Analysis:
China unveils oil offensive in South China Sea squabble
First
came the diplomatic offensive, then the flexing of military muscle.
1
August, 2012
Now,
China is opening a third front to assert its claims in the South
China Sea - moving ahead with its first major tender of oil and gas
blocks in disputed parts of its waters.
China
National Offshore Oil Corp (CNOOC), a state oil giant, invited
foreign firms in late June to bid on oil blocks that overlap
territory being explored by Vietnam, putting the 160,000 sq km of
water on offer at the forefront of Asia's biggest potential military
flashpoint.
Oil
companies have until next June to decide whether to bid for the nine
blocks, said a Chinese industry source with knowledge of the matter.
CNOOC, parent of Hong Kong-listed CNOOC Ltd, has received many
informal enquiries from foreign oil companies, added the source, who
did not want to be identified.
Beijing
claims almost all the South China Sea, a body of water believed to
hold rich reserves of oil and gas and which stretches from China to
Indonesia and from Vietnam to the Philippines. Vietnam, the
Philippines, Taiwan, Brunei and Malaysia claim parts of it.
Any
conflict in the sea, one of the world's busiest trade routes, would
have global repercussions given the $5 trillion in ship-borne trade
carried on its waters each year.
"The
Chinese government's stance is clearer than ever ... They want to
take on and develop this region," said an executive at a global
oil major, who declined to be identified because of the sensitivity
of the matter.
The
Philippines put two disputed blocks on offer on Tuesday but only
received three separate bids for exploration rights, an indication
that there was little appetite to go up against China in the South
China Sea.
"China's
view is that the little countries, like Vietnam and the Philippines,
are increasingly stealing its resources and it must demonstrate it is
serious about upholding its claims," said Ian Storey, a senior
fellow at the Institute of Southeast Asian Studies in Singapore.
Vietnam's
state oil firm, Petrovietnam, has condemned the CNOOC tender, calling
it a "serious violation of international law" since the
blocks lie within the country's 200-nautical mile exclusive economic
zone and continental shelf. It urged energy firms not to participate
in the tender.
CNOOC
Chairman Wang Yilin told reporters last month the tender was
attracting interest from U.S. companies, but declined to name them.
"China
does not have any well and oil production in the resource-rich
mid-south area of the South China Sea, while other countries have
produced more than 50 million tonnes of oil in the territory ... that
China claims," Zhou Shouwei, a former vice president of CNOOC,
said in July.
Other
analysts have cast doubt on the figure, since Vietnam pumps most of
its 16 million tonnes (126 million barrels) of oil a year from
undisputed areas, and the Philippines has yet to tap into significant
amounts of oil or gas in territory also claimed by China.
MAJORS
WARY
Small,
independent oil firms could be the main respondents to China's offer,
analysts say. Global oil majors will be more wary of the escalating
tensions, especially those already working offshore Vietnam such as
Exxon Mobil, Russia's Gazprom and India's ONGC.
Beijing
awarded a South China Sea oil block in 1992 that has yet to be
explored due to the dispute. The block, owned by U.S.-based Harvest
Natural Resources, overlaps territory being explored by Petrovietnam
and Canada's Talisman.
"There
are hundreds of independent upstream companies in the world willing
to go anywhere for a small volume of oil to turn a profit," said
Kang Wu, managing director of consultancy FACTS Global Energy.
"Companies
will go to the disputed South China Sea and rely on the Chinese
government to protect them and ensure that drilling is safe. If they
cannot get those guarantees, then they don't drill, don't spend a
penny, and don't lose."
CNOOC
has limited experience in deepwater drilling and will need help from
foreign companies in the South China Sea. The $89 billion company
recently launched its first ultra-deepwater rig near Hong Kong, and
could move it further south to explore deeper waters in the South
China Sea, according to Chinese energy experts. CNOOC has described
the vessel as "mobile national territory".
Beijing's
oil offensive follows moves on the diplomatic and military fronts.
At
a meeting last month of foreign ministers of the Association of South
East Asian Nations (ASEAN), China's influence led to an unprecedented
breakdown in the 10-member group's preference for unity.
China's
close ally Cambodia, the meeting's host, blocked every attempt to put
the South China Sea on the agenda, said diplomats from other member
nations. Cambodian diplomats in turn accused the Philippines and
Vietnam of trying to hijack the meeting.
On
the military front, China has approved the establishment of a
military garrison, located in Sansha city in the Paracel Islands, for
the South China Sea.
AVOID
CONFLICT
Nevertheless,
analysts believe Beijing wants to avoid a conflict, particularly if
it raises the prospect of U.S. intervention.
"Energy
exploration activities in these disputed waters will lead to more
diplomatic rows, and potentially skirmishes between surveying and law
enforcement vessels of opposing claimants, but it is unlikely to
trigger military confrontations," said Stephanie
Kleine-Ahlbrandt, Northeast Asia Director for the International
Crisis Group think-tank.
"However,
if it is discovered that the area does in fact contain energy
reserves and if China decides to drill in these areas, the situation
could change drastically."
CNOOC
has drilled around a dozen deep sea wells so far in the South China
Sea, focusing mainly in the north and staying away from politically
sensitive waters to the south.
Vietnam
and the Philippines have partnered with foreign oil companies to
develop oil blocks deeper into disputed waters, sparking several
tense incidents between exploration vessels and Chinese military
vessels.
In
the Philippines, Forum Energy is planning to drill its first
exploration well in the Reed Bank, which is also claimed by China,
possibly before the end of the year.
Vietnam
offered eight blocks more than three years ago that overlap with
China's recent oil offering, although no exploration wells have been
dug.
Estimates
for proven and undiscovered oil reserves in the South China Sea range
from 28 billion to as high as 213 billion barrels of oil, the U.S.
Energy Information Administration said in a March 2008 report. That
would be equal to more than 60 years of Chinese demand under the most
optimistic outlook, and surpass every country's proven oil reserves
except Saudi Arabia and Venezuela, according to the BP Statistical
Review.
For
natural gas, the South China Sea has a 50 percent chance of at least
3.79 trillion cubic metres of undiscovered conventional gas,
equivalent to more than 30 years of Chinese consumption, according to
the U.S. Geological Survey in a June 2010 report.
This scenario has been foreseen by some for a number of years. See Sizing Up the Competition --Is China The Endgame? This analysis from from the Wilderness dates from 2002.
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