Vietnam: Managing Chinese Pressures around Vanguard Bank

As Vietnam’s recent decision to cancel deals for oil and gas activities in waters around Vanguard Bank caused significant financial and reputational damage, Hanoi should rethink its strategy to avoid similar incidents in the future.

The Noble Clyde Boudreaux rig, pictured here, was not deployed for a drilling operation after PVN cancelled a drilling contract with Noble Corporation. (Photo: Noble Corporation, Facebook)

Le Hong Hiep

23 July 2020

Vietnam recently cancelled several agreements with foreign partners over oil and gas exploration activities on its continental shelf near Vanguard Bank in the South China Sea. The move prompted concerns that Vietnam’s credibility in protecting its maritime interests in the South China Sea would be undermined, making it difficult for the country to attract new investors for its future oil and gas projects.

Last month, Vietnam cancelled production sharing contracts (PSC) with Repsol, an international energy company based in Spain, for blocks 135-136/03 and 07/03. Under the arrangement, Repsol would transfer its entire interests in these blocks to PetroVietnam (PVN), its local partner in the PSCs. Earlier this month, PVN also cancelled a drilling contract with Noble Corporation, a London-based offshore drilling contractor. Consequently, the Noble Clyde Boudreaux rig was not deployed at nearby block 06-01 for a drilling operation as initially planned. In both cases, PVN incurred significant financial losses as it had to compensate Repsol and Noble.

Apparently, Chinese pressure was the main reason Vietnam cancelled the two deals. In July 2017, PVN had to ask Repsol to cease drilling activities at block 136/03 after China reportedly threatened to attack Vietnamese bases in the Spratlys should the drilling not stop. China also repeatedly harassed Vietnam’s oil and gas activities in block 06-01. Last year, a four-month standoff between Chinese survey vessel Haiyang Dizhi 8, together with Chinese coast guard and paramilitary escorts, and Vietnamese ships only ended after Vietnam decided to withdraw the drilling rig Hakuryu 5 from block 06-01.

To be sure, Vietnam’s decision to halt its oil and gas activities in these blocks does not mean Vietnam acknowledges China’s maritime claims over Vanguard Bank and surrounding waters. Vietnam has always rejected such claims as baseless and illegal and considers these blocks as a non-disputed area. In the future, Vietnam can always resume its oil and gas activities in these blocks when the timing is right.

Apart from China’s pressures, some other factors may have also contributed to Vietnam’s decision. First, the current slump in oil prices, which are projected to remain low in the foreseeable future, make the pursuit of oil exploration in these offshore blocks commercially unviable. Second, as the Communist Party of Vietnam is preparing for its 13th National Congress early next year, its leaders may prioritise political stability and peaceful ties with China to ensure the success of the congress. Third, Repsol’s commercial calculations, especially its management’s accountability towards its shareholders, also incentivized the company to cancel the deals with PVN to forestall financial losses. Finally, as noted by an expert from PVN, new tensions over block 06-01 may disrupt existing gas exploitation activities in two important nearby gas fields. As such, PVN may prefer to play safe rather than push for the deployment of the Clyde Boudreaux rig.

As the decision to cancel the two deals caused significant financial and reputational damage, Vietnam should rethink its strategy for oil and gas activities in these blocks to avoid similar incidents in the future.

…if China continues to block Vietnam’s oil and gas activities in waters around Vanguard Bank, Hanoi should consider filing a case against China’s maritime claims in the area.

First, Vietnam should plan the operations carefully, especially in terms of timing and how to deal with China’s pressures, so that the operations can successfully achieve their objectives. Otherwise, Vietnam should not conduct such operations because a half-hearted attempt and ill preparation will only bring financial and reputational costs while further emboldening China.

Second, Vietnam should be more strategic in selecting partners for PSCs in these blocks. Companies like Repsol mainly pursue commercial targets and may quickly try to look for a way out if they face pressures from China or financial constraints. Selecting partners from the US, for example, may prove to be a better choice. On 13 July, US Secretary of State Mike Pompeo stated that the US rejects any Chinese maritime claim in the waters surrounding Vanguard Bank, and that any action by China to harass “other states’ fishing or hydrocarbon development” in the area is unlawful. As such, the US government may support American companies to resist China’s pressures if they are engaged by Vietnam for oil and gas operations in the area.

Finally, if China continues to block Vietnam’s oil and gas activities in waters around Vanguard Bank, Hanoi should consider filing a case against China’s maritime claims in the area. In 2016, the arbitral tribunal in the landmark Philippines versus China case ruled that China’s nine-dash line claim is legally invalid and features in the Spratlys have at best only a 12-nautical mile territorial sea, generating no exclusive economic zones (EEZs) or continental shelf of their own. This means there is no overlap between territorial seas of these features on the one hand and the EEZ and continental shelf generated from the Vietnamese mainland on the other. Any maritime claim by China over Vanguard Bank and surrounding waters is therefore baseless and illegal. The ruling, however, applies to the Philippines and China only. Given the 2016 precedent, if Vietnam files a similar case against China’s maritime claim over this area, it will stand a good chance to win the case and have a stronger basis to resist China’s harassments in the future.

Dr Le Hong Hiep is a Fellow at ISEAS – Yusof Ishak Institute.

ISEAS Commentary — 2020/100

The facts and views expressed are solely that of the author/authors and do not necessarily reflect that of ISEAS – Yusof Ishak Institute. No part of this publication may be reproduced in any form without permission.