Oil and Gas in the Capitals

Vol. 232 No.8

The South China Sea has heated dramatically since March. Chinese vessels accosted Vietnamese and Philippine seismic ships, as well as those of Western seismic companies. World Oil asked Vietnamese and Philippine government representatives in Washington, D.C., to shed light on the issue for the E&P community, but they politely declined. Absent their comments, the only other way to peer into the near future of E&P in this region is to track the war of words between the parties involved. Unfortunately, their words don’t suggest a peaceful resolution.

The Philippines incident. On March 2, at Reed Bank, Chinese patrol vessels reportedly accosted a seismic ship operating on behalf of the Philippine Department of Energy. The ship was conducting a survey of potential gas reserves near the prosperous Malampaya gas field for a UK-Philippine joint venture, Forum Energy and Philex Mining.

The Philippine military said Chinese vessels approached the vessel, ordering it to leave Chinese territory. When it did not, according to Philippine sources, the Chinese maneuvered against the ship, trying to “sandwich” it. The Philippine military assigned two Coast Guard vessels to escort the vessel as it completed its survey.

On March 4, the Philippine government complained to the Chinese embassy. China replied, “Ever since ancient times, China has indisputable sovereignty over [the] Nansha Islands [Spratly Islands] and their adjacent waters.”

On March 8, Manila said it was dedicated to solving the issue via the 2002 Declaration of the Conduct (DOC) of Parties in the South China Sea signed by China and the Association of Southeast Asian Nations (ASEAN). The next day China said the same, but reiterated its “indisputable sovereignty” over the waters. To punctuate its authority, in July, Beijing announced it was deploying Marine Oil 981, China National Offshore Oil Corp.’s giant deepwater drilling platform, to the Spratlys, right in the middle of the disputed zone.

By June 11, Philippine Foreign Secretary Albert del Rosario had visited Beijing to sort the matter out, but accomplished nothing. Six days later, the Philippine Navy chief, Vice Adm. Alexander Pama, said that, while the Philippines would not provoke China, the Navy would take “proactive defense measures” to secure all territorial waters. By July 11, Manila announced that it was taking its case to the UN’s International Tribunal on the Law of the Sea, a 1982 convention both countries signed.

The Vietnam incident. On May 26, Chinese Marine Patrol vessels approached PetroVietnam seismic ship Binh Minh 2 and cut its streamer cables as it surveyed block 148, 120 miles off Phu Yen province. Multiple Chinese vs. Vietnamese harassment incidents reportedly followed. Then, on June 9, Chinese patrol vessels reportedly cut the streamer cables of CGGVeritas’ Viking 2 while it collected seismic data in block 136-03, off southeastern Vietnam.

Hanoi blasted Beijing, accusing it of regularly harassing its exploration vessels. On May 27, Do Van Hau, a senior PetroVietnam official, said Chinese actions “will impact on the attitudes of foreign investors.” At the same time, Hanoi complained to the Chinese ambassador, saying China had violated Vietnam’s territorial integrity, the 1982 UN Convention on the Law of the Sea and the China-ASEAN DOC.

On May 31, Beijing sent its reply: “The law enforcement activities by Chinese maritime surveillance ships against Vietnam’s illegally operating ships are completely justified. We urge Vietnam to immediately stop infringement activities and refrain from creating new troubles.” By June 10, Hanoi had touted the story all over the global press.

US involvement. The US got involved in the dispute by default. Amid all the cable cutting and harassment, in July, it held its annual naval exercises with the Philippines, which were announced well ahead of time. The US also staged exercises with Vietnam, planned a year in advance. Moreover, the US stated in July, that freedom of navigation for all nations in international waters such as the South China Sea was a core US policy.

Chinese Vice Foreign Minister Cui Tiankai had harsh words in response, asserting that the US should leave South China Sea negotiations to “claimant states.” Cui also said, “I believe the individual countries are actually playing with fire and I hope the fire will not be drawn to the United States.” And while the Chinese admitted that the joint naval exercises were regular events, Chen Bingde, the Chinese Army’s chief of the general staff, said, “It’s not a proper time for the US to conduct military drills in the region with the Philippines and Vietnam.”

Conclusion. China claims the entire South China Sea and all nearby waters up to Vietnamese, Indonesian and Philippine 12-mile territorial limits. Before March 2011, save for a few naval skirmishes with Vietnam, China had rarely been so brazen about its claims. Now, however, it seems Beijing is intent on policing them with force; how much force remains to be seen. The Philippines and Vietnam are, at the very least, legally and politically standing up to China and its massive Navy and Air Force.

Some companies such as ConocoPhillips may be headed for the door over the heightened risk. It announced in July plans to divest its Vietnam assets of $1.5 billion. Other companies such as Diamond Offshore seem undeterred. It announced in June that it was moving a deepwater rig from the Gulf of Mexico to Vietnam for BP. Regardless, from now on, energy companies operating in the South China Sea will be forced to deal with the 6,000-lb shark in the water, or else. Stay tuned. This has the potential to get nasty. WO