Exxon-Vietnam gas deal to test Tillerson’s diplomacy

The multi-billion dollar joint energy project comes amid past Chinese threats and tough Trump administration talk on the South China Sea
By HELEN CLARK

Former ExxonMobil executive Rex Tillerson testifies during his confirmation hearing for Secretary of State before the Senate Foreign Relations Committee in Washington, DC, January 11, 2017. 

US energy giant Exxon Mobil and state-owned PetroVietnam agreed this month to develop Vietnam’s largest natural gas-fired power generation project, a US$10 billion joint venture known as ‘Blue Whale’ (Ca Voi Xanh).

The deal, signed while outgoing US Secretary of State John Kerry was on his last official visit to Vietnam, threatens to create new ripples in the contested South China Sea under the new Donald Trump administration.
The project is scheduled to come online in 2023 and will draw on a natural gas field situated 88 kilometers from Vietnam’s central Quang Nam province in the South China Sea. 

The field is estimated to hold some 150 billion cubic meters of natural gas, three times the amount of Vietnam’s current largest gas project, a joint venture with Russia’s Gazprom in the southern Con Son Basin.
Exxon Mobil will construct an 88-kilometer sea-to-shore pipeline, while PetroVietnam’s Exploration Production Corporation (PVEC) subsidiary will build gas treatment and four power plants with a total capacity of 3 gigawatts, according to reports. 

A planned expansion phase will generate enough gas for another 5,750 megawatts of power and petrochemical production, the reports said. 

PetroVietnam estimates the project will produce US$20 billion for state coffers over an undefined timeline.
The deal comes against the backdrop of Trump’s decision to scrap the Trans-Pacific Partnership agreement, a US-initiated trade pact of 12 Pacific Rim countries of which Vietnam stood the most to gain. 

The tariff-slashing deal, if it had been implemented, projected to boost Vietnam’s gross domestic product (GDP) by 11%, or US$36 billion, and exports by 28% over the decade spanning 2015-2025. Vietnam is a signatory to the China-led Regional Cooperative Economic Partnership, which does not require the same type of economic reforms that TPP would have required.
The ExxonMobil project will have a strong diplomatic defender in US Secretary of State designate Rex Tillerson, Exxon Mobil’s former chairman and chief executive officer. 

Two days before Kerry met with Vietnamese leaders, Tillerson threatened China over the South China Sea, saying in a Senate confirmation hearing that the Trump administration would send Beijing a “clear signal” and “block” China’s access to artificial islands it has built in international waters.
While within Vietnam’s exclusive economic zone (EEZ), the deepwater field is also in an area China claims on its nine-dash map, which lays wide-ranging claim to 90% of the entire South China Sea. 

In 2011, China indirectly warned Exxon Mobil soon after the company announced a big gas find at Block 118, contained in the Blue Whale project zone, saying foreign companies should refrain from exploration in the "contested" area. 

Other multinational energy companies appeared to buckle under China’s pressure by abandoning their exploration activities with Vietnam.
China has also explored in the same area and is believed to have discovered its first commercially viable store of fuel in the South China Sea. 

In mid-2014, state-run China National Offshore Oil Company (CNOOC) positioned a massive deepwater exploration rig in the contested area, setting off sea skirmishes and sparking anti-China riots in Vietnam that resulted in arson attacks on Chinese factories and the exodus of hundreds of fearful Chinese.

Tillerson and CNOOC chairman Wang Yilin met in Beijing on May 14, 2014, where the two executives discussed “further cooperation” between the two firms without giving specific details, according to a Reuters report. 

After those closed door talks, neither side announced any production plans in the area until this month’s Exxon Mobil-PetroVietnam deal. 

Exxon Mobil also has exploration rights to blocks that could be "contested" in adjoining areas.
Vietnam expert Carlyle Thayer wrote in a January 16 background briefing paper on the deal that Tillerson “would have institutional knowledge of Chinese attempts to intimidate Exxon Mobil from investing in Vietnam dating back to 2007-8” and that the businessman-cum-envoy “will not be receptive to Chinese protests at the Exxon Mobil deal with PetroVietnam.” 

Thayer wrote that Chinese officials had previously privately warned Western oil companies that their interests in China would suffer if they assisted Vietnam’s exploration ambitions.
China has not commented specifically on the multi-billion dollar Blue Whale deal, though mouthpiece media has blasted Tillerson’s Senate confirmation comments on the South China Sea. The China Daily said in a January 13 op-ed that Tillerson’s remarks were “a mish-mash of naivety, shortsightedness, worn-out prejudices and unrealistic political fantasies.” 

