Conflict in South China Sea

Analysis: China unveils oil offensive in South China Sea squabble

First came the diplomatic offensive, then the flexing of military muscle.

News Daily,

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.