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Potential Asian energy flash points to watch during 2011

By Neil Ford

January 7, 2011 - By its very nature, risk assessment is more of an art than a science. Long-standing bilateral disputes can erupt into open conflict with little warning and territorial disputes can trigger trade wars overnight. The energy sector is more vulnerable to geopolitical problems than most other sectors.

Hydrocarbon potential can complicate territorial claims while hydroelectric dam development on major river systems almost inevitably affects downstream riparian states.

This analysis assesses the main geopolitical problems that have at least the potential to impinge on Asian energy markets during the year to come.

Domestic political difficulties can often discourage the development of energy projects. But the inclusion of a cross-border element generally makes such problems particularly challenging.

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The Himalayan nation of Nepal, for instance, is ideally placed to export hydroelectric power to its southern neighbor India.

Nepal is one of the poorest countries in per capita terms in Asia, but its mountainous terrain and high precipitation provide the ideal conditions for large hydroelectric projects that could both generate substantial export revenues and increase the still-low domestic electrification rate of 40%.

The long-running Maoist insurgency and uncertainty over the level of Indian commitment to dam projects held up construction of Nepalese hydropower plants for many years.

These problems seemed to have been resolved in the late 2000s when India's economic boom and rising power consumption created the necessary demand, while the electoral success of the Unified Communist Party of Nepal-Maoist (UCPN-M) in April 2008 seemed to bring the Maoists into the political mainstream.

However, Prime Minister Pushpa Kamal Dahal, otherwise known as Prachanda, resigned after just a year in office and Nepal has lurched from political crisis to crisis ever since.

Maoist leaders have since condemned foreign control of domestic hydroelectric projects and insisted that they will not be allowed to proceed.

The UCPN-M spokesman on water resources and energy, Lila Mani Pokharel, told Indian investors in October 2010 to withdraw from the country and particularly from the 900-megawatt (MW) Upper Karnali hydroelectric project, which is being developed by a consortium led by India's GMR Group. He said that "our party will never support the government strategy to keep neighbor's houses illuminated while keeping our own houses in the dark."

Even if no attacks are made on hydroelectric schemes, such sentiments are likely to deter investment in the sector during 2011. Maoist groups are likely to continue expressing anti-Indian sentiments until they have a greater say over national policy.

But it is worth noting that several agreements on hydroelectric schemes were signed during the UCPN-M's short period in office, so the party's policy on the issue has not been consistently hard line.

Much will depend on parliament's ability to create a more stable government. A new budget was passed by the caretaker government in November 2010 but the lack of a prime minister means that political uncertainty is likely to continue.

Although headline-grabbing plans for 10,000 MW of new hydroelectric capacity have been drawn up, new schemes are unlikely to get the go ahead if Nepal remains without a stable government.

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