The Exxon Mobil-PetroVietnam venture was announced while Kerry was in Hanoi and Vietnam Communist Party General Secretary Nguyen Phu Trong was in Beijing meeting with Xi Jinping, where the two signed a joint communiqué on cooperation and peace. 

The pro forma agreement is not expected to resolve or even mitigate the South China Sea disputes.
Hanoi and Beijing maintain a wide network of cooperative ties and agreements despite their South China Sea disputes. 

Whether these agreements, including a joint steering committee to oversee relations, help to restrain bilateral ructions or are useless in the face of serious disputes, such as China’s 2014 incursion into Vietnam’s EEZ, is difficult to say due to the opaque nature of both nominally communist regimes.

This handout photo taken on June 23, 2014 shows a Chinese boat (L) ramming a Vietnamese vessel (R) in contested waters near China’s deep sea drilling rig in the South China Sea.
Bilateral ties cratered after the 2014 anti-Chinese riots and relations were not reset until November 2015, when Xi Jinping visited Hanoi. 

During Xi’s visit a dozen new bilateral agreements were signed under a comprehensive strategic cooperative partnership where China promised US$157 million worth of investments for hospitals and schools and US$500 million for infrastructure.
The sea disputes have been accentuated and complicated by recent joint exploration ventures Hanoi has entered into with foreign energy concerns. 

The deals have also added new geostrategic dimensions to the volatile region. 

For instance, India’s drive to sell Hanoi advanced missiles and other power-projecting weaponry is believed to be motivated in part to protect its ONGC Videsh Ltd energy company’s joint exploration ventures with Vietnam in the South China Sea.
China’s threat to Vietnam’s exploration activities in the area, however, is as much about political power as natural resources. 

U.S. Energy Information Agency (EIA) estimated in 2013 that the South China Sea holds 11 billion barrels of oil and 190 trillion cubic feet of natural gas, including both proven and possible reserves. China’s estimates for the sea are higher, with the state-run China National Offshore Oil Corporation (CNOOC) projecting 125 billion barrels of oil and 500 trillion cubic feet of gas. 

China consumed around 1.7 billion barrels of oil in 2015, according to industry estimates.
Like China, Vietnam sorely needs the energy to fuel its fast expanding industrializing economy. 

The Exxon Mobil deal is believed to be part of a broad Vietnamese central plan to integrate its coastal economy with natural resources in its EEZ, according to academic Thayer’s briefing paper. 

Those designs for contested maritime areas riled China in the past and will likely do so again if Tillerson backs his tough language with firm action in the South China Sea.

Oil Becoming Code for Sovereignty in Contested South China Sea

By Ralph Jennings

Ships of Chinese Coast Guard are seen near Chinese oil rig Haiyang Shi You 981 in the South China Sea, about 210 km (130 miles) off shore of Vietnam.

TAIPEI — The search for oil and natural gas is seen as a driving factor in rival claims to the South China Sea, with many of the countries in the region currently reliant largely on fuel imports.
Yet no one has struck a head-turning deposit of oil or gas in the 3.5-million-square-km (1.4-square-mile) sea, which stretches from Taiwan to Singapore, despite prospecting since 1970.
Analysts who follow the South China Sea disputes point to national sovereignty as a top reason that countries are exploring for oil and gas. 

Brunei, China, Malaysia and Vietnam do their own prospecting. 

The Philippine government accepted exploration bids in 2014 from private companies.
“The South China Sea is not Saudi Arabia, it’s not Iraq, it’s not the Middle East,” said Fabrizio Bozzato, associate researcher specialized in international affairs at Tamkang University in Taiwan. “The primary purpose of the claimants to be there is not because they want to access the oil and gas resources in the area. Developing hydrocarbon resources in the South China Sea would be way to mark the territory.”
Fossil fuel exploration came up in October when Manila and Beijing began discussing joint oil exploration, according to Philippine media. 

The talks are part of rebuilding relations that were strained since 2012 when vessels from the two sides became locked in a standoff at Scarborough Shoal west of Luzon Island.
In Taiwan, which also claims much of the South China Sea, the former president suggested joint resource exploration with rival claimants.
But the act of exploring for oil or gas sends a signal of control over the tract of sea being drilled, analysts say, pointing to a series of spats.
An aerial view of one of the structures built by China at the Philippine-claimed Mischief Reef, Spratly Islands in South China Sea.
When the Philippines turned up gas off Palawan in 1976, China complained and stalled the project.
The positioning of a Chinese offshore oil driller’s rig in the Gulf of Tonkin in 2014 sparked a boat ramming incident with Vietnam, where deadly anti-China riots also erupted. 

