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South China Sea: Impact of Falling Oil Prices By Carlyle A. Thayer

C3S Paper No. 0042/ 2015


China spent a lot of money deploying the deep water rig Haiyang Shiyou 981 to disputed waters in South China Sea last year and finally withdrew.

Do you think this costly action, and other efforts in disputed areas offshore the Philippines, are merely for political purposes? Do you think China will deploy again the deep water rig to disputed waters in South China Sea this year, amid falling oil prices? Could you provide reasons for your answer?

ANSWER: Chia appears to be acting for a mix of motives, both political, to assert sovereignty, and commercial. This creates a natural alliance between state oil companies and the People’s Liberation Army Navy and other maritime law enforcement agencies. The HD 981 is now operating in waters off Myanmar and it is unlikely that China will repeat its extraordinary actions of last year and deploy a deep water rig to waters contested by Vietnam. This would completely undercut the current resetting of China-Vietnam relations and pose more problems for China than it would solve. If China did deploy a deep water rig it would most likely be in Reed Bank but this possibility has a low probability because of the risk of drawing in the United States and possibly Japan. ASEAN under Malaysia’s chairmanship, is likely to take a strong political stance because Prime Minster Najib puts much stock in the peaceful resolution of disputes under international law. As for falling oil prices, in the long-term China pursues a mercantilist policy in which the central government seeks to dominate all aspects of oil exploration, production and refinement. If China really believes that the South China Sea is the “next Saudi Arabia” in terms of hydrocarbon reserves it will act to control these reserves.

(Article reprinted with the permission of the author Carlyle A. Thayer, Emeritus Professor,The University of New South Wales at the Australian Defence Force Academy, Canberra email: Carlthayer@webone.com.au)

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