Tech Talk - Tensions Over Oil in the South China Sea

In the introductory remarks to these posts on Chinese energy supplies and usage, I mentioned that one of the concerns beginning to be evident lies in disputes over the ownership of some of the oilfields offshore. Disputes over ownership have been continuing for some time, and this week was no exception, with Chinese moves to create a new city, Sansha, on Woody Island and thereby strengthen their claim to the region. Woody Island, or Yongsing, lies in the Paracel chain of islands in the South China Sea.

(The post has been slightly modified to recognize the speculative nature of the overall resource available.)

Figure 1. Location of the current region of dispute in the South China Sea (Agency France Press)

Ownership of the territory and underlying potential hydrocarbon reserves, is a matter of dispute between several countries, although China has administered the region since a 1974 conflict with Vietnam.

The Chinese government declared the establishment of Sansha last month, saying its role is to administer the disputed Paracel and Spratly archipelagos and surrounding South China Sea waters, which are believed to hold oil and natural gas deposits. The islands are claimed in whole or in part by Brunei, China, Malaysia, the Philippines, Taiwan and Vietnam.

The China National Offshore Oil Corp (CNOOC) has recently sought foreign interest in exploring nine blocks in the region, coming as close as a mile to the Paracel Islands – a region that Vietnam claims lies within its territorial waters, and which it used to occupy.

Further south, near the Spratly Islands, the dispute switches to include the Philippines with the latter already getting bids for some of the blocks, which the Philippines also claims lie within their 200-mile territorial waters. The benefit that China achieves by claiming the Spratly Islands can be seen by looking at the change that this brings to their territorial waters, in contrast with those of the other adjacent countries.

Figure 2. Disputed territories around the Spratly Islands, and the territorial waters in dispute. (EIA) The extent by which the Spratly’s extend Chinese territorial waters can be understood from the location of the red line showing their claims.

In more detail, the areas of dispute can be broken into more specific locations, names that will likely become more familiar as these disputes continue to fester. The actual amount of oil and gas that might be available is still relatively speculative, since there has been little actual drilling in the region, as yet. However, by some estimates, much of which is Chinese, the region is thought to hold up to 213 billion barrels of oil, more than that left in the Saudi reserve. On the other hand, as Joules and Art have reminded me, the USGS estimates put the total at only on the order of 20 -30 billion barrels. Only drilling into the putative fields will realize an answer to that question, but then this turns to the debate into who gets to sell the permits for such drilling.

Figure 3. Regional identifying names in the South China Sea. (Next Big Future)

The disputes are now moving to possibly bring in additional players, with China already accusing the United States of meddling, and this just after Secretary Clinton had appeared to make some progress in defusing the tensions.

These tensions in the region are not new, and in his book “Resource Wars” Michael Klare listed some of the conflicts that had taken place between some of the involved parties in the years to 2001, when the book was written. In several cases shots had been fired and people died, as the different nations tried to establish claims, most particularly to various, otherwise uninhabited islands in the Spratly Islands.

In 1974, China seized the Paracel Islands from Vietnam, and in the resulting conflict a Vietnamese naval vessel was sunk, and several soldiers were killed.

In 1988, the Chinese and Vietnamese navies exchanged shots at Johnson reef (video here) with Vietnam losing three ships.

In 1992, Vietnam accused China of landing troops at Da Luc Reef, and China seized 20 cargo ships in the ongoing dispute. Both parties have landed on different islands as a way of seeking to claim the territory and the Vietnamese Parliament has just (2012) passed a law establishing sovereignty over the Paracel and Spratly Islands. This has raised more tension with China.

The conflicts are not just between China and Vietnam - in 1995, the Philippine government discovered that China had built a military base at Mischief Reef, which lies some 150 miles from Palawan Island, and as Michael Klare notes, well within the 200-mile territorial waters of the Philippines (which extend 200 miles – to simplify the explanation of the nuances of maritime law). Given that there are mutual defense treaties between the USA and the Philippines (dating from 1951) and that China militarily rebuffed the Philippine ships sent to investigate, created new tensions in the region. An Army War College review paper has noted the military buildup that is now occurring:

Aside from China's long-term modernization plan for both her Army and Navy, Brunei, Malaysia, and Indonesia have purchased aircraft from the United Kingdom. Malaysia bought guided missile frigates from the United Kingdom and Indonesia purchased sixteen corvettes from the former East Germany. Even the financially strapped Philippines is acquiring Italian aircraft and is also considering an additional $14 billion for defense modernization. The possibility of a regional arms race is clearly very real, if not already underway.