Vietnam formally protested another Chinese rig in April this year.
Joint exploration would imply a concession of sovereignty, Baker said.
“There’s probably very little incentive for countries to actually go and try to do this exploration simply because it’s very difficult to come to an agreement between different countries because it requires some acknowledgement of the right to exploit those resources, which means they have to give up some sense of sovereignty,” said Carl Baker, director of programs at Pacific Forum CSIS in Honolulu.
“And for the Chinese this is very difficult to do, and for the Philippines and Vietnam, they’ve found it creates problems in domestic circles as well,” he said.
The Philippines began more than 40 years ago looking for oil west of Palawan island, at Reed Bank. In 1984, a Philippine company found an oil field in the same region and it supplies 15 percent of the annual oil consumption in the Philippines.
The U.S. Energy Information Agency estimates 11 billion barrels’ worth of oil under the sea and 190 trillion cubic feet of natural gas. 

Much of that lies under the continental shelves of Southeast Asian claimants, which are not disputed. Much of that potential energy has not been tapped yet, Baker said.
Saudi Arabia has an estimated 268 billion barrels of proven oil reserves and Iraq has 144 billion, the U.S. Energy Information Agency says. 

Russia leads the world in natural gas reserves with 5,085 trillion cubic feet.
Falling oil prices and the costs of extracting any fuel from under the seabed limit the value of exports from any undersea discoveries, analysts add.
In Malaysia, the claimant country that has found the most fossil fuel to date, few are pushing for exploration, said Oh Ei Sun, international studies teacher at Singapore Nanyang University. 

Malaysia has about five billion barrels of oil and 80 trillion cubic feet of natural gas.
“Even if you discover new sources of oil and gas, you would still have to spend a lot on equipment and other resources to dig them out, so the urgency, the call for having new sources of oil and gas at the moment I don’t think they are very high,” Oh said.

US on edge over new powder keg in the South China Sea

By Clay Dillow

A China-Russia naval joint drill off south China's Guangdong Province

 
China and the Philippines could begin exploiting long-untapped energy reserves in the South China Sea, according to reports coming out of this week's meeting between Rodrigo Duterte and high-ranking Chinese officials — including a Thursday sit-down with Xi Jinping — in Beijing. 

How soon that may happen remains unclear, however, as Duterte cautioned reporters that he has not been empowered by his Congress to finalize any energy exploration deal with his Chinese counterparts.
Earlier reports by Philippine newspaper the "Inquirer" suggested that Beijing and Duterte were set to enter into an agreement to explore for energy sources in a part of the South China Sea close to the Philippine coastline. 

China has long sought to exploit what it believes could be more than 100 billion barrels of oil and hundreds of trillions of cubic feet of natural gas lurking beneath the South China Sea. 

However, a litany of overlapping territorial claims in the region by the more than half-dozen nations rimming the South China Sea has rendered broad energy development there a nonstarter.
The fact that potential joint development of offshore energy deposits in the region is even being discussed underscores the tectonic shift in regional foreign policy undertaken by Duterte since winning the Filipino presidency in May.
The Philippines, long a U.S. ally in the region, has moved away from its bilateral ties and military entanglements with the United States and instead embraced a budding new friendship with China, long a regional rival. 

A joint energy-exploration deal between China and the Philippines could serve as a way to dodge thorny questions of national sovereignty and begin extracting energy wealth from the South China Sea, potentially setting a precedent for future energy development deals.
The U.S. Geological Survey estimates the South China Sea region holds reserves of some 11 billion barrels of oil and 190 trillion cubic feet of natural gas. 

China National Offshore Oil — the state-owned energy company responsible for offshore energy exploitation — provides a much rosier estimate, predicting the region holds some 125 billion barrels of oil and 500 trillion cubic feet of natural gas.
Neither estimate is insignificant for a region woefully dependent on imported oil and natural gas. China is the second-largest consumer of oil after the United States and critically dependent on imports to feed its energy demands. 

Japan and South Korea are likewise dependent on foreign oil to keep their economies humming. Booming growth in Southeast Asia has pushed the region to emerge as a net oil and gas importer as well.
The Philippines, too, faces a looming energy shortage. 

The nation's main island of Luzon depends heavily on the Malampaya gas field, an energy deposit estimated to hold perhaps another decade's worth of energy before running out. 

Given that it can take half a decade or longer to bring a major new energy project online, the clock is ticking for the Philippines, which could experience rolling brownouts on Luzon — home to the capital, Manila — if new energy sources are not tapped.
One potential source is the Reed Bank, an underwater mountain off the Philippine coast believed to hold significant oil and gas deposits. 

The Reed Bank falls exclusively in the Philippines' exclusive economic zone, which according to the UN Convention on the Law of the Seas (UNCLOS), places it firmly in the Philippines' possession. China, however, doesn't see it that way.
Developing the South China Sea's energy reserves has proved problematic for decades, in part due to China's sweeping territorial claims. China's so-called "nine-dash line" encompasses much of the strategic waterway, conflicting with the various territorial claims of other Asian states, including the Philippines, Vietnam, Malaysia and Brunei.

