China and oil

China Decides that South China Sea Oil is a National Asset

Oil Price,

17 February, 2013

While the Western press is fixated on both recent North Korean nuclear tests and Beijing’s recent skirmishes with Japan over the Senkaku (“Diaoyu” in Chinese) islands, other maritime issues have developed further south, where China is involved in sovereignty disputes over the Spratly islands’ 750 islands, islets, atolls, cays and outcroppings with the Philippines, Taiwan, Vietnam, Malaysia and Brunei.

Beijing is bolstering its claims with ancient Chinese maps, despite the 2002 "Declaration on the Conduct of Parties in the South China Sea," designed to ease tensions over the archipelago.

Now, no less an authority than the U.S. government’s Energy Information Agency has waded into the dispute over the potential riches at stake.

The EIA’s updated “South China Sea” brief, issued on 7 February, after noting, “The South China Sea is a critical world trade route and a potential source of hydrocarbons, particularly natural gas, with competing claims of ownership over the sea and its resources,” goes on to add, “EIA estimates the South China Sea contains approximately 11 billion barrels of oil and 190 trillion cubic feet of natural gas in proved and probable reserves.”

The silver lining here?

“Conventional hydrocarbons mostly reside in undisputed territory.”

Searching for yet more optimism, the EIA estimates are far below those of the U.S. Geological Survey, which calculates that the South China Sea may contain roughly 28 billion barrels of oil, even as the Chinese government calculates that the South China Sea region contains nearly 200 billion barrels of oil.

No one knows for sure, especially as the Chinese Navy harasses and chases off foreign survey vessels.

What is certain is that the EIA’s modest observations will only strengthen the multinational South China Sea disputes, as even a modest 11 billion barrels of oil, as opposed to 28 or even 200 billion barrels, is still hard to walk away from.

Throwing yet more oil on troubled waters, the EIA reported that three months ago the Chinese National Offshore Oil Company (CNOOC) estimated the area holds around 125 billion barrels of oil and 500 trillion cubic feet of natural gas in undiscovered resources, although independent studies have not confirmed this figure.”

Will negotiations save the day? The EIA reported, “Rather than attempting unilateral exploration and production (E&P) activities in disputed territory, several countries have opted to cooperate in the South China Sea. Malaysia and Brunei settled territorial disputes in 2009 and have partnered to explore offshore Brunei waters. Thailand and Vietnam have jointly developed areas of the Gulf of Thailand, despite ongoing territorial disputes. These success cases contrast with the parts of the South China Sea contested by multiple parties, which have seen little energy development.”

Down the road, besides the Spratlys, China occupies some of the South China Sea’s Paracel Islands, which it seized in 1974 but are still claimed by Vietnam and Taiwan, along with a territorial dispute with Indonesia over the South China Sea’s 272-island Natuna archipelago, 150 miles northwest of Borneo.

The future?

The EIA, hardly alarmist, concludes, “The South China Sea historically has been a source of conflict among its states.”

On 11 February the Filipino Department of Foreign Affairs Assistant Secretary Raul Hernandez, told reporters that Manila hoped that China would make an official response to the arbitration case it filed before a tribunal under the 1982 United Nations Convention on the Law of the Sea, before maintaining that the case would move forward should China refuse to do so, remarking, “We are hoping that by the deadline, they would be able to officially notify us and reply to our notification that we have submitted to them earlier.” By invoking UNCLOS, the Philippines hauled China to the UN arbitral tribunal in the hope of compelling Beijing to respect Manila’s 200-mile UNCLOS guaranteed maritime exclusive economic zone (EEZ) and adjacent continental shelf.

Bolstering Manila’s determination is the fact that the U.S. is negotiating to return to its former military bases in the Philippines at Clark airfield and Subic Bay.

With billions of barrels of oil at stake, gentlemen - place your bets.

China Wants More Oil

Forbes,

18 February, 2013

Think gasoline prices are coming down this year? Think again. Between supply constraints, the usual suspects in the Middle East, and China, oil demand is seen hefty enough to keep prices stable to high for the foreseeable future. In fact, China’s oil demand is seen rising by 5% this year on the backs of an economic recovery.

Faster-than-expected economic growth could raise fuel demand even higher than market estimates, if car sales and property sales continue on their positive trend lines. A government stimulus program on infrastructure also remains a possibility when the new leadership formally assumes power at the March legislative meetings, Barclays Capital noted recently.

Upside Surprise Possible In China Oil

China’s oil demand staged a sharp rebound in the fourth quarter of last year, reaching a historical high of 10.6 million barrels a day in December, after languishing near the 9 million per day mark during the summer. Strength into the year-end propelled fiscal year 2012 oil demand to 9.6 million a day, 360,000 higher than the same period a year ago.

Barclays pointed out in a report on China energy demand back in October that improving industrial activities and new refining capacity in China are fueling the pick up in demand. Since then, China’s headline data have confirmed a revival of manufacturing activities, and now Barclays analysts in London and Singapore expect China’s oil demand to grow by 480,000 barrels daily in 2013, or roughly 5% from 2012 levels.

Fourth quarter data could be skewed by seasonality. Stock building, the concentration of new capacity additions to fourth quarter 2012 and an unusually cold winter likely helped push up refinery runs. While real demand by companies and residences was softer, evidenced by increased exports. As industrial activities are likely to stay muted in the first quarter, real oil demand may hit a soft patch before picking up again in the second, Barclays analysts led by Sijin Cheng in Singapore wrote in an 11 page report dated Feb. 6.

Nevertheless, there is more upside than downside to China oil watchers.

Oil demand is recovering along with industrial activities growth, most accurately reflected in power generation. The PMI index has risen from 49.2 in August 2012 to 50.6 in December 2012, confirming that manufacturing has been expanding and driving a modest recovery. Property sales are rising and housing construction began to gain momentum from a low base by the second half of the year.

“We expect an improvement in industrial activities and continued additions of new refining capacity to lift Chinese oil demand,” says Chen. ”A faster-than-expected rebound could of course present an upside risk to that forecast. A slew of new and potential government policies, on the other hand, could also affect oil demand, with an upside surprise more likely on balance.”