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New Oil Deals To Ease Tensions In South China Sea

In Chinese President Xi Jinping’s…

Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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China Crushes Vietnam’s South China Sea Drilling Hopes

At the EIC Energy Vietnam Conference held today in Ho Chi Minh City (Saigon), there was considerable talk from a multitude of players discussing in length oil and gas development in the country, investment opportunities, new offshore production ventures, the role of liquefied natural gas (LNG) and even wind and solar in the country’s future energy mix.

There were also representatives from a slew of various state-run PetroVietnam subsidiaries as well as over 100 foreign companies keen on investing in Vietnam’s energy future.

However, what was missing, what no journalist asked in follow up sessions, what no interested company talked about openly, was the role of geopolitics in the Southeast Asian nation of more than 90 million people.

The fact that much of Vietnam’s UN-mandated Exclusive Economic Zone (EEZ) overlaps that with its giant neighbor to the north, China, was not on the agenda, even though less than two months ago Hanoi caved into pressure from Beijing, and ordered Spanish energy firm Repsol to stop drilling for oil and gas at the Red Emperor block in waters off Vietnam’s southeast cost. The Spanish company and PetroVietnam are joint partners in the venture.

The project was in its final stages, while the pull-out could cost Repsol some $200 million in lost investment, a figure that that the Madrid-based company says it wants Vietnam to reimburse. Related: Brent Breaks $80 On Flurry Of Bullish News

The site in question rests in block 07/03 in the South China Sea, while Repsol's local subsidiary estimates that it contains 45 million barrels of oil and 172 billion cubic feet (bcf) of gas. The area is also clearly within Vietnam’s UN-mandated 200-nautical mile EEZ but is also claimed by China as part of its U-shaped nine-dash-line which covers nearly 90 percent of the South China Sea.

This marked the second time in less than a year that Vietnam had to suspend a major oil development in the heavily contested South China Sea due to Chinese pressure. In July, Vietnam also ordered Repsol to stop oil drilling operations at an adjacent location, Block 136/3, in response to what media at the time called “threats from China.”

Vietnam in vice-grips

Now, the situation for Vietnam is getting even dicier and this time it involves a Russian energy company. Reuters reported today that the Vietnamese unit of Russian energy firm Rosneft also fears backlash from Beijing over its recent drilling in an overlapping claim between Vietnam and China. The news agency cited two sources with direct knowledge of the matter.

On Tuesday, Rosneft said that its Vietnamese subsidiary had already started drilling at the LD-P well, part of the so-called Lan Do “Red Orchid” offshore gas field in Block 06.1, about 230 miles (370 km) southeast of Vietnam.

This block also lies within China’s nine-dash line, though that claim has no recognition under international law. Reuters added that most of the area shows that the block in question is 53 miles (85 km) inside the contested area.

According to media today, the Vietnamese foreign ministry, the Chinese foreign ministry and the Russian foreign ministry did not respond to requests for comment on the matter. Related: How To Mitigate The Risk Of Peak Oil Demand

The problem for Vietnam is pronounced as the country’s oil and gas production is declining from maturing fields and it needs new production to offset these declines. However, considering Beijing’s ever-increasing push to enforce its South China Sea claims, even when it crosses into the EEZ’s of other countries, leaves Vietnam in a near hopeless situation.

China has considerable leverage over its smaller communist counterpart. China is Vietnam’s largest trading partner for starters, and economic reprisal from Beijing could take a heavy toll on Vietnam’s economy. China’s military, and especially its navy and maritime naval fleet,, which often does Beijing's bidding to enforce its claims, is vastly superior in both technology and in numbers to anything Vietnam can put afloat, prompting the question: What will Vietnam do to make up for depleting oil and gas reserves if its giant and often belligerent neighbor to the north keeps causing Hanoi to fold over oil and gas development?

Perhaps that answer did indeed come at today’s conference. It will have to make a pivot to more costly LNG imports and also more oil imports in addition to renewals like solar and wind. However, some of these options take time to implement, while large quantities of oil and gas clearly within Vietnam’s own UN-mandated waters will lay untapped.

By Tim Daiss for Oilprice.com

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