November 9, 2012 3:59 pm

Gas finds give impetus to China sea claim

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The South China Sea could hold far greater reserves of crude oil and natural gas than previously thought, newly revealed estimates from China’s biggest offshore oil and gas company show, making the area a crucial future energy source for the world’s biggest energy user.

On the sidelines of the 18th Communist party congress in Beijing on Friday, Wang Yilin, head of Cnooc, China’s state-controlled energy group, disclosed the company’s South China Sea resource estimates for the first time, saying the area could hold 17bn tonnes of oil and 498tn cubic feet of natural gas.

Although only a fraction of those resources would be economically feasible to extract, analysts calculate that the levels of reserves could one day double China’s current proven reserves of oil and gas.

In recent months Beijing has clashed with Vietnam and the Philippines over maritime boundaries in the South China Sea. Hanoi issued a formal complaint in June when Cnooc put up for auction several oil and gas blocks that Vietnam believed were in its territory.

China has also clashed with Japan over the Senkaku, or Diaoyu, islands in the East China Sea, a dispute that sparked violent anti-Japanese riots in China and hurt business ties between the two countries.

The tensions over rival territorial claims have raised fears among China’s neighbours and the US that Beijing will become more militarily aggressive as its economy grows. Although disputes over sea territory have focused on sovereignty, there are big economic implications for which countries control which parts of the sea. The South China Sea is a strategic area for Chinese shipping lanes – a third of the world’s shipping traffic passes through it – and is used as a commercial fishing ground.

On Thursday, Hu Jintao, China’s president, urged the next generation of leaders to turn the country into a “maritime power” and protect China’s maritime sovereignty, signalling that the country will build its power on the seas.

Mr Wang said the president’s comments “showed the way” for Cnooc’s offshore development. He acknowledged the South China Sea was a “relatively sensitive area”, and said Cnooc wanted to “lay aside disputes and develop it jointly” with international companies.

The head of the China State Shipbuilding Corporation, one of the world’s largest shipbuilders, also highlighted the commercial importance of China’s sea claims on Friday, and called for the country to build its fleet of surveillance and fishing patrol ships.

“In the area of safeguarding our maritime rights, the capabilities of our equipment are seriously inadequate,” said Hu Wenming, chairman of the shipbuilding group. “Right now the gap between our maritime equipment and that of the surrounding nations is very big,” he said, on the sidelines of the party congress.

Exploration in the deepwater South China Sea has been relatively limited because of the territorial disputes, but Cnooc is investing heavily to build up its ability to develop oil and gas in the challenging waters. It commissioned its first domestically built deepwater drilling rig, the Cnooc 981 CK, this year.

Mr Wang also announced Cnooc had made a “big” gas discovery in the Yinggehai basin, which lies off the west coast of Hainan island.

“It’s a basin that’s right on the border between Vietnam and China. If they’re making big gas discoveries there, it’s going to make things interesting [politically],” said Neil Beveridge, oil analyst at Bernstein.

Cnooc’s figures for South China Sea reserves are higher than earlier forecasts from the US Geological Survey, and within the range of previous estimates from China’s Ministry of Land and Resources. Energy consultancy Wood Mackenzie says there are currently 2.5bn barrels of oil equivalent of proven oil and gas reserves in the South China Sea, a tiny fraction of the potential unproven resources estimated by Cnooc.

For decades, Chinese naval strategy focused on protecting the country’s coasts and being prepared for a potential conflict over Taiwan, the independently ruled island that Beijing claims as part of its territory.

Since the early 1990s, the navy has been modernising to acquire the capability eventually to enforce other territorial claims as well. But it was only in 2004 that Mr Hu laid out “new historical missions” for the People’s Liberation Army. He listed safeguarding of China’s “expanding national interests” as one objective. Since then, government and military officials have argued more frequently that China’s integration in the global economy means it has more far-reaching national interests, which in turn require bigger military capabilities.

Additional reporting by Kathrin Hill, Gwen Chen and Javier Blas

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