Vietnam-China Naval Confrontation / Beijing reporter’s questions on “China’s Oil Aims in South China Sea”

Buffalo, NY  (on the road)

Last week tensions between China and Vietnam flared up over conflicting claims to oil reserves under the South China Sea.  Brunei, China, Malaysia, the Philippines, Taiwan and Vietnam make variously conflicting claims.   But, China is the one that has become increasingly intimidating against other claimants.  This is not to say any Chinese claim is legimitate or not, only that China is the one initiating  confrontation in order to settle disputes in its favor.Map of South China Sea claims by country

VN claimed a Chinese vessel maliciously cut the cables of  one of its oil exploration ships in a VN-claimed oil blocks off its central coast.  In answer, last week the VN Navy, after an unusual public declaration, held live-fire exercises in the area to demonstrate its willingness to defend its claim. 

This is one of today’s very few cases of STATES vying for control of oil reserves–a throwback to a previous, mercantilist era, before today’s global, market-centered era took hold.  Why does China, unlike today’s other big powers, feel such a mercantilist urge?  Below here, from November 2010 are my written answers to five questions from a  Chinese reporter from “Life Week”  about China’s oil policy in the South China Sea.   I was told it’s Beijing’s largest-circulation Chinese-language magazine.  Unfortunately, the reporter later told me the editor said he would not permit the printing of any of my references to U.S. international oil companies (IOC) working with  Chinese national oil companies (NOC) in the South China Sea (see question 5) . 

Well, I suppose it is difficult to protest that neighboring states are too tight with the US Navy, if it turns out your own national oil companies are contracting with US companies to develop the area.  Here are my uncensored responses.

“Dear Dr. Tom O’Donnell,  … Life Week … magazine is affiliated to China Publishing Group.  Our circulation is about 250,000 per week. … (here are our) questions:”

1. For a long time, the South China Sea was considered a military strategic key point because this is water lane. When did the conflict of oil begin?

Interest in the South China Sea as not only as a location of strategic sea lanes for trade and commerce, but as a source of possibly significant oil and gas began in the mid-90’s. One of the major factors was the passage in 1993 of China from a country able to practice “self-reliance” in oil supplies–the policy Chairman Mao had set long ago–to a country lacking sufficient supplies for its domestic oil needs.

From that time, China was forced to find a new policy besides self-reliance, yet one that is as independent as possible. The new oil policy of “Go Abroad,” seemed like the next best thing to “self-reliance”. This led to rapid growth of CNPC, CNOOC, SINOPEC and other Chinese national oil companies (NOC), all of which were given the task of “going abroad” to find new sources of oil and to bring it home.

However, today, the world’s big oil companies do not produce oil with the aim of bringing it back to their home countries; instead they produce oil for the international market–mainly in New York and London where it is traded in US dollars. With almost all oil companies distributing the oil they produce through the global market–whether they are a private IOC of the global north, or a national oil companies (NOC) of the global south–this provides a global system of collective oil security. In my writing, I have often called this the “One Global Barrel” oil-security system.

This is quite unlike the old mercantilist and neo-colonial system that existed before OPEC states nationalized their oil in the 1970s. Before then, so-called “national champion companies” went around the world seeking oil not only to sell internationally, but to guarantee oil security for their home countries; and competition between countries often led to conflicts over sources of oil.

After 1993, with Chinese NOC given a mandate to produce oil abroad and import it directly back home—which is an old-style, mercantilist policy—China was attempting to find energy security in a go-it-alone manner, separately from the global market. One big reason for this is because today’s global market has the US as its dominant actor, and the main idea of China’s “Go Abroad” policy is to seek as much “self-reliance” and independence as possible in its oil supplies.

Therefore, as it became clearer that there are very significant gas resources in the South China Sea and perhaps large oil reserves as well, the possibility of Chinese NOC acquiring oil so close to home was a very attractive possibility. And, China and its NOC strongly desired that the South China Sea be recognized as China’s territory to ensure that the Chinese NOC are guaranteed the future production deals on the basis of Chinese sovereignty, and not merely based on competition in bidding for contracts.

So, the conflict over ownership and development of the South China Sea oil has heated up. Every year China becomes more dependent on imported oil. However, together, all of China’s NOC, working abroad for over 15 years now, produce only about one-third as much oil as a large major oil company such as Exxon or BP. And, the Chinese NOCs are not able to bring all of the oil they produce abroad back home; so some is sold in the global market.

As relative late comers to the international oil business, it will take the Chinese NOC more time to acquire large equity oil-field contracts around the world, and to develop the same level of technical and managerial abilities as older IOC enjoy. Therefore, to gain sovereign control of the full South China Sea is seen as a big opportunity where oil could be developed without having to compete with the larger and/or more experienced foreign firms.

2. Could you please tell me some information about the history and current situation of European and U.S. oil companies’ business in South China Sea, especially in the Chinese mare clausum?

