Corporate Debt Review

S. China Sea Offshore Crisis Heats Up

A Little Trouble Near Big China

Three events over the past 72 hours indicate that the crisis over offshore drilling control in the South China Sea is taking a turn for the worse.

First, Chinese fighter jets intercepted a U.S. espionage plane in what Washington claims are international waters. Both nations have been increasing their naval presences in the waters with further confrontations almost guaranteed.

Second, yesterday morning the Philippine Department of Energy announced that it would begin drilling at Reed Bank, a 3,400 square-mile raised mount west of Palawan Island. Manila had suspended development at the location in December of 2014 in advance of a World Arbitration Court hearing on the status of the area. China had also claimed the waters (along with about 90% of the entire adjoining waters).

In July of last year, The Hague court ruled that Reed Bank falls within a Philippine ocean exclusive economic zone. China rejected the outcome and in May warned the Philippines against reopening the area for exploration. In a clear escalation, Philippine President Rodrigo Duterte is using the first anniversary of the court decision to lay down a gauntlet.

Pho-gettaboutit

The third event, however, is both the most serious and likely to have a more destabilizing effect. It is also the first that has explicitly included a declaration of military consequences.

In a move I anticipated months ago, China has put pressure on Vietnam to cease work in contested offshore waters. Beijing has threatened to take military action against the Vietnamese bases in the Spratly lslands unless drilling was suspended at the huge natural gas offshore field Hanoi calls Block 136-03.

The operations had been initiated earlier this month by Talisman-Vietnam, a subsidiary of Spanish Repsol, some 400 kilometers off Vietnam’s coast. According to media accounts, Hanoi has now ordered Repsol to leave the zone.

For its part, China claims the field under the name Wan-an Bi 21. Almost three years ago, an otherwise unknown Hong-Kong company named Brightoil bought the Chinese rights. Later, it was learned that two members of the Chinese Central Committee are partners in that firm.

On the sidelines is Indonesia. Jakarta has renamed its northern offshore zone and is taking a read of the current conflicts before deciding whether to proceed. The region lies juxtaposed to some of the most important trading straits and waters in the world.

The action comes as U.S. policy over the South China Sea has been subject to cross-purposes between what remains an undermanned Department of State (DOS) and a White House hesitant to declare any ongoing resistance to the Chinese.

That’s enough for Beijing to increase the pressure.

Build an Island & Make Vietnam Pay For It

This whole situation has what is more than a passing interest to me personally. I had initially been designated as one of the DOS advisors to be sent to Vietnam. My job was to advise on the regulatory, legislative, and market policy implications. The approach had been to support Vietnam in the offshore controversy against China.

Now that entire effort is paralyzed.

The impasse involving China on the one hand and the Philippines, Indonesia, Malaysia, Brunei, Taiwan, and Vietnam on the other has been simmering for some time. One of the primary points of contention is territorial.

China has been completing a network of manmade islands at breakneck speed certain to serve as bases for extended military operations. Beijing says it wants to “maintain stability.” However, it is becoming clear that, with claims extending for more than 1,600 miles beyond its shore line, this stability can only be prosecuted under hegemony defended by the Chinese military.

No international court, UN action, or multinational resolution supports Beijing in what most regard (at least privately) as a brazen power grab. In the past, the threat from China has resulted in the region turning to Washington for support.

But the American response to the push has stagnated. There has been no guidance from the new Administration. President Trump is fixated on North Korean nuclear ambitions and has effectively left the other major regional crisis in limbo. Meanwhile, the DOS is now headed up by a former oil major exec who had his own problems with Hanoi.

This is not a matter that can be simply shifted to the Pentagon for attention, as Trump has been prone to do with other international problems. A concerted national policy posture is required upon which to base any threat of military action.

An approach had been under construction for two years – one combining exclusive national zones and blue water areas subject to joint development. Those deep-water opportunities would further be enhanced by access to a network of international finance-both sovereign and private sector sponsored-including government guarantees.

But to move into a negotiated settlement there needs to be an articulated American posture in the basin, and a declared position, all subject to a concerted U.S. presence.

But to date, the White House has been reluctant to even talk about it.

In the meantime, Beijing is being given carte blanche to set its own aggressive stance.

About the Author

KentMoors

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment.

He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio-and-television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network.

A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.