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China hunts for energy in stormy waters

Territorial disputes in the South China Sea likely to escalate after Beijing's recent expansion of deepwater assets.

Last Modified: 27 Mar 2013 07:14
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China's search for energy may intensify in the South China Sea, along with territorial tensions [GALLO/GETTY]

Shanghai, China - China's hunt for energy to keep the world's second-largest economy humming is increasingly leading to the deep waters of the South China Sea, where bitter territorial spats are likely to surge.

The country's dominant offshore oil and natural gas producer, China National Offshore Oil Corporation (CNOOC), is expanding its deepwater drilling capability to meet booming Chinese demand for energy.

Last month, the state-run company sealed a blockbuster takeover of Nexen, a Canadian explorer with deepwater assets stretching from the United States' Gulf of Mexico to West Africa. CNOOC paid $15.1bn for Nexen, making it China's largest foreign business takeover to date.

The Nexen deal came less than a year after CNOOC took delivery of an ultra-deepwater drilling platform that cost nearly $1bn to build in Shanghai.

Both moves suggest CNOOC intends to begin exploring deeper, potentially resource-rich waters of the South China Sea - where China, Vietnam, the Philippines, Taiwan, Malaysia and Brunei have overlapping territorial claims.

China's oft-stated position is that it has indisputable sovereignty over the entire South China Sea, encompassed by its controversial "nine-dash line" map.

For the first time a Chinese Navy task force has been deployed 1,800 kilometres to the southernmost area of the South China Sea that Beijing claims - about 80 kilometres off the coast of Malaysia.  

Naval manoeuvres were being carried out to "defend the South China Sea, maintain national sovereignty and strive towards the dream of a strong China", the state-run Xinhua news agency reported. 

"It was a surprisingly strong message in sending out this task force," Gary Li, an analyst with maritime research company IHS Fairplay in London, told the South China Morning Post. "We've never seen anything like this that far south in terms of quantity or quality."

New oil frontiers

"The rig is quite important, because CNOOC didn't have the experience and also the technology for the deep sea. But with that rig, they can really go there."

-  Lin Boqiang, China Centre for Energy Economics Research

For now, China's jumbo drilling rig, dubbed Haiyang Shiyou or Offshore Oil 981, has steered clear of contested waters in the South China Sea. The rig has been drilling off the coast of Hong Kong and Guangdong province - a deliberate deployment, according to Erica Downs, a scholar with the Brookings Institution.

"My sense is that if CNOOC wanted to drill in disputed areas of the South China Sea, they could do so," said Downs.

"You have some disputed areas that require a rig like [Offshore Oil 981] to do ultra-deepwater drilling. And there are other disputed areas that are shallow where you don't need those capabilities, which CNOOC presumably already had."

Offshore Oil 981 nevertheless opens up new frontiers of the sea to Chinese development. The semi-submersible platform can operate in waters as deep as three kilometres and drill wells to a depth of 10 kilometres.

"The rig is quite important, because CNOOC didn't have the experience and also the technology for the deep sea. But with that rig, they can really go there," said Lin Boqiang, director of the China Centre for Energy Economics Research in Fujian province.

Lin said he believes that CNOOC will eventually move the rig to explore deeper waters in the central and southern zones of the South China Sea.

"It depends on how well they do. But I think eventually they will go there," he said. "If China doesn't do it, other countries will do it."

Resourceful thinking

Chinese interest in the sea stems partly from energy security concerns. China, the world's largest energy consumer, relied on imports to meet 56 percent of its crude oil consumption last year, more than double the 26 percent in 2000.

Deepwater energy resources could help China curb its import dependency. But how much oil and natural gas lies beneath the South China Sea is unclear, as territorial spats have hindered exploration.

"The possibility that there might be something that's commercially producible in significant volumes is a factor driving China and other claimants," said Downs. "But the reality is nobody knows for sure what's there."

China is eyeing deepwater drilling expansion [GALLO/GETTY]

Chinese estimates suggest enormous potential. The sea could hold 17 billion metric tonnes of oil, and more than 14 trillion cubic metres of gas, CNOOC Chairman Wang Yilin said at a major Communist Party meeting in November.

China's Ministry of Land and Resources estimates oil reserves range between 23 to 30 billion tonnes and gas reserves are about 16 trillion cubic metres. About 70 percent of the oil and gas resources are believed to exist in deep water, considered by Chinese engineers to be between several hundred metres and three kilometres deep.

Independent estimates are more conservative. Energy consultancy Wood Mackenzie says the sea contains only 2.5 billion barrels of oil equivalent in proven oil and gas reserves.

"Because of the disputes, estimates have become even more confusing. But I believe there's something there," said Lin.

Any discoveries would take time to exploit, according to Downs. "It's certainly not a short-term solution for Chinese concerns about dependence on oil and gas imports."

South China seize

Beijing nevertheless underscored the South China Sea's importance to its interests in October, by naming it as the main offshore site for gas production by 2015. China expects to produce 15 billion cubic metres of gas every year from the sea by then, representing 75 percent of total offshore gas production.

Realising those targets could be fraught with political and diplomatic risk.

At the Offshore Oil 981's inauguration last year, CNOOC Chairman Wang Yilin stoked tension by declaring that CNOOC would "strive to protect the nation's offshore oil interests".

"Large deepwater drilling rigs are our mobile national territory and strategic weapon for promoting the development of the country's offshore oil industry," Wang said.

Other nations are also seeking the South China Sea's resourcess [GALLO/GETTY]

Wang's comments were rooted in nationalism and intended for a domestic political audience, according to Downs from the Brookings Institution.

"My sense is that his main target was the Chinese public. You have to remember that the guys who run these companies wear two hats - there's the oil executive hat, but then there's also the Communist Party hat," said Downs.

"They're judged not just on their ability to do a good job running their companies but … also advance and support broader interests of the Chinese state. I saw those comments as Wang basically saying: 'Look, we're doing our part. We're not going to let anybody push us around in the South China Sea.'"

Nexen's deepwater knowhow

Wang made his remarks during a tense standoff between Chinese and Filipino ships in a disputed part of the sea known as the Scarborough Shoal.

China has also sparred with Vietnam in a separate territorial squabble. Beijing expressed outrage after Vietnam passed a law in June formally declaring sovereignty over the Hoang Sa and Truong Sa islands.

Both are also claimed by China and known as the Paracel and Spratly islands, respectively. The two countries fought over the islands in 1974 and 1988.

"I don't see whatever expertise [CNOOC] has acquired in the Gulf of Mexico necessarily being something they could transport to the South China Sea."

- Erica Downs, Brookings Institute

Days after the law's passage, CNOOC angered Hanoi by inviting foreign companies to help explore nine offshore blocks that appeared to lie within Vietnamese waters.

"My sense of what CNOOC was doing here was 'We'll auction these blocks to demonstrate to the leadership, [and] the Chinese public, that we're not going to be pushed around by Vietnam … and then sit back and do nothing,'" said Downs.

"I think for CNOOC, it probably worked out well. You hold the auction, and then you can say to the powers that be in China: 'Look, we did our part, it's not our fault that nobody wanted to buy these blocks.'"

Analysts have viewed Nexen's deepwater knowhow as a factor behind the takeover by CNOOC, but Downs said the Canadian firm's expertise is overstated.

"I don't see whatever expertise [CNOOC] has acquired in the Gulf of Mexico necessarily being something they could transport to the South China Sea," said Downs. She noted that Nexen is a newcomer to deepwater development and does not own any drilling rigs.

"For CNOOC, I think what was more important was the resources [of Nexen]. Of course, the technology is always one aspect of it," said Lin.

Follow Colin Shek on Twitter: @ColinShek

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