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Controlling the waves

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LNG Industry,

Friction over the complex web of overlapping maritime territorial claims in the East and South China Seas has steadily intensified in recent years, leading many to describe the region as the defining battleground of the 21st century. China is certainly the major player in the disputes, but they are also key to the economic interests of Japan and other countries in the region, with natural gas very much at the heart of the issue. This comes in part from the potential reserves at stake, but more so from the significance of the South China Sea in particular as a vital transportation route for natural gas shipments. A drawn-out battle of gradual manoeuvring looks set to dominate the western Pacific in the coming years, and this could have huge ramifications for the natural gas industry.

East China Sea

The East China Sea dispute centres on the Japanese-controlled Senkaku (Diaoyu) islands, which China also claims, and on a disputed maritime boundary, the overlapping area between which covers over 200 000 km2. China’s claim to the Senkakus is historical, but it only began disputing Japan’s claims in 1970 after a UN report indicated possible large hydrocarbon deposits in surrounding waters. A state-run Chinese magazine estimated that the East China Sea holds total natural gas reserves of up to 8.4 trillion m3. The US Energy Information Administration (EIA) gives a far less generous estimate of 28 billion m3 of natural gas in proven and probable resources (i.e. only including resources whose extraction is currently economically viable). The majority of these are thought be located in the Okinawa (Xihu) trough, part of which is in disputed waters. China National Offshore Oil Company (CNOOC) and China Petroleum & Chemical Corp. (Sinopec) have been the key extractors of oil in undisputed parts of the trough. However, the exploration and development of East China Sea blocks has been limited by political concerns hampering commercial viability – in 2004 Unocal and Shell withdrew from a joint venture to explore gas reserves in the Okinawa trough.

South China Sea

The South China Sea situation is similar, but the greater number of countries and maritime features involved render it more complex. China – along with Taiwan – claims almost the whole of the sea on historical grounds using its controversial and seemingly arbitrary ‘nine-dash line’. Smaller chunks of varying sizes are claimed by Vietnam, the Philippines, Indonesia, Brunei and Malaysia. The disputes are based in numerous disagreements over maritime boundaries, as well as the ownership of the sea’s many reefs and islets. This makes potential oil and gas exploration in the South China Sea even more difficult than in the East China Sea and figures on reserves in the area are similarly speculative. The US EIA puts the approximate proven and probable resources of natural gas in the South China Sea basin at 5 trillion m3. Within this latter estimate, the vast majority of reserves are located in uncontested shallow water basins on the sea’s boundaries. Very little exploration has been undertaken in contested deep-water areas. There has been speculation that the sea could hold significant as-yet undiscovered hydrocarbon deposits, particularly around the highly contested Spratly islands. However, a 2010 US Geological Survey (USGS) analysis put the reserves at a relatively insignificant 1.98 trillion - 8.21 trillion m3 of natural gas.

A new normal

Despite the increasingly fraught nature of regional relations, open conflict in the western Pacific remains highly unlikely. Control of the seas is more a long-term strategic goal than an immediate necessity and gradual manoeuvring is thus set to define the disputes in coming years. As the key player in both seas’ disputes, China is attempting to create a ‘new normal’ in the region by slowly asserting its control. It is unlikely to be successful in this regard in the East China Sea and a continuation of the status quo is likely there for many years. Japan has little to gain from responding to any provocative action and China’s armed forces are still far off competing with those of the US, which has explicitly stated that a mutual defence treaty with Japan covers the Senkakus. Despite the country’s constitution limiting its military development, even Japan’s naval capacity is superior to that of all of South-East Asia combined and it thus acts as a strong deterrent to Chinese aggression.

The South China Sea is therefore likely to be the most active arena for the region’s territorial disputes. Here, China is by far the most powerful direct participant in the dispute and even though it has a limited mutual defence treaty with the Philippines – which does not cover the South China Sea – the US has little to gain from becoming directly involved in regional issues. Most countries are trying to develop their rocky outcrops in order to bolster their legal claims to surrounding waters and to house military garrisons. However, China’s economic clout means it is able to do this at a far faster pace, while it can also use its strength to harass other countries’ economic activity, including energy exploration or geological surveys. In 2011, Vietnam accused China of sabotaging its exploration vessels, while Malaysian seismic survey ships have allegedly been consistently troubled by China over the past year.

Although they cannot compete with China individually, other countries surrounding the South China Sea have been attempting to resist China’s increasing boldness. The Philippines and Vietnam have both filed cases with international tribunals and despite having overlapping claims themselves, have been stepping up defence cooperation. With Japan also having a vested interest in the South China Sea dispute, it is boosting its ties with South-East Asian countries, strengthening military, diplomatic, trade and investment ties throughout the region to create the beginnings of a unified bloc that can stand against China. However, this is also likely to be a drawn-out process and it remains to be seen whether it will be able to halt China’s gradual rewriting of the status quo. China thus looks set to be able to continue using its power to, bit by bit, get what it wants.

