Rather than upset its neighbors, China is going slowly on the offshore projects. Earlier this year, China halted all drilling activities in the East China Sea area close to the median line that Japan claims. It has taken similar steps in the Spratlys, delaying approval of an overall development plan for the Chunxiao field and canceling a major riglease contract with Transocean to drill the first deepwater wildcat in the Spratlys.

In midJune, just two hours before China and Japan announced their statement of joint exploration in the East China Sea, antiJapan protesters demonstrated in front of the Japanese embassy in Beijing. The group of about 15 gathered with banners amid strong police security. The protestors shouted slogans such as “Japan get out of the East China Sea,” and “Japan get out of the Diaoyu Islands.” Both areas are in dispute. The protest’s timing calls into question whether it was government orchestrated in an attempt to calm the situation after China’s apparent compromise.

The breakthrough deal, after three years of negotiation, calls for the two countries to jointly explore oil and gas in a designated area of the East China Sea. But the agreement has failed to determine an offshore demarcation line, and has not settled exploration rights for the rest of the existing gas fields in the area. As part of the agreement, Japanese companies may participate in the development of the Chunxiao gas field in the East China Sea, based on China’s laws on foreign joint exploration of offshore oil and gas fields. The deal has sparked strong criticism by some Chinese who contend that the government has backed away from its earlier stance that joint exploration with Japan in the East China Sea would exclude Chunxiao.

On the surface China has compromised, but industry officials said Chunxiao’s inclusion would save face for Japan, which has insisted that Chunxiao is so close to its median line that development would siphon off hydrocarbon reserves to China. Japan believes that the field’s reservoir might extend into its territorial waters, although China does not recognize the maritime border, maintaining that resource development has been carried out in “uncontested waters.”

Japanese companies, like other foreign ones, can participate in the Chunxiao development as productionsharing contract partners, a practice popular in offshore oil and gas exploration elsewhere. What the Japanese will pick up from Chunxiao is what Shell and Unocal dropped years ago.

In August 2003, CNOOC and Sinopec offered 20 percent stakes in the Chunxiao project to Shell and Unocal, but both withdrew from the deal for commercial reasons. Their action appeared to be justified by the fact that the field has experienced a rapid natural decline just three years after development.

The gas output from six wells in Chunxiao has now fallen to 440,000 cubic meters per day, declining from its peak of 520,000 cubic meters per day in May of last year. CNOOC and Sinopec, each with 50 percent in the development, attributed the drop to geological structure issues. In the meantime, the government has rejected a plan to further develop Chunxiao which consists of four fields: Tianwaitian, Canxue, Duanqiao, and Chunxiao to avoid irritating Japan. Currently, only Tianwaitian is producing gas.

The development plan calls for construction of a new platform at the Chunxiao prospect and three subsea wells at the Duanqiao prospect. The scheme involves drilling eight wells at Chunxiao.

Similarly, China is holding back independent exploration activities in the Spratlys, pursuing joint efforts with other claimants to avoid further diplomatic crises that flare up periodically, and on occasion have led to naval clashes.

China has advocated joint exploration of the Spratlys since the 1980s, when leader Deng Xiaoping called for “setting aside disputes” and joint exploration and development. China and Vietnam claim sovereignty over all the islands in the chain, with the Philippines, Malaysia, and Brunei claiming it over some. The Spratlys have long been a regional flashpoint, and some claimants occupy several of the islands and station troops there.

Although no proven reserves have been established, there is speculation the area could contain as much as 70 billion barrels of oil equivalent some 200 to 1,000 meters below the sea’s surface. Thus, all of the countries take their claims seriously. China and the former South Vietnam fought a naval battle over the islands in 1974 after the Saigon government allowed Western oil companies to explore in the area. In 1988, they clashed again over possession of Johnson Reef in the Spratlys. The two countries normalized relations in 1991, but remain at loggerheads over the Spratlys.

But they are now taking a less confrontational stance, especially since the two have become hostage to the international system. Their growing dependence on the international economy dictates that building good relationships top their foreign policy agendas. Both countries signed the Declaration on the Code of Conduct of Parties in the South China Sea in November 2002. In March 2005, CNOOC, PetroVietnam, and the Philippine National Oil Company signed a landmark agreement to conduct joint seismic surveys in the disputed waters for three years it expired this July but will soon be extended.

Underpinning these positive moves are hints that neither is ready to back away from its sovereignty claims over the islands. Last year, Vietnam decided to hold elections to choose parliament members representing 24 of the total 48 islands. In response, China established the countylevel city of Sansha, which is part of Hainan Province and encompasses all the islands on the waters spanning 2.6 million square kilometers. This sparked a Vietnamese protest in front of the Chinese embassy in Hanoi.

Chinese demonstrators in front of the Japanese Embassy in Beijing on June 18, in protest of a joint gas exploration deal between Tokyo and Beijing in the East China Sea. They also protested a collision of Taiwanese and Japanese ships near East China Sea islands claimed by China, Japan and Taiwan.

In the Zhongjiannan basin in the South China Sea, whose sovereignty is disputed with Vietnam, PetroChina has abandoned a plan to drill the first wildcat, even though it signed a lease deal last year with Transocean to do so.

The company is now working on the budget for conducting 3D seismic surveys in nondistributed areas of the seas for this year, while processing data collected from a 2D survey done last year in the Zhongjian South Trough.

While the surveys may set the stage for further exploitation, it’s clear that the offshore wrangling between China and its neighbors won’t end any time soon.