China’s territorial sovereignty dispute is all about energy

South China Sea oil rig

China seeks energy security through its territorial claim to the possibly ‘natural resource rich’ areas of the South China Sea, jeopardising diplomatic relations with the remaining five countries, who also claim conflicting territorial rights.

Some reports have argued that one of the main drivers of this conflict is “sizable deposits of oil and gas,” others claim oil and natural gas reserves are far more limited and wildly overestimated by Chinese reports. This has led to some downplaying the severity of the disputes, despite the fact that in 2013 China stepped up its military presence in the region to enhance the safeguarding of China’s national security, territorial integrity and maritime interests. Should offshore reserves be considered when analysing China’s security strategy and interests?

What the data says

Both the US Energy Information Agency (EIA) and industry sources suggest there are about 11.2 billion barrels of oil reserves and 190 trillion cubic feet of natural gas reserves in the South China Sea. Regarding undiscovered resources, the U.S. Geological Society’s  (USGS) 2010 Survey  estimates only up to 22 billion barrels of oil and 290 trillion cubic feet of natural gas might exist. Taking a global view of undiscovered hydrocarbon reserves, data from the EIA suggests the South China Sea potential is relatively small.

undiscovered oil and gas

Source: U.S. Energy Information Administration

However, in November 2012, the Chinese National Offshore Oil Company (CNOOC) estimated the area holds around 125 billion barrels of oil and 500 trillion cubic feet of natural gas in undiscovered resources, about ten times US estimates for oil and more than double the estimates for natural gas. Which is true? And to what extent should the hydrocarbon potential be factored into the geopolitical debate?

Both Chinese reports and US reports might be reconcilable. The USGS 2012 does not include natural gas hydrate resources, which even the EIA note might be significant around the Paracel Islands. Yet, another USGS survey suggests that global stocks of gas hydrates are at least 10 times the supply of conventional natural gas deposits.

These reserves had originally been excluded from the USGS’s 2010 report due to considerations of technological limitations to extraction, the price of natural gas at the time, and IEA reports of the dangers associated. It was presumed such reserves were not commercially viable. However, things are starting to change.

Technological developments in the extraction industry

China’s state oil companies previously lacked the ability to extract deep-sea hydrate reserves. Yet, in 2012 China’s first deep-water drilling rig, the CNOOC 981 (also known as the HYSY 981), commenced operations in an area in the South China Sea with reports suggesting the drilling to depths of 2,335 meters. In March 2013, Japan used a deep-sea drilling vessel to successfully extract natural gas from offshore methane hydrate deposits off Atsumi Peninsula. The technology is available.

Moreover, China’s National Oil Companies are heavily investing in their deep water potential, having signed production sharing contracts in 2013 and with BP, with blocks at water depths between 370 and 2300 meters. Tellingly, the president of BP China notes this is a strong base for future exploration success for China. The deep-water rig could give China the physical capacity to drill almost anywhere in the South China Sea as documented by the image below.

South China Sea drilling

Yellow area represents the expanded area now accessible to Chinese Oil Companies.

The geopolitical consequences of this are significant, Given that the rig is mobile it may be used as a ‘geopolitical tool’ and maneuvered into areas in dispute.

China’s energy security strategy

The EIA expects China to account for 43% of growth in natural gas consumption by non-OECD Asian countries. This is sizeable given that it also predicts that by 2035, non-OECD Asia natural gas consumption will account for 19% of the global total.

China is set to move away from oil supplies towards national gas. The EIA has previously reported that 85% of China’s domestic oil production has been on-shore in maturing fields, with only 15% from shallow offshore reserves. Reports suggest production at China’s two largest oil producers (the Daqing and Shengli fieldsis declining by 3.4% and 2.0% per year. Their combined production is around 1.3 million barrels per day. This leaves China’s energy security dependent on off-shore fields or foreign imports.

Currently, Chinese imports of natural gas constitute a small proportion of total energy supply relative to oil imports. However, even at current levels, an interruption in gas supplies to major urban areas could cause economic and political havoc. If China were able to meet future energy needs using domestic sources, the risk would be significantly reduced.

Deep water natural gas resources hold this untapped potential, given that two-thirds of China’s oil and natural gas reserves lie in deep-water reserves. The future of China’s energy security and evolution of extraction technology lie behind its claims to a significant part of the South China Sea. These claims are not going to be relinquished easily.

The territories’ strategic importance in access to international shipping routes should also be considered when assessing geopolitical risk. China depends on free-flowing trade through the Strait of Malacca for 90% of its oil imports.

However, this does not mean that the wealth of resources within the South China Sea, nor their role in China’s decision-making, should be downplayed. The South China Sea does hold enormous potential especially given national oil companies’ technological advancements, a growing rate of energy consumption, and the increased importance of energy security.

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Categories: Natural resources, Pacific Asia

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  1. China leads mission to explore South China Sea for oil – 1800 kms from China | China Daily Mail - January 29, 2014

    […] China’s territorial sovereignty dispute is all about energy (globalriskinsights.com) […]

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