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This year has seen yet another series of flare ups in China-Vietnam tensions over oil exploration projects in the South China Sea. Most dramatically, in May, a Chinese oil rig exploring area around the disputed Paracel Islands, sparked anti-China protests in Vietnam. More recently, Vietnam and India’s October defense and oil exploration agreement has been met with Chinese opposition as the oil blocks set aside for Vietnam-India joint development overlap with blocks that the Chinese National Offshore Oil Corporation (CNOOC) attempted to auction off for exploration and development in 2012.
This post assess the development of CNOOC offshore activity in the context of trends in overall Chinese oil and gas production to better understand both ongoing and future Chinese energy interests in the South China Sea. While offshore crude oil and natural gas production represents only a small share of total Chinese energy production, for CNOOC, the South China Sea has been an important source of offshore natural gas. Going forward, it is not clear that there will be the same tension over oil reserves in other disputed territories, primarily because estimates of total oil and gas reserves in the South China Sea are low (representing less than 5 percent of the world’s estimated reserves), they are particularly low around the contested Spratly and Paracel Islands.
First, to get a sense of long run trends in the composition of Chinese energy production, figure 1 shows the growth in total Chinese crude oil, natural gas and coal production since 1978. Coal remains the largest source of both Chinese energy production and consumption, capturing 75 percent of all production on average from 1978 to 2012. Beginning in the 1990s, natural gas production grew rapidly, surpassing growth in coal production starting in 2005. Crude oil production has grown steadily since 1978, although at a lower level than natural gas or coal, and without any spike in production in the early 2000s.
Figure 1 Growth in energy sectors, 1978-2012, China
Source: Total Production of Energy and its Composition, China Statistical Yearbook, 2013, author’s calculations
As one of China’s three state owned oil companies, the CNOOC is the largest Chinese producer of offshore oil and natural gas. Their domestic offshore operations include production in Bohai bay in northeastern China, the East China Sea, and the South China Sea. Three quarters of CNOOC natural gas production in the first half of 2014 was in the South China Sea. Specifically, the western part of the South China Sea has been the largest source of natural gas production for CNOOC since 2001. Figure 2 shows the regional breakdown of CNOOC offshore crude oil and natural gas production since 2001.
Figure 2 CNOOC oil and natural gas production by region, 2001-2013
Note: Eastern South China Sea refers to the Pearl River Mouth Basin, south of Guangdong Province; Western South China Sea refers to the area surrounding Hainan Island including the Gulf of Tonkin Source: CNOOC annual reports
Relative to overall Chinese production of crude oil and natural gas, CNOOC’s offshore production is small even at peak levels, making up only about 15 percent of total Chinese crude oil production and 6 percent of total natural gas production in 2011. However, China is the second largest producer of natural gas in the South China Sea (following Malaysia, which in 2011 was the largest producer of both offshore oil and natural gas in the region). [i]
Up to this point, CNOOC production in the South China Sea has also remained within undisputed Chinese territory south of Guangdong and on the Chinese side of the Gulf of Tonkin.[ii] However, since 2012, CNOOC’s attempts to move production further into the South China Sea have been at the center of territorial-related tensions between China and Vietnam. In 2012, CNOOC offered a series of nine oil exploration blocks to outside investors, which conflict with Vietnam’s territorial claims in the South China Sea (shown in orange below).
CNOOC offshore oil and natural gas operations in the South China Sea
Note: block locations are approximate. For detailed information on CNOOC operations in the South China Sea, see Deloitte’s announcements of CNOOC oil block licensing rounds in 2012 and 2014.
Sources: Deloitte PetroView®, Google Maps (map image)
These nine blocks fall within Vietnam’s Exclusive Economic Zone, which under the UN Convention on Law of the Sea gives Vietnam exclusive rights to the oil and natural gas reserves therein, but are also part of China’s “nine dash line” territorial claims. Both CNOOC and PetroVietnam (Vietnam’s state owned oil company) have actively sought to explore and auction off this same territory to outside oil companies and as of this July, Vietnamese production has continued to move forward in these areas, while the contested CNOOC blocks remain inactive. This reflects the relative importance of offshore oil and natural gas production for Vietnam, which in 2011 relied on offshore South China Sea production for 95 percent of crude oil and 80 percent of total natural gas production.[iii] Moreover, assuming that the current disputed blocks remain under Vietnamese control, the US Energy Information Administration estimates that Vietnam’s offshore crude oil reserves are double Chinese reserves, and also more substantial than Chinese natural gas reserves.[iv]
Outside of these nine currently disputed blocks, it is unclear oil and natural gas production will hamper the resolution of the rest of the territorial conflicts in the South China Sea. This is because most of the estimated oil and gas reserves in the South China Sea are in coastal and non-disputed areas (see map). [v] The IAE estimates that there are little or no probable oil and natural gas reserves surrounding either the Spratly or Paracel Island chains.
There are also precedents set for joint cooperation in oil exploration despite overlapping territorial claims in the region, with joint development projects between Malaysia and Brunei, Thailand and Vietnam, and Malaysia and Thailand. For China and Vietnam, similar cooperation seems unlikely in the short term, since there has been no coordination on current crude oil and natural gas exploration or any moves towards settling Vietnam-China territorial disputes. Instead, despite the relative unimportance of the South China Sea for total Chinese energy production and the current downturn in oil prices, the periodic conflicts over drilling rights between the two countries over the past few years are likely to continue indefinitely.
[i] Author’s estimates based on data from the International Energy Agency, US Energy Information Administration and CNOOC annual reports
[ii] China and Vietnam reached an agreement to divide the Gulf of Tonkin and its resources in 2000.
[iii] Author’s estimates based on data from the International Energy Agency, and US Energy Information Administration
[iv] Reserve estimates for Vietnam: 20 trillion cubic feet of natural gas, 3 billion barrels crude oil; China: 15 trillion cubic feet natural gas, 1.3 billion barrels of crude oil.
[v] Disputed areas include the Paracel Islands (China Vietnam) Spratly Islands (China, Vietnam, Malaysia, Brunei and the Philippines) and Scarborough Shoal (China-Philippines)
