China's push for offshore oil: chance 4 joint deals 25-09-04
China's push for offshore oil: A chance for joint deals

SEPT 25, 2004 SAT
By Mark J. Valencia

AS CHINA'S energy demand and oil import bill soar and its other domestic sources run dry, it is increasingly casting its eye offshore - to disputed areas in the South and East China seas. This has raised tension. But it has also created the opportunity for joint development, which could build confidence and improve relations in the region.

The recent flurry of activity concerning the contested Spratly Islands brought an abrupt end to the relative calm that followed the multiple-claimant Nov 4, 2002 Declaration on the Conduct of Parties in the South China Sea. This was supposed to be a so-called 'code of conduct' for the behaviour of the claimants in the contested area. The declaration was signed by all claimants in what was hailed as a breakthrough agreement decreasing tension and allaying concerns of both the claimants and foreign maritime powers like Japan and the United States, which depend heavily on the safety and security of sea lanes adjacent to the disputed area.


THE SPRATLY CONTEST


THE 40-plus tiny atolls and their attendant ocean space, seabed and resources are claimed in whole or in part by China, Taiwan, Brunei, Malaysia, the Philippines and Vietnam. China, Taiwan and Vietnam base their claims on discovery and historical usage since 'time immemorial'. But if legalities ever come into play - an unlikely event - International Court of Justice precedents have shown they will favour those who can show the best evidence of continuous, effective occupation, administration and control ('effectivities').

History, particularly ancient history, will not be a major factor unless continuity of control - without protest - can be shown. And this is not possible for any of the claimants - at least from ancient times. China, through its claim to Taiwan, actually has one of the best legal claims to a feature since it can demonstrate continuous, effective occupation, administration and control of Taiping Dao. While others have had troops on some features since the 1970s, Taiwan has had marines and now coast guard personnel on Taiping Dao continuously since the early 1950s.

The first significant sign that the 'code of conduct' was not holding came last month when Vietnam announced the beginning of commercial flights and the construction of an airport on the largest feature - what it calls Truong Sa (Spratly Island). This was undoubtedly an attempt by Vietnam to enhance its legal claim by demonstrating 'effectivities'. But this activity drew strong protests from China, Taiwan and the Philippines.

All claimants believe the Spratly area contains considerable petroleum resources. Although the size of any deposits in the Spratlys is and will remain unknown until drilling actually occurs, traces of gas were struck on the Reed Bank in the 1970s.

China had been gearing up to explore for oil in the southern Spratlys. But such plans were strongly protested by the Philippines. So it must have come as a bit of a shock to the Philippines' fellow Asean claimants when it was announced on Sept 8 that Philippine President Gloria Macapagal Arroyo and Chinese President Hu Jintao had reached an agreement to 'study' potential oil deposits in the Spratlys.

This three-year pre-exploration 'study' is to be undertaken by the two nations' state energy firms. To implement the agreement, a Memorandum of Understanding to collect, process and analyse seismic data was signed by the Philippine National Oil Company and the China National Offshore Oil Company.

Politically, that the Philippines would enter such a bilateral arrangement with China is a striking volte-face. For years Asean struggled to maintain a united front against China's constant 'divide and conquer' strategy. The Philippines was one of the most frequent and ardent advocates of Asean solidarity vis-a-vis China, particularly after China occupied and built structures on the Philippine-claimed Mischief Reef.

Perhaps because of this political contradiction, the Philippines went to great lengths to emphasise to its Asean partners that neither drilling nor production is covered by its agreement with China, presumably because such activities could be seen as a violation of the 'code of conduct'. But even the 'research' covered by the agreement could be interpreted as violating the code's solemn undertaking to exercise 'self-restraint in the conduct of any activities that could complicate or escalate the disputes'. And the Philippines-China announcement stated that 'any definitive agreement for further cooperation between the Philippines and China shall be subject to further discussions'.

This could mean that if the seismic results identify good petroleum prospects, China and the Philippines may agree to proceed to drilling. As an indication of the intentions of the parties, Philippine Speaker of the House Jose de Venecia urged other claimants to revise the 2002 declaration to allow oil exploration in the disputed area.

The China-Philippines agreement should be of concern to the other claimants for several reasons. First of all, it adds weight to the claims of China and the Philippines to both the islands and the area at the expense of others. In particular, the agreement would seem to legitimise China's occupation of Mischief Reef on the Philippines' legal continental shelf, and also tacitly implies that both parties recognise the legitimacy of each other's claims to the area to be 'researched', as well as to the nearby features.

Naturally, those claimants that were left out protested vehemently. Vietnam claimed the agreement violated the 2002 declaration. In response, the Philippines denied that it violated the 'code of conduct' and announced that the 'research' plans would be discussed with the other claimants. This leaves open the possibility that a multilateral arrangement to explore the area could be reached. Indeed, the bilateral arrangement was on the agenda at a high-level Asean-China meeting in Manila late this month, in the larger context of a possible Asean-China 'strategic partnership'.


CLAIMS IN EAST CHINA SEA


THE situation in the East China Sea is somewhat similar. China's June 22 proposal to Japan to jointly develop an offshore gas field in the East China Sea is an opportunity to improve relations between the two while harvesting the sea's petroleum resources. The development of oil and gas in much of the area has been prevented for decades by the boundary dispute. Several Japanese companies, including Japex and Teikoku, have been pressing the Japanese government for some years to claim the resources in the area. However, the government has refused to do so because it could adversely affect negotiations with China on the boundary line.

But now, China is drilling near the mid-line between its claim and that of Japan, and Japan is concerned that China's well could take some of its resources by pumping from an oil pool that extends under the line. Japan has officially protested against the drilling and is now exploring the area and even considering undertaking its own test drilling on its side of the mid-line. This, in turn, has been protested by China. Although tension is increasing, it may be time to make a deal.

The East China Sea is thought to contain up to 100 billion barrels of oil as well as 200 billion cubic metres of natural gas in the area of drilling, and is one of the last unexplored high-potential hydrocarbon resource areas located near large markets. Ownership of the area is claimed by China, Taiwan and Japan, based in part on their claims to the Diaoyu islands.

The Diaoyutai, or 'fishing platform', consists of five uninhabited islets and three barren rocks, located approximately 120 nautical miles north-east of Taiwan, 200 nautical miles east of the Chinese mainland coast, and about 200 nautical miles south-west of Okinawa, Japan.

Japan controls the islands, which it calls the Senkakus. Taiwan, in a Bill submitted by its Cabinet to its legislature, has defined its territory as including the Diaoyu Islands. China has already incorporated the Diaoyu Islands into its territory under its law on the territorial sea. The total maritime area that might be claimed from the islands is about 20,500 square nautical miles and includes potential oil, gas and mineral deposits.

The dispute over the boundary in the area involves differing interpretations of the 1982 United Nations Convention on the Law of the Sea to which China and Japan are parties - but not Taiwan. China and Taiwan hold that because the Diaoyu islands are small, uninhabited and unable to sustain economic life of their own, they are not entitled to generate a continental shelf or consequently a 200-nautical mile Exclusive Economic Zone (EEZ).

To China and Taiwan, this means that the boundary should be at the edge of their continental shelf which they argue is the axis of the Okinawa Trough, very near to Japanese territory. But Japan maintains that the topographical features are indeed islands and are therefore entitled to have continental shelves and EEZs, and the Okinawa Trough is a mere indentation in a continuous shelf. Japan therefore uses the Diaoyu islands as base points for its continental shelf and EEZ claims, and argues that the boundary should be the line equidistant between the Chinese and Taiwanese coast and the islands.

As proposed by China, the sovereignty dispute could be shelved, allowing the governments to jointly develop resources in an agreed area of overlapping maritime claims. Taiwan and China might then jointly develop the resources on the Chinese side of a provisional boundary line.

As part of the deal, Japan might be allowed to purchase gas from China at a reduced rate in return for investment in the project. And Japan might offer technical assistance in the development of alternative energy and in pollution control. Thus China's aggressive offshore exploration activities in or near disputed areas could actually prod the other claimants into joint development agreements which would, in turn, contribute to regional confidence building.

This is the silver lining in the cloud of vituperative exchanges that surround these controversial initiatives.

The writer is a senior fellow at the East-West Center in Hawaii where he has focused on maritime policy and international relations for 25 years.

source: http://straitstimes.asia1.com.sg/commentary/story/0,4386,274529,00.html