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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Are We Likely To See A Clash Over Resources In The South China Sea?

Destroyer vessel South China Sea

Sparks of hostility are flying between Beijing and Washington, kindled by China’s expansionist policies in the South China Sea – a major shipping route and a reservoir of oil and gas – and the U.S.’s unwillingness to adhere to China’s warnings for its vessels to stay away from its territorial waters there.

President Trump has voiced criticism of China more than once, both on the campaign trail and after entering office. His attitude was echoed by Secretary of State Rex Tillerson during his confirmation hearing, when he said he would take a tough stance on China’s expansion in the South China Sea, preventing its army from accessing artificially created islands used as military bases.

Tillerson’s stance is in tune with other representatives of the Trump administration, but for some observers, this stance reflects a conflict of interest with his former employer, Exxon. One such observer, Steve Horn, notes in an analysis of the South China Sea situation, how Exxon has been building a presence in the region despite pressure from China.

Last month, Exxon announced a US$10-billion deal with PetroVietnam for the development of a natural gas field in Vietnam’s sector of the South China Sea. The company also has interests in Indonesia, via a production-sharing agreement with local state-owned major Pertamina, and in Malaysia, where it is partnering with local Petronas on several offshore projects.

For those who doubt Tillerson’s bona fides, this must look like a pretty extensive presence – sufficient to use as an argument of a possible conflict of interest. The argument could be solidified – from a certain perspective – by adding to it the fact that Gazprom and Rosneft are also building a presence in the region, notably in Vietnam. Related: Saudis To Raise $10 Billion Ahead Of Aramco IPO

For critics, the interests of Exxon and the Russian energy firms overlap in a suspicious way – though it’s worth asking the hypothetical question whether this overlapping would have been identified as such had Tillerson had no history with the Kremlin.

From another perspective, however, these interests could be seen as competing – Russia has much better relations with China at the moment. What’s more interesting – with Tillerson being “accused” of having no political experience at all, i.e., having no idea what he’s doing – is that the Secretary of State’s position on the South China Sea is actually more hawkish than the position of Secretary of Defense James Mattis. Mattis said last week that “At this time, we do not see any need for dramatic military moves at all.”

Indeed, analysts familiar with the history of the South China dispute seem to be of the opinion that no open conflict is likely there, not just because of the nuclear deterrent, but because of the overall costs of such a conflict for both sides as well as the uncertain outcomes. Related: Oil Prices Fall On Glut Fears Despite Tighter Market

This could be positive for the oil industry if both China and the U.S. adopt the view that a conflict in the South China Sea will lead to more problems than solutions. On the other hand, the oil and gas reserves in the contested areas of the sea are, according to the EIA “few” – almost no oil and some gas. The total reserves of the sea have been estimated at about 11 billion barrels of crude and 190 trillion cubic meter of natural gas, but most of this is near the countries’ shorelines and actively exploited.

In this context, doubts about where Secretary Tillerson’s loyalties lie seem to be a bit exaggerated. The importance of what is happening between Beijing and Washington right now, however, is real: it could be seen as a test for the new U.S. administration on the geopolitical scene – how it handles the South China Sea issue will tell the world how it is likely to handle other similar issues as well.

By Irina Slav for Oilprice.com

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