China helps Nepal look for oil, vying with India for influence in Himalayan nation

China is helping Nepal look for oil as Beijing seeks to strengthen bilateral ties and competes with India for influence with the Himalayan neighbour.

A team of about 20 Chinese engineers and 45 Nepali technicians began a six-month drilling campaign in Dailekh, Nepal earlier this month, according to the Nepali-language newspaper Kantipur.

Financed by the Chinese government, which also provided technical help, the campaign is part of an agreement between China and Nepal signed in 2007. Drilling is expected to reach as deep as 4km (2.5 miles) below ground to determine oil and gas reserves.

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It will be the first oil and gas exploration in the Himalayan country since 1985 when a similar mission in southern Nepal yielded no results.

Observers see the latest project as an attempt by Nepal to reduce its reliance on India for the fossil fuel.

“Nepal’s dependence on India for oil has long been a strategic vulnerability, often subject to political and logistical challenges,” said Narayani Sritharan, a research fellow at the Global Research Institute at the College of William and Mary in Virginia.

“If successful, this could significantly reduce Nepal’s reliance on Indian oil imports, enhancing its energy security and economic independence.”

Liu Zongyi, a senior fellow with the Shanghai Institutes for International Studies, said Nepal might take a “more balanced approach” in its pursuit of a foreign policy of non-alignment if it becomes more self-sufficient in energy supply.

“Nepal is now too dependent on India for energy and trade, and one result of that is that India has enormous influence on Nepal’s domestic and foreign policy even though Nepal has opted for a trend of hedging with both neighbours,” Liu said.

“But self-sufficiency in energy may help Nepal adopt a more balanced approach between India and China.”

A shipment of petrol arrives at Kerung port in Nepal via China in 2015, effectively ending India’s decades-long fuel monopoly in the Himalayan country. Photo: CGTN alt=A shipment of petrol arrives at Kerung port in Nepal via China in 2015, effectively ending India’s decades-long fuel monopoly in the Himalayan country. Photo: CGTN>

Landlocked Nepal has no known oil or gas reserves. Kathmandu invited foreign oil companies to look for resources in 1985. They conducted a seismic survey and drilled a 3,520-metre (11,549-foot) test well that turned out to be dry. No investors have shown interest since a joint team by Shell and Triton Energy withdrew in 1990.

In 2015, Nepal was hit by a serious energy crisis triggered by what Kathmandu has called an undeclared blockade by New Delhi. Nepal accused India of imposing the blockade because of the latter’s dissatisfaction over the new Nepalese constitution. India has denied it imposed the blockade.

To alleviate fuel shortages, Nepal turned to China in December of that year. Beijing agreed to grant 1.4 million litres of fuel worth 10 million yuan (US$1.4 million) to Nepal, and the state-owned PetroChina signed an agreement with Nepal Oil Corporation to export fuel to the Himalayan country, effectively ending India’s four-decade-long monopoly on fuel in the country.

During a 2007 visit by then-prime minister KP Sharma Oli, Beijing signed an agreement with Kathmandu to help Nepal in oil exploration. A decade later in 2017, China and Nepal agreed to jointly carry out a feasibility study for oil and gas exploration after a visit to Kathmandu by then vice-premier Wang Yang.

In 2019, a technical team with China Geological Survey carried out a technical study and later identified drilling spots in Dailekh, where a series of oil and gas seeps were discovered. However, further exploration was disrupted by the Covid-19 pandemic.

Saurav Dahal, a geopolitical analyst in Kathmandu, said that the 2015 blockade was a “wake-up call” for Nepal.

“Since then, Nepal has sought to diversify its oil and trade dependencies through various agreements with China.”

Sritharan, who researches China as a non-traditional aid donor in developing countries, said that while the exploration initiative, which involved substantial Chinese support, could deepen Nepal’s ties with Beijing, “this collaboration may be perceived by India as a strategic move by China to increase its influence in Nepal, potentially heightening geopolitical tensions”.

“However, successful oil exploration could also provide Nepal with greater leverage to negotiate with both neighbours, balancing its foreign relations more effectively.”

Sitting between geopolitical rivals China and India, Nepal, a country of 30 million people, has been long considered by India as part of its sphere of influence. But China has made inroads in recent decades with increasing investment, from highways, airports and power plants to factories and schools.

In 2010, China granted zero-tariff treatment to more than 8,000 Nepali products.

In 2016, Beijing and Kathmandu signed a transit and transport agreement allowing Nepal to use Chinese ports for third country trade. And in 2018, Nepal-China Optical Fibre Link started operation, ending Nepal’s dependence on India for internet services.

In another sign of Beijing’s growing influence, China and Nepal settled a long-running dispute in 2020 by agreeing on the height of Mount Everest, which straddles the border between the two countries.

In 2022, the two sides carried out a joint feasibility study for the 170km (106-mile) Trans-Himalayan Tibet-Nepal railway to link Gyirong county in southwest China’s Tibet autonomous region to Kathmandu. The project is part of the Belt and Road Initiative, Beijing’s strategy to build global trade and infrastructure links. Nepal signed on to the initiative in 2017.

However, uncertainties about the future of China’s ties with Nepal have emerged in recent years.

In 2022, Nepal decided to accept a US$500 million grant from Washington’s Millennium Challenge Corporation (MCC), part of Washington’s foreign-aid apparatus seen as an attempt to rival China’s initiative.

A month later, Chinese Foreign Minister Wang Yi travelled to Kathmandu, where his Nepali counterpart Narayan Khadka promised that Nepal would “not allow any activity against China on Nepali territory”.

As Nepal grapples with its economic woes such as a poor job market, inflation and corruption, there have been growing calls in the Himalayan country to rethink its deals with its global partners, including China.

Dahal said he was cautious against excessive optimism about Chinese-led projects in Nepal.

The belt and road agreement between China and Nepal, for instance, had been in limbo over a couple of issues such as funding modality and interest rates since its signing in 2017, he said.

“If implemented correctly, [Belt and Road Initiative] could bring significant benefits to Nepal. However, there has been no progress over the years,” he said.

“We in Nepal hope that both the ongoing oil exploration and the historic oil trade agreement of 2016 and other major agreements like the [Belt and Road Initiative] will come to fruition sooner rather than later.”

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2024. South China Morning Post Publishers Ltd. All rights reserved.