Posted: 27 May, 2011
By Daniel Ten Kate
Source: Bloomberg
Vietnam and the Philippines are pushing forward oil and gas exploration projects in areas of the South China Sea claimed by China, risking clashes in one of the world’s busiest shipping corridors.
State-owned PetroVietnam’s partner Talisman Energy Inc. (TLM) aims to begin drilling next year in a block that China awarded to a U.S. rival and has protected with gunboats. Ricky Carandang, a spokesman for President Benigno Aquino, said the Philippines plans to exploit a field in an area of the sea where Chinese patrol boats harassed a survey vessel in March.
The neighbors of China, which has Asia’s largest military, were emboldened after the U.S. asserted interest in the waters last year, said James A. Lyons Jr., a former U.S. Pacific Fleet commander. A surge in crude prices to near $100 a barrel also spurred Vietnam and the Philippines to pursue the oil needed to meet economic growth targets of at least 7 percent this year.
“With the economic situation in the Philippines and Vietnam, the exploration for oil and gas makes good economic sense,” said Lyons, who led the Pacific Fleet from 1985 to 1987 and is now president of Lion Associates LLC, a Warrenton, Virgina-based business advisory company. “They depend on the United States to provide the overarching security umbrella.”
China asserts “indisputable sovereignty” over most of the South China Sea, including oil and gas fields more than three times further from its coast than they are from Vietnam. Exploration in waters under China’s jurisdiction infringes its “sovereignty and interests and is illegal,” the Foreign Ministry in Beijing said May 12.
UN Protest
Maritime disputes may be discussed at an annual security forum in Singapore starting June 3 that will include a speech from Chinese Defense Minister Liang Guanglie. At last year’s event, Defense Secretary Robert Gates said the U.S. opposed efforts to “intimidate” companies operating in the sea.
The Philippines protested April 5 to the United Nations that a Chinese map laying out its claims had “no basis under international law.” Taiwan, Malaysia, Indonesia and Brunei also have overlapping claims with China.
Talisman, Canada’s third-largest oil company by market value, will start exploratory drilling about 1,000 kilometers (625 miles) from China’s Hainan island, located off its southern coast, after a seismic program this year, according to a corporate presentation on its website this month. The Calgary- based company is partnered with Hanoi-based Vietnam Oil & Gas Group, or PetroVietnam.
“We have what we believe are legitimate licenses,” John Manzoni, Talisman’s chief executive officer, said in a May 4 interview. The company plans to push ahead “at a normal pace.”
Rival Award
Talisman’s blocks 133 and 134, about 300 kilometers from Vietnam, are known as WAB-21 in China -- which in 1992 awarded Crestone Energy Corp. the site, now owned by Houston-based Harvest Natural Resources Inc. (HNR)
China “did indicate it was very concerning to them and that they would intervene in some way,” Harvest CEO James Edmiston said in response to questions about Talisman’s license in an August interview.
Exxon Mobil Corp. (XOM) plans an exploratory well off Vietnam this year, Mark W. Albers, a senior vice president, said in a March 9 meeting with analysts. The Irving, Texas-based company is developing Block 119, state-run Vietnam News reported March 31, without saying where it got the information. Part of the site sits in waters claimed by China.
Details of exploration programs are confidential, Exxon Mobil spokesman Patrick McGinn said by e-mail.
Ordered to Leave
Two Chinese patrol boats in March ordered a ship doing seismic work for Forum Energy Plc (FEP) to leave an area near disputed waters about 250 kilometers west of the Philippines’ island of Palawan, Philippines Army Lieutenant General Juancho Sabban said at the time. The Chinese left the area after two military aircraft were deployed, he said.
The contract area for Chertsey, U.K.-based Forum Energy lies in waters China, Vietnam and the Philippines agreed to explore jointly in an arrangement that lapsed in 2008. Majority owned by Manila-based Philex Mining Corp. (PX), Forum plans to drill wells there, it said in a March 15 statement.
The field the Philippines plans to exploit is a “very important” part of Aquino’s plan to cut oil imports, spokesman Carandang said by phone May 16.
American policy makers have put forward the U.S., which has defense treaties with the Philippines and Thailand and guarantees Taiwan’s security, as a counterbalance to China. More than half of the world’s merchant fleet by tonnage passes through the South China Sea each year, according to GlobalSecurity.org, a research group in Alexandria, Virginia.
‘Not Bullied’
Secretary of State Hillary Clinton declared a “national interest in the freedom of navigation and unimpeded lawful commerce” in the waters at a regional meeting in Hanoi in October.
That statement gave Southeast Asian nations “a little more confidence,” said Michael Green, a former Asia specialist at the U.S. National Security Council who is now at the Center for Strategic and International Studies in Washington. “It took somebody to say ‘we’re not going to be bullied.’”
The U.S. navy has patrolled Asia-Pacific waters since World War II. China has bolstered its forces over the past decade, procuring nuclear-powered submarines and developing an aircraft carrier, according to a Defense Department report in August.
In a 1988 skirmish over the Spratly islands, China killed more than 70 Vietnamese troops and sank several ships, according to the U.S. Energy Information Administration. In 1994, Chinese warships were sent to stop Vietnamese drilling.
China’s Shrinking Reserves
Chinese studies cited by the EIA suggest the waters sit atop more than 14 times BP Plc estimates of the country’s oil reserves and 10 times those for gas. China’s oil reserves have shrunk almost 40 percent since 2001 as the economy expanded 10.5 percent a year on average, according to data compiled by Bloomberg.
Vietnam’s domestic gas demand is set to triple by 2025, according to World Bank estimates. The Philippines plans to boost hydrocarbon reserves by 40 percent in the next two decades to reduce its almost total reliance on imports, according to a department of energy plan.
Going it alone may be a negotiating tactic, said Marshall Mays, director of Emerging Alpha in Hong Kong. China and its neighbors are likely “working on the assumption that a negotiated split of revenues” will be agreed, he said.
The 10-member Association of Southeast Asian Nations has made little progress in negotiating a binding code of conduct for the sea with China since 2002.
“By agreeing to a joint exploration you ipso facto recognize the legitimacy of the claims of the other countries,” said Ralf Emmers, a professor at the S. Rajaratnam School of International Studies in Singapore. “That’s a very tough political decision.”
To contact the reporter on this story: Daniel Ten Kate in Bangkok at dtenkate@bloomberg.net
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