Spotlight

Regional Implications for China’s Newest Oil Rig

July 02, 2012

By Zach Dubel - The May 9th launch of a new oil rig by the Chinese National Offshore Oil Corporation (CNOOC) is a fresh cause of concern among observers of the South China Sea. Some believe that China will attempt to exploit this development to independently mine seabed resources in disputed areas, and the surprisingly nationalistic language employed by CNOOC to describe the drilling rig does little to assuage that fear. For example, CNOOC Chairman Wang Yilin has used phrases such as "mobile sovereign territory" and "strategic instrument" to describe its role within the South China Sea. Whether China's actions will be guided by nationalistic rhetoric or pragmatic commercial considerations remains to be seen.

The new Chinese drilling rig is called the Haiyang Shiyou 981 (HYSY 981). It grants China the indigenous ability to drill in deep-water conditions up to depths of 3,000 meters for the first time.  Accompanying the launch of HYSY 981 was HYSY 201, China's first deep-water pipe-laying ship. Together, these two vessels represent a landmark achievement and technological hurdle that had previously left China dependent on the expertise of foreign oil companies for offshore resource extraction deeper than a few hundred meters.

Unquestionably, CNOOC and other state-owned companies can play a role as instruments of the state itself if need be, but some analysts view it as telling that CNOOC chose to deploy HYSY 981 and HYSY 201 to the Liwan fields area, an offshore block well within the boundaries of what would be China's 200 nautical mile Exclusive Economic Zone (EEZ), rather than the Spratly Islands area. Some in China had publicly anticipated sending the rig to this disputed area a year prior during the testing phase of HYSY 981, and several of China's neighbors feared it would make good on that threat, but it never came to be. As an April 3rd article from China SignPost argued:

"Although China's sovereign deep-water drilling capabilities are set to rise, we believe Beijing will exercise restraint in unilaterally exploiting energy resources further than 200 nautical miles from the Chinese coast. Even the benefits of a large new oil or gas field would not outweigh the negative implications of catalyzing more formal anti-China regional security alignments."

China's oft-cited concerns about the protection of its energy supply lines from the Gulf, Iran, and North Africa would potentially become a self-fulfilling prophecy in the event of aggressive military action or unilateral drilling in disputed areas. China may believe it has good reasons to worry about the potential threat to its energy lifelines in the Malacca Strait or other maritime choke points, but any Chinese action that introduces a significant destabilizing element to the security architecture of East Asia has the potential to dramatically heighten this risk without any guaranteed gain.

In the short-to-medium term, neither the PLA Navy nor any of China's several paramilitary patrol and surveillance entities have sufficient capability to completely ensure the safety of any significant oil installations and transport vessels in areas of the South China Sea beyond its EEZ. Subsequently, the risk of such an action to regional stability and China's security would likely be too high to accept given the high cost of expanding its oil and gas operations to the unexplored fields of the disputed areas with the unavoidable nationalistic backlash in other claimant states, with which China has important and growing trade and investment ties. In fact, much of CNOOC's expansion strategy of late has revolved around boosting its overseas production outside the region, such as its involvement in the development of Canadian oil sands projects and in the Missan Oil Fields of Iraq.

Given these realities, the introduction of HYSY 981 has the potential to be a positive development for the region. HYSY 981 could end up making CNOOC more attractive as a development partner because of its newfound capability to exploit resources in areas that would be beyond the technological reach of some of China's neighbors. This could have the effect of promoting joint development without either a resolution of the underlying maritime boundary dispute or a formal government-to-government agreement. When speaking about Filipino plans to develop the natural gas fields around Reed Bank, Philex Petroleum chairman Manuel Pangilinan said recently that, "a gas field will need major expenditures and the help of international oil firms that have the technical capability and financial resources."

Pangilinan, himself, made a recent trip to Beijing to talk with CNOOC executives about the possibility of partnering to develop gas resources in the Reed Bank, despite the recent row between Manila and Beijing over Scarborough Shoal. Though Pangilinan said that CNOOC was only a potential partner and that Philex had not ruled out partnering with other foreign companies, CNOOC at least has a foot in the door for this type of project, and the added technological expertise of deep-water drilling can help their prospects while potentially setting a precedent for joint-development projects in other areas of the South China Sea.

It is often lost on observers that the development of undersea oil and gas deposits inevitably involves production-sharing agreements with foreign state-owned and multinational oil companies. In this case, the most difficult aspect of negotiation between Filipino and China energy companies would be whether the terms of such an agreement were sufficiently balanced to avoid enflaming Filipino national sentiments and eliciting accusations of betrayal in the way that an earlier joint exploration agreement with China did several years ago. The stakeholders of any potential agreement in both countries would have to tread carefully lest this potential opportunity for progress harms, rather than helps, the possibility for cooperative development and the avoidance of conflict. 


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