China unveils oil offensive in South China Sea squabble

Posted on August 2, 2012


Vietnamese navy personnel patrol on Truong Sa islands or Spratly islands in this April 13, 2010 picture. REUTERS/Stringer

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

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.


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.


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.


China ends unilateral fishing ban, unveils ‘oil offensive’

MANILA, Philippines – China has announced that the two-and-half-month summer fishing moratorium in some parts of the West Philippine Sea (South China Sea) ended on Wednesday.

In an announcement posted on the Chinese government’s web portal yesterday, China said it has implemented a summer fishing moratorium from May 16 to Aug. 1 as a routine annual measure to rehabilitate the area’s marine resources.

The Chinese government said in May that the annual fishing ban, which has been in place since 1999, covered areas north of the 12th parallel, including Panatag (Scarborough) Shoal, which China calls Huangyan Island, but excluding most of the Nansha (Spratly) Islands.

The South China Fishery Administration Bureau under the Ministry of Agriculture (MOA) said the fishing ban was adopted to promote the sustainable development of the fishing industry in the West Philippine Sea and protect the fundamental interests of fishermen.

The fishing ban is also applicable to foreign ships.

Chinese enforcement of the ban earlier sparked tensions with Vietnam. Manila also did not recognize the ban, saying it is an “encroachment” of the Philippines’ Exclusive Economic Zone (EEZ).

Panatag Shoal is an integral part of the Philippine territory, 124 nautical miles from the nearest base point in Zambales province. It is within the Philippines’ 200 nautical miles EEZ and continental shelf.

The Philippines’ claim of sovereignty in Panatag Shoal is supported by the United Nations Convention on the Law of the Sea (UNCLOS) and international law is clear in terms of the fact that Panatag Shoal is well within the Philippines 200-nautical mile EEZ and also within its continental shelf.

China stands on a historical claim which the Philippines feels is not supported by UNCLOS.

Joint exploration difficult without a binding code of conduct

Malacañang admitted yesterday that it would be difficult to enter into joint exploration contracts with China and other claimants in the West Philippine Sea, particularly the Kalayaan Island Group or Spratlys, without a binding code of conduct that would spell out the guidelines for countries.

“It will be very difficult for one or two countries to go in there and simply begin exploring while there’s no set of ground rules in place. The code of conduct seeks to establish ground rules so that if any activity were undertaken in the disputed territories, then they would be consistent with what has been agreed upon. Right now it remains an aspiration until certain agreements can be reached with our claimant countries,” Secretary Ricky Carandang of the Presidential Communications Development and Strategic Planning Office explained. He also stressed there should be no issue in the Philippines’ inviting bids for oil exploration early this week, saying that the service areas were well within the country’s territory.

“We are bidding out areas for exploration within Philippine territory. This is not part of what is generally considered disputed territory. This is not part of the Spratlys, not part of the Kalayaan Islands. This is part of Philippine territory so we don’t see any problem with that,” he noted. Carandang said that while the contracts contained “no explicit security guarantee,” the Department of Energy, the Philippine Coast Guard and the Philippine Navy would ensure that there were regular patrols to protect investors.

“Remember, we’ve been issuing service contracts for the last 30, 40 years and there have never been issues in the past with regard to the issues that we face now. So service contracts do not have an explicit security guarantee. Having said that though, there are companies that have done exploration in Philippine waters that we’re helping to coordinate,” Carandang said.

Military steps up territorial patrols

Despite the prevailing weather condition in the West Philippine Sea, China has maintained its presence in Panatag Shoal, only 124 nautical miles from Zambales.

Defense Secretary Voltaire Gazmin said that based on latest monitoring, two Chinese ships continue to linger in Panatag.

“As of this morning, we don’t have an update, but as far as I know there are two (Chinese) ships in the area,” said Gazmin in a media dialogue yesterday.

Gazmin said recent monitoring showed that a Chinese Fishery and Law Enforcement Command (FLEC) and one of its maritime surveillance ships are still in the area.

The Defense chief also confirmed that Chinese ships have already laid down buoys and lines at the entrance of the shoal’s lagoon.

Asked about plans to redeploy Philippine Coast Guard (PCG) vessels in the area, Gazmin said that there’s no order yet coming from the national leadership.

Aurea Calica – Jaime Laude

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