The situation at Mischief Reef has continued to evolve. As Strategy World notes:

For over three decades China has been using a gradual strategy that involves first leaving buoys (for navigation purposes, to assist Chinese fishermen), followed by temporary shelters (again, for the Chinese fishermen) on islets or reefs that are above water but otherwise uninhabited. If none of the other claimants to this piece of ocean remove the buoys or shelters, China builds a more permanent structure to aid passing Chinese fishermen. This shelter will be staffed by military personnel who will, of course, have radio, radar, and a few weapons. If no one attacks this mini-base, China will expand it and warn anyone in the area that the base is Chinese territory and that any attempts to remove it will be seen as an act of war. The Vietnamese tried to get physical against these Chinese bases in 1974 and 1988 and were defeated both times.

Since the initial incident, the small base at Mischief reef has been expanded into a more substantial military base whose presence is now being used to justify a Chinese objection to the Philippine authorized drilling for oil off Palawan Island. The Chinese have also prepared to start drilling around Palawan Island, bringing the Philippine Navy back into the dispute.

And further north the Chinese Drilling Ship the CNOOC 981 has begun (in early May) to drill around the Paracel Islands. This is the first deep water well that the company has drilled itself, the fifteen earlier such wells being drilled by CNOOC partners. The exploration vessel Ocean Oil 708 is now also working in the disputed region.

Although the tensions have not accelerated as swiftly as Michael Klare anticipated when he wrote “Resource Wars” over a decade ago, they are nevertheless indicative of the aggressive position that China is taking to secure as much oil and gas as it can for future needs. With the modernization of their navy there some quite serious concerns developing over their future plans, since territorial issues can lead on to much greater conflict that we have seen so far in the region.

The disputes has now spread to Scarborough Shoal where an initial arrival of Chinese fishing vessels has been followed by support vessels from Chinese government agencies. Scarborough shoal lies 124 miles from the main Philippine island of Luzon. However

China insists it has sovereign rights to all of the South China Sea, even waters close to the coast of other countries and hundreds of kilometres from its own landmass.

This makes claims for even the smallest piece of land projecting from the sea more critical.

Figure 4. Raising the Philippine flag over part of Scarborough Shoal. (News Com)

Figure 5. Chinese flag flying over Scarborough Shoal (or Reef) (Huang Yang Dao Google Earth)

USGS report on South East Asian Undiscovered Oil and Gas resources

Using a geology-based assessment
methodology, the U.S. Geological Survey
estimated a mean of 21.6 billion barrels
of oil and a mean of 299 trillion cubic
feet of undiscovered natural gas in
23 provinces of southeast Asia.

Pearl River Mouth Basin Province (Paleogene Lacustrine TPS)


279 MMBO F95
567 MMBO F50
1,079 MMBO F5

608 mb / 10 mb/d Chinese consumption = 60 days

Regardless of the 'fair' interpretation of international maritime boundaries, the PRC is the big dog by far in this area and no one, including the U.S., is going to go to bat and contest their reach in this my opinion.

Rockman's concept of MADOR (Mutually Assured Distribution Of Resources {wrt U.S.-PRC})applies.

The U.S. has its Monroe Doctrine, with implications for FF resources in the area which that doctrine encompasses, and China has its own similar 'This is our area of influence, all others stay out' doctrine regarding the South China Sea.

In addition, there is more upside to the continual threat of conflict, vice actual conflict, for the two major/top-tier players applicable to this region and issue...War would be bad for business.

The 'Lesser Includeds' in the South China Sea region will have to keep a stiff upper lip and play according to the pecking order rules.

If China wished to claim the diplomatic high ground and show its statesmanship and save face for its neighbors, it could lead negotiations to give it the lion's share of the resources (70-80%) and throw some bones (apportion the remainder) to the other countries in the area. A Greater East Asia Co-Prosperity Sphere.

Thanks, HO, as always. I thought a Google Maps link to the area being discussed would be handy.

At some point, the Philippines may wish they hadn't 'invited' the US out of Subic Bay. Seems they're rethinking this decision:

The Philippines re-opens military bases to US forces

06/06/12 02:18 PM ET- American warships and fighter plans can once again call Subic Bay and Clark Air Force Base home after Manila approved limited U.S. deployments to the former American military outposts.

“They can come here provided they have prior coordination from the government,” Filipino Under Secretary for Defense Affairs Honorio Azcueta announced shortly after his meeting with Chairman of the Joint Chiefs of Staff Gen. Martin Dempsey on Monday.
In April, DOD officials agreed to relocate 9,000 Marines from Okinawa to Guam and other outposts in the Pacific. It remains unclear whether those displaced Marines will end up on Filipino soil.

