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In Disputes Over Asian Seas, Winner May Take Zilch

Three senior US officials are visiting America’s two East Asian allies, South Korea and Japan, in a bid to defuse tensions over territorial claims. Strains of nationalism and saber-rattling with modern weaponry like drones could derail Asia’s quest for prosperity and global leadership and threaten the dream of an Asian Century, explains Robert A. Manning, senior fellow with the Brent Scowcroft Center for International Security at the Atlantic Council. Potential undersea energy resources, perhaps exaggerated by some, add to the animosities, as well as technological advances allowing deep and horizontal drilling. The energy reserves may be paltry for the long term when compared with potential riches associated with regional stability or joint investments in alternative technologies. The quarrels and security risks