China Comment

Energy, Environment, and Economy

Trouble in the Spratlys

The Spratlys, co-claimed by Vietnam, China, Brunei, Malaysia, the Philippines, and Taiwan appeared again in the news this week as China warned Vietnam and Exxon Mobil to not go ahead with planned exploration. Previously, in 2007 China discouraged BP from co-developing a natural gas field with Vietnam.

Chinese assertion of sovereignty in this case, when compared to its June 2008 deal with Japan to co-develop Chunxiao oil field in the East China Sea, is interesting. With the Chunxiao deal, China asserted supremacy, still claiming sovereignty, but it still agreed to co-develop the field, splitting investment and revenues 50-50% (“Sun Bin” has a description of that deal).

With Vietnam’s claim to the Spratly oil, China will reach no such consensus. PetroVietnam seems intent on not splitting investments with China, and Vietnam definitely has a legal case for not splitting. The Spratlys are beyond China’s Exclusive Economic Zone of 200 miles from its shores (in which it can exploit resources), however China still lays claim to them since the Spratlys are on China’s Continental Shelf.

And China has been enforcing its claims. In June 2007, “China arrested 41 Vietnamese fishermen near the Spratlys for straying into contested waters.  They were released after paying fines.  Vietnamese fishermen in another incident on July 9th were not as lucky.  One fisherman was killed and several others were injured when Chinese navy vessels opened fire on their fishing boats near the islands.” In November 2007, “large military exercises by China in the South China Sea close to the Paracels sparked protest from Vietnam.” And “on December 4… Vietnamese state media criticized China for ratifying in the People’s Congress a plan to create the Sansha administrative zone to manage the Paracels, Spratlys and the Macclesfield Banks.  The zone has been given the status of a “county-level city” within Hainan Province with its administrative headquarters on Woody Island in the Paracels… Chinese Foreign Ministry spokesman Qin Gang claimed China has “indisputable sovereignty” over the islands.”

As described by Bernard Cole in The Great Wall at Sea (2001), China signed the 1996 UN Convention on the Law of the Sea, but only after including several reservations. It claimed a sovereign right over an Exclusive Economic Zone (which would allow full naval intervention within more than 200 miles), and over its Continental Shelf (350 miles).

China also wanted boundary disputes to be settled bilaterally rather than internationally and would not allow foreign warships to transit through waters without approval. China’s naval claims extend from its coast nearly to the coasts of Indonesia, Vietnam, and the Philippines, and if accepted, would basically make the South China sea an exclusively Chinese lake, denying Vietnam easy naval access to the Pacific Ocean.

China’s historic claims to the Spratlys/Paracels are based on exploration by the Han from 200BC-220AD, and administration by the Tang Dynasty from 618-906, but Cole argues this does not really establish current-sovereignty according to modern usage.

China currently occupies around seven islands militarily, and vietnam has military garrisons on 20 Spratlys. Vietnam traces its legitimacy to 1933 French claims on the area.

The Philippines base their claim on an alleged discovery by a businessman in 1947. In 1974, he deeded the islands to government. The Brunei claim is based on proximity. 

China is upset about Vietnam exploiting the natural resources because strategic costs and energy supplies are hanging in the balance. Although most estimates place reserves under the Spratlys at 7-20 billion barrels of oil; China believes there may be as many as 200 billion barrels beneath the waves. Strategically, if Vietnam starts developing the fields, then its claim to the islands would strengthen since the country would be utilizing the area.

Could this situation escalate? If the June 2007 collapse of the PetroVietnam/BP deal is any guide– then no, the status quo of undeveloped Spratlys could prevail. However, Vietnam and ExxonMobil may attempt to take advantage of the Olympics in order to push hard to shame Beijing into refraining from harsh rhetoric and threats. This would allow PetroVietnam and ExxonMobil to push ahead with developing the oil field and might lead to diplomatic consequences after the Olympics are finished.

ExxonMobil must have known the political consequences after seeing BP’s failure to join Vietnam in investing. Later, I hope to uncover some research on ExxonMobil’s oil interests and investments in China. To what degree would acquiring new sources with PetroVietnam hurt ExxonMobil’s bottom line? Now, ExxonMobil might still pull out of the deal if China exerts enough pressure, but I find it difficult to believe that ExxonMobil didn’t expect China to push back– they must have a  good reason for pursuing talks with PetroVietnam.

What’s certain, though, is that Vietnam seems ready to go ahead with the deal and exploration despite Beijing objections.

Advertisements

24 July, 2008 - Posted by | China Diplomacy, China Energy | , , , , , , ,

3 Comments »

  1. Exxon has two fairly significant JVs with Saudi Aramco and Sinopece, signed in 2007. One is to expand production capacity at a Sinopec refinery and the other is a 25% stake in operating a chain of gas stations in Fujian province. Deals worth a total of $5 billion, I think.

    China just took part in an ASEAN meeting. We’ll see whether the Chinese pulled the Vietnam rep aside to discuss the situation. All of this will like occur behind the scenes.

    Comment by Damien | 24 July, 2008

  2. vietcong is too weak. They been raped too many time. They claim this so they could remember their french master. I mean, you already have their written language, and why would you need to remember them anymore.

    Comment by jkjk | 25 July, 2008

  3. Damien, Thanks for the info.

    I also just noticed that the Wall Street Journal (July 24, 2008) had an article on this: “China Pressures Exxon, Vietnam” by Yee Kai Pin.

    Considering how ExxonMobil is already involved in the China market, I wonder if ExxonMobil might be using the PetroVietnam situation as a pawn to leverage better exploration and/or refinery deals from Beijing in the future? (This would certainly be an odd way of going about that). Is ExxonMobil really serious about its Spratly exploration talks?

    It’s a very strange situation and it should be interesting to see how this develops.

    Comment by chinacomment | 25 July, 2008


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: