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 160,000km2 of water on offer at the forefront of Asia’s biggest potential military flashpoint.
Oil companies have until June next year to decide whether to bid for the nine blocks, a Chinese industry source with knowledge of the matter said. CNOOC, parent of Hong Kong-listed CNOOC, has received many informal inquiries 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. Taiwan, Vietnam, Philippines, Brunei and Malaysia claim parts of it.
“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 last week, 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 (370.4km) exclusive economic zone and continental shelf.
CNOOC chairman Wang Yilin (王宜林) told reporters last month the tender was attracting interest from US 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 (周守為), a former vice president of CNOOC, said last month.
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 US-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 US$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.
Beijing’s oil offensive follows moves on the diplomatic and military fronts. At a meeting last month of foreign ministers of 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, diplomats from other member nations said. 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 its newly created Sansha city in the Paracel Islands (西沙群島), for the South China Sea. Nevertheless, analysts believe Beijing wants to avoid a conflict, particularly if it raises the prospect of US 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 thinktank. “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.”
Vietnam and the Philippines have partnered with foreign oil companies to develop oil blocks in disputed waters, sparking several tense incidents between exploration vessels and Chinese military vessels.
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 US 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.
Additional reporting by Charlie Zhu, Jeffrey Jones, Braden Reddall, Erik dela Cruz, Chau Ngo, Ho Binh Minh, Melissa Akin and Malini Menon
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