The Fuse

Dispute over South China Sea is About More than Oil and Gas, and Far from Over

by Nick Cunningham | July 12, 2016

The dispute over territory in the South China Sea between China and several of its neighbors has often been framed as a competition for natural resources, particularly for oil and gas deposits. China’s state-owned oil companies have sent oil rigs into disputed territory in recent years, at times sparking heated maritime standoffs between ships from different nations.

The decision could undercut China’s oil and gas claims in the South China Sea. But the court’s ruling is unlikely to influence China’s outlook on maritime boundaries in the Sea, which, despite how it is often portrayed, is not really about oil and gas.

But China suffered a huge loss on July 12 when an international tribunal based in The Hague ruled that China’s sweeping claims over territory in the South China Sea have no legal basis. The decision was not only a victory for the Philippines, who brought the case to the court in 2013, but it could also set a precedent for China’s territorial claims elsewhere in the region. The court said that the “nine-dash,” China’s expansive interpretation of maritime boundaries in the South China Sea, was invalid.

The decision could undercut China’s oil and gas claims in the South China Sea. But the court’s ruling is unlikely to influence China’s outlook on maritime boundaries in the Sea, which, despite how it is often portrayed, is not really about oil and gas.

Territorial disputes

Competing claims for territory in the South China Sea between China and its neighbors are longstanding. China’s territorial claims in the South China Sea are based on its “nine-dash line,” an historical demarcation of maritime territory that China claims grants it vast swathes of the Sea. The nine-dash line carves out territory for China deep into the 200-mile Exclusive Economic Zone (EEZ) of other countries in the region. EEZs are afforded to sovereign nations under the UN Convention on the Law of the Sea, granting them control over maritime territory within 200 nautical miles of their coastlines.

A few of the most contested island chains are the Spratly and Paracel Islands. China controls the Paracels, but they are also claimed by Vietnam and Taiwan. The Spratly Islands are controlled by China, Malaysia, Vietnam and the Philippines.

China’s militarization of the South China Sea strengthens its military capabilities in the region, extends territorial claims, and creates a fait accompli in regards to those territorial disputes—at some point Chinese control of the region becomes too difficult to reverse.

With an eye on strengthening its case for control over maritime territory, China began building sandbars, reefs, and tiny islands in the South China Sea, presumably to extend maritime claims outwards from those newly constructed locales. It has also constructed ports, military installations, and airstrips, with a lot of activity concentrated in the Spratly Islands. Earlier this year, news reports revealed that China has moved radar, fighter jets, cruise missiles, and air-to-surface missile systems onto Woody Island, part of the Paracel Islands. The moves serve multiple objectives at once: China’s militarization of the South China Sea strengthens its military capabilities in the region, extends territorial claims, and creates a fait accompli in regards to those territorial disputes—at some point Chinese control of the region becomes too difficult to reverse.

The U.S. government has made freedom of navigation the top priority for the South China Sea. That is because each year, roughly $5.3 trillion in sea-based trade travels through the area. Nearly a third of global crude oil and more than half of LNG trade moves through the Sea, according to EIA.

The U.S. has not taken a position on the territorial disputes but called for an end to China’s land “reclamation” and island building, arguing that disputes need to be solved diplomatically. Rather than resolving territorial disputes through diplomacy, China is advancing its interests “through aggressive coercive island building without meaningful diplomatic efforts toward dispute resolution or arbitration,” U.S. Navy Adm. Harry B. Harris Jr. said in July 2015.

On May 26, the President of the Philippines accused China of failing to live up to a 2012 U.S.-brokered agreement to withdraw ships from disputed territory in the Scarborough Shoal. The deal called on both the Philippines and China to remove their ships from the disputed area, but only the Philippines complied. “Now, their continued presence is something that we have continuously objected to,” President Benigno Aquino said at the time.

