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Oil worries lubricate South China Sea pact
By Alan Boyd

SYDNEY - Soaring oil prices have raised the stakes in China's game of brinkmanship over the hotly disputed Spratly Islands, with the Philippines this week becoming the first rival claimant to break ranks.

In a separate development, Beijing reacted with unusual restraint to Vietnam's announced plans to begin regular air services to another Spratlys atoll within months, indicating that the feuding neighbors may have reached an accommodation on the issue.

Philippine President Gloria Macapagal-Arroyo and her Chinese counterpart Hu Jintao agreed at talks in Beijing jointly to study potential oil deposits in the South China Sea atolls as part of a three-year research project involving two state energy firms. A communique by the Philippine government went to great pains to emphasize that the pact did not imply that the two countries, whose naval forces have clashed over the contested reefs, would proceed to the drilling stage.

"It will be a pre-exploration study solely to collect, process and analyze seismic data. No drilling or development is covered under the study. There is no reference to joint petroleum production," the statement said.

Manila was also keen to underscore the point that it had not given up its territorial rights to a portion of the Spratlys, which are contested in part or full by Taiwan, the Philippines, Malaysia, Brunei and Vietnam, as well as China. Vietnam calls the islands Truong Sa, and in China they are known as the Nanshas.

Philippine Energy Secretary Vicente Perez noted that research agreements were permitted by the 2002 Declaration of the Conduct of Parties in the South China Sea between China and the 10 members of the Association of Southeast Asian Nations (ASEAN), which includes all of the other claimants except for Taiwan.

Nevertheless, the accord represents the first chink in the diplomatic wall that China has built around the issue since it began to assert its sovereignty over the entire region in a short-lived naval battle with Vietnam in 1988.

Significantly, the communique left open the possibility of follow-up deals on exploration, with Manila stating that "any definitive agreement for further cooperation between the Philippines and China shall be subject to future discussions".

China also reacted with relative calm to the announcement by Vietnam that it would start commercial flights by the end of the year to Truong Sa Lon (Large Spratly), an island where it already has military and administrative facilities. Although only a small number of visitors is possible - the runway will be a tight 600 meters in length, and there is limited accommodation - the challenge might well have attracted a naval response by China if it had happened a decade ago.

But Vietnam's intentions have been widely broadcast for the past year, and did not prevent Beijing and Hanoi from establishing a hotline in August as part of a commitment to resolve land and sea border disputes without resorting to force. It was the eighth bilateral round of talks over the South China Sea. This suggests that an understanding has probably been reached on the Spratlys that will set aside sovereignty issues for future negotiation while "research" activities go ahead at full speed.

Beijing's negotiating position over the South China Sea has correlated to movements in global oil-price indexes, shifting from implacable opposition to a deal during the formative growth years of the late 1990s, when it laid claim to 80% of the entire sea area, to a cautious flexibility in the face of a looming energy crunch.

Expected to be the world's No 2 oil importer this year, China is struggling to cool an overheating manufacturing base that consumed 6 million barrels of oil a day in 2003, a rise of 11.5%, according to research by British oil company BP. About 30% of China's energy requirements are purchased abroad, including half of its crude-oil supplies and massive amounts of coal and natural gas that are shipped from other parts of Asia and Australia to maintain industrial power generation.

There are also 1,000 new motor vehicles entering the congested streets each day in Beijing alone, draining refined petroleum supplies. The government is wary of responding too harshly to the consumption boom, because it is the engine of the economic-growth miracle.

Salvation was to come from the direction of Central Asia, with Russia shipping 400,000 barrels per day of crude through an overland pipeline to Daqing, in northern China. However, it is more than a year behind schedule, and dogged by uncertainty.

Suddenly the hundreds of coral atolls have shifted back into focus, even though the documented evidence of oil and gas supplies is at best circumspect. Diplomatic reports suggest that China may be poised for a decisive push into the region.

In a flurry of recent activity, China's national oil companies have drawn up exploration plans for zones in the East China Sea and South China Sea that all are potential flashpoints because of overlapping economic zones or unresolved territorial claims.

Japan has protested vehemently against exploration plans by China National Offshore Oil Corp (CNOOC) in waters near the island group of Diaoyu - known by the Japanese as Senkaku - which are also claimed by Taiwan. CNOOC has installed a drilling plant close to Japan's exclusive economic zone to look for natural gas, and said this year that it had been authorized by Beijing to construct an underwater pipeline to China.

Tokyo, concerned that gas fields on its side of the boundary might be exhausted, sent a survey team to the area in July. Japan's gas reserves are projected at 200 billion cubic meters, a commercially viable level. Beijing proposed in June that the gas field be jointly developed, but Tokyo has not responded, reportedly because the extent of the Chinese reserves is unknown and out of concern that the issue might inflame tensions between China and Taiwan.

Further to the east, Petro China has been given the green light to begin drilling for gas near the Nanxia Archipelago, a strategic area contested by Vietnam, Malaysia, Taiwan and the Philippines. It is not known whether this will become part of the research agreement brokered between Beijing and Manila. Reports suggest that Petro China is waiting only for its operations plan to be approved, and already has drilling ships close by.

Any exploration would technically be a violation of the 2002 code of conduct with ASEAN, which bans the installation of any structures on or near the atolls until the various territorial conflicts have been settled. However, most claimants have already violated the code. Five have permanent military garrisons on atolls, and two - Malaysia and Vietnam - have tourism facilities; others have hidden their monitoring stations under the guise of "bird-watching towers" or weather huts.

With the code now effectively void, the way is cleared for economic realism to win out against nationalism - even if China does end up with the diplomatic kudos.

(Copyright 2004 Asia Times Online Ltd. All rights reserved. Please contact for information on our sales and syndication policies.)

Sep 4, 2004

Russian tangle with Japan and China (Sep 1, '04)

East Asia tackles energy security
(Aug 24, '04)

Tense petro-rivalry in East China Sea  (Jul 27, '04)

Conduct Unbecoming in the South China Sea? (Jun 26, '04)


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