Recently there has been new interest by foreign major oil companies in the U.S., Europe and elsewhere to obtain contracts in the portions of South China Sea that are not disputed to be under the control of the People’s Republic, or any another country.

For example, it was reported this week [i.e. this was written on 6 November 2010 – T.O’D.]that a consortium of the Norwegian Statoil and Talisman Energy of Canada are looking to make a deal with Sinopec to explore offshore shale oil in the S. China Sea; and in September Chevron, a U.S. oil Company, purchased rights to explore for oil and gas in three fields about 250 kilometers offshore from Hong Kong. If Chevron finds oil or gas, CNOOC has a right to control the majority interest in fields. In addition, Anadrko Petroleum Corporation, the British BG Group PLC, and Husky Energy of Canada have contracts to explore for oil or gas.

Foreign companies naturally avoid signing contracts if there is any dispute over what nation owns a field, as this would be a great financial risk. However, in some cases when large fields are discovered, their full extent may reach into disputed areas, causing complications. In 2008, the Chinese government warned Exxon against an exploration deal with Vietnam; however, according to reports, Exxon has not suffered any penalties and seems to be going forward.

This renewed international interest in the South China Sea is part of a global trend of IOC seeking offshore oil contracts–whether in Angola and Africa, offshore of Brazil, or in the Gulf of Mexico waters belonging to the US, Mexico or Cuba, or in the South China Sea. Most of the world’s oil fields are nationalized and it is somewhat difficult for the private IOC to acquire reserves that they can “book” as equity holdings on Wall Street to boost their companies’ stock values. So, as the global search for places they can get private equity holdings in oil gets tighter, these newer offshore fields such as the South China Sea become more attractive.

3. Around 1983 and 1993, there were two waves of boom of foreign oil companies investing oil exploration in China part of South China Sea? What were the dynamics of this two booms and the following low tide?

(I am not particularly familiar with this phenomenon. I do know that after 1979, the Second Oil Crisis took place following the Iranian Revolution causing international oil prices to go very high. This situation caused an increase in exploration for oil everywhere. However, in 1993 the situation was different.)

4. How do Chinese and U.S. policy influence the investment? Could you please give me some example?

I think the answer to Question #1 explains how Chinese policy influences these investments. It is not so clear about U.S. investment, as the foreign investments are only recently becoming large and more serious. In general, the US companies’ participation is driven by their commercial interests, and probably has nothing to do with US diplomatic or military interests. However, the companies are undoubtedly following very closely the geo-political conflicts that might disrupt their businesses.

5.  What is you comment on the current big oil companies business activities in South China Sea, especially their cooperation with Chinese states oil companies?

In addition to my answer to Question #2: It is clear that foreign companies actively participate in many oil field projects, both onshore and offshore, together with the Chinese national oil companies. The Chinese companies seem to be very happy to have foreign companies participate, bringing capital investments and also especially their expertise and technology. For the IOC’s part, as compared to the political difficulties they face in many areas such as Africa, parts of Latin America and the Caspian Basin, China has offered a relatively stable and business-like atmosphere for the IOC’s to invest.

However, the problem lurking always is disagreements between the surrounding states over who controls portions of the South China Sea. The IOC are cautious about risking large investments in any region where there may be ownership and sovereignty conflicts that could annul their contractual rights.

The recent assertions by a Chinese military official in a public meeting attended also by US Secretary of State Hillary Clinton in Hanoi, of China’s “indisputable sovereign” control of the entire South China Sea clearly sent a shockwave of sorts to foreign international oil companies interested in working with not only Chinese, but also with Vietnamese, Indonesian, Thai, Filippino and other local states’ companies. It also sent a shock through U.S. and local S. East Asian states’ leaderships, as well as states with deep interests in open access to shipping lanes through the South China Sea such as India, Japan and South Korea.

This has been especially so as this recent assertion by Chinese military officials comes along with recent Chinese efforts to increase its deep-water naval capacities in the region. This has led to a round of new focused diplomacy by the U.S. Secretary of State Hillary Clinton with ASEAN states, including especially Vietnam, and has caused a certain sense of crisis surrounding President Obama’s current trip to India, South Korea and Japan.

In summary, (and as I explained in Question 1):

China’s strategic concern to avoid growing energy dependence has led, first, to the Chinese policy of “go abroad” for oil still includes a general desire to avoid reliance on the collective global market place for its energy security, and instead attempt to either bring foreign oil directly back home, and, secondly, in the case of South China Sea oil, to assert sovereign control to, again, avoid dependence on the global market where the US and OECD are the dominant players. This is an energy security vision that differs from other states’ vision of collective, global market-based energy security, and which faces many obstacles. No major oil consuming state today has found “energy independence”.

By the way:  There were reports of the recent Vietnamese-Chnese  ccnfrontation in Stratfor, “Vietnam: Live-Fire Exercise in Disputed Waters” (13 June), the Wall Street Journal (14 June), and the BBC (10 June).   For a good overview of the resources and issues involved, see the US Energy Information Agency (IEA) page on the South China Sea.

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