x Abu Dhabi, UAETuesday 20 February 2018

Disputed claims in the South China Sea slow oil and gas exploration

Oil in the South China Sea belongs to no single country

The flag of PetroVietnam (R) next to Vietnamese national flag (C) and China's Communist Party flag in front of the headquarters of PetroVietnam in Hanoi. China has pressured the firm to stop drilling in the South China Sea. Nguyen Huy Kham / Reuters
The flag of PetroVietnam (R) next to Vietnamese national flag (C) and China's Communist Party flag in front of the headquarters of PetroVietnam in Hanoi. China has pressured the firm to stop drilling in the South China Sea. Nguyen Huy Kham / Reuters

Block 136/3 lies far off the southern Vietnamese coast, under warm and thundery tropical skies.

The drillship Deepsea Metro I, drilling an exploration well there for a partnership of state firm Petrovietnam, Spain’s Repsol, and Abu Dhabi’s Mubadala, found oil and gas there last month, and intended to keep going deeper. But the drillship had sailed into another storm: China claims this area, too, and threatened military action if the drilling went on.

On Wednesday, Vietnam decided after a contentious Politburo meeting to stop the drilling for now, although the Deepsea Metro I is still on station. Reportedly, the party general secretary and the defence minister felt they could not rely on the United States in case the confrontation escalated.

Further north, close to the mouth of the Gulf of Tonkin, ExxonMobil, formerly headed by the US secretary of state Rex Tillerson, is developing Blue Whale, Vietnam’s largest new gas project. China has not commented specifically on Blue Whale, but it has warned off foreign companies from the area, and threatened BP back in 2007. India’s state ONGC is also exploring off Vietnam, while Delhi seeks to sell Hanoi advanced weaponry, part of its own policy of trying to build regional allies against Beijing.

Surprisingly, given its China-like manufacturing boom, oil and gas is still 30 per cent of Vietnam’s GDP. But oil output has been on a plateau since 2000, and dropped by 8 per cent last year. This fast-growing country of 93 million people became a net importer of oil in 2010. With domestic gas output set to decline, Vietnam is also expected to begin importing liquefied natural gas (LNG) by 2023. It is urgent for it to develop more of its offshore resources.

The Philippines has a similar dilemma. All its gas comes from the Malampaya gas field, developed by Shell, which will run out within a few years. The giant Sampaguita field beneath Reed Bank, estimated to hold 20 trillion cubic feet of gas (Malampaya originally held just 2.7 trillion cubic feet), is also disputed by China.

Despite a win at arbitration over maritime borders, in which China refused to recognise the tribunal, tough-talking Filipino president Rodrigo Duterte instead appears to have conceded his country will not develop Sampaguita on its own.

Of the other countries that claim part of the South China Sea, oil output in the small but wealthy petro-state the Sultanate of Brunei is declining. Malaysia and Indonesia, once major petroleum powers, are both now importers, and have to ship LNG from their remoter islands to their populous industrialised heartlands. ExxonMobil last month gave up on trying to develop Indonesia’s giant but technically complex Natuna D Alpha gasfield, also theoretically within China’s claim.

Unlike the Gulf of Tonkin area, which abuts the large Chinese island of Hainan, neither Block 136/3, Natuna nor Sampaguita are anywhere near China, so Beijing cannot develop them itself. Its policy is more one of principle over all its expansive claim to the South China Sea, asserting its dominance over its neighbours, and testing the US’ resolve.

It is not clear whether the US’ lack of support for Vietnam is a deliberate policy, or the result of a government distracted by internal battles and a calamitously understaffed state department. The former US ambassador to Vietnam David Shear criticised the Trump administration’s “inattention” to the region. Once the Chinese artificial reefs and oil platforms create “facts on the sea”, there will be no going back.

The US’ withdrawal from the Trans-Pacific Partnership trade deal has left the neighbouring countries looking to a Chinese alternative. But some are engaging other allies too: Vietnam’s links to India, as mentioned, and Indonesia’s marine cooperation with Australia, a growing LNG supplier to the whole of east Asia.

Abu Dhabi's Mubadala is only a minority partner in the Vietnamese oil venture, but it has other stakes in the country as well as in Thailand, Indonesia and Malaysia. The UAE is a neutral party with strong economic relations with all concerned countries. Without interfering, some quiet diplomatic conversations may still be useful. Like the Middle East, South East Asia is increasingly served by tanker-delivered LNG, but there are very few cross-border gas pipelines. Mubadala itself, of course, developed Dolphin, the Middle East’s most successful international pipeline.

If the South East Asian states cannot develop the disputed resources themselves, the next best option is cooperation with China. “Joint development areas” already exist between Malaysia and Thailand, and Vietnam and Malaysia, and China and Vietnam have agreed on sharing the Gulf of Tonkin. But a wider accord is problematic because China has never formally clarified its expansive South China Sea claim.

Cooperative solutions would allow Vietnam, the Philippines and China to go ahead with these promising resources, creating mutual trust and shared interests, without any party having to relinquish sovereignty. Otherwise, Block 136/3 will continue generating diplomatic thunder rather than energy.

Robin M Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis