Senkaku Islands

China's oil demand fuels island dispute

China and Japan sat down for talks and agreed to jointly develop a natural gas field under the East China Sea, defusing a dispute between Asia's biggest economies over who owns the reserves. That was in 2008.

SMH,

10 November, 2012

The accord, hailed as a model for co-operation at the time, has yet to be carried out and the countries now face a new territorial dispute, also in the East China Sea. The quarrel over who owns the uninhabited islands called Diaoyu by China and Senkaku by Japan is again linked to a prize beneath the ocean that may hold enough oil to keep China running for 45 years.

China is the world's largest energy consumer and is running out of oil because its aging onshore fields cannot keep pace with near double-digit economic growth. By the end of this decade, the country will need to import more than 60 per cent of its crude compared with about 50 per cent now and one third of its natural gas, according to estimates from China Petroleum & Chemical Industry Federation.

"China has to look for offshore fields to deliver the energy supply it needs as onshore fields are exhausted," said Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University in Fujian province.

Japanese Prime Minister Yoshihiko Noda yesterday called for talks to contain economic damage from the diplomatic dispute with China. He reiterated that the islands are "Japan's inherent territory".

Saudi-sized reserves

The sea east of China may hold as much as 160 billion barrels of oil and the South China Sea 213 billion, according to Chinese studies cited by the US Energy Information Agency. Combined, the reserves would be bigger than Saudi Arabia's 265 billion barrels and enough to supply China's needs for a century based on 2011 consumption data provided by BP.

Gaining control over the largely untapped areas in the South China and East China Seas would help China avoid Japan's postwar energy model, where its security is largely staked on oil tanker supplies originating 7700 kilometres from Tokyo in the Middle East.

"China is concerned about the long term," said Hooman Peimani, principal fellow at the National University of Singapore's Energy Institute. "Many of its suppliers are Arab countries and in North Africa, which are facing serious problems."

Mideast imports

China is being forced to buy more from the Middle East, importing a record 35.5 million tons of crude from Saudi Arabia, its biggest supplier, in the first eight months of this year, according to data compiled by Bloomberg. The was 10 per cent higher than the same period last year and the bill came to $29 billion.

That's gaining ground on Japan, Asia's third-biggest energy consumer, which also gets most of its oil from Saudi Arabia. Japan spent $34.8 billion in January to August to buy 40.2 million tons of crude oil from the Middle Eastern country, according to data compiled by the Ministry of Finance.

The disputed area of the East China Sea is about 209,000 squuare kilometers, or almost the size of Victoria, according to a report last month by the US Energy Information Agency. China and Japan have different measures of defining sea boundaries, both based on the 1982 UN Convention on the Law of the Sea.

Japan defines its boundary as the exclusive economic zone extending westward from its southern Kyushyu and Ryukyu islands while China uses the principle of the natural extension of its continental shelf.

Gas field

The signing of the 2008 gas field development agreement seemed to offer a model for cooperation in the area. The field, known as Chunxiao in Chinese and Shirabaka in Japanese, is about 309 kilometres from the disputed islands.

The agreement "proves that Japan and China can solve difficulties together," Masahiko Komura, Japan's foreign minister at the time, told reporters in Tokyo on June 18, 2008.

China regards the agreement as "conducive to stability" and "in line with the fundamental interests of the two countries," Foreign Ministry spokeswoman Jiang Yu said in a statement on the ministry's website the same day.

Even with the breakthrough on paper, joint development at the site never started.

"The attempt at co-production hasn't been successful so far," said Euan Graham, senior fellow at the S. Rajaratnam School of International Studies in Singapore. "The encouraging thing for the future is that it's very difficult for any one side to develop the fields by itself. It would make much more economic sense to go at it together."

'Tipping point'

"China is projected to be the leading consumer of oil from the Middle East in the future," Graham said. "That is kind of the tipping point. Owning resources is very important."

Because of a lack of naval supremacy, China wants energy it can tap within its own territories instead of relying on oil tankers -- that's why they're very serious about the South China Sea, Singapore University's Peimani said. They don't want to be dependent on imports as with Japan's economy, he said.

China National Offshore Oil Corp. has been told not to comment on the issue, said an official at the company who declined to be named because of the order. China National is the parent of Cnooc, the country's biggest offshore oil producer that built a drilling platform at the East China Sea field. The company isn't pumping gas from the field at the moment, the official said.

Liu Xiaobiao, a Cnooc spokesman, didn't answer four calls to his office line and mobile phone seeking comment.

Inpex partner

Oil explorer Inpex was Japan's partner for Cnooc to develop the gas field under the 2008 deal. Inpex has no further information on the development, Keisuke Yano, a spokesman for the company, said. The company is awaiting a decision from the Japanese and Chinese governments to go ahead with the project based on the 2008 agreement, Yano said.

Discussions on joint development of the gas field are stalled, said an official at Japan's Ministry of Economy, Trade and Industry. Japan has asked to restart the talks, and China has not responded, the official said.

Zeng Yachuan, a Beijing-based spokesman at the National Energy Administration, didn't answer two calls to his office seeking a response to the METI comment.

Shi Qingfeng, a Beijing-based spokesman at State Oceanic Administration, was not available for comment, according to an official who answered his office phone this week. The official refused to give his name. A fax sent to Shi's office didn't receive a response.

Oil estimates

Estimates of oil and gas deposits in the East China Sea are based on a geological survey by the UN Economic Commission for Asia and Far East in 1969. The commission said the underwater shelf around the disputed islands may be "extremely rich" in oil reserves.

In the early 1970s, the finding brought to a head claims by China, Japan and Taiwan of sovereignty of the five islets and three barren rocks, largely ignored since the end of World War II.

"The geophysical structure suggests it's a hotbed for oil's formation, but more drilling is needed before definite conclusions can be made," said Gordon Kwan, Hong Kong-based head of energy research at Mirae Asset Securities Ltd. "Personally I'm optimistic that oil and gas reserves in the region should be very rich."