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China Presses Joint Development with South China Sea Claimant States, By Carlyle A. Thayer

Image Courtesy: NES Global Talent

Article No. 41/2019

Courtesy: Carlyle A. Thayer, “China Presses Joint Development with South China Sea Claimant States,” Thayer Consultancy Background Brief, September 14, 2019

There have been reports these past few days that ExxonMobil could quit the Blue Whale project off Vietnam. Though unconfirmed by ExxonMobil the narrative seems to be that recent issues in the South China Sea, with China sending its own oil rig to the Vanguard Bank and its militia to hassle and block operations by Rosneft, have helped dissuade the U.S.supermajor from continuing its involvement in the contested waters.

Q1. Would you agree that China’s aim is to push all foreign oil companies out of the region and force all claimants to develop their offshore resources only in partnership with Chinese companies?

ANSWER: China’s track record speaks for itself, laying claim to all the islands and their adjacent waters in the South China Sea in May 2009, cutting the cables of oil exploration vessels in Vietnamese waters in 2011 and 2012, putting pressure on the Philippines to stop oil exploration in Recto (Reed) Bank in 2012, threatening Vietnam in July 2017 and March 2018 to cease oil exploration in the waters near Vanguard Bank, and the current challenge to oil exploration by Rosneft Vietnam in Block 06-1.

China’s submission to the ASEAN-China South China Sea Code of Conduct Single Draft Negotiating Text made its objectives crystal clear. I was leaked a copy of the Single Draft Negotiating Text. With respect to oil and gas, China’s submission stated that cooperation is to be carried out by the littoral states “and shall not be conducted in cooperation with companies from countries outside the region.”

In contrast, Malaysia proposed that nothing in the Code of Conduct “shall affect… rights or ability of the Parties to conduct activities with foreign countries or private entities of their own choosing.”

Q2. China seems to be making progress on joint exploration with the Philippines, but will Vietnam be open to such agreements? Seems unlikely to me.

ANSWER: In September 2004, China and the Philippines signed a three-year agreement to undertake seismic surveys in Philippine waters China then invited Vietnam to join. In March 2005, after some hesitancy Hanoi agreed because oil exploration would not take place in waters that it claimed. China, the Philippines and Vietnam signed the Tripartite Agreement for Joint Marine Scientific Research in Certain Areas in the South China Sea. The agreement expired in July 2008 and was not renewed.

It appears that the during President Rodrigo Duterte’s visit to Beijing in August, Xi Jinping proposed joint development reportedly conceding 60 per cent to the Philippines and 40 per cent to China.

In November 2006, Vietnam Oil & Gas Group (PetroVietnam), and China National Offshore Oil Corporation (CNOOC) agreed to commence joint exploration for oil and gas an area encompassing 1,541 square kilometers in the Gulf of Tonkin. No commercial reserves were discovered. In June 2013 the two sides agreed to extend their agreement until 2016 and to expand the area involved to 4,076 square kilometers. It was widely rumoured that this agreement was made for political reasons to demonstrate trust.

In February 2012, China and Vietnam agreed to establish working groups at the department level to negotiate the delineation of waters forming the mouth of the Gulf of Tonkin and cooperate in “jointly developing this area”. This is also rendered as “cooperation for mutual development.” No tangible progress has been reported.

Given the past history of China-Vietnam discussions on “cooperation for mutual development” and the toxic anti-China atmosphere in Vietnam, Hanoi is unlikely to rush into any new agreement with China on joint development. Vietnam is likely to string out discussions with China for tactical reasons while trying to firm up the commitment of non-Chinese oil companies to continue their operations in Vietnam.

Q3. Surely Beijing would not risk putting pressure on ExxonMobil’s Blue Whale development? That could spark a military conflict.

ANSWER: China has exerted pressure on ExxonMobil in the past. In 2007, for example, China warned ExxonMobil to steer clear of oil exploration and production in Vietnam by threatening to harm its interests in China. Nonetheless, two years later ExxonMobil went ahead and acquired three blocks from BP including the Blue Whale. In 2014, during the Hai Yang Shi You 981 crisis, ExxonMobil dispatched senior executive’s to Beijing to determine what risks were posed for the Blue Whale project. Once again, ExxonMobil continued its oil exploration operations. The likelihood of a military conflict is very low. Vietnam has been quite circumspect in its response to the deployment of the Haiyang Dizhi 8 survey ship to waters near Vanguard Bank and to Chinese harassment of Rosneft Vietnam’s oil exploration program. At the same time, Chinese intimidation has not yet risen to the level justifying the use of military force.

On 13 August, I was told by a senior Vietnamese foreign ministry official that if Chinese pressure failed to stop foreign oil exploration activities near Vanguard Bank, “Blue Whale would be next.” Whether China has or will exert pressure on ExxonMobil remains an open question. China, however, appears engaged in a full-court press against the Philippines,

Vietnam and Malaysia to pressure them into agreeing to joint development with Chinese state-owned oil companies in order to achieve China’s objectives set out in the ASEAN-China South China Code of Conduct Single Draft Negotiating Text. China’s  recent dispatch of the mammoth crane vessel, Lan Jing, to waters to the south of the Blue Whale block suggest China is prepared to open a second front.

Q4. How do you think this game would play out if a state-backed Russian company purchased ExxonMobil’s interest in Blue Whale? What would China make of that?

ANSWER: Russian oil companies have a long-standing involvement in oil exploration and production off Vietnam’s southern coast. For example, Rosfneft Vietnam signed a production sharing agreement in 2013 for oil exploration off Vung Tau. This has been extended to 2023.

On 13 August, I was told by a senior Vietnamese foreign ministry official that when China’s foreign minister Wang Yi met his Russian counterpart, Sergei Lavrov, in Bangkok on the sidelines of the ASEAN annual ministerial meeting, Wang YI requested that Rosneft Vietnam stop its operations. Lavrov declined.

Obviously China would not be pleased if Rosneft acquired ExxonMobil’s blocks 116, 117 and 118. But there is very little China could do about it given its dependency on Russian military technology and arms. China would also risk upsetting the “marriage of convenience” with Russia to oppose the United States in the Indo-Pacific.

[Carlyle A. Thayer is an Emeritus Professor at the University of New South Wales, Australian Defence Force Academy, Canberra. The views expressed are his own. Thayer Consultancy provides political analysis of current regional security issues and other research support to selected clients. The views expressed in this article are of the author.]

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