South China Sea oil and gas

The dispute over territory in the South China Sea is multifaceted. From China’s perspective, much of it has to do with projecting power in the region, using islands as strategic locations to control territory and build up its military presence. But it also has to do with the potential energy bonanza that lies beneath the sea.

The South China Sea holds around 11 billion barrels of oil and 190 trillion cubic feet of natural gas, according to EIA. Although international oil companies are too hesitant to enter disputed territory in the Sea because of the large degree of uncertainty to investments, China has tried to move forward unilaterally to develop what it believes are large reserves of oil and gas.

At times, the disputes escalate into heated standoffs. In April, the Vietnamese government demanded that China remove its oil drilling rig from disputed territory in the Gulf of Tonkin. It issued a formal protest with the Chinese embassy in Hanoi. “Vietnam resolutely opposes and demands that China abandon drilling plans and immediately withdraw the Hai Duong 981 oil rig from this area, and that it not take additional unilateral actions that further complicate the situation,” Vietnam’s foreign ministry said in a statement.

China dismissed those protests, arguing that the rig, owned by the state-owned China National Offshore Oil Corporation (Cnooc), was in Chinese waters. “The activity is taking place in a maritime area that is under China’s undisputed control. This is regular exploration, we hope those involved can view this matter rationally,” a spokesman for China’s foreign ministry said in response to Vietnam’s complaint. A very similar incident occurred in 2014, when the same rig was deployed to disputed waters, leading to clashes between ships from both countries. The incident sparked anti-Chinese riots in Vietnam.

Not really about oil and gas

Because oil and gas exploration to date has been sparse, the often-cited EIA estimates are not necessarily reliable. Moreover, the figures include both proved and probable reserves, making them an optimistic figure. Wood Mackenzie puts proved oil and gas reserves at a much lower 2.5 billion barrels of oil equivalent. On top of that, those estimates were issued in 2013 based on triple-digit global oil prices, meaning even those modest volumes are much less economically viable in today’s oil market.

The EIA says that natural gas production has much more of an upside in the South China Sea than oil production. But, developing gas fields would require the construction of costly subsea pipelines to carry the gas to some gathering point or processing facility. The reserves are unknown, while the costs are likely to be high. Large-scale hydrocarbon development, in other words, is not a given.

The fight over territory, therefore, is less about a scramble for resources than it is about asserting sovereignty and hegemony in the region. Control over oil and gas reserves happens to be one component of that objective, but is not necessarily central to it.

That suggests that China’s assertiveness in the region is not really, or at least not entirely, about energy development. There are also several other reasons to back up such a hypothesis. Much of the reserves in the region are located closer to the coasts in uncontested territory. Some of the most hotly contested areas, such as the Spratly and Paracel Islands, have little potential for oil and gas development. The Paracels in particular—where China is building up military capabilities—is thought to have little or no oil and gas at all. It is unlikely that China is willing to risk war with its neighbors and the U.S. simply over access to unproven and high-cost energy resources.

The fight over territory, therefore, is less about a scramble for resources than it is about asserting sovereignty and hegemony in the region. Control over oil and gas reserves happens to be one component of that objective, but is not necessarily central to it.

The ruling from The Hague will surely not put this matter to rest. China sees hegemony in the South China Sea as a core national security interest. Some China watchers fear Beijing will react to the court ruling with aggression. “Xi Jingping cannot be humiliated over this,” Bonnie C. Glaser, a senior adviser for Asia at the Center for Strategic and International Studies, told The New York Times. “XI Jingping has lost face here, and it will be difficult for China to do nothing. I expect a very tough reaction from China since it has lost on almost every point.”

Indeed, China dismissed the ruling immediately. “Chinese people will not accept the result and all people around the world who uphold justice will not accept the result,” China’s foreign minister Wang Yi told reporters. “Now the farce is over it is time to get back to the right track.”

But while China sees territorial control over the South China Sea as a core security interest, so too does China’s neighbors. Despite what appears to be a conclusive ruling from The Hague, conflict in the South China Sea is far from over.

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