The Implications of Hydrocarbon Development in the South China Sea


By Craig Snyder
Post Doctoral Fellow
Centre for International and Strategic Studies
Joint Centre for Asia Pacific Studies
York University, Toronto, Ontario, Canada

The South China Sea and the Spratlys in particular are the subject of a six party dispute over sovereignty involving China, Taiwan, Vietnam, The Philippines, Malaysia and Brunei. The strategic importance of the Spratly Islands and the South China Sea is a major cause of the potential conflict. It links the Indian and Pacific Oceans and mainland Asia and insular Southeast Asia. It also contains two of the busiest ports in the world, Singapore and Hong Kong. Some seventy five per cent of Japanese oil imports travel through the area. The islands are also strategically located to provide potential staging areas for surveillance, sea-lane interdiction and other naval operations that could disrupt traffic from Singapore to southern China and Taiwan.

The South China Sea also holds other economic potentials. The South China Sea has vast quantities of mineral and living resources. Moreover, most international press reports on the Spratlys describes them as 'oil rich'. This may be the case as preliminary exploration in the South China Sea has proved promising but it could take several years, millions of dollars and numerous wells to find out how much oil lies beneath the scattered atolls and islands of the Spratlys.

Many analysts and pundits have claimed that the search for oil in the area, combined with the economic bonanza large oil finds would have for the littoral states, increases the importance of the territorial disputes for each of the claimants. Indeed China and Vietnam clashed over the occupation of several features in 1974 and 1988. More recently both have been involved in military confrontations over oil exploration activities in the disputed area.

The belief that the South China Sea contains large deposits of resources has exacerbated the pursuit of a peaceful resolution of the territorial dispues. While the claimants have agreed, in principle, to renounce the use of force to resovle the dispute, there is almost no agreement as to how a resolution should be developed. One of the problems is there is no agreement amongst the claimants in terms of a legitimate basis for a claim. China, Taiwan and Vietnam all base their claim on historic rights of sovereignty. The Philippines bases its claim on rights of discovery, while Malaysia and Brunei claim only those features that lie within their Exclusive Economic Zones. Indonesia has also been drawn into the dispute as the Chinese claim extends into its EEZ, and substantive Natural Gas fields to the Northeast of Natuna Island. Moreover, there is a considerable amount of disagreement over the appropriateness of multilateral fora in resolving the dispute.

One common suggestion to prevent conflict is the creation of a Joint Development Agreement (JDA). This would involve the claimants agreeing to put aside questions of sovereignty and cooperate in joint resource development in the disputed area. The problem with this approach, however, is there is still little agreement among the claimants as to how this cooperation would work and as to where exactly the cooperation would occur. While most are willing for the JDA to incorporate the main group of Spratly features in the middle of the South China Sea most are also unwilling to allow joint development projects within their EEZ or on their continental shelves. This paper will explore how the possibility of economic windfalls due to resource exploitation add to the the difficulty in reaching any agreement among the rival claimants.

ECONOMIC DEVELOPMENT AND SECURITY

The uncertainty over maritime boundaries has contributed to insecurity felt in many states. This insecurity is being felt in the manner in which hydrocarbon exploration and production is being conducted in the area. While hydrocarbon exploration and production operations are well established along the coastal areas of the littoral states little is known of the rest of the South China Sea and the Spratlys in particular. In 1987 the South China Sea Institute of Oceanology conducted a geophysical survey of portions of the Spratlys and confirmed strong evidence of commercial oilfields.(1) The Chinese in 1989 sent a survey vessel through the South China Sea and estimated that the Spratlys held deposits of 25 billion cubic metres of natural gas, 370,000 tons of phosphorous and 105 billion barrels of oil with an additional 91 billion barrels of oil in the James Shoal area off the North Borneo coast.(2) In 1988, US geologists estimated reserves of 2.1-15.8 billion barrels of oil while Russian estimates are 7.5 billion barrel of oil equvalents, 70 per cent of which are probably gas resources.(Bruce Blanche and Jean Blanche, "Oil and Regional Stability in the South China Sea," Jane's Intelligence Review 7, no. 11 (November 1, 1995): 511.) In addition to oil and gas deposits the area is also rich in tin, manganese, copper, cobalt, nickel and other materials.(4) The waters around the Spratly and Paracel islands are also rich in fish stocks.

It is important to note that the majority of the exploration and almost all of the production in the South China Sea is being conducted well within the territorial seas of the littoral states. While China has begun exploration off Vanguard Bank, which is much closer to Vietnam and Natuna island than mainland China, China continues to concentrate its production activity on the Xijiang fields near the Pearl River Delta, some 150 nm south of Hong Kong and in the Yancheng and Wenchang fields off the South Coast of Hainan Island.

Vietnam has also been more successful with the Bach Ho and Rong fields which are situated off the Southeast Vietnamese coast near Ho Chi Minh City total reserves for these fields are estimated at 400 billion barrels of oil with current production of 170,000 barrles of oil per day. In the Dai Hung and Blue Dragon fields which are adjacent to the disputed territory the Vietnamese estimate rserves of 150 billion barrles of oil and are producing 25,000 barrels of oil per day.

While Malaysia has found gas fields in disputed waters its main oil production fields are much closer to shore. In the James Shoal area off the Sarawak coast the malaysians estimate reserves of 12 trillion cubic metres of gas. Brunei has also developed a large offshore capability but has restricted its activity to areas close to shore. The only production activity off the Philippine coast is also well within its archipelagic waters. Estimates of the reserves for these areas range between 60 and 300 billion barrels of oil.(5)

SECURITY IMPLICATIONS

The security implications of this rush for hydrocarbons are quite substantial. The discovery of the natural resources potential, if not actuality, of the are has increased the stake in the disputes. in addition to complicating the nature of the overlapping claims, unilateral exploration and development of oil and gas in the disputed area can lead to military confrontations, as indeed they have in 1993 and 1994.

Tensions over the territorial disputes in the South China Sea have recently spilled-over to impact on hydrocarbon exploration activities in the region. In May 1993 a Chinese Ministry of Geology seismic survey vessel ventured into Block 5-2, under lease to British Petroleum (BP) and Norway's Statoil. BP has drilled two wells in this block but the results have been kept secret because of Vietnamese concern over China's reaction.

The Chinese vessel refused to leave the block despite Vietnam's protests.

Tensions were further increased in April 1994. Following the announcement by Crestone Energy Corporation of Denver that it would begin a seismic survey of the Wan'an Bei-21 (WAB-21) block it had leased from China, Mobil Corporation announced that it had entered into a production sharing contract with Vietnam for the Blue Dragon area (Block 5-1B) which borders WAB-21. Mobil began their surveys, the Vietnamese and Chinese Navies began to harass these efforts. In July 1994 China announced that it had sent two warships to the area to stop the Vietnamese operations and did blockade a Vietnamese rig operating within the WAB-21 area. The Chinese turned back at least one Vietnamese vessel that was ferrying supplies to the rig. In August the Vietnamese retaliated when one of their warships forced a Chinese research vessel to leave the Crestone area.

Tensions were reduced, however, in November when the Chinese and Vietnamese leaders met in Hanoi and agreed to "refrain from all acts that make things more complicated or broaden conflicts".(6) The most significant event in this stand-off was the Chinese refusal to resist the Vietnamese expulsion of the Chinese Navy's research ship out of the Crestone concession. This is probably because the Chinese did not want to frighten the ASEAN states. Moreover as Westerners were on board the Chinese may be willing to show restraint in order not to frighten off investors. Another explanation is that the Chinese navy did not have enough ships in the area at the time to effectively challenge the Vietnamese. Regardless of their rationale, this new found willingness to enter into multilateral negotiations over such a nationally sensitive issue bodes well for an eventual peaceful resolution to the dispute.

While the immediate crises were resolved peacefully in 1994 the failure of the Vietnamese and Chinese leaders to agree on some form of code of conduct in the disputed area allows for future clashes to occur. Indeed Vietnam is defying China by going ahead with exploratory drilling in Block 135 which overlaps the southern portion of WAB-21. A drilling rig operated by VietPetro containing Russian technicians was deployed in the area in January 1995. In February 1995 Vietnam also opened tenures for blocks 122-130 all in waters claimed by China. There has been little interest in the area, however, as it would be in the deepest waters off the Vietnamese coast and little is known about the area.

There has also been a great deal of concern in Indonesia over the full extent of the Chinese claim. In July 1995, however, the foreign ministers of the two countries met in Beijing and according to Ali Alatas, the Indonesian foreign minister, the Chinese assured him that China did not claim any of the waters around Natuna. China's increased reliance on external sources of oil and gas may be forcing it to modify its claim. China has begun negotiations with Indonesia and Malaysia for liquefied natural gas from the Indonesian Natuna fields and the Malaysian Central Luconia fields. Both of these areas are within the Chinese historic waters claim and if China agrees to purchase the gas from these two sites it will signal de facto acknowledgement of Malaysian and Indonesian sovereignty over the areas.

While China appears to be distancing itself from its claims over the Natuna gas fields, Indonesia continues to be watchful of Chinese actions. In October 1995 it announced that it would base a squadron of its newly acquired British-made Hawk-200 fighter jets in West Kalimantan on Borneo island, at its closest base to the Natuna fields.

JOINT DEVELOPMENT AREAS

One commonly suggested solution for the Spratlys is the establishment of a Joint Development Agreement for the area. While there are numerous precedents for such an arrangement it should be noted that such a mechanism is not a solution in and of itself but rather a demonstration of the political will of the various claimants to reach a working arrangement to manage the disputed territory. There are four main reasons states may be willing to enter into JDAs. First, the desire, in each state, to produce hydrocarbon resources outweighs the desire to win a boundary dispute, or some other item on the national agenda of each of the states Second, the states already have close relations or they see the opportunity, in the JDA, to demonstrate trust, amity and friendship which will lead to closer relations. Third, where one or more state does not possess the technolgical expertise for offshore develoment and the others see the opportunity to gain by selling such technology to the other(s). Finally, when all lack sufficient management capacity, then by pooling resources in a JDA could allow all to effectivley exploit their offshore resources.(7)

In order for a JDA to be practical the states involved must accept that they are sharing the resources in the area with all. Should any consider the argeement to be an interim measure that can be revoked at any time the agreement is doomed to failure. In addition the terms and conditions of the agreement must be fully supported and accepted by all the particiants. Finally, the member-states need to remember that the most important objective of the JDA is the search for and development of resources in the area.

There are also several questions that would have to be addressed in terms of a South China Sea JDA. Who would be included? Where would the agreement take place? How would revenues be divided? Finally, who would manage the exploitation, that is would national governments or a supra-national committee retain granting rights?

The first two of these questions can be combined in raising the point of the second: that is, what area will fall under the agreement? The Spratlys are not a group of large islands that are easily identifiable as a group or chain. The majority of the named features in the Spraltys are not islands at all, but reefs, rocks and cays. A realistic assessment of the features, under international law would allow perhaps a dozen or so islets to generate 12 nautical mile territorial seas but not Exclusive Economic Zones (EEZs). Another solution would be to derive a joint development area based on overlapping territorial or historic water, EEZ and continental shelf claims. The problem with this approach is that the multiple claim area which would become the JDA rewards those with the most extravagent claims. This leads to the question of membership. Under these alternatives those with the most extravgent claims to the area would be granted full participation in the JDA while those with partial claims to the multiple claim area would be granted only limited rights.

The division of revenues and the management of the development are also important questions that need to be addressed in any JDA. Again issues of membership are affected in determining the proportion of total revenues each member would receive. In the South China Sea the China-Taiwan dispute has added significance as they would either have to

be aloted separate allotements or would have to agree to share a Chinese' portion. The development of a management structure for the JDA is also important. Would a supra-national management committee be struck and how would national governments be represented on the committee? Would this committee be given authority to develop, implement and enforce policies on granting of exploration and production rights, civil and criminal jurisdiction, disposition of resources, reserves management environmental and safety issues, foreign investment limits and provisions regarding deposits located along the boundary of the zone.(8)

A JDA is impractical in the South China Sea as there is no agreement among the claimants states over any of these points. There is no indication among any of the claimants states, with the possible exceptionof the Philippines that the search and production of oil and gas outweighs their desire to gain sovereignty over their claim area. Malaysia is unwilling to allow any JDA to include the area that they claim. Vietnam will not allow any joint development that will include parts of its continental shelf. China and Taiwan do support joint development but insist the agreement cover the entire disputed area. Moreover this can only occur after the others recognise Chinese sovereignty in the area. This leaves only the Philippines and to a lesser extent Vietnam as the ony supporters of a multilateral joint develoment agreement for the area.

CONCLUSION

While this paper has concentrated on the implications of hydrocarbon developments in the South China Sea there are other development issues of importance in the area. The increase in the use of cyanide in fishing is not only depleting fish stocks in the area but is also destroying the coral reefs in the South China Sea. This has wider implications as studies have found that the Tuna stocks of the South Pacific migrate through the South China Sea and the destruction of the marine ecostructure there could severely retard the growth of these stocks. This could lead to an increase in violence over competition for the remaining fish stocks, not only among the littoral states but others states reliant on South Pacific fishing.

ENDNOTES

1. Energy Asia 9, no. 3 (August 1987): 12.

2. John W. Garver, "China's Push Through the South China Sea: The Interaction of Bureaucratic and National Interests," _The China Quarterly_ (September 1992): 1015.

3. Bruce Blanche and Jean Blanche, "Oil and Regional Stability in the South China Sea," _Jane's Intelligence Review_ 7, no. 11 (November 1, 1995): 511.

4. Eoin H. MacDonald, "Offshore Minerals Other than Hydrocarbons in Southeast Asia," in Chie Lin Sien and Colin MacAndrews eds., _Southeast Asian Seas: Frontiers of Development_ (Singapore: McGraw Hill, 1981), 56.

5. Blanche and Blanche, "Oil and Regional Stability," 511.

6. Yojana Sharma, "Asia: Shook Up Over Sino-Vietnamese Spratlys Handshake," _Inter Press Service_, November 26, 1994.

7. William G. Stormont and Ian Townsend-Gault, "Offshore Joint Development: Functional Instrument? Compromise? Obligation?" Paper Presented to the 1994 Conference of the International Boundaries Research Unit, University of Durham, England (July 1994), 24.

8. William G. Stormont and Ian Townsend-Gault, "Ocean Diplomacy, Joint Development and International Law," Paper Presented to the Ninth Asia Pacific Roundtable, Kuala Lumpur, Malaysia (June 1994), 11.

By
Craig Snyder
Post Doctoral Fellow
Centre for International and Strategic Studies
Joint Centre for Asia Pacific Studies
York University, Toronto Ontario Canada
Phone: (416) 736 5156 Fax: (416) 736 5752
csnyder@vm2.yorku.ca


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