Significance to the natural gas industry?

But just what is the significance of these areas if they offer such limited proven reserves? For the natural gas industry, they are important for two main reasons. Firstly, there is the potential both offer. With hydrocarbon extraction becoming more difficult and expensive as known resources are slowly used up, the chance of discovering an abundance of natural gas in the future makes it a worthwhile gamble for countries to stake their claims in the area. With its economy still expanding rapidly, China has an insatiable appetite for energy that is only expected to grow. Resource-poor Japan is even more reliant on energy imports than China, especially after the Fukushima disaster led it to shut down almost all of its nuclear reactors.

However, the still nuanced political situation means natural gas from contested areas is highly unlikely to significantly bolster global supplies for some time. China will likely undertake limited exploration drilling in disputed areas it controls, a process it began in May when CNOOC deployed a drilling rig to disputed waters near the Paracel islands, control of which China won from Vietnam in 1974. Yet this is aimed more at boosting its territorial claims than successful resource extraction, a fact borne out by China’s removal of the rig a month ahead of schedule in July with only a vague statement that “oil and gas was discovered”. This strategic element means China’s activities will likely be largely limited to its state-owned enterprises, with little involvement of foreign firms. Most other countries’ drilling will likely be hampered by political uncertainties and the costs and risks these bring with them, with any activities unlikely to occur in hotly contested areas. The Philippines has allowed exploration of Reed bank in the face of stern opposition and potential disruption from China, but Reed bank is a comparatively safe location for the country – it is relatively close to Palawan island and access to it from Chinese-controlled features in the Spratlys is blocked by a line of Philippine-controlled islets.

The second and more important reason for the disputes’ significance to the natural gas industry is that crucial shipping routes pass through both seas. China has been a net importer of natural gas since 2007, and in 2013 almost 90% of its natural gas imports passed through the South China Sea, either from the Middle East or from the Asia Pacific region. Similarly, natural gas imported from West Africa or the Americas reaches China via the Pacific, and Chinese control over the Senkakus would help create a chink in the long chain of pro-US island countries that creates a ‘shield’ around it to the east. Japan, the world’s largest natural gas importer, is in a similar situation. Although it has no claims in the South China Sea, it has a vested interest in keeping it out of the control of China, its major rival – in 2013 over 60% of its imported natural gas passed through the South China Sea.

In the long-term, absolute control of the South China Sea could be used by one country to prevent or delay energy shipments to another. For example, China has a long-standing regional rivalry with Japan, an important ally of the US, which is itself China’s major rival for preeminent global power status in the 21st century. An uncontested presence of Chinese naval vessels from the Spratlys to the Paracels would give China a crucial weapon in the event of a deterioration of relations with either the US or Japan. China could unilaterally require all ships passing through ‘Chinese waters’ – whose definition and boundaries would be decided by China itself – to seek Chinese authentication. This would vastly increase the cost of Japan’s natural gas imports and limit its ability to meet its energy needs. The significance to the energy industry of the control of waterways can be seen around the world: fears over Egyptian disruption of Suez Canal shipments have caused panic-buying of oil, while Iran has used blocking the Strait of Hormuz as a political bargaining chip.

Although Japan is the key player, other US allies could face similar risks: Taiwan is also reliant on natural gas imports and could be held to ransom by China if it makes moves towards independence. Indeed, in the slightly less likely event that pro-US (or simply anti-China) countries control the sea, Chinese imports could be forced to enter the country via a different route, and perhaps mindful of this fact, China has been hastily inking numerous pipeline deals with Russia, Central Asian countries and even Myanmar. With a study in June suggesting Asia Pacific (even excluding Japan) will overtake the US as the world’s wealthiest region in 2018 and with the region’s energy demands only set to grow, any issues in the coming decades in the South China Sea would play havoc with natural gas supply chains and prices.


The complex maritime territorial disputes in the South and East China Seas are key to the future of the natural gas industry. There very may well be huge reserves of natural gas lying under contested waters and gaining exploration rights by controlling maritime features is attractive for the energy-hungry countries in the region. But with political disputes still making accessing these resources largely unfeasible, large-scale exploration and extraction remain unlikely for many years. The seas’ greater significance stems from their use as key shipping lanes for the regional powers’ energy imports. With tensions possible from China’s slow realignment of the global power structure and its threat to US hegemony, it is keenly aware of the need to ensure its energy security. It remains unable to do this in the East China Sea, but its gradual manoeuvring in the South China Sea – and other countries’ attempts to respond to them – suggest that a new, maritime ‘great game’ is on the cards in the coming years, with natural gas supplies at the same time a potential prize, strategic tool and victim.

Written by George Martin, AKE Ltd, UK. Edited from various sources by

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