New South China Sea Update is Must Reading for Geo-Political Pundits

New South China Sea Update is Must Reading for Geo-Political Pundits

By Tim Daiss

The US Energy Information Agency’s (EIA) updated South China Sea (SCS) analysis was released on February 7 and it’s required reading for policy makers, energy executives, oil and gas players, geo-political pundits, journalists and the general public wanting to understand what all the fuss is about lately in the South China Sea.

It is rare that a somewhat mundane EIA report can live up to such high expectations – but this time it does.

Setting the stage for the geo-political drama in the SCS the report gives vital intelligence and background information.

For starters the SCS’s geographical location dictates that it is one of the most important bodies of water in the world. Forget the Persian Gulf, because China calls the SCS the “Second Persian Gulf.”

The EIA reports begins: “Stretching from Singapore and the Strait of Malacca in the southwest to the Strait of Taiwan in the northeast, the South China Sea is one of the most important trade routes in the world. The sea is rich in resources and holds significant strategic and political importance.”

More than half of the world’s annual merchant fleet tonnage passes through the Straits of Malacca, Sunda, and Lombok, with the majority continuing on to the SCS. Almost a third of global crude oil and over half of global LNG trade passes through the SCS.

However, therein lies the irony. For an area that has seen so much controversy recently, the sea boasts no great islands. The area includes several hundred small islands, rocks and reefs, with the majority located in the disputed Paracel and Spratley Island chains.

“Many of these islands are partially submerged land masses unsuitable for habitation and are little more than shipping hazards,” the EIA states.

For example, the Spratley Islands that saw a tense standoff last year between the Philippines and China, with bickering continuing between the two up to the present, encompasses a total land area of less than three square miles.

Of course, it’s not the rocks that really interest rival complaints but the potential hydrocarbons in the area that has them at each other’s throats.

Not that the hydrocarbon deposits haven’t always been there but they simply weren’t needed. But with the exponential economic growth of China and now ASEAN (Association of Southeast Asian Nations), which together comprises more than 1.8 billion people, Asia needs all the oil and gas it can get its hands on.

Growing Asian consumption

The EIA projects that total liquid consumption in Asian countries outside the Organization for Economic Cooperation and Development (OCED), which excludes South Korea and Japan, will rise from around 20 percent of world wide consumption in 2008 to over 30 percent by 2035. If one factors in Japan, the worlds’ number three oil importer and South Korea, the world’s fifth largest crude oil importer, the idea of the substantial energy consumption in the Asia Pacific region emerges.

Non-OCED Asia natural gas consumption is projected to grow annually from ten percent of overall world gas consumption in 2008 to 19 percent by 2035, and China will account for 43 percent of that growth. Asia is oil and gas hungry while China has an unquenchable thirst for oil and gas. Likewise, Japan is the world’s largest LNG importer and South Korea the second largest LNG importer in the world.

And that’s exactly what lies underneath the SCS – gas. EIA estimates that the SCS contains approximately 11 billion barrels of oil and 190 trillion cubic feet (Tcf) of natural gas in proved and probable reserves. Yet, the report also states that it is difficult to determine the amount of oil and natural gas in the SCS because of under exploration and territorial disputes.

However, Chinese estimates are considerably higher. Last November, Chinese oil-major CNOOC estimated that the SCS holds around 125 million barrels of oil and around 500 Tcf of natural gas in undiscovered resources. This is one reason why CNOOC’s new $I billion deep-sea drilling rig HYSY 981began drilling in the SCS last year.

Additionally, oil and gas production in most Asian countries is either flat or declining, so it ups the ante for control of the SCS even more.

Juxtaposing EIA intelligence and background data with daily headlines, there is a need for better understanding of news coming out of the region, particularly China.

Take February 8 as an example. News broke that the People’s Liberation Army (PLA) Navy concluded war games and drills in waters between Taiwan and the Philippines (also rival SCS claimants). What were they training for? According to Xinhua news agency, three advanced Chinese warships (a missile destroyer and two missile frigates with helicopters) carried out drills related to expelling ships that could infringe on “China’s territorial waters.”

Untapped resources

Yet, there are other challenges than geo-political. Regardless of who ends up with the spoils, extracting new hydrocarbon reserves underneath the SCS is not for the faint hearted.

“[Gas] Producers would have to construct expensive subsea pipelines to carry the gas to processing facilities. Submarine valleys and strong currents present formidable geologic problems to effective deepwater gas infrastructure. The region is also prone to typhoons and tropical storms, precluding cheaper rigid drilling and production platforms,” the EIA states.

With bi-lateral agreements between rival claimants not on the table, and these additional challenges, it seems that these resources may go untapped for the foreseeable future. But don’t bet on it. China, and the entire Asia-Pacific region needs the resources too much for them to sit idle for much longer.

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