding at only $2.7M.

19. (SBU) USAID is playing a leadership role in the U.S.-India Energy Dialogue -- particularly the Power and Energy Efficiency Working Group, of which USAID/India is a U.S. co-chair -- aimed at increased India-U.S. trade and investment in the Indian energy sector by working with the public and private sectors to further identify areas of cooperation and to build on the broad range of existing cooperation between the two countries to mobilize secure, clean, reliable and affordable sources of energy. USAID's demonstration programs in clean coal-fired power generation and electricity distribution reform are being widely replicated by Indian entities. The U.S. Mission in India has had a long and successful history working with DOE on clean coal technologies. USAID programs directly support DOE objectives being pursued through the U.S.-India Energy Dialogue working groups, as well as other Presidential Initiatives such as the Asia Pacific Partnership for Clean Development and Climate. Unfortunately, the bilateral resources which support these successful USAID programs will be reduced to nearly zero in FY 2008. This abrupt reduction in funding could eliminate the on-the-ground management capacity that is critical to keeping the Energy Dialogue moving forward.

PYATT