Bowing To Beijing Or Suffering Are The Two Options Faced By Energy Firms Operating In The South China Sea

Oil and gas players with interests in the disputed zone are put in a bad place as the world’s second-largest economy threatens military action in the South China Sea.

For the Spanish energy firm Repsol, that was the case. After Beijing warned the Southeast Asian country that it would attack bases if operations continued, the subsidiary of Repsol – Talisman-Vietnam, was ordered by Hanoi to stop gas drilling in a China-claimed area in July.

Hugo Brennan, Asia analyst at Verisk Maplecroft, said in a Wednesday note that President Xi Jinping’s administration’s use of military retaliation could result in further pressure on future business dealings and is “a worrying escalation”.

According to Brennan, there is likely to be pressure from Beijing on companies that have interests or operations in blocks located within China-claimed waters but those that are licensed by Southeast Asian governments.

There are many overlapping claims in the region. In the South China Sea, a massive area that extends roughly 1,000 miles from its southern shores is marked by China which relies on a concept known as the nine-dash line to mark its territorial claims. Sovereign rights over parts of the international waterway, which is rich in resources and boasts key maritime routes, have also been laid by Vietnam, the Philippines, Malaysia Brunei and Taiwan.

Chinese protestations are to be faced by firms licensed by other countries to operate in disputed areas against that backdrop. Brennan said that implicit threats to company staff and assets, or de facto exclusion from the Chinese market and on-site harassment are the consequences that any company ignoring those Chinese reservations would likely face. Heh added that in 2007, BP experienced the former option.

“Operators also have to analyse the resolve of Southeast Asian governments to stand up to China. Otherwise, companies with rights to develop blocks or fields in contested waters may find that they are prevented from exercising them as host government become wary of rocking the boat.”

Vietnam’s Red Emperor oil and gas field, also called Ca Rong Do, could be the next potential flash-point. Drilling in this project is slated for 2019 and Repsol is active in the project. This is a contentious project because it is located within China’s nine-dash line. Brennan said that it remains to be seen how much progress the Madrid-based firm will make in light of Chinese threats.

In response to China’s aggressive behavior, regional players are already taking defensive action.

Indonesia recently announced intentions to use its military to provide security for resource exploration activities even though it isn’t a claimant in the South China Sea drama but maintains an exclusive economic zone there.

However, “blurring the lines between commercial and naval activities in this way raises the potential for oil and gas assets to become targets in any militarized confrontation,” Brennan said.

China itself is in no rush to develop those assets even though it prevents others from tapping hydrocarbon deposits located within its nine-dash line. According to Brennan, that’s likely because 71.2 percent of total discovered reserves within the nine-dash line are “not currently considered commercially viable.”

(Adapted from CNBC)

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