The Setting
China says it wants close, cordial and cooperative relations with its neighbours in South-East Asia, the 10 member-states of ASEAN. (1) Progress in this direction has gained impressive momentum since the end of the Cold War and Chinese support for communist-led insurgencies seeking to overthrow established governments in the region.
However, China’s military power is growing steadily and it claims ownership of a network of widely-scattered islands and their surrounding waters and resources in the South China Sea, one of the world’s largest semi-enclosed bodies of water (see Map 1.). These claims overlap in a substantial way with those of at least three Asean countries, Vietnam, the Philippines and Malaysia.
The three million square kilometer South China Sea is the maritime heart of Southeast Asia. It is two-thirds the size of the combined land territory of all the ASEAN states. Most Southeast Asian countries have coastlines overlooking or close to the South China Sea. Some would be wary about having to share a common maritime boundary with such a big and increasingly powerful nation as China, or even having it as a very close neighbour.
Meanwhile, oil and gas reserves under the seabed of the South China Sea are being discovered and exploited further and further from shore, as advances in drilling and production technology enable coastal states and the energy companies working for them to tap hydrocarbons in ever deeper waters (see Map 2.).
If China does not yet have the military capability to enforce its claims in the South China Sea, it is expected to gain this strength in the next few years. This puts a dark shadow of uncertainty over the future of China’s relations not just with ASEAN members, but also with their main dialogue partners including the United States, Japan, India, South Korea and Australia. All of these countries have important links with China. They also have significant strategic and commercial interests in the South China Sea and in ASEAN. (2)
Maritime disputes
Among South-East Asian states, Beijing’s claims to the Spratly Islands in the South China Sea are disputed by Vietnam, the Philippines and Malaysia (see Map 3.). Brunei in 1984 established an exclusive fishing zone that encompasses Louisa Reef in the southern Spratly Islands but has not publicly claimed the reef. About 45 of the islands are occupied by relatively small numbers of military personnel from China, Vietnam, the Philippines, Malaysia and Taiwan.
The Spratlys form a widely-scattered archipelago of more than 100 small islands, coral cays and reefs that lie to the east of busy international sealanes in the South China Sea (see Maps 4 & 5.). The sealanes running through it connect the Straits of Malacca and Singapore in South-East Asia with China, Japan and South Korea, the main oil-importing industrial economies in North-East Asia. These sealanes carry a large part of the world’s maritime trade and are frequently used by leading navies, especially the US and increasingly by China. Located about two-thirds of the way between southern Vietnam and the southern Philippines, the Spratly archipelago covers an area of nearly 410,000 square kilometres of the central South China Sea. (3)
Although the total land area of the Spratlys is less than 5 square kilometres, control of this remote but potentially important real estate might be used to establish naval patrol and surveillance bases. It could also be used to bolster claims to fisheries and offshore oil and gas resources in a vast area of the South China Sea. China, Taiwan and Vietnam claim all of the Spratlys, surrounding waters and any resources they may contain. The Philippines and Malaysia assert sovereignty over smaller portions of the Spratlys closest to their shores. (See map 3.)
The South China Sea claims of China, Taiwan and Vietnam are far wider than those of other claimants. Vietnam asserts sovereignty over the Paracel Islands (see Map 4) as well as the Spratlys. The Paracels were seized by China from South Vietnamese forces in 1974 in the closing stages of the Vietnam War, when Hanoi and Beijing were supposed to be allies. Chinese forces have since reinforced their garrison on the Paracels and extended an airport runway there, strengthening their grip on what is seen in Beijing as a strategic outpost south-east of China’s Hainan Island and roughly one-third of the way between Vietnam and the Philippines. There are 130 islands and rock outcrops in the Paracels group. (4)
Vietnam asserts that both the Spratlys and the Paracels are part of its national territory and have historically belonged to Vietnam. In the 1930s, France annexed the Spratlys and Paracels on behalf of its then-colony Vietnam. Hanoi treats the Spratlys as an offshore district of the province of Khanh Hoa. Vietnam’s claims beyond the Spratlys and Paracels cover an extensive area of the South China Sea, although they are not clearly defined. Both China and Vietnam protested in February 2009 after the Philippines passed new legislation spelling out its claims to some of the Spratly Islands and Scarborough Shoal.
China’s U-shaped claim
However, China’s claim appears to be far wider, encompassing much of the South China Sea. The precise limits are not clear from the broken U-shaped line drawn on official Chinese maps (see Map 4 for approximate location of this line.). Still, this claim, if acknowledged by ASEAN countries or enforced by Beijing, would bring China into the maritime heart of South-East Asia. It would make China a next-door neighbour not just of Vietnam, but also of the Philippines, Malaysia, Brunei and Indonesia (through its Natuna Island in the southern section of the South China Sea).
Moreover, this U-shaped line seems to coincide with the extension into the South China Sea of the so-called ‘first island chain’ extending from the southern tip of Japan through Okinawa and the ocean east of Taiwan to the Northern Philippines and around the perimeter of the South China Sea (see Map 6.). Chinese military theorists say the first island chain forms a geographic basis for China’s maritime defensive perimeter. It is the inner of two such barriers, the second and outermost of which extends southeast from Japan to and beyond the US island territory of Guam in the western Pacific Ocean. (5)
China’s growing military power
Taiwan maintains a similar claim in the South China Sea to Beijing’s U-shaped line. But neither Vietnam nor Taiwan have the military might to enforce their claims and evict other claimants. Only China has, or will have, that power if its military modernization program continues at, or close to, its pace of recent years.
