Oil Companies Shun South China Sea As Geopolitical Tensions Rise
3
January, 2015
The
South China Sea is continually paraded as a region rich in oil and
gas deposits; however, no one really knows what’s there with any
degree of accuracy. Furthermore, these possible deposits are shrouded
in conflict that will not abate anytime soon, and will most likely
worsen with an intensification of the security competition between
China and the United States along with its regional allies, which is
tightly related to these disputes.
The
available exploration information in the South China Sea is either
limited or old. So, there are assumptions, but evidence is shaky.
The EIA estimates
there may be nearly 11 billion barrels of oil and 190 trillion cubic
feet of natural gas in proved and probable reserves all based on 2013
estimates and of course, 2013 prices. Not only were these reserves
thought to be somewhat inflated at the time, but given the lower
pricing currently available, this is potentially far less.
Much
of these proved and probable reserves also reside in uncontested
areas of the South China Sea, making for safer, albeit potentially
difficult investments. This is an important distinction to make since
we should be focusing on the contested areas of the South China Sea
when referring to the current feasibility of oil and gas operations
in the South China Sea. The core disputes in the South China Sea
revolve around the Spratly and Paracel Islands, along with various
shoals throughout the region typically located closer to the
Philippines.
So,
what deposits do these areas contain? Not much. The Spratly Islands
do have some moderate, confirmed
deposits but
even these areas are not fully explored, and the known figures are
contentious. Estimates range anywhere from 800 million to 5.4 billion
barrels of oil in the Spratly Islands and associated shoals.
These
estimates are imprecise, and the only work that was being conducted
there has ceased. A recent casualty of this conflict was the UK-based
Forum Energy, which was forced to cancel their joint work with the
Philippines in developing a bloc in contested territory after the
Chinese voiced
concern.
This turn of events was so negative for the company, they even had to
delist their shares from the London Stock Exchange. And, the Paracels
don’t even seem to have any serious oil and gas deposits at all.
There aren’t any confirmed resources in the area, nor do geological
formations predict any significant finds in the immediate region,
according the USGS.
If
oil and gas deposits are only ancillary factors driving these
disputes in the South China Sea, then what is? The main driver here
is territoriality and security for China and the other competing
states in the region. The underlying fundament for both is
nationalism, which heavily constrains all competing states from
compromise. And, as time goes on, compromise becomes even more
difficult. So, the issue of energy has become intertwined with this
contest for territory, leading, for instance, heads of national oil
companies to refer to their oil platforms as “mobile national
territory” in
their speeches.
This
security competition leads to troubling dynamics emerging in the
region, which is economically the fastest growing in the world and
responsible for nearly all oil demand increases over the past several
years. The main concern is a rising power, China, potentially
upsetting the regional security order, which in turn makes all other
states in Asia feel less secure. This triggers a reaction from other
states whereby they must counter that rising power in order to
maintain their own security, fueling the potential for a conflict
spiral.
China
also likes to exercise escalation dominance, a practice used heavily
by the Soviet Union during the Cold War, and what the strategist
Edward Luttwak likes to refer to as “localized escalation
dominance” in the case of China and its regional relations. In this
sense, China will seek to settle these conflicts on favorable terms
by sharply escalating a conflict at each level, putting the onus on
the opposing side to escalate further into more dangerous territory.
This means the situation has a greater chance of escalating quickly
and spiraling out of control.
China
is determined to gain as much military control over the South China
Sea as possible, not necessarily to protect the sea lines of
communication, but to provide a certain amount of strategic depth in
their maritime environment, which has been a perennial weakness for
China ever since the decline of Chinese naval power after the voyages
of Zheng He in the 15th century.
Outside
of the catastrophic potential for open conflict between China, the
United States, and regional allies, there is another more probable
implication of this spiral. In the age of nuclear weapons, those same
weapons induce a healthy dose of caution in all belligerents, and
rightly so. This also means that involved parties will instead likely
be pulled into some form of economic warfare with China before any
possible conflict would break out, proving difficult for some states
in region. Think trade and currency wars before localized conflicts.
he point is, the first step would be economic warfare causing great
pain throughout the region.
More
immediate, any drilling or investments in the region would have to be
carefully considered before any escalation in the region, economic or
otherwise. If exploration or drilling were to commence in areas
contested by China, expect to see harassment of the operations,
impediments to work, and other state sponsored indirect and
asymmetric means to discourage effective operations.
Another
key concern for any investments would be China related business
interests. Western companies that may wish to explore and develop in
contested waters will be putting other business interests at risk
that may be tied to China or other Chinese entities. Think global
joint ventures and access to fields and markets within China’s
mainland that may be denied. This is not to be taken lightly since
Chinese oil companies are involved in nearly every resource rich
emerging market, and the capacity of the Chinese market is quite
large.
There
is a strong possibility that the region will witness increasing
geo-economic conflict between China, neighboring countries, and the
United States. As a result, the South China Sea will likely become
caught in the middle of increasing tensions and posturing throughout
the Asia-Pacific. In short, there are very serious long-term dynamics
shaping the investment climate in the South China Sea that should
give any investor pause.
By
Ryan Opsal of Oilprice.com
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