Thursday, July 13, 2017

Background Briefing: Oil and Gas Exploration & Development in the South China Sea: China’s Response

Background Briefing:
Oil and Gas Exploration &
Development in the South China
Sea: China’s Response
Carlyle A. Thayer
July 11, 2017
[client name deleted]
We are preparing an assessment about reports that Vietnam has started drilling for
oil near the Paracel Islands, much to China's displeasure. We request your analysis on
this development from a geopolitical stand point and also how it relates to energy.
ANSWER: Vietnam has taken two major steps this year to explore and develop its oil
and gas reserves. In January, PetroVietnam and ExxonMobil’s Vietnam Unit signed an
agreement to develop Blocks 116-117-118, collectively known as the Blue Whale
project. These blocks are located approximately 80 kilometers/50 nautical miles off
shore from the central coast within Vietnam’s Exclusive Economic Zone (EEZ). Block
118 is also located 84 nm from Triton island in the Chinese-occupied Paracel Islands.
The Blue Whale is Vietnam’s largest gas project. It is expected that the Blue Whale
project will produce gas for Vietnam’s domestic power plants by 2023.
On June 21st this year Deepsea Metro 1 commenced drilling in Block 136-03 off
Vietnam’s southeast coast held by the Repsol Group (Spain). The BBC reported that
Vietnam had withheld permission to drill for three years in order not to provoke China.
In May-July 2014, it should be recalled, Vietnam confronted China when it parked the
mega oil drilling platform HYSY 981 inside Vietnam’s EEZ. In 2015 Repsol acquired
Talisman-Vietnam that had been operating in Block 136-03.
Vietnam’s crude oil production peaked in 2014. Gas production presently meets
domestic demand. Late last year Vietnam’s prime minister approved the construction
of four gas-fired power plants to be supplied by the Blue Whale. Demand by Vietnam’s
domestic energy market will exceed supply. Vietnam is also shifting to cleaner energy
from coal-fired power plants.
July 12 will mark the first anniversary of the Arbitral Tribunal Award in the case
brought by the Philippines against China. President Duterte’s decision to set aside the
Award and pivot to China resulted in a lowering of tensions between China and the
Philippines. At the same time, China has become more active diplomatically with
ASEAN members and reached agreement on a draft Framework Code of Conduct
(COC). ASEAN members and China are now expected to begin discussions on the
content and timeline for the COC with a tentative deadline by the end of this year.
China has warned outside powers not to interfere in this process.
Thayer Consultancy
ABN # 65 648 097 123
Although the Arbitral Tribunal Award ruled that China’s claims to historical rights were
superseded by the United Nations Convention on the Law of the Sea and that China’s
nine-dotted line claim to the South China Sea was without legal foundation, China has
refused to comply with the Award. Vietnam’s resumption of hydrocarbon exploration
and exploitation has aroused Beijing’s ire. Last month a senior Chinese general
abruptly left Hanoi after Vietnam’s leaders rebuffed his request to stop hydrocarbon
activities in disputed areas. The general also cancelled the fourth friendly border
defence exchange activities in which he was scheduled to take part.
In May, President Duterte gave a speech and said that when he met President Xi
Jinping and mentioned plans to drill for oil in the Spratlys, Xi replied, according to
Duterte, ”we’re friends, we don’t want to quarrel with you, we want to maintain the
presence of warm relationship, but if you force the issue, we’ll go to war.” Later, a
prerecorded TV interview went to air, Duterte quoted Xi as saying “do not touch it [oil
This month Vietnam granted India’s ONGC a two-year extension to continue exploring
in Block 128. This announcement led to protests by China.
China’s response to oil exploration and development by the Philippines, Vietnam and
India has likely been fueled by a series of recent developments that if take together
are viewed by Beijing as part of a concerted effort by the United States and Japan to
push back against China in the South China Sea. These developments include: the
resumption of U.S. freedom of navigation patrols in the Spratly islands by the Trump
Administration on 24 May and 31 June; China’s interception of a US Navy P-3C Orion
maritime patrol aircraft flying over the waters near Hainan island on 24 May; Prime
Minister Nguyen Xuan Phuc’s back-to-back visits to Washington and Tokyo (late Mayearly
June) where defense relations and maritime security were discussed; strong
criticism of China’s behavior in the South China Sea by the Australian prime minister
and the defense ministers of the United States, Australia and Japan at the Shangri-La
Dialogue in early June, and the deployment of Japan’s largest warship the Izumo-class
helicopter carrier to the South China Sea for exercises with the USS Ronald Reagan
aircraft carrier followed by hosting defence officials from ASEAN states, and the eighth
U.S.-Vietnam naval engagement activity in Da Nang on 5 July.
Suggested citation: Carlyle A. Thayer, “Oil and Gas Exploration & Development in the
South China Sea: China’s Response,” Thayer Consultancy Background Brief, July 11,
2017. All background briefs are posted on (search for Thayer). To remove
yourself from the mailing list type, UNSUBSCRIBE in the Subject heading and hit the
Reply key.
Thayer Consultancy provides political analysis of current regional security issues and
other research support to selected clients. Thayer Consultancy was officially
registered as a small business in Australia in 2002.

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