Monday's basing agreement also comes months after Manila announced plans to build a new seaport in the Spratly Islands, off the coast of the Philippines, Malaysia and Vietnam in the South China Sea.

Local residents claim the seaport is the first step in creating a mini-naval base for U.S. and Filipino troops. The Philippine government claims the effort is strictly designed to support commercial business and tourism to the island.

The South China Sea has become a continued flash point for tensions between American allies and China, as Beijing continues to flex its growing military might in the region.

This hasn't been highlighted much in the MSM, memories of US involvement in SE Asia being what they are; still fresh for many. Bears watching closely...

Zooming in on Nanshan Island in the Spratlys; hardly seems worth a dispute, looks to be too small to be of much use, especially for a seaport. Large areas of the Spratlys seem to be unavailabe in satellite mode, unlabled in map mode.

That's not the only island, of course. Here is "Woody Island" in the Paracels:,+paracel+Islands&hl=en&ll=16....

There are a number of buildings and an airstrip. It is hard to tell what else is there (no Google street view).

CNOOC output from the South China Sea is put at a tentative figure of 221 kb/d according to this very useful article: China Aims to More Than Triple Its Oil & Gas Production in the South China Sea over the Next 10 years | China SignPost™ 洞察中国

Offshore oil & gas production in China
Offshore oil, and to a lesser extent gas, play an important and growing role in securing China’s energy supply. The country currently obtains roughly 15%, or more than 600,000 bpd, of its domestic oil production from offshore fields. This makes China one of the world’s largest offshore energy producers. China’s growing emphasis on offshore energy production, including that from new deep water fields in the South China Sea, is likely to have profound effects on Chinese energy security strategies as well as international diplomacy regarding disputed zones in the South China Sea.
Exhibit 1 (below) shows the production of CNOOC, China’s main offshore oil & gas producer. The Bohai Gulf is presently China’s core offshore production zone in terms of oil output. Yet the South China Sea is poised to become an increasingly important oil and gas supplier in the future as Chinese oil companies gain proficiency in deepwater operations and the local maritime industry becomes an increasingly proficient supplier of deepwater drilling rigs and other important equipment. Oil and gas production in deepwater areas of the South China Sea is slated to hit 500,000 bpd of oil equivalent by 2015 and 1 million bpd of oil equivalent by 2020, according to China 5e.

The article also tells us that Daqing and Shengli are declining by 3.4% and 2.0% per year respectively; they provide 30% of China's 4.3 mb/d. Contrast that with China's production jump of 281 kb/d for 2010, which, as we can see, can be almost entirely chalked up to offshore gains. Looks like a very useful resource, this website.

I can see this claimn by China escalating into conflicts involving the US since we have commitments to aid the Philipines in case of agression. Likewise, if Vietnam employs US companies to help explore and produce these oil reserves, the US will make some moves to protect its interests and citizens. I can see this being an area of great conflict where the US will be against China in every case and rightfully so. H

My guess is that the U.S. has and will continue to apply quiet, behind-the-scenes pressure to attempt to inhibit the South China Sea countries contending China's ambitions from doing anything we all will regret.

Imagine if the U.S. was contesting oil/other resource claims with Cuba, or other islands of other nationalities in the Caribbean...and China proposed to sail its naval vessels and fly its aircraft in shows of force and provocation against the U.S?

Recall the Cuban Missile Crisis...


H – Just another WAG that supports my MADOR concept. Despite public condemnation of China extending their oil/NG rights across this region, the US govt may see an advantage for us. Assume whatever resources are produced ends up in the hands of Asian consumers other then China. That leaves China to more aggressively compete with the US for other exports. Might be better for China to control that which the US would never control.

Sorta like the story I heard about a homeowner in a neighborhood hit by a lot of buglers recently. Put a big sign on his garage door: “I have a good security system…my neighbors don’t.” IOW who’s oil do we want China usurping…ours or somebody else’s?

You and I agree on this concept.

"..IOW who’s oil do we want China usurping…ours or somebody else’s?"

Like Canada's and Venezuela's?

Round and round spins the old Victrola and the same song plays endlessly... More and more fighting over less and less (or if not actively "having at it", at least posturing and positioning to later) (insert a good "eye-roll" emoticon here).

Ghung - Excactly. The "Mutual" phase only works as long as there's enough for two. After that? You and I probably won't be around to see that resolution.

vROCK, it seems to me that China has already set it's hooks in Ven. and is in the process of doing so with Canada. I expect it won't be long before we have to make the deal: You stay out of our hemisphere, we'll stay out of yours. Too bad it is, and will be, far more complicated than that. The musics fixin' to stop, and there's already a shortage of chairs...

