Mar 17, 2013

ASEAN - More fuel to South China Sea disputes

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Many analysts today have tried to explain Beijing's insistence on its "immutable sovereignty" over the South China Sea in reference to the "vast deposits of oil and gas" under these contested waters.

So, are these pools of oil truly vast? If they aren't so vast, does Beijing know? And vast or half-vast, does China have to control the oil of the South China Sea in order to benefit from the potential bounty?

In January, the US Energy Information Administration updated its estimate of the oil and natural gas resources of the South China Sea (SCS). Once again the EIA reported that a lot of hydrocarbons seem to lie beneath the SCS, with a mean estimate of approximately 11 billion barrels of oil in proved and probable reserves, and 190 trillion cubic feet (Tcf) of gas. Expressed in comparable energy terms, there's about three times as much gas, or about 33 billion barrels of oil equivalent. "Proved and probable reserves" are oil and gas that can be produced with existing technology if the price is high enough and the political environment is favorable.

According to BP's annual statistical review, China consumed 3.5 billion barrels of oil and the gas equivalent of another 800 million barrels of oil in 2011. By 2030, adds BP, China's demand for oil and other liquid fuels will grow by 70% to six billion barrels annually and will be slightly greater than the US.

Whereas the US will remain nearly self-sufficient in oil and gas, China's surging demand and very modest fraction of known global reserves, circa 1%, will force it to seek more and more of these fuels abroad. EIA projects that by 2035 China will import 75% of its oil and its annual gas demand will have grown from 4.5 trillion to 11 trillion cubic feet, with perhaps three-quarters imported by pipeline or as liquefied natural gas (LNG). Bearing in mind that there's a lot of air in all these estimates, they indicate that if all the proven and probable reserves in the SCS were recovered and shipped to China, they would satisfy less than two years of China's oil demand circa 2035 but over 17 years of its gas demand.

Then there's the seabed hydrocarbons that have not been found yet. In 2010, the US Geological Service estimated that beneath disputed parts of the SCS there may be another 16 billion barrels of oil and 145 trillion cubic feet of gas, the energy equivalent of another 25 billion barrels of oil. If all that oil and gas could be retrieved three decades from now, it would add nearly three more years of Chinese oil consumption and a dozen more years of gas consumption to world energy supplies.

An important reason why the undiscovered oil and gas hasn't yet been found is because sovereignty disputes have prevented oil companies from exploration. That would include the 2.5 billion barrels of oil and 25 trillion cubic feet of gas (4.6 billion barrels of oil equivalent) that USGS suspects may lie in the Spratly Islands area. Another important obstacle is that even if ownership of the seabed were not contested, the presumed deposits may just be too difficult to retrieve - at too great a depth, too remote, or in formations too complex to be worth the trouble at today's technology capacities and energy prices.

Competitive estimates

The EIA survey emphasized that the majority of proven or probable SCS reserves are in shallow water basins close to the coasts of Vietnam, the Philippines, Malaysia and Brunei - areas which are well within the exclusive economic zones (EEZs) awarded to these nations by the UN Convention on Law of the Sea.

USGS, addressing the "undiscovered oil and gas", did not even include the Paracel Islands area in its survey of Southeast Asia "oil and gas provinces". That archipelago south of China's Hainan Island and east of Vietnam's central coast, from which China drove South Vietnamese troops in 1974 and where it is now setting up a government for its entire SCS claim, is brusquely dismissed by EIA: "Geologic evidence suggests the area does not have significant potential in terms of conventional hydrocarbons."

However, Beijing apparently thinks there is considerably more oil and gas beneath the SCS. For the entire area that China claims - all the seas, islets, reefs and rocks within its notorious "U-shaped line" map - analysts for China National Offshore Oil Corporation (CNOOC) estimated 125 billion barrels of oil and the gas equivalent of 93 billion barrels of oil in November 2012. That includes hydrocarbons from various small fields already developed in the offshore basins of rivers that drain China's Guangdong province.

Deduct production in China's EEZ and the new Chinese estimate is only two and one-half times larger than the American estimate. That's less of a spread than before, and very likely the American and Chinese assessments now overlap at their respective high and low ends.

The distribution of oil and gas fields throughout the SCS explains why Chinese vessels have challenged seismic exploration within the Vietnamese and Philippine EEZs in 2011 and again in 2012. According to USGS, the next substantial strikes are likely to be made in the Reed Bank area (the portion of the Spratlys nearest the Philippines) and in the Phu Khanh "oil province" off central Vietnam.

The mystery that remains is why China has mounted such a robust challenge to the Law of the Sea regime and de facto abandoned the "peaceful rise" scenario that it so diligently cultivated in the decade leading up to 2008. To be sure, there is a significant amount of hydrocarbons to be exploited beneath the SCS seabed, no matter whose estimates one consults. Yet they are negligible on a global basis.

Under even high-end estimates, all the oil and gas in the South China Sea and the contested Senkaku/Diaoyu islands to the north as well will not contribute more than a few percent of world production, or no more than a smallish fraction of the total hydrocarbons that the Chinese economy will require in years ahead. By any objective calculation, China's national interest is better served by building regional relationships that ensure its unimpeded access to oil and gas markets centered in the Persian Gulf. As with the US, freedom of navigation has become an essential prop to the prosperity of the world's second superpower and soon to be largest economy.

Nor is there an objective need for China to exercise sovereignty over the SCS's seabed resources in order to benefit from their proximity. Already Southeast Asian neighbors like Vietnam sell a large percentage of their coal and oil output to China. Assuming all sides are able to settle or shelve their competing territorial claims, the SCS is ripe for accelerated development and China is a natural market for the hydrocarbons that may be produced.

Chinese companies have acquired substantial expertise in deepwater operations that could be put to use in production sharing and joint development arrangements. Unless, of course, paranoia prevails, fueled by the obsolete notion that the foundation of national power is control of the sources of raw materials wrested, if need be, from smaller neighbors.

David Brown

David Brown is a retired American diplomat who writes on contemporary Vietnam.

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