Azernews.Az

By Bloomberg

When it comes to territorial tensions in the South China Sea, it’s more about what goes through it than what lies beneath it.

Oil last week dropped below $46 a barrel to more than five- year lows. The biggest collapse in energy prices since the 2008 global recession has prompted companies from Royal Dutch Shell Plc to Norway’s Statoil ASA to scrap projects not considered viable at current prices and drawn attention to the future of costly deep-sea exploration.

Yet in the South China Sea, where Chinese and Vietnamese boats clashed last May after China parked an oil rig in disputed waters, political and security considerations will keep territorial tensions simmering, fueling military spending by countries that border the area. The South China Sea contains some of the world’s busiest shipping lanes and is a vital artery for China’s energy supplies from the Middle East.

“The South China Sea dispute is not some struggle for energy,” said Shi Yinhong, director of the Center for American Studies at Renmin University in Beijing and an adviser to China’s State Council. “This is a dispute for maritime territory and there is no compromise over claims.”

China says it is entitled to about four-fifths of the South China Sea, based on a nine-dash line drawn on a 1940s map that loops down like a cow’s tongue to a point about 1,800 kilometers (1,119 miles) south from China’s Hainan island. The area overlaps claims from Vietnam, Malaysia, the Philippines, Brunei and Taiwan.

The HS 981 oil rig episode last year illustrates the tensions. When it was first deployed for exploration work in 2012, Cnooc Ltd. Chairman Wang Yilin described deep-water rigs as “our mobile national territory and strategic weapon for prompting the development of the country’s offshore oil industry.”

Vietnam Riots

When it was sent into waters disputed with Vietnam in May last year, deadly anti-Chinese riots erupted in Vietnam and the U.S. called the action “provocative.” The rig was removed in July, a month before schedule. Project manager China National Petroleum Corp. claimed to have detected oil and gas, but gave no further details.

“You have to ask: what was the rationale by the Chinese last year?,” said Philip Andrews-Speed, a fellow at Singapore’s Energy Studies Institute. “If you believe it was a one-off political gesture, to say ‘hey, we can do this,’ then the oil price isn’t going to make a difference.”

The slow trickle of production from the area gives credence to the view that China is mostly interested in being able to freely deploy its navy to protect its trade routes, and seeks sovereignty in order to act as it wishes. Vice Foreign Minister Liu Zhenmin last May described the sea as ‘‘a maritime lifeline.’’

Justifying Claims

“The South China Sea is far more important for the hydrocarbons that sail through it than those that lie beneath it,” said Bill Hayton, author of The South China Sea: The Struggle for Power in Asia, published last year. China uses “oil as a pretext to stage a national territorial claim and justify it because they argue that it is rich in oil.”

Almost a third of global crude passes through the South China Sea, or 14 million barrels of oil a day, according to the U.S. Energy Information Administration.

The countries bordering the South China Sea produced about 1.26 million barrels of oil a day in 2011, according to the EIA -- just 1.4 percent of the 89 million barrels a day the International Energy Agency says is consumed globally.

Estimates of the potential for discoveries in the South China Sea vary wildly. The EIA says the area has proved and probable reserves of about 11 billion barrels of oil and 190 trillion cubic feet of natural gas.

Coastal Areas

Most of the undiscovered oil lies in coastal regions that aren’t disputed, according to the EIA. In addition to the geopolitical tensions, the EIA notes, the contested areas face geological and technological challenges, not least the depth of the waters and frequency of typhoons.

China’s estimates dwarf those of the U.S. organization. In 2012, Cnooc’s chairman estimated the area holds around 125 billion barrels of oil and 500 trillion cubic feet of natural gas, according to a report in the Financial Times. When asked to confirm this estimate, Cnooc said Wednesday in an e-mail that it only discloses its own proved reserves in the South China Sea.

These numbers have been dismissed by some western observers, including Hayton, who argue they are based on estimates from the 1990s when China’s oil self sufficiency was ending just as its economy was beginning to take off.

“Once these official sources declared these numbers to be true, it was very hard for any other official to declare them nonsense.” Hayton wrote in his book. Cnooc became “a powerful voice within the system amplifying the sea’s potential. The bigger the reserves appeared to be, the stronger the case for winning more funding from the state.”

Deep-Water Projects

Others say China may not be exaggerating.

“I don’t think there is any reason to dump money into the ocean if they don’t believe that,” said Gordon Kwan, the Hong Kong-based head of regional oil and gas research at Nomura Holdings Inc.

While Kwan doesn’t expect China’s oil explorers to dramatically reduce work in the South China Sea, he equally doesn’t expect them to boost investment after oil dropped almost 50 percent last year.

“Certainly restrained cash flow will lower their capex and they have to rationalize whether deep-water exploration is still worthwhile,” he said. “If they believe the oil price will rebound by the time the deep-water projects start producing, they make take a different view.”

Frontier Area

In the meantime the world’s major oil companies are staying away.

“There has been limited exploration in the disputed areas and it will need resolution between China and the other claimants before we see any ramp-up,” said Andrew Harwood, a senior researcher at energy consultant Wood Mackenzie in Singapore. “The majority of the South China Sea is considered a frontier area, which means high risk and high cost, but potentially high reward.”

There are other potential flash points in the seas, which host enough fish to comprise about 10 percent of the globe’s total catch, according to the Southeast Asian Fisheries Development Center.

The Malaysian Maritime Enforcement Agency said Jan. 7 it detained an Indonesian fishing boat and four crew for suspected fishing in Malaysian waters. Days later, Malaysia’s Ministry of Foreign Affairs said it was ready to discuss the sinking by Indonesia of a Malaysian vessel for illegal fishing.

Fishing Boats

Further north, Vietnamese newspaper Tuoi Tre reported Chinese boats chased and damaged three Vietnamese fishing boats near the Paracel islands on Jan. 7 in separate incidents.

Claimants regularly argue over reclamation projects, the most recent Vietnam’s complaint over China’s expansion of an airport on an island in the Spratly area. In August, China rebuffed efforts by U.S. Secretary of State John Kerry to secure a freeze on any actions that might provoke tensions in the waters.

“Although the perception that the South China Sea is rich in energy resources remains a key driver of the dispute, there are many other factors at work,” said Ian Storey, senior fellow at the Institute of Southeast Asian Studies in Singapore. “Nationalism, attempts by the various parties to enforce their historical and jurisdictional claims and geostrategic rivalry will keep this issue at or near the top of the regional security agenda.”