China’s annual military spending has grown fourfold or more over the last decade, rising from 0.9 per cent of GDP to at least 1.5 per cent, or $US58 billion. By some assessments, China’s real military spending may be several times the published figure when off-budget items relating to defence are included. Even without allowing for this, China’s declared spending on military modernization overtook India’s in 2002 and Japan’s in 2008. While Chinese land forces are being upgraded, maritime and air forces (and thus power projection) are modernizing faster. Meanwhile, defence budgets in South-east Asia, including those of the region’s Spratly claimants, are small by comparison with those of China and elsewhere in Asia. (6)
China’s Navy has around 860 vessels. Some are old, small and only able to operate in ‘brown water’ close to the coast. But the Navy has ‘blue water’ ambitions. It is extending its reach and capability to protect China’s offshore interests, including those in the South China Sea and beyond. Since 2000, China has built at least 60 warships. According to the US Defence Department, China already has the largest force of principal combatants, submarines and amphibious warfare ships in Asia. Its Navy has 29 destroyers, 45 frigates, 26 tank landing ships, 28 medium landing ships, 54 diesel attack submarines, five nuclear attack submarines and 45 missile-armed coastal patrol craft. Of these 232 vessels, 168 are in China’s East and South Sea Fleets. (7)
In November 2008, a senior Chinese military spokesperson indicated that the next major addition to the Navy will be several aircraft carriers built in China, although analysts doubt that the first will be in service before 2015. (8) China’s ability and readiness to use naval power to protect trade and other interests far from its shores was underscored by Beijing’s decision in December 2008 to send two of its most advanced warships and a supply vessel from its naval base near Sanya, on Hainan Island, through the South China Sea and the Straits of Malacca and Singapore into the Indian Ocean to protect Chinese ships from pirate attack in the Red Sea off lawless Somalia. The flotilla was ordered to guard convoys and deter piracy for at least three months, before possible replacement by another squadron of Chinese Navy ships.
China’s milplex
China’s military-industrial complex, the biggest in Asia, is also improving both the quantity and quality of production. China is one of the few countries in the world to produce a full range of military equipment, from small arms to surface ships, submarines, and jet fighters as well as ballistic and cruise missiles and nuclear weapons. Since 2000, China has been producing several new types of weapons that are highly competitive in terms of quality and capability, among them the Song-class diesel-electric submarines and the Type-052C destroyer equipped with an indigenous Aegis-type radar and air-defence system.
One consequence of this growing self-sufficiency in arms acquisition, could be the rise of a more technologically-advanced China that would be increasingly prone to challenge the US for regional, even global, predominance. Another consequence of a militarily self-confident China could be a more assertive policy in a number of areas – in the Taiwan Strait, in the South China Sea and in the ‘blue waters’ of the Pacific and Indian oceans – that would upset regional security. (9)
Still, the US intelligence community estimates that China will take until the end of this decade or longer to produce a modern force capable of defeating a moderate-size adversary and that it will not be able to project and sustain even small military units far beyond China before 2015. (10)
If this assessment is correct, there is still time to enmesh China more fully into a regional relations system based on international law, non-use of force and negotiated settlement of disputes. Indeed since 1998, China has settled at least eleven territorial disputes with six of its neighbours, among them Russia, Vietnam and Japan. The most recent was the completion of the land border delimitation treaty with Vietnam in December 2008. (11)
China’s policy since 1975 has been to “shelve” the conflicting sovereignty claims to the land features and waters of the South China Sea and, in the meantime, undertake cooperative activities in the area. (12) ASEAN formalized a similar approach to resolving these maritime disputes peacefully when it issued a Declaration on the South China Sea in 1992. (13)
However, many of the disputes in the South China Sea involve more than one other country and sometimes as many as five contestants. The plurilateral nature of the claims and the sensitive national interests that are at stake make solutions complex and difficult to reach. Moreover, China calls for joint development only in the areas in which Beijing has overlapping claims with Southeast Asian countries, and where they assert legal jurisdiction and have established authority, such as in the Spratlys or zones on the continental shelf southeast of Vietnam. China refuses to countenance joint development in the Paracels, which are already under Chinese control. Some Vietnamese scholars refer to this as the “yours is ours, ours is mine” principle.
What do China’s maritime claims portend?
China’s U-shaped claim in the South China Sea is the source of considerable controversy, even among Chinese analysts. The “nine-dotted line”, so called since it is composed of nine dashes, has been on official Chinese maps dating back to 1947 when the Kuomintang ruled China. After the KMT was defeated in 1949 by communist forces and its remnants fled to Taiwan, the new government of the People’s Republic of China adopted the same U-shaped claim in the South China Sea and Chinese maps published since 1953 have displayed the nine-dotted line. (14)
The dotted line encloses the main islands, atolls and rock outcrops of the South China Sea: the Pratas Islands in the far north, the Macclesfield Bank roughly mid-way between Vietnam and the northern Philippines, and also the Paracels and Spratlys (See Map 4.). At its full extent, the Chinese claim covers about 80 per cent of the South China Sea.