Then there's India, who China's getting ready to start a water war with, Australia with it's gas and coal, Africa, which is essentially screwed and caught in the middle, and China buying up whatever's worth having. Jeez... duck-n-cover.

Ghung – The US oil patch is at a great disadvantage to Chinese oil companies. Not only does it not receive direct support as Chinese companies do from their govt but at times deals with a somewhat adversarial relationship. Then add the ability of the Chinese companies to deal at corrupt levels with foreign officials while American companies are prohibited…at least officially. Not saying our govt shouldn't conduct itself as it does but it leaves a great deal of leverage to the Chinese. To make it even worse due to our capitalistic system US companies focus on quarter to quarter results while the Chinese are playing the long game.

The only obvious leverage the US has is political/military influence IMHO. But it’s difficult for me to imagine how that would play out to our significant advantage. And there’s will always be the fact that China has become a major source of finance for our country. Especially as we go deeper into debt. It seems our best leverage is that we are a major buyer of Chinese exports. More so if the EU meltdown gets worse.

I understand, Rock; XOM, and your little oil company are in competition with the 'full faith and credit' of 1.34 billion people. I'm not sure most folks understand the implications... AT least they're doing their part to keep prices up ;-)

As I think I've mentioned in the past, I think at some point either the US has to collapse China, or China has to collapse the US. That's for good economic, military and resource constraint reasons.

Whilst I doubt anyone is going to want to tangle with China using warships, I wouldn't be surprised to see a pretext such as this to slap an export ban on China. You then just have to wait for the implosion.

Sensible warfare today is economic warfare - a lesson I think China learnt a decade or so back.

I do not think it is plausible, or desirable, to all the sudden slap a ban on /imports/ (not exports, that would entail some kind of naval and aerial blockade) from China.

How many Chinese-made products do United States citizens consume every day? How many of our supply chains rely on Chinese-made products?

How much do multinational corporations with a predominant (or strong) American presence rely on present and future sales to China?

What may China be provoked to do in such a case? I do not care to offer my speculations on this forum...I will leave that as an exercise for the readers.

I do not agree with your premise stated in your first sentence. For decades the same was said about the USSR by many red-blooded Americans, most of whom honestly thought they were on the side of righteousness.

H - Yous talkin to me? LOL. "The US oil patch is at a great disadvantage to Chinese oil companies." Is that what you reject? A Chinese company can pay a price for Angolan oil fields that no US company can justify based upon capitalistic methodology. I would say that's a huge advantage. China can link its oil/NG aquisitions directly to govt policies. US companies can't. Another huge advantage IMHO. But maybe yous wern't talkin at me. LOL.

Rockman, nope, I was replying to garyp.

Ablokeimet (below) has a good take on the situation.

H - I agree about Abs and will go one step further: "a US containment policy will be defeated, as the US will not have the resources to continue to contain China while pursuing its interests elsewhere in the world." I think the US govt may unofficially welcome China imposing itself on exports that would have gone to countries others than the US. I think the US will always have difficulty usurping anyone's imports by any means other than outbidding them. I'll use my favorite target: Equatorial Guinea. Last I saw half of the export crude went to the US and the other half to the EU. So China slips in under the tent and makes a deal with the EG dictator and freezes the EU out of the trade...legally or otherwise. The US might officially criticize such a move. But better for the US to have China latch on to the EU imports from EG than go after crude from one of our current Canada.

As I think you suggest, the day is well-advanced.
I offer my own simplistic frame for the next decade (with some assumptions!).

China continues to grow at 10% and doubles GDP in 7 years, needing on the way to nearly double its present resource use.
China grows at 7% per annum and nearly doubles GDP in 10 years, with similar need for resources.

Within 4 years from now we (RoW including USA) should know whether the above could be remotely possible.
We might by then glimpse some of the alternatives, which I find equally breathtaking. At some point in the next 4 years the future stares us directly in the face? Next US President?


Phil - I agree with your analysis. So much of America's future depends on future Chinese growth. If it goes as you suggest I suspect push will come to shove before 2020. If China slows down (or implodes) then there's a different time line. Folks can project what they want about Chinese growth. I don't think any projection, even if it turns out true, is valid: too many unknown variables IMHO.

I can see this being an area of great conflict where the US will be against China in every case and rightfully so.

