June 2022

Oil and gas in the capitals: China is now threatening Indonesian E&P

In December 2021, China and Indonesia had a standoff over E&P in the southern South China Sea that involved unequivocal politico-military intimidation. While China has done this to the Philippines, Vietnam, and Japan, this was a first for Indonesia.
Jeff Moore / Contributing Editor

In December 2021, China and Indonesia had a standoff over E&P in the southern South China Sea that involved unequivocal politico-military intimidation. While China has done this to the Philippines, Vietnam, and Japan, this was a first for Indonesia. The big takeaway here is that the hostilities risk level for offshore Indonesia E&P has significantly increased. This also means the same for Association of Southeast Asian Nations (ASEAN) offshore E&P, signaling an accelerating trend. London-based Harbour Energy, a key player in ASEAN E&P, is feeling the heat. 

What happened? In July 2021, a Chinese Coast Guard (CCG) ship approached the Noble Clyde Boudreaux semi-submersible (Editor’s note: Noble in early 2022 said it would divest itself of this particular rig.), ultra-deep water drilling rig and told it to cease operations because it was trespassing in Chinese waters. Here, the CCG was referring to China’s territorial claim to most of the South China Sea—Beijing’s nine-dashed line. The rig, deployed by Harbour, had arrived days earlier at Indonesia’s Tuna Block in the Natuna Sea to drill two appraisal wells. The Natuna Sea is hailed by many as having the largest untapped gas reserves in all offshore Asia. 

Tuna is a new project for Harbour (as is another off the coast of Aceh in the Andaman Sea.) Harbour already has a 28.67% operated interest in Natuna Sea Block A. Furthermore, Sea Block A has seven producing fields, which supply gas to Singapore via the undersea West Natuna Transportation System, a series of pipelines. ConocoPhillips Indonesia operates it. Sea Block A is west of China’s nine-dashed line. 

That is not the case with the Tuna Block, where Harbour has a 50% interest. JSC Zarubezhneft, a Russian state-owned energy company, has the other 50%. Tuna is inside China’s nine-dashed line. In contrast, Indonesia says Tuna is inside its UN Exclusive Economic Zone (EEZ.) 

Jakarta awarded this block to Harbour in 2007. Harbour discovered Tuna field in 2014, and it was in the process of drilling two appraisal wells there when the CCG showed up. Indonesia thinks the hydrocarbons there might be worth $500 billion. Harbour’s original plans for the Tuna Block were to sell its hydrocarbons to Vietnam via a yet-unbuilt series of underwater pipelines linked to the Nam Con Son gas infrastructure. 

What happened next at Tuna is a bit foggy, but Indonesia deployed its Coast Guard ships and, a bit later, naval warships—corvettes, to be precise. Local fishermen said the Chinese also deployed warships. The opposing vessels then shadowed each other around the Tuna area into October. 

Adding to its intimidation, China also deployed its Haiyang Dizhi 10 survey ship to the East Natuna Block (aka D-Alpha Block) containing Tuna from Aug. 30 to Oct. 21. The East Natuna Block is inside Jakarta’s exclusive economic zone (EEZ). It has estimated reserves of 46 Tcf, but it also has a high CO2 level of around 71%, requiring more technology to develop. 

Then, as a side intimidation venture, China sent the survey ship, Da Yang Hao, along with two technical support vessels and a militia ship, to survey waters off Malaysia’s EEZ from Sept. 25 to Oct. 15. This also was a protest against PTTEP’s E&P activities in Block K’s Siakap North Petai oil field, which utilized the West Capella drillship. 

As part of its enhanced engagement with ASEAN countries and policy of freedom of sea navigation, the U.S. deployed two aircraft carriers to monitor the situation, the USS Carl Vinson on Sept. 11, and the USS Ronald Reagan on Sept. 25. 

At some point in all this deploying and counter-deploying, Beijing sent an official diplomatic letter to Jakarta, ordering it to stop drilling in Natuna. Muhammad Farhan, an Indonesian lawmaker on parliament’s national security committee, told Reuters, “Our reply was very firm, that we are not going to stop the drilling, because it is our sovereign right.” 

Throughout it all, Harbour kept drilling and made two discoveries in 120 m of water, Kuda Laut and Singa Laut. They contain over 100 MMboe (55% is gas and 45% is liquids.) Harbour is planning for a final investment decision on these discoveries in 2023. 

What’s next? China’s actions caused Jakarta to mobilize. It’s now planning to turn Natuna into a special economic zone, with tax breaks to attract foreign investment for gas and oil, fishing, and port facilities. It’s also planning to build military facilities on Natuna Island and aiming to have part of its annual exercises with the U.S.—Garuda Shield—on Natuna Island. The U.S. ambassador to Indonesia, Sung Kim, toured the Natuna area during March 2022 and doubled down on America’s defense and economic relationship with Jakarta. This is the opposite of what China wanted. 

While Harbour cannot move its E&P sites out of disputed waters, it can adjust its hydrocarbon transportation plans. It’s considering rerouting its pipelines to Vietnam through Malaysian waters, which reduces some politico-military risks, but not all of them. 

Looking ahead, military tension between Indonesia and China will increase. China will not cease its territorial grabs in the southern South China Sea. It will continue them. Malaysia is likely next. Indonesia will not relinquish its EEZ. It will further develop it. The U.S. will accelerate its growing relationship with Indonesia, and all ASEAN nations, which will increasingly draw China’s ire. All E&P companies in the southern SCS must recognize the heightened threat picture and prepare for future losses.  

About the Authors
Jeff Moore
Contributing Editor
Jeff Moore runs Muir Analytics, a risk consulting firm specializing in deciphering threats in conflict zones. He is author of the book, Spies for Nimitz, which depicts America’s first modern intelligence agency. He holds a PhD from the University of Exeter in the UK.
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