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11 July 2013

Energy Cooperation in the South China Sea

Portrait of Jonas Grätz

Jonas Grätz

Does China covet the disputed energy reserves of the South China Sea? Only for their symbolic value, argues the CSS’s Jonas Grätz. The disputes over ownership and access enable Beijing to whip up nationalist sentiments and to promote its broader geostrategic interests.

By Jonas Grätz for ISN

ISN: How much oil and natural gas is the South China Sea thought to hold?

Jonas Grätz: Resource estimates differ widely as the contested status of many areas in the South China Sea inhibits exploration. Based on known fields, proven and probable reserves have been estimated by the US Energy Information Administration at 11.2 billion barrels of oil and 5.3 trillion cubic meters of natural gas. About half of it is located off Malaysia’s coast, which probably reflects less exploration activity by other countries. Speculative figures for potential reserves – based on some known discoveries near the coast and geological projections – are substantially higher. The Chinese Land and Resources Ministry is the most bullish, putting the figure at 400 billion barrels of oil and 20 trillion cubic meters of gas, although without citing sources. That would equal half of the oil reserves of the entire Middle East and a quarter of its natural gas reserves. China National Offshore Oil Corporation (CNOOC) is a bit more conservative, estimating potential reserves at 124 billion barrels of oil and 14 trillion cubic meters of natural gas. With so much uncertainty attached to resource estimates, high Chinese forecasts may be intended to underscore the symbolic value of the South China Sea. This is further emphasized by the fact that Chinese media and oil companies refer to the South China Sea as a “second Persian Gulf” or, more humbly, the “maritime Daqing”, referring to China’s largest onshore oilfield. Based on the currently known fields and geological knowledge, however, the South China Sea looks set to be rich in natural gas rather than oil. Also, the gas often comes with a high CO2 content. As gas incurs considerably more transport costs than oil, a relatively high gas price and regional cooperation are in order to render gas development profitable.

Where are the majority of these reserves located? For instance, are they close to the disputed Spratly and Paracel Islands?

Knowledge about the location of reserves is patchy due to the territorial conflicts in the area. Nevertheless, the Spratly Islands seem to hold more oil and gas than the Paracel Islands. There are substantial known reserves north of Borneo, which implies that they are close to the Spratly Islands. Some of these fields, such as the Jintan and Saderi gas fields and possibly also the Gumusut oil field, are located inside of the “nine-dashed line” that marks the area claimed by China. Substantial reserves are also thought to be located in the Reed Bank some 80 nautical miles off Palawan, which was first explored in 1976 by the Philippines. However, further surveys were halted by Chinese maritime surveillance ships in 2011 and development has stalled since then. From an industry perspective, the Spratly and Paracel islands are interesting mainly because of the low water depth in the area, which significantly reduces exploration costs compared to deep-water developments. The islands would likely receive substantial attention from international petroleum companies were it not for political obstacles.

Have the territorial disputes associated with these island chains complicated efforts to extract these reserves?

Although most of the states in the region are in various sovereignty disputes over the Spratly Islands, the main current reason for delayed energy exploration and development in the South China Sea is China’s “soft enforcement” of its claims expressed in the nine-dashed line. This enforcement has been carried out with the help of various maritime enforcement agencies, such as the Bureau of the Fisheries Administration, China Marine Surveillance, or China Coast Guard. China advances its territorial claims primarily to improve its geostrategic position and to drum up nationalistic support for the regime, whereas control over natural resources seems not to be a main driver. While China’s power is already unsurpassed in the region, it keeps on growing, and rival navies and coast guards are weak. As a result of its capabilities and low immediate interest in resource extraction, China prefers to take a more confrontational stance rather than to opt for joint development. In fact, China often uses its naval power to block development of resources in its claimed areas, and puts forward proposals for joint development subsequently. As its territorial claims are far-fetched, other nations in Southeast Asia have shown little willingness to accept these proposals. Thus, the questionable legality of China’s claims, together with its measures to establish control of the areas in question, further complicate matters since mutual agreement on joint development would undermine the international law that ASEAN nations try to uphold.

Illustrations of China’s relative disinterest in resource extraction abound. In exchange for Malaysia’s support for Chinese claims and its opposition to the involvement of outside powers in the South China Sea, Beijing exercises restraint concerning Malaysian exploitation of oil and gas fields inside the nine-dashed line. By contrast, Chinese forces were mobilized against Philippine exploration projects in the Reed Bank and against Vietnamese survey vessels and extraction projects. Both of these nations are hawkish in contesting Chinese claims over the Spratly and Paracel Islands. In the Reed Bank, for example, Chinese agencies prevented the Philippines from going ahead with exploration. Manila has subsequently invited Chinese companies to participate in joint exploration, but has not been willing to concede sovereignty to Beijing. Instead, Manila resorted to international arbitration to enforce its claims. For its part, Beijing refuses to take part in international arbitration, and refuses to accept Philippine jurisdiction in the area.

Ultimately, this Chinese strategy pays off both economically and strategically because it blocks other states’ access to the resources and increases their willingness to include Chinese interests in exploration projects. But it is aimed at asserting sovereignty over the disputed territories, and not driven by immediate economic concerns.

Despite their respective territorial claims, some South China Sea states have entered into partnerships aimed at extracting natural gas and oil. Could you provide an overview of the most significant partnerships?

The idea of joint development was indeed pioneered in Southeast Asia, as South Korea and Japan set up the first joint development zone in 1974. Today, the uncertain nature of Chinese claims and its assertiveness in enforcement are the main factors inhibiting further cooperation. Although sovereignty disputes over the Spratlys do exist between the other littoral states of the South China Sea as well, their weak naval capabilities and high economic dependence on oil and gas extraction imply that they would find a way to settle mutual disputes. Also, their overlapping claims also tend to be formulated not in terms of distant history, but in terms of the UN Convention on the Law of the Sea (UNCLOS), which renders it easier to agree on a common denominator, if only by way of international arbitration. UNCLOS is of interest to these states as it generally favors states with a large coast-to-territory ratio over those with a smaller share of coastline.

As the main non-Chinese oil and gas player in the region, Malaysia has been at the forefront of joint development measures. It is involved in a successful joint development project in the Gulf of Thailand, administered jointly by the Thai and Malaysian governments, which the two states first agreed on in 1979 and which has been under development since 1990. In a smaller, adjacent area investments and proceeds have been shared between Malaysia and Vietnam since 1992 (despite being administered by Malaysia). And a third joint development project is underway between Brunei and Malaysia, after a border dispute was settled in 2009.

Notably, there is a joint exploration initiative between China and Vietnam in the relatively undisputed waters of the Gulf of Tonkin. Although this initiative has repeatedly been suspended due to incidents between the two countries, it was recently prolonged until 2016. This latter project is an illustration of the relatively benign relations between the two countries based on ties between their respective communist parties.

What about ‘outside’ actors? Is India or the United States also partnering with South China Sea states?

Most of the states in disputes with China have an interest in drawing outside actors into the region in order to counterbalance Chinese aspirations. During the last decade, there has been a marked growth of outside involvement in the region.

The United States – The United States has a vital interest in limiting Chinese influence in the South China Sea. Washington, which has ironically not (yet) ratified UNCLOS, is interested in upholding the convention’s key provisions in the area. Chinese control over the South China Sea would restrict the movement of military and economic vessels in the area. This would expand Chinese power at the expense of the US and its allies in this pivotal region. Hence, the US seeks to strengthen the Association of Southeast Asian Nations (ASEAN) in an effort to build regional coalitions, in contrast to the Chinese approach of bilateral agreements. The US also has a mutual defense agreement with the Philippines, and its “pivot” to Asia has coincided with calls from the Philippines, Vietnam, and Singapore for greater US involvement. Needless to say, all major international energy companies are active in the region, but all of them cooperate with national oil companies, including Chinese ones.

Japan— In partial coordination with the US, Japan has been increasing its activities in the region, both with its coast guard and navy. Recently, defense ties with the Philippines were strengthened. Tokyo knows that the South China Sea is pivotal for Japanese energy security, as almost all of its oil and gas deliveries are currently routed through the region. This adds to Tokyo’s general interest in countering the rising Chinese influence in the region.

India— India is also becoming more active in view of Chinese muscle flexing in the region. The Indian state oil company, ONGC, has invested into three blocks off the coast of Vietnam, which are partly located in areas claimed by Beijing. The Indian military has made it clear that it would venture into the South China Sea if China threatened ONGC’s assets.

Russia— Last but not least, Russia has also partnered with Vietnam in offshore exploration and production. The Russian state gas company, Gazprom, is exploring four blocks south of Hainan Island, which lie inside the area claimed by China. It also received a stake in another block inside that area, which possesses known gas fields. The Russian engagement seems mostly in order to deepen defense ties with Vietnam, but may also be motivated by the desire to gain an additional lever vis-à-vis China.

Do you expect the conventional oil and gas resources of the South China Sea to become a major source of regional conflict over the coming years?

The oil and gas resources are not likely to become a major source of conflict. Rather, they function as political symbols, as material for political actors to rationalize a nationalist strategy and to crystallize conflicts. What we can expect is more geologic exploration vessels being chased away and more conflicts crystallizing around exploration and extraction projects. But this has little to do with the dynamics of hydrocarbon extraction. It has more to do with other economic drivers like fisheries, and with revisionist power aspirations, notably in the case of China. China controls enough hydrocarbon resources in other areas of the country and even in undisputed areas of the South China Sea, so oil and gas are not likely to be the main driver for its policy. One might argue that China wants to boost its long-term economic power and energy security by laying claim to the South China Sea. But with today’s knowledge it is unclear whether the South China Sea holds sufficient hydrocarbon resources to rationalize this strategy, which comes with the economic opportunity costs of confrontation. As for the other states in the region, they have shown relative restraint and a greater willingness to come to an amicable solution with each other, as South China Sea hydrocarbons are important for their economic well-being. The real question is thus whether China will reconsider its position in view of the regional counter-balancing efforts that have been set in motion.

Jonas Grätz is a researcher at the Center for Security Studies (CSS) at ETH Zurich.


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