Mbnewtrain is suffering from a condition that many in the US do - illusions of US omnipotence. The world has changed a lot since 1945, when the US really could dictate terms to countries around the world and establish overwhelming pressure on a number of fronts simultaneously. China is vastly more powerful than it was even 10 years ago and won't be pushed around on issues close to the heart of its government. Certainly the US has the ability, at the moment, to mount a policy of containment of China. This ability, however, will not last all that long. By 2025, and probably earlier, China will be able to dictate the broad outline of power in East Asia and a US containment policy will be defeated, as the US will not have the resources to continue to contain China while pursuing its interests elsewhere in the world.

What I can't understand is the reasoning behind China's strategy. The way it is behaving is guaranteed to drive its neighbours into the arms of the US just for self protection. A more intelligent approach would be one that involved a "win-win" outcome for all parties in the territorial dispute, even if China won more than any other single player. It would be settled with a regional treaty which included a clause prohibiting the establishment of foreign military bases in any of the signatory countries without the agreement of all signatories.

The only thing I can think of that would explain the Chinese position, except for an extremely shortsighted approach on the part of the so-called "Communist" Party, is the possibility that its actions are designed firstly to establish a negotiating position and secondly to delay any settlement until China is sufficiently strong and developed that all regional partners would jump at a reasonable offer. I have not, however, yet seen any evidence to support this hypothesis.

Re: llusions of US omnipotence

I've always thought that the biggest problem with the belief that the US can use military force to bring oil to our shores (that we are not able to buy at market rates) is that tankers are extremely vulnerable to attacks, using a variety of methods--from sabotage to submarines. How many tankers sunk or damaged off our shores would it take for us to get the message?

And we also have the whole onshore refining and product transportation infrastructure to worry about.

This would also be a factor as the US attempts to use, or threaten the use of, military force around the world, and it does seem that we have already seen a curiously high number of refinery accidents lately.

My statement was based on observing the US energy supply and consumption situation since the 1970's when I attended the U Of Missouri College of Engineering. I did not say that the US could force its will around the world as you purport with using the word "omnipotence". The fact is that US spends as much on its military as the rest of the world combined. Where US allies have resources that are threatened by an unfriendly power, the US is likley to act in some manner to protect that country and its resources, especially if it involves oil.

China's grab for these oil resources, if successful, will mean less oil put on the world market for possible purchase by the US. If Vietnam or the Philippines were to take possesion of these tracts and hire companies to produce the oil, much would be sold for export as neither country has large domestic demand. If China gets this area's oil by taking possession of these islands, then none of it will be offered on the export market for possible purchase by the US.

The price every person pays for oil based fuel is dependent on the price set by world markets. As less oil is put on world market, price will go up unless global economy collapses to a permanent depressed state.

Just one reminder, Vietnam import large amount of rice seed and electricity from China. You can not be really aggressive to the person who feed you, or you will starve....

mb - FWIW I agree with your use of omnipotence. But I foresee a different dynamic developing with respect to defending our "allies' oil". I can see a lot of diplomatic protests as well as some weak economic leverage being tossed out by our gov. But gunboat diplomacy only works well when the other guy's gunboats don't open fire. I have no doubt the Chinese would use whatever conventional force they need to protect their interests. Are the US and China too mature to engage in open warfare over oil? There are more than a few dead Brit and Argentina military who might disagree about how civilized our societies have become. After the US has spent hundreds of billions of $'s and thousands of American lives making Iraq oil available for the Chinese, BP and Royal Dutch Shell I doubt the American people will care to pay for more such efforts.

I agree with you about the fungible nature of oil. But IMHO that could work in favor of the US if the Chinese capture oil production that wasn't going to be earmarked for the US. I think when there's only enough oil left for the US and Chinese to divide up our "allies" will realize how flexible that term has become. Whether the US govt ever publicly announces it I do think China will become one of our main allies in the world. They are already one of our prime bankers and we are one of their prime export markets. Such economic ties will bind the US and China closer together than our historical allies. Or to put it more bluntly; If the EU continues looking for financial support from the US while China is still buying our bonds and financing our social programs who will Americans look upon with more favor? Nothing personal...just good business.

The tension nearby is too complicated with multiple players having different interests. And changing of govs sometimes u-turn policy and make all pervious talks useless. For example, around 20 years ago, Chinese goverment agreed a deal with a Japan company to share resources from Chun xiao gas field. But JPN mof blocked the deal fearing internal oppsition. So Chinese start to explore, starting from Chinese side. Now, Chinese is rapidly drilling of the Chinese side and gradually getting closer to centerline. If someone in JPN can not hold office long enough and determined enough to struck a deal with Chinese gov, it is very hard for Chinese to stop at the center line.