Reed Bank, like many other contested areas, falls within the nine-dash line. 

Under Duterte's predecessor, the Philippines challenged China's claim at the Permanent Court of Arbitration at the Hague, which ruled in July under UNCLOS that China's claims are invalid. 

China has refused to accept the decision.
These types of conflicting claims and the political risk associated with them have made exploration and development of even nearby uncontested areas difficult, as energy companies and foreign investors seek to steer clear of international entanglements. 

"I have not seen anyone go into these developments in any meaningful, substantial way," said Clara Gillispie, senior director of trade, economic, and energy affairs at the National Bureau of Asian Research. 

"There's been a number of starts and stops. But in terms of breakthroughs in collaborative, joint efforts or in terms of pure Chinese development, I think we're still talking about what could happen rather than what is happening."

Territorial disputes
Joint development between the Philippines and China could reverse the trend toward disputes and conflict in at least one corner of the South China Sea, though it will likely take much more than a deal between the two states to open the wider South China Sea for exploitation.
"I think the biggest factor impacting exploration activities, or lack thereof, in the South China Sea are the low oil prices that we've seen for the past two years now — that's been big disincentive to do exploration activity there," said Erica Downs, a senior analyst at the Eurasia Group. 

"Plus, nobody knows exactly how much energy is there."
At press time, the Brent crude-oil price was $51.37 a barrel, way off its historic peak of $139.05 a barrel in June 2008.
To lure foreign energy companies and their deepwater drilling technology into the region, things will have to change economically, said Michal Meidan, a China analyst at the London offices of consultancy Energy Aspects. 

"If you had proven reserves and you knew this was a very attractive resource, the story might be different," she said. 

"But prices would need to go up considerably, which is not likely — we'd need to go back to at least a 100-dollar-a-barrel kind of world." 

Prices currently hover around half that.
Circumstances would have to adjust on the political stage as well. 

China has floated various other attempts at joint development deals previously, "but those kinds of agreements have been very tenuous in the past," Meidan said, adding that the region would require some kind of internationally agreed-upon code of conduct for joint exploration, something that seems unrealistic at the present time.

A satellite image of Subi Reef, an artificial island being developed by China in the Spratly Islands in the South China Sea, on September 4, 2016.

Disagreements over who owns what in the South China Sea have long stoked tensions there, exacerbated in recent years by China's building of artificial islands in areas like the contested Spratly Islands, a cluster of 14 islands and more than 100 submerged reefs (and claimed in part by Malaysia, China, the Philippines and Vietnam).
These islands, complete with military installations and runways that can accommodate combat aircraft, lie far from China's continental shores. 

Nonetheless, China has claimed in many cases that these manufactured islands confer rights to 12 nautical miles of territorial waters surrounding each island and in some cases exclusive economic zones extending up to 200 nautical miles away from these disputed island outposts.
If honored, these claims would give China de facto territorial control over much of the South China Sea. 

A warming relationship between China and the Philippines — and particularly a successful joint-development deal allowing both countries to begin extraction of the South China Seas energy wealth — could prove a first step in changing the entrenched political reality in the region. 

It might also help China validate its territorial claims elsewhere in the region.

$5 trillion in global trade
The territorial disputes over the South China Sea are about much more than energy resources buried in the seabed. 

More than $5 trillion in global trade passes through the strategic waterway annually, including the vast majority of the imported oil on which Japan, China and South Korea rely. 

China sees control of the waterway as a key security concern — not just in terms of national defense but also in terms of energy and economic security.
The linking of various nations' energy security with political tensions in the South China Sea has driven an uptick in military activity in the strategic waterway. 

Over the past several weeks, the United States (along with the Philippines), Indonesia and a consortium of nations, including Australia, Malaysia, Singapore, New Zealand and the United Kingdom all conducted separate military exercises in or around the South China Sea. China and Russia also conducted joint naval drills in the region. 

The Indonesian Air Force's two-week exercise was that nation's largest to date in the South China Sea. 

Meanwhile, defense budgets have experienced a pronounced uptick across the region as nations bordering the sea look to bolster and modernize their armed forces with new patrol boats, submarines and aircraft.
The uptick in military spending doesn't necessarily spell looming confrontation or an outright arms race, analysts say. 

But the increased tempo of military activity by a growing number of actors heightens the risk of a mishap or misunderstanding between militaries that could quickly escalate.
"There's still a low likelihood of a conflict because that's bad for everyone," said Meidan, the China analyst. 

"But the chance of an accident are greater than they have been in the past."