Jeremy Maxie
The geopolitical context in the South China Sea (SCS) has evolved considerably since I first wrote a client briefing on the implications of the territorial disputes on upstream oil and gas development in 2008; however, the fundamental nature of disputes over oil and gas development remains much the same. On April 8, 2016, Hanoi demanded that China National Offshore Oil Company (CNOOC) remove its Haiyang Shiyou 981 (HD-981) exploratory drilling rig from Vietnam’s territorial waters. This same Chinese-built rig sparked a similar incidents in 2014 and 2015. Despite high-profile incidents such as the ones involving the HD-981 drilling rig, the SCS territorial dispute is not about oil and gas—at least not how you think.
All too frequently the SCS dispute is framed as a militarized contest for access and control over an untold abundance of oil and gas thought to lie beneath the seabed. This “resource conflict” narrative overlooks the complex and dynamic geopolitical and strategic drivers at play, and misplaces the role of hydrocarbons. In terms of resource competition, disputes over fishing are far more frequent than those involving offshore drilling and are arguably more important. Indeed, on April 3, 2016 Vietnam seized a Chinese ship that intruded into its territorial waters carrying fuel to resupply a Chinese fishing fleet operating in the area.
Applied to the SCS territorial dispute, the resource conflict narrative inverts the causal relationship between hydrocarbon development and the territorial disputes. Competition over offshore oil and gas resources is a component rather than the proximate cause of the territorial disputes between China and other claimants. The SCS dispute is about oil and gas resources to the extent that offshore developments are leveraged to assert or challenge territorial claims. China is not asserting expansive territorial claims and risking military confrontation with its neighbors (and potentially the United States) just to gain access and control of unproven oil and gas resources; instead, the development of offshore oil and gas resources is contested because it evokes sovereignty.
Estimates of oil and gas reserves vary since the SCS remains mostly under-explored with the majority of unproven reserves located in offshore deep-water areas. According to the U.S. Energy Information Agency (EIA) the South China Sea is thought to hold 11 billion barrels of oil and 190 trillion cubic feet of natural gas (Tcf) including both proven (P90) and possible (P50) reserves. These high-end estimates are the most widely quoted, frequently without the caveat that it includes probable reserves which only have a 50% certainty of being recovered under existing economic and technological conditions. This misrepresentation adds to the misconceptions that drives the resource conflict narrative.
The EIA South China Sea report estimates Vietnam’s reserves at 3.0 billion barrels of liquids and 20 Tcf of natural gas, while China’s are at 1.3 billion barrels of liquids and 15 Tcf of natural gas. The Philippines’ share of reserves is only 0.2 billion barrels of liquids and 4.0 Tcf of natural gas. Malaysia has the biggest share, with 5.0 billion barrels of liquids and 80 Tcf natural gas, while Indonesia hold 55 Tcf of natural gas but only 0.3 billion barrels of liquids.
In contrast, CNOOC claims that the SCS holds an estimated undiscovered 125 billion barrels of oil and 500 Tcf of natural gas. These numbers are likely inflated for political purposes, as the consultancy Wood Mackenzie estimates that the SCS only holds about 2.5 billion barrels of oil equivalent. The focusing on estimated reserves of oil or natural gas is also misleading, as global average recovery rates for “oil in place” is only about 35% with technical limits estimated at 60-70% with enhanced oil recovery techniques.
To put things into perspective, all of the recoverable oil in the entire SCS would cover less than two years of Chinese oil demand and slightly more than two years of Chinese oil imports. In 2015, China’s oil demand averaged 10.32 million barrels per day (mb/d) while oil imports were 6.74 mb/d. This puts China’s annual oil demand at approximately 3.77 billion barrels, while annual oil imports were about 2.46 billion barrels. Assuming that all of the 11 billion barrels of proven and possible reserves in the entire South China Sea (including both contested and non-contested areas) were extracted at a 50% recovery rate, this would result in about 5-6 billion barrels of commercially recoverable crude oil. Vietnam’s 3.0 billion barrels of oil reserves located in the SCS would likely only yield enough recoverable crude oil to cover about six months of Chinese imports. The energy security dividend in terms of equity oil secured through Beijing’s attempt to commandeer the SCS is therefore tenuous.
The SCS is mostly gas prone. With an estimated 190 Tcf of proven and probable natural gas, the potential gas prize is much greater relative to oil. In 2015, Chinese gas demand was approximately 192 billion cubic meters (bcm) or 6.78 Tcf, including imports of 32 bcm (1.13 Tcf) of piped gas and 27 bcm (0.95 Tcf) of LNG. Therefore, the entire proven and possible gas reserves in the SCS (in contested and non-contested waters) is enough to theoretically cover 28 years of Chinese gas demand and 91 year of imports. Vietnam’s portion of the SCS is thought to only hold 20 Tcf, which is about 3 years of Chinese gas demand and ten years of imports. The estimated gas reserves in the Philippines are a marginal 4.0 Tcf.
Most of the gas in the SCS is located in offshore deep-water fields (defined as 400-1,200 meters) that is more technologically challenging and costly to develop than shallow-water or onshore fields. In order to monetize any potential deep-water gas discoveries, subsea pipelines would need to be built to onshore processing facilities. This means that gas developed in contested areas claimed by China but located near Vietnam or the Philippines could be delivered via pipeline to Vietnam or the Philippines to be sold on the local market or converted to LNG for export.
Such arrangements are politically inconceivable in the currently geopolitical environment unless the countries eventually agree to joint development—which may be one possible end-state that Beijing is working toward. An alternative option would be for China to use floating LNG (FLNG) vessels, but CNOOC reportedly abandoned such expensive and unproven plans in 2015.
Wherever SCS gas would be marketed and how it would be delivered (pipeline or LNG) would likely be based on commercial rather than political decisions and which may not materially contribute to Chinese energy security. These commercial, technological and logistical considerations strengthen the argument that the SCS territorial dispute is not driven by resource competition as an end to itself. Rather, resource competition is a means to an end—as an instrument for Beijing to assert territorial sovereignty for geopolitical and strategic purposes.
Even more indicative is that China’s most assertive and belligerent claims are directed towards Vietnam and the Philippines, rather than towards Malaysia and Indonesia which hold the largest shares of offshore oil and gas resources in the SCS. Beijing’s assertive behavior in the SCS has had a chilling effect on oil and gas exploration in disputed areas over the past decade that further suggest that developing offshore resources is not Beijing’s strategic priority.
To argue otherwise is to implies that Beijing is willing to risk military conflict in order to advance the commercial interests of a handful of Chinese oil companies in gaining control over unproven oil and gas resources that would make uncertain contributions to Chinese energy security—an improbable scenario considering the catastrophic consequences of such a conflict.
While offshore oil and gas resources are important sources of much needed supplies to Vietnam and Philippines, the SCS is more consequential for Chinese energy security as a vital shipping lane than as an energy resource base. Currently, around 50% of the world’s oil tanker traffic is estimated to flow through the SCS. By 2035, it is expected that 90% of the Middle East fossil fuel exports will be shipped to East Asia with much of it transiting the SCS en route to China, Japan and South Korea. In this context, the SCS is very much about oil and gas.
Sumber - Forbes
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