China asserts sovereignty over all the islands and their adjacent waters, based on prior discovery, occupation and use stretching back through centuries of history. But does the contemporary Chinese claim mean that Beijing is asserting sovereignty over all the waters within the dotted line? Does it mean that Beijing regards them as internal waters or territorial sea, and that the line is viewed as China’s maritime boundary in the area, even though it is not marked by any coordinates?
The PRC’s 1998 law on its Exclusive Economic Zone and Continental Shelf states that the legislation will not affect the state’s “claim of historic rights.” This suggests that China may maintain its claim to historic rights and waters within the dotted line of the South China Sea. However, it may also indicate that China no longer regards the waters within the line as historic waters, because historic waters can only be treated as internal waters or territorial seas. They cannot be included in exclusive economic zones and continental shelves, as defined by the 1982 United Nations Convention on the Law of the Sea (UNCLOS), which China ratified in 1996. (15)
Hasjim Djalal, who has served as President of the International Seabed Authority and as Indonesia’s Ambassador-at-Large for the Law of the Sea and Maritime Affairs, says it is presumed that what China claimed, at least originally, was limited to the islands, rocks, and perhaps the reefs, but not the whole sea area enclosed by the nine dotted line, which has no coordinates. He argues that it is inconceivable that in 1947, when general international law still recognized only a three-mile territorial sea limit, that China would claim the entire South China Sea. He says that a careful reading of recent Chinese law strengthens this assumption, despite the fact that some Chinese writing seems to imply that Beijing also claims the “adjacent sea” of the islands and rocks within the dotted line. However, “adjacent sea” is not clearly defined and the concept does not occur in UNCLOS, which China has ratified.
UNCLOS deals only with internal waters, archipelagic waters, territorial seas, contiguous zones, exclusive economic zones, continental shelves and high seas. Moreover, UNCLOS stipulates that the measurements of those waters or zones should start from base points on land, or appropriate baselines connecting legitimate points, and not by arbitrarily drawing them at sea. (16)
Tug-of-war at sea
Why does the Chinese government not clarify the situation? If Beijing abandoned its U-shaped dotted line claim to a vast area of the South China Sea, its Exclusive Economic Zone (EEZ) would extend to a maximum 200 nautical miles from southern points of Hainan Island. If China’s jurisdiction over the Paracels were recognized, its EEZ would stretch further south. UNCLOS allows pieces of land at sea to be defined as islands on two conditions. First, if they are “a naturally formed area of land…which is above water at high tide.” And second, if they are capable of sustaining human habitation or economic life. Under international law, only natural islands can generate a legitimate EEZ and continental shelf claim. Of the Spratly Islands, perhaps only Itu Aba would meet the definition of being a natural island. Itu Aba is occupied by Taiwan. It is the largest and one of the most northerly islands in the Spratly archipelago. This would significantly reduce the extent of China’s territorial and maritime claims in the South China Sea.
Retaining the U-shaped claim may also be intended by Beijing to keep a negotiating card in hand and rival claimants in a state of uncertainty. There have been several armed clashes and numerous standoffs among contending claimants to the Spratlys in the past couple of decades. The main encounters have embroiled China and Vietnam. In 1988, they fought a brief naval battle near one of the Spratly reefs. More than 70 Vietnamese sailors were killed and several of their vessels sunk.
There have been repeated incidents since then, raising nationalist sentiment on both sides. In December 2007, China announced the elevation of Hainan Province’s Xisha (Paracel) Islands department to a country-level office named “Sansha City,” which would have administrative jurisdiction over the Paracel and Spratly island groups and the submerged reefs of the Macclesfield Bank (see Map 4). A PRC spokesperson said that China had “indisputable sovereignty” and effective jurisdiction over the islands of the South China Sea “and the adjacent waterways.”
In reaction to China’s declaration, hundreds of Vietnamese protestors demonstrated outside the Chinese embassy in Hanoi. (17) A Vietnamese foreign ministry spokesman said that Hanoi objected to China’s move to administer the three island groups, including Vietnam’s Hoang Sa and Truong Sa archipelagos. “This action is a violation of Vietnam’s sovereignty, (and is) not in line with the common perception of high-ranking leaders of the two countries or beneficial to the bilateral negotiation process of seeking fundamental and long-term solutions to sea-related issues,” the spokesman added. (18)
In the Spratlys, the armed garrisons that all the claimants, except Brunei, have stationed on the tiny dots of land they say are theirs are still in place. In some cases, they have been reinforced. Vietnam reportedly occupies 21 of the Spratlys, the Philippines 8, China 7, Malaysia 3 and Taiwan 1. (19)
A code of conduct for the South China Sea, signed by Beijing and ASEAN in 2002, is voluntary. (Declaration on the Conduct of Parties in the South China Sea, signed by ASEAN member states and China, 4 November 2002. (20) Meanwhile, a joint seismic survey of hydrocarbon resources, agreed by the national oil companies of China, Vietnam and the Philippines in 2005, lapsed in July 2008 and may not be renewed. Even when it was operational, the tripartite seismic survey did not include other Spratly Island claimants. Moreover, it covered only a small part of the contested sea area.
Sino-Vietnamese rapprochement?
