The Chinese and Indian state hydrocarbon monopolies signed a far-reaching agreement last week envisaging cooperation across the gamut of activities from exploration to the point of sales. This brings into play several business synergies but geopolitically, it throws up many conundrums and opportunities.

Two possibly related developments have to be kept in mind here. India last month withdrew from its allotted exploration blocks in the South China Sea, widely seen as capitulating to Chinese pressure. Almost simultaneously, India’s defense minister Arackaparambil Kurien Antony delivered one of India’s harshest condemnations of China at the Shangri La summit in Singapore, in effect joining the ring of naval containment emerging around China.

Both China and India are heavily dependent on sea lanes for their energy security.

The deal between their state enterprises covers upstream (exploration and production), midstream (transportation pipelines and the liquified natural gas business) and downstream (refining, marketing and distribution) opportunities. The synergies at play here are that both countries have significant investments in “rogue states” and countries that are considered unfriendly to Western business like Iran and Sudan.

Added to the nonoutbidding deal that China and India signed a few years back, in effect they are forming what may end up being one of the biggest energy cartels in the world. Both have deep pockets and their expansions are prioritized by their governments.

Additionally, while China has leverage to work the “rogues,” India, being more or less aligned to the West, enjoys traction in both swing and Western friendly markets.

The dynamics at work here are exemplified by the oil sanctions against Iran. India’s shipping companies are susceptible to Western insurance pressure, as indeed the Indian government is to official American pressure. Indian refineries, however, are tuned to process lower quality Iranian crude, in addition to enjoying significant pricing leverage over an isolated Iran.

China is far more insulated from external pressure in this regard. The deal therefore provides an avenue for India to tag onto Chinese hydrocarbon shipments without having to deal with the pressure of Western governments.

Curiously, this arrangement has the potential to both dilute India’s commitment to China’s containment and to intensify it.

From the Chinese point of view, this is an insurance policy against an emerging naval containment, one in which India plays a big role. Given that the Oil and Natural Gas Corporation of India is the weaker party, it gains significantly from the Chinese partnership. As energy security is one of India’s foremost priorities, China will attempt to leverage ties to the United States against viable energy security guarantees inherent in this deal. This gives India a fundamental interest in preventing any escalation vis-à-vis China.

A lot of this has to do with India’s emerging naval game plan — in effect, creating the capability to choke off the Strait of Malacca and starve China of energy shipments while the United States and allied navies tie down China’s power projection capabilities in the South China Sea.

China can attempt a continental balancing against India but the logistics of the Tibet Plateau make such a proposition ruinous, though the threat can always be held out. China therefore has just incentivized India to tone down.

On the other hand, China National Petroleum Corporation having much deeper pockets, greater expertise and a much better portfolio, holds the swing power. Should the containment of China gain momentum, India’s negotiating position within the construction increases significantly, benefitting from American assurance of freedom of navigation and access to markets that are denied to Chinese investments. This mirrors how India’s bargaining position vis-à-vis Iran improves significantly post sanctions.

India therefore has an inherent interest in intensifying the naval containment of China — to balance off its weak negotiating position.

Ultimately a very complex cost-benefit matrix emerges for both countries. Time will tell how elements within that matrix can move.