Oil Riches Pile on China Doorstep as Clashes Delay Drilling

Oil Riches Pile on China Doorstep as Clashes Delay Drilling
An oil platform is shown in the South China Sea. Photographer: Ding Jianzhou/Imaginechina via Bloomberg

To China, the world’s biggest energy consumer, another Saudi Arabia of oil may lie beneath the ocean to its south. Escalating regional tensions mean large-scale drilling may be slipping further into the future.

The South China Sea may hold 213 billion barrels of oil, or 80 percent of Saudi Arabia’s reserves, according to Chinese studies cited in 2008 by the U.S. Energy Information Agency. The world’s second-largest economy claims “indisputable sovereignty” over most of the sea, including blocks off Vietnam that Exxon Mobil Corp. and Russia’s Gazprom OAO are exploring.

Disputes have strained China’s ties with its neighbors and tensions rose this year as Vietnam said oil survey boats were harassed by Chinese vessels. The friction threatens maritime security in one of the world’s busiest shipping lanes and may be discussed at a two-day summit of Asia-Pacific leaders hosted by U.S. President Barack Obama in Honolulu starting tomorrow.

“China is the elephant in the room at the moment, so like it or not, you cannot ignore it,” said Lin Boqiang, director of the independent China Center for Energy Economics Research at Xiamen University in Fujian province. “Countries at the rim of the South China Sea are under pressure to find a practical way to deal with its presence -- not to anger or challenge it.”

The sea lies south of mainland China at the western extreme of the Pacific Ocean, and while it borders several nations China claims a huge expanse. That’s based largely on a historical map that predates the founding of the People’s Republic in 1949. There are hundreds of islands, many disputed.

China-Vietnam Clash

Chinese and Vietnamese military forces clashed in the Paracel Islands in 1974 and the Spratly Islands in 1988. The region, marked by China’s “nine-dotted line” to delineate its territorial claims, extends hundreds of miles south from its Hainan Island to equatorial waters off the coast of Borneo, and overlaps with areas claimed by Brunei, Malaysia and Taiwan.

The Philippines will propose a new initiative to settle disputes in the South China Sea at a meeting of the Association of Southeast Asian Nations next week, Foreign Affairs Secretary Albert del Rosario said Oct. 26. President Benigno Aquino will also meet with U.S. Secretary of State Hillary Clinton in Manila this month and discuss maritime security with Obama at the East Asia summit in Bali on Nov. 18, del Rosario said Nov. 9.

The U.S. set off China’s ire in 2010 when Clinton, speaking at a regional summit in Hanoi, called resolving the competing claims to the sea “a leading diplomatic priority.” That drew a rebuke from Chinese Foreign Minister Yang Jiechi, who said internationalizing the incident with U.S. involvement “can only make matters worse and more difficult to solve.”

Security Alliances

“There are challenges facing the Asia-Pacific that demand America’s leadership, from ensuring freedom of navigation in the South China Sea to countering North Korea’s provocations and proliferation activities to promoting balanced and inclusive economic growth,” Clinton said in Honolulu yesterday.

The U.S. has longstanding security alliances with countries including Australia, Japan, South Korea, and the Philippines, which it aims to enhance, and faces a balancing act as it seeks to deepen regional integration. Nations such as the Philippines and Vietnam are simultaneously attracted by Chinese commerce and concerned by what they consider Chinese belligerence. The U.S., likewise, sees China as both partner and rival.

Obama is hosting the annual 21-nation Asia-Pacific Economic Cooperation summit in Honolulu Nov. 12-13 before visiting Australia and attending the East Asia Summit Nov. 18-19.

Foreign Drillers

Vietnam and the Philippines reject China’s map as a basis for joint development of oil and gas resources, and have pushed forward oil and gas exploration projects in blocks which also lie within areas claimed by China. In March, Chinese ships chased away a vessel off the Philippines. Chinese vessels in June rammed the cables of a survey ship doing work for Vietnam, the second such incident in a month.

“Where we’ve seen these assertive -- verging on aggressive -- actions from Chinese vessels of one stripe or another, the common factor is a determination not to see the other countries going ahead unilaterally to explore and produce oil or gas if China is not involved,” said Euan Graham, senior fellow at the S. Rajaratnam School of International Studies in Singapore.

Talisman Energy Inc., a partner of state-owned Vietnam Oil & Gas Group, aims to begin drilling next year in a block that China had already awarded to a U.S. rival and protected with gunboats. Talisman’s blocks 133 and 134, about 300 kilometers (186 miles) from Vietnam, are known as WAB-21 in China, which awarded them in 1992 to Crestone Energy Corp. Crestone is now owned by Houston-based Harvest Natural Resources Inc.

Exxon’s Discovery

Exxon, the world’s most valuable company, discovered oil and gas in a field off Vietnam, the Wall Street Journal reported Oct. 25. Companies including Malaysia’s Petroliam Nasional Bhd., Russia’s Gazprom, Paris-based Total SA and London-based Premier Oil Plc have also found oil in the South China Sea, according to the report.

China warned foreign energy companies against exploration in the area after Exxon’s discovery, Hong Lei, spokesman of the Chinese foreign ministry, said Oct. 31.

India’s state-run Oil & Natural Gas Corp. and PetroVietnam signed Oct. 12 a three-year deal that aims to boost the countries’ investment in exploration and production. On the same day, D.K. Sarraf, managing director of unit ONGC Videsh Ltd., said the company may bid in an auction of nine offshore blocks being offered by Vietnam that will close Jan. 26.

“China should denounce this agreement as illegal,” an editorial published by the state-run People’s Daily said Oct. 14. “Once India and Vietnam initiate their exploration, China can send non-military forces to disturb their work, and cause dispute or friction to halt the two countries’ exploration.”

Saudi Arabia

Chinese estimates of oil reserves cited by the U.S. energy agency compare with 264.5 billion barrels of proven reserves held by Saudi Arabia at the end of last year, data from the BP Statistical Review of World Energy show.

The region may hold 2 quadrillion cubic feet of natural gas. That’s more than five times the 350.8 trillion cubic feet of gas held in North America, according to BP.

The Chinese numbers dwarf a 2010 United States Geological Survey assessment of the entire Southeast Asia region which calculated a mean undiscovered reserves estimate of 21.6 billion barrels of oil and 299 trillion cubic feet of gas, including onshore deposits.

“There are definitely oil and gas deposits in the South China Sea, but there’s no confirmation how much until actual drilling happens,” said Hooman Peimani, Principal Fellow at the National University of Singapore’s Energy Institute. “It’s essential for China to ensure it ends up with as large chunks of assets as it can get in its vicinity.”

Chinese Consumption

China surpassed the U.S. as the world’s largest energy user last year, using 2.4 billion tons of oil equivalent. Consumption climbed 11.2 percent, the fastest among the world’s major economies, according to BP.

Chinese companies have announced about $53 billion of bids for overseas oil and gas assets since the beginning of last year to meet the energy needs of the world’s most populous nation.

For Vietnam and the Philippines, the revenue and energy security from offshore hydrocarbon reserves would help boost economic growth. For China, delays to a final resolution of territorial claims may prove more fruitful in the longer term.

“Time will only make China much stronger, both economically and militarily, and increase its chances of grabbing a bigger share of the pie,” Lin said. “We all know when the elephant moves, it shakes the room.”

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