All at sea, offshore – China more aggressive as energy focus moves

CHINA wants the South China Sea to become a main source of oil and gas into the future as it targets a doubling of production to one million barrels per day oil equivalent by 2020, much of it from deep sea areas also claimed by a number of ASEAN countries who have their own energy security ambitions . . .

China’s aggressive pursuit of energy resources through its wide-ranging territorial claims in the South China Sea has heightened following its retreat from North Africa and the Middle East, according to Chinese author and academic, Zhao Hong.

“The recent crises and turmoil in the Sudan, in northern Africa and the Middle East have affected China’s overseas energy-strategic areas, posing potential constraints and raising costs,” Zhao writes in a paper on The South China Sea and China-ASEAN Relations, published by the Singapore-based Institute of South East Asian Studies (ISEAS).

Zhao says that following the outbreak of civil war in Sudan, China’s imports of crude oil from both North and South Sudan decreased from 13 million tons in 2011 to 2.5 million tons in 2012, a drop of 80 per cent. A large amount of China’s energy facilities and infrastructure was also damaged.

This experience raised China’s national interest in the development and utilisation of oil and gas resources in the South China Sea, which the Chinese would like to see become a main source of China’s oil and gas supply into the future.

China is targetting oil and gas production of 500,000 bpd oil equivalent by 2015, doubling that to one million bpd oil equivalent by 2020 in 3,000-metre deep sea areas of the South China Sea, says Zhao.

China’s State-owned oil and gas company, CNOOC, has developed deep-sea exploration capability over the last few years. Though still in its early stages, CNOOC has partnered foreign companies and increased indigenous development to expand its technological reach.

Zhao writes that, in May 2012, CNOOC began its first deep-sea project in an undisputed area of the South China Sea, southeast of Hong Kong. Another scholar, Erica Downs, of the Washington-based Brookings Institute, claims that deployment of CNOOC’s new rig indicates that CNOOC is beginning to close the gap with major international oil companies in deep-water drilling.

Currently, CNOOC is equipped with two deep-sea oil platforms, which will drill in water depths of 3,000 metres. China’s ambition is, however, being thwarted by its Southeast Asian neighbours. Vietnam, the Philippines, Malaysia, and Singapore have been actively exploiting oil resources since they were discovered in the South China Sea in the 1960s. There were hundreds of platforms in the Spratly Islands area, according to Chinese data.

China’s response to Vietnam’s claims and its decision to provocatively begin drilling in Vietnam’s economic waters was triggered by its concern over Vietnam’s “Ocean Strategic Programme to 2020,” according to Zhao’s interpretation. Vietnam’s goal is to establish an oceanic economy by 2020 to provide 53-55 per cent of its GDP, with ocean exports amounting to 55 to 60 per cent of total exports.

To realise these ambitions, Vietnam has had incentive to involve as many foreign partners as possible — to reinforce its claims in the area and to deter Chinese opposition.

Zhao writes that the “most striking” evidence is the fact that, in 2013, US-based ExxonMobil and PetroVietnam announced plans to build a US$20 billion power plant in Vietnam to be fuelled by oil and gas from two exploratory areas. India also entered the fray when it established joint exploration with Vietnam.

India’s OVL (Oil and Natural Gas Commission Videsh Limited) – a State-owned company under the Ministry of Oil and Natural Gas – has been present in Vietnam for some time, participating in a major oil venture for offshore oil and gas exploration.

India has already invested and holds a stake in a block with an area of 955 square km located 370 km southeast of Vung Tau, on the southern Vietnamese coast. The exploration licence for this block was acquired in 1988, and it has started commercial production.

Then, there is the Philippines, which, of all ASEAN members, has the most lukewarm relations with China. Zhao believes tension between Manila and Beijing is set to escalate in coming months because of the Philippines’ unilateral actions in the South China Sea.

The Philippines’ imperative in protecting what it sees as its waters is as equally pressing as that of China in wanting to establish its own energy security. Zhao writes that the Philippines’ relations with Arab countries and Indonesia are complex due to domestic political and religious reasons, resulting in an unstable energy supply. Therefore, the Philippines wants to expand its domestic oil production to reduce almost total reliance on oil imports.

“The Philippines has ambitious goals for its energy strategy and has attempted to boost self-sufficiency in oil production. It had intended to offer 15 exploration contracts over the next few years for offshore exploration off Palawan Island in an area claimed by China,” wrote Zhao.

More prominently, the Philippines is seeking to develop the seabed hydrocarbon resources of Reed Bank in the South China Sea, an area under dispute with China.

In May 2014, the Philippines’ Department of Energy opened a tender for exploration rights to 11 oil and gas blocks, and Philex Petroleum Corp of the Philippines announced that its London- listed unit, Forum Energy Plc, plans in early 2016 to start drilling appraisal wells in the Sampaguita gas field, also at Reed Bank.

“Should the Philippines proceed to develop Reed Bank unilaterally, there is a likelihood that tensions between the two countries will escalate,” says Zhao.

Indonesia has, until recently, kept out of the skirmishes with China. But in March this year, China released its nine-dash line map, outlining its claims in the South China Sea.

The map overlaps with Indonesia’s Riau province, which includes the Natuna Island chain. Says Zhao: “Should Jakarta’s posture shift to become a party to South China Sea disputes, this would have tremendous repercussions on the region’s geopolitics, leading to a potential change in the game being played out in the South China Sea.”

At stake for Indonesia is not only the Natuna Islands and surrounding waters but the sanctity of UNCLOS (the United Nations Conference on the Law of the Sea). Indonesia is the world’s largest archipelagic State and it lacks the naval capacity to defend its far-flung archipelago, which spans 4,800 km from east to west. It has, therefore, always been a strong advocate of UNCLOS.

In Indonesia’s view, in recent years China has taken a series of actions that have undermined UNCLOS and have threatened regional stability. In recent times, Indonesia has had a number of encounters with Chinese naval ships over the arrest of Chinese fishermen in Indonesian waters. Zhao suggests that these episodes could well be the reason behind Jakarta’s support for the arrangement between Australia and the US to set up a US naval base in Darwin.

China is currently Asia’s largest offshore energy producer, followed by Malaysia, Vietnam, and Indonesia. China’s offshore oil production recently reached more than 600,000 barrels per day, accounting for about 15 per cent of China’s total oil production.

Before 2012, China’s energy exploration was primarily confined to shallow waters adjacent to its southeastern coast. The Bohai Gulf is presently China’s core offshore production zone in terms of oil output.

China is, of course, looking for oil and gas well beyond the South China Sea. Chinese State-owned enterprises have been making acquisitions far and wide. CNOOC spent US$15 billion to acquire Nexen in Canada in the largest overseas deal ever undertaken by a Chinese oil and gas company.

Chinese companies are also buying technology and know-how to develop China’s domestic resources. Chinese companies have been among the most active players in seeking to partner with Western, and especially American companies, for their shale technology.

In 2013, for example, Sinochem entered into a US$1.7 billion joint venture with Pioneer Natural Resources to acquire a stake in the Wolcamp Shale project in Texas.

In China, the two giant State oil and gas companies, PetroChina and CNOOC, have signed a number of agreements with major western transnational corporations, including Shell. The Shell-PetroChina partnership in the Sichuan basin entails a US$1 billion investment from Shell, according to UNCTAD in its World Investment Report 2014.

UNCTAD says companies including SOEs from nations rich in shale resources are strongly motivated to establish partnerships with the United States and other international players to acquire the technical knowhow to replicate the success of the US shale revolution in their home countries.