In October 2008, China and Vietnam outlined new steps to resolve their long-running territorial disputes in the South China Sea in an effort to avert further conflict and put their relations on a steadier footing for the future. Although both countries are ruled by Communist parties and share extensive land and sea borders, they have had a tense relationship. But they now face political challenges at home as their export-oriented economies and investment slow under the impact of global financial turmoil and deepening recession. They have evidently decided to give primacy to strengthening bilateral party, trade and investment ties to offset the wider economic downturn.
The latest measures to improve relations emerged during the visit to China of Vietnam’s Prime Minister, Nguyen Tan Dung from 20 – 25 October, 2008. It was his first official visit as prime minister and came ahead of the Asia-Europe summit in Beijing. Mr Dung held talks with his Chinese counterpart, Wen Jiabao, and Chinese President Hu Jintao. A joint statement issued at the end of the visit said the two sides believed that “to deepen the bilateral all-round strategic cooperation partnership under the current complicated international situation conforms to the fundamental interests of both countries, ruling parties and peoples.” (21)
Under the plan, Chinese and Vietnamese companies will be encouraged to form joint ventures and engage in large-scale projects in infrastructure construction, chemicals, transport, electricity supply and home building. The aim of these projects, and the new road, rail and shipping connections, is to bond the neighbouring provinces of southern China and northern Vietnam. This would be part of a growing network of highways linking China with Southeast Asia. In an attempt to boost bilateral trade to a targeted US$25 billion by 2010 from $16 billion in 2007, there will be a joint crackdown on cross-border smuggling, counterfeiting and swindling. The two sides also agreed to promote investment in two ‘international economic corridors’. One links their land border towns while the other involves China’s Guangxi, Guangdong and Hainan Island provinces as well as Hong Kong and Macao, and 10 coastal areas of Vietnam. (22)
Whether this promised increase in two-way trade and investment materializes remains to be seen. But the proposed expansion of economic ties will also depend on progress in managing and eventually settling festering territorial disputes between China and Vietnam. Both sides reaffirmed that they would complete demarcation of their 1,350-kilometre land border by the end of 2008, a deadline that was set in 1999. As agreed, they finished the work on time.
What was new in the joint statement was an agreement to start joint surveys in disputed waters outside the mouth of Beibu Bay (the Gulf of Tonkin) at an early date and a promise jointly to exploit the demarcated zones for their fisheries and oil and gas potential. (23) Vietnamese analysts say that the disputed waters referred to are a small area that immediately connects to the mouth of the Gulf of Tonkin and that it is not a reference to the wider South China Sea dispute. They add that resolving disagreements in this area is perhaps among the easiest of the territorial disputes that Vietnam faces in the South China Sea.
South China Sea Stakes
The most contentious and difficult territorial issues in the relationship between China and Vietnam are their conflicting claims to the Paracel and Spratly islands. In their October 25 joint statement, China and Vietnam agreed to find a “basic and lasting” solution to the South China Sea issue that would be mutually acceptable. No detail was offered on how such a resolution might be reached. But, significantly, they said it would be in accordance with UNCLOS, the law of the sea treaty. Meanwhile, they would observe the ASEAN-China code of conduct in the South China Sea and refrain from any action that would complicate or escalate disputes. They would also consult on finding a proper area and way for joint petroleum exploration.
On the principle of starting with the easier steps, they agreed to collaborate on oceanic research, environmental protection, weather forecasting, and information exchanges between the two armed forces. (24) A strategic cooperation pact between state-run China National Offshore Oil Corporation (CNOOC) and its Vietnamese counterpart, PetroVietnam, is also reported to have been signed during Mr Dung’s visit to China.
Together, these accords would be important mutual-restraint and confidence-building measures, provided their terms are strictly and consistently observed by both sides – something that has not been a feature of past agreements between China and Vietnam on the South China Sea.
Changed Circumstances
However, several things may be different this time, apart from the desire to build bilateral economic ties to cushion both countries from global trouble. Beijing may want to defuse widespread concern in Asia over its growing military power and the fear that military muscle will be used to enforce territorial and maritime boundary claims that China has with many of its neighbours, stretching from Japan through Southeast Asia to India. In this context, the South China Sea is a sensitive touchstone.
In October 2008, not long before the Vietnamese prime minister arrived in Beijing, China banned its fishing fleet, one of the biggest in the world, from operating in waters contested with neighbouring countries. Fishing disputes in recent years have not only pitted China against Vietnam. They have also become an irritant in relations with North and South Korea, Japan, the Philippines and Indonesia. In the South China Sea, Chinese fishermen have been detained by the Philippines, allegedly for illegal fishing in waters claimed by Manila close to the Spratly Islands. Similar incidents have been reported in Vietnam. China’s cabinet, the State Council, issued a directive for the coast guard and fishery authorities to stop Chinese fishing vessels from entering “key sensitive maritime areas.” (25)
Another new factor is the recent steep fall in the price of oil and natural gas. This has removed some of the incentive for petroleum companies to explore in ever deeper waters, further and further from shore in the South China Sea. Deep-sea drilling is very expensive. But when the oil price surged past $100 a barrel for the first time at the start of 2008 and peaked at just over $147 a barrel in July, the expense seemed fully warranted.
Around that time, China told the US-based oil giant ExxonMobil to cancel planned oil exploration ventures off the coast of Vietnam with PetroVietnam, implying that if it did not do so it could be barred from operating in China. A Chinese foreign ministry spokesman said China opposed any act “violating China’s territorial sovereignty, sovereignty rights or administrative rights in the South China Sea.” (26)
Following a similar warning from Beijing, BP halted plans in 2007 to carry out exploration work with PetroVietnam off southern Vietnam, citing territorial tensions. This was also in an exploration block approved by Vietnam, but contested by China, about 370 kilometres offshore, at the outer edge of Vietnam’s Exclusive Economic Zone between Vietnam and the Spratly Islands.
With the oil price falling below $40 a barrel by February 2009 as slowing global growth crimped demand, the race for offshore hydrocarbon resources in the South China Sea had lost some of its impetus. This has provided a political respite, allowing China and Vietnam to pursue more conciliatory measures.
Energy Resources Cockpit
What could upset the fragile equilibrium in the South China Sea and resurrect emotive issues of national sovereignty, prestige and pride? The biggest risk is that economic recovery, rapid growth and a resurgence of strong demand for energy in Asia will again push China and its Southeast Asian neighbours into contention.
China’s oil and gas production has been failing to keep pace with surging consumption and it is worried that existing reserves will not last much longer. These concerns are shared by other petroleum producers in the South China Sea, among them Vietnam, Malaysia and Indonesia. They are currently net exporters of oil or gas or both, but can see the time approaching when their energy reserves will be insufficient to meet domestic demand. They want to extend the life of their reserves by finding more oil and gas. As in China, this is an energy security imperative and an economic growth imperative, because oil and gas are vital for transport and industry. Meanwhile, the Philippines, a net importer of both oil and gas, urgently needs to find more fossil fuel and regards its offshore zones in the South China Sea as a key to greater self-sufficiency in future. (27)
For the Chinese government, energy policy has become an arm of foreign policy. From being a net exporter of oil in 1993, China today relies on foreign supplies for about half the oil it uses. It is also becoming a major gas importer. For reasons of energy security, China has placed a high priority on getting as much of its future oil and gas as it can from within its land territory, from offshore zones, or as close to home as possible, including Russia and Central Asia. At present, around 75 per cent of China’s oil imports come from politically volatile areas of the Middle East and Africa. (28) They have to be shipped to China through distant sealanes, which the Chinese armed forces do not yet have the means to protect. These maritime arteries of energy supply could be cut in a crisis.
NOCs versus IOCs
It is not only countries that are under pressure to increase their oil and gas reserves at a time of perceived looming scarcity and high prices. So are major energy companies, whether they are state-controlled or majority owned by private sector interests. In the past few decades, national oil companies (NOCs) have emerged to challenge the dominance of international oil companies (IOCs). The NOCs are partially or wholly state-owned firms, through which governments control access to reserves of oil and gas, and retain profits from production. (29)
Today, these national champions in Asia, the Middle East, Africa and Russia control much of the world’s oil and gas. Thirty years ago, the big international oil companies lorded over 75 per cent of global reserves and 80 per cent of output. Now they control about six per cent of oil reserves and 25 per cent of production. (30)
Western energy giants, including ExxonMobil and BP, are struggling to secure shares of new finds of oil and gas to boost their reserves. ExxonMobil’s reserves-to-production ratio is just over 14 years and falling, while BP’s is 12 years and flat. The IOCs need access to reserves they can “book” with the Securities and Exchange Commission, the US stock market regulator. Only then can investors measure the health and attractiveness integrated energy companies that explore for, produce, process and market oil, gas and related products. (31)
Meanwhile, leading international petroleum service firms are helping national oil companies break their dependence on Western energy majors by providing seismic survey, drilling, training and a wide range of other skills and technology to both NOCs and smaller listed firms, the so-called independents, as they move to tap onshore and offshore resources. (32)
Deepwater drilling
Advances in know-how and equipment are enabling NOCs, IOCs and independents to explore and exploit what they find further and further from land in ever deeper waters, although it remains and very high-risk, high-cost business. Dozens of new drill ships and rigs are being built to explore for oil and gas in the deep waters of places like the Gulf of Mexico, West Africa, Brazil, Australia, New Zealand, India and the South China Sea.
In the next three years, ODS Petrodata, which tracks drilling rigs and other industry equipment, expects 160 new offshore rigs to enter service. Seventy five of these rigs will be for ultra-deepwater drilling. They can operate in waters up to 4,000 metres deep and have a total drilling depth of as much as 13,000 metres. Assuming enough engineers and drill crews can be found to operate them successfully and safely, their arrival may reduce sky-high charter rates for ultra-deepwater rigs. At the height of the oil price boom in the first half of 2008, owners of these rigs were able to charge as much as US$600,000 per day. (33)
The global credit crisis and recession will crimp deep-water drilling for a while. But as the world economy recovers, demand for oil and gas will revive and, when it does so, the rush to explore for and produce hydrocarbons from beneath the seabed in ever deeper waters will resume.
Among hydrocarbon explorers, deepwater drilling is usually considered to mean working in depths of 800 metres or more. Ultra-deep drilling starts at around 2,500 metres. Oceans and seas cover just over 70 per cent of the surface of the Earth, and nearly half of the world’s marine waters are over 3,000 metres deep. This is a new frontier for the discovery and exploitation of oil, gas, minerals and other valuable resources. The drillships and rigs being built in South Korea, Singapore, China and other parts of the world that are capable of tapping into oil and gas reserves at such depths are helping to reshape the global petroleum business.
The amount of oil pumped from deepwater fields will nearly double between 2005 and 2010 to about 11 million barrels a day, or about one eighth of estimated daily consumption in 2008, according the US Energy Information Administration. Consulting firm, Cambridge Energy Research Associates offers a slightly different but still bullish forecast. It says that deepwater wells produced about two million barrels of oil a day in 2000, but are expected to yield over 10 million barrels a day by 2015. Another consulting firm, Douglas-Westwood, says capital spending on deepwater oil and gas will rise US$25 billion annually by 2012, nearly double the figure for 2003.
Enter CNOOC, Husky and other explorers
In December 2008, the Chinese government approved a program by the state-owned China National Offshore Oil Corporation (CNOOC) to spend 200 billion yuan (US$29.2 billion) with partners to expand oil and gas exploration in the South China Sea over the next 10 – 20 years, starting in 2009. Of course, the program could be slowed or scaled back by the recession and low oil and gas prices. CNOOC, the country’s third-largest oil producer, said in November 2008 that it aimed to increase hydrocarbon output in the the South China Sea to 50 million tons per year (1 million barrels per day), equivalent to the current production of China’s biggest onshore oil field at Daqing. (34) CNOOC said it would focus on deepwater and ultra-deepwater oil-gas exploration in water depths of between 1,500 – 3,000 metres. (35) CNOOC says it already has 3.1 billion tons of oil equivalent in proven reserves in its deepwater zone in the South China Sea. (36)
CNOOC announced in July 2008 that it was buying a Norwegian oil exploration contractor, Awilco Offshore ASA, for US$2.52 billion, so that it could reach depths of up to 1,500 metres. Awilco owns and operates deepwater drilling platforms and equipment. At present, CNOOC itself is unable to drill in depths of over 300 metres. (37) CNOOC has also placed an order for deepsea drilling rigs with a Norwegian supplier.
One of the independent oil companies, Canada’s Husky Energy Inc., that works with CNOOC moved a new deepwater drilling rig built in South Korea into the South China Sea in November 2008 on a three-year contract. It is delineating and evaluating a giant gas field which Husky and CNOOC Ltd, the listed arm of the state-owned parent company, announced they had found in June 2006 in the northern sector of the South China Sea. (38)
Husky, controlled by Hong Kong tycoon Li Ka-shing who has close ties to China, said the Liwan field could contain up to 6 trillion cubic feet of recoverable resources, adding around 7% to China’s total gas reserves. Significantly, it was China’s first deepwater petroleum discovery. The exploration well was drilled 250 kilometres south of Hong Kong at a depth of 1,500 metres.
Husky announced in late February 2009 that it would soon begin developing the Liwan field, 350 kilometres southeast of Hong Kong, after the first of two appraisal wells confirmed a major gas discovery. The flow rate from the 55 square kilometer reservoir indicated that it could produce gas at a rate of over 150 million cubic metres per day. Under its production-sharing agreement with Husky, CNOOC has the right to participate in development of the field by taking a stake of up to 51 per cent. Apart from Liwan, Husky has five other exploration blocks in the South China Sea. The gas discovery in mid-2006 sparked a burst of interest in the surrounding deepwater zone of the South China Sea, with other independent energy companies including BG Group, Devon Energy Group and Anadarko Petroleum Corp., preparing to drill in adjacent blocks.
South China Sea bathymetry
The seabed area of the South China Sea consists of about one million square kilometres of continental shelf that is less than 200 metres below the sea surface, and about two million square kilometres of continental shelf deeper than 200 metres. The shallower part of the seabed, known as the Sunda Shelf, is mainly located in the western and southern zones of the South China Sea. The deeper part, known as the South China Sea Basin, is in the eastern and northeastern zones. In some areas, the water depth is over 5,000 metres. This deeper basin is punctured by the outcrops of the Spratly Islands. Much of this zone is now within reach of deepwater and ultra-deepwater drilling vessels.
Methane hydrates
It is not just the search for conventional oil and gas that is driving energy companies further and further offshore into deeper and deeper waters. China announced in 2007 that it had for the first time managed to tap into seabed sediment containing gas hydrates in the northern part of the South China Sea. Zhang Hongtao, deputy director-general of the China Geological Survey, a government agency, said that by collecting the gas hydrate samples in May 2007, China had become the fourth country after the United States, Japan and India to achieve this technological breakthrough.
Some scientists have said that the huge quantities of methane-rich hydrates kept stable by low temperature and high pressure on the seafloor or below the Arctic could become an important fuel for the future. Methane is the main component of natural gas. Every cubic metre of gas hydrate, which is a solid crystalline structure in its natural state, releases as much as 160 cubic metres of gas.
Mr Zhang was quoted as saying that initial estimates indicated that the potential volume of gas hydrates on the continential shelf in the area of the South China Sea tapped by China was equivalent to more than 100 million metric tons of oil (2 million barrels of oil per day) – about one quarter of China’s oil consumption of 7.8 million bpd in 2007. However, he added that because it was difficult to produce a continuous gas flow from hydrates, China might not be in position to develop the resource for many more years.
However, China is clearly in a race with Japan, the United States, South Korea, India and perhaps other countries to try to master the technology needed to exploit a potentially important offshore energy source for the future.
Asia’s rising gas demand
Meanwhile, China, the world’s second-largest energy consumer after the US, wants to increase its gas consumption to reduce heavy reliance on coal, which causes serious air pollution. Southeast Asian countries are also turning to cleaner-burning gas in a big way to generate electricity, and for industrial and home use. Natural gas use among Asian countries is forecast to rise by about 4.5% annually on average until 2025 – faster than any other fuel – with almost half of the increase coming from China. If this growth rate is maintained, Asian demand will exceed 21 trillion cubic feet, nearly triple current consumption, by 2025.
The South China Sea is considered to have greater gas than oil potential. Most of the hydrocarbon fields explored in the South China Sea areas of Brunei, Indonesia, Malaysia, the Philippines and Vietnam, as well as China, contain gas, not oil. Estimates by the US Geological Survey indicate that between 60% and 70% of the region’s hydrocarbon resources is gas. Even so, a significant proportion of the more than six million barrels of oil per day produced by China and Southeast Asian countries comes from the South China Sea region. A bigger proportion of the region’s gas output of over eight billion cubic feet per day comes from the South China Sea basin, although no precise figures are available. Chinese estimates of the overall oil and gas potential of the South China Sea tend to be much higher than those of non-Chinese analysts. (39)
The most bullish of the Chinese estimates suggest potential oil resources as high as 213 billion barrels of oil, nearly fourteen times China’s proven oil reserves of 15.5 billion barrels at the end of 2007. For gas, the potential production level is put by the most optimistic Chinese estimates at over 2,000 trillion cubic feet, although only about half of this might be recoverable, even if fields on this scale were found. China’s proven gas reserves at the end of 2007 were 67 trillion cubic feet. (40)
China’s Southward Thrust
China’s emergence as an increasingly big gas consumer and the emphasis it puts on getting as much of its future oil and gas from as close to home as possible, may help explain why China rates the energy potential of the South China Sea so highly. Such estimates buttress its sweeping claims to sovereignty in the area. Of course, these estimates have yet to be tested. Much of the area, particularly in deep waters, is unexplored because it is remote and contested.
However, China seems intent on expanding its offshore energy search. Until a few years ago, the state-owned Chinese energy giants were discouraged from competing and CNOOC had a virtual monopoly on offshore work. This has changed and now all of the Chinese oil and gas majors can bid for onshore and offshore projects, both local and foreign. PetroChina - an arm of China’s biggest oil producer, China National Petroleum Corporation - announced in March 2006 that it would be turning its attention to the southern sector of the South China Sea in the next few years.
As Southeast Asian governments and the energy companies working for them push deeper into the South China Sea in their hunt for more gas and oil, they can only hope that China’s southward push will lead to better cooperation, not confrontation. China has handed out exploration contracts or production licences over most of its deepwater oil and gas blocks in the South China Sea south of Hong Kong. These are contested only by Taiwan.
However, future Chinese permits seem set to overlap with those from its Southeast Asian neighbours. (41) Unlike in the 1980s or 1990s, China may soon have the military power to enforce its territorial claims against rivals in the region, should it decide to do so. But at what cost to its international reputation, to stability in the maritime heart of Southeast Asia and to its relations with ASEAN?
China seems to be confronting Exxon Mobil, the world’s largest publicly traded oil company by market capitalization, and BP, the third biggest oil firm by sales, with the choice of pursuing their offshore plans in Vietnam or jeapordizing their already substantial investments in China, potentially the world’s biggest energy market. China, of course, would argue that it is Vietnam which should exercise restraint. How will Vietnam react if Chinese pressure again stops Western oil and gas majors from going ahead with planned projects off the South China Sea coast of southern Vietnam?
The US & Japan
More important, how will the United States and its main Asian ally, Japan, react when they see hard evidence of Beijing’s southward extension of its offshore power projection into areas of the South China Sea over which it claims sovereignty but has so far been unable to enforce? About a quarter of the world’s trade and around 20 per cent of its daily oil consumption is shipped through Southeast Asian straits and the South China Sea.
Japan, which is entirely dependent on imported oil and gas, gets over 80 per cent of its supplies via the South China Sea. South Korea, another Northeast Asian ally of the US and a major energy importer, is also heavily reliant on shipments through the South China Sea. Taiwan, too, is depends on South China Sea shipping routes for most of its energy imports.
The US puts a high strategic priority on support for its Asia-Pacific allies and also on maintaining freedom of navigation around the world. America regularly sends warships, including aircraft carriers, from its Pacific fleet through the South China Sea, and the Malacca and Singapore straits, to reinforce its military presence in the Arabian Sea and Persian Gulf. This naval ‘surge’ capacity from the Pacific to the Indian ocean is especially important to Washington at times of crisis in the Gulf or Indian Ocean region. If the world economy recovers and an era of perceived petroleum scarcity and high prices returns, the US and Western nations will be under pressure to protect the interests of their leading energy companies in any confrontation with China in the South China Sea.
What next from China
Beijing is likely to keep re-stating its sovereignty claims in the South China Sea whenever it feels they are under challenge. However, although China is building its own deepwater drilling rigs, the first is not due to be delivered before 2010. Chinese NOCs have limited experience in deepsea oil and gas exploration, let alone production from such a challenging environment. They will continue for quite a few more years to depend on the small group of energy companies that have the necessary know-how and equipment to work in deep waters in remote and stormy locations. CNOOC says it can hire service companies to do the work. But first China must persuade more energy firms that the South China Sea is an attractive alternative to the world’s hottest deepsea frontiers, among them the Gulf of Mexico and the Atlantic ocean off Brazil and West Africa which account for nearly 75 per cent of global deep-water expenditure by energy companies. (42) Energy firms are unlikely to go to the expense of working in deep-water areas of the South China Sea unless they are assured of a peaceful environment.
Meanwhile, Beijing has held out an olive branch to its neighbours by publicly declaring on many occasions its preference for joint development of energy resources in contested offshore zones. In June 2008, it reached such a deal with Japan in the East China Sea. But reaching a workable arrangement in an area like the South China Sea, where there are multiple claimants, would be much more difficult. Meanwhile, pressure within oil-short China to tap oil and gas in the offshore areas it claims is intensifying as its onshore production fails to keep pace with demand.
China-SEAsia ties
As noted earlier, relations between China and Southeast Asia have taken a great leap forward in the past couple of decades. Mistrust from the Cold War and the days when Beijing supported communist-led insurgencies in the region has largely been dispelled. Two-way trade, investment and tourism are booming.
Security ties, though moving far more slowly, are also taking shape. There is closer collaboration between China and ASEAN countries in maritime security, search and rescue, disaster relief, counter-terrorism and curbing transnational crime. China has said it is ready to sign the protocol to the treaty that bans the development, possession or storage of nuclear weapons in Southeast Asia. But ASEAN is still negotiating the protocol with the other four recognised nuclear weapon states, Britain, France, Russia and the US. But these are easy, cost-free steps for Beijing. To cement its ties with ASEAN for the long-term, China could go further. Indeed, it may already have signaled a willingness to do so.
China-Malaysia deal
In October 2006, China and Malaysia announced a deal worth around $US25 billion in which the Malaysian national petroleum company, Petronas, will supply liquefied natural gas to Shanghai for 25 years starting in 2009. The gas is to come from Malaysian offshore fields in the South China Sea. Some of these fields fall within, or straddle, China’s broken line claim. The deal with Petronas indicates Beijing now accepts that Malaysia, not China, owns the fields. Beijing would not buy gas from another country if it maintained a claim to ownership of the field from which the gas was drawn.
Further steps
China could preempt a potential future conflict over energy, fisheries and sealane control in the South China Sea by formally and finally abandoning its broken line maritime boundary claim in the area. This claim may not now be active. But it could always be revived if China believed it had the military might to enforce the claim. Dropping it would make it clear that Beijing bases its claims in the South China Sea on UNCLOS and current international law, not pre-modern law.
Alternatively, China and the Southeast Asian contestants could agree to put their rival sovereignty claims to arbitration or adjudication before the UN Law of the Sea Tribunal or the International Court of Justice, as some Southeast Asian countries have done with their island and maritime boundary disputes.
As an interim measure, China and the Southeast Asian claimants to the Spratly islands could move beyond their 2002 non-binding joint declaration on conduct in the South China Sea and sign a mandatory code of conduct that would freeze unilateral activities and permit no further occupation of atolls and reefs, or new construction on inhabited parts of the widely scattered archipelago.
Southeast Asian countries with significant navies or coast guards could develop a more intensive program of training exercises with China that includes a search-and-rescue, counter-terrorism and anti-piracy component, similar to programs they now have with the US and Japan. For its part, China could accept the standing invitation from the US and Southeast Asian countries to take part in regional military cooperation exercises, such as Cobra Gold held annually in or off Thailand, which has developed close ties with China. The main focus of these exercises is no longer on defence from external attack, but on peacekeeping, disaster relief, and combating terrorism, piracy and other potential threats to safety and freedom of navigation.
However, possibly the most effective action ASEAN countries can take to pacify the South China Sea is to engage the commercial interests of China and as many other countries and foreign companies as possible in the search for off-shore energy in the area. This is already happening. However, it could be accelerated by making contract terms more attractive to investors, especially in costly, high-risk deepwater work.
In addition to an array of Western energy companies, firms from Russia, India, South Korea, Japan, Australia and other ASEAN dialogue partners are exploring for, or producing, oil and gas in the zone claimed by Vietnam and in other parts of the South China Sea that other Southeast Asian states say falls within their sovereignty. China has close ties with many of these countries and would not want to upset relations with them, particularly if it felt it had substantial access to the resources of the region through commercial ties.
For example, Indonesia has said it may offer the China National Petroleum Corp an equity stake in its Natuna D-Alpha block, near the Indonesian island of Natuna in the southern section of the South China Sea. The block is estimated to hold 46 trillion cubic feet of gas, making it one of the biggest reserves in Asia although it has a high carbon dioxide content which will make it expensive to exploit. (43) On a visit to Indonesia in December 2008, Chinese Vice-Premier Li Keqiang suggested that the two countries combine to explore for energy in third countries and “jointly tap oil and gas in the South China Sea.” (44)
Conclusion
Some analysts believe that China is biding its time until it has the military muscle to enforce its claims to sovereignty and resource control in the South China Sea. Then it would be able to negotiate with other claimants from a position of strength. But this approach would not enhance mutual trust and security cooperation between China and Southeast Asia, or between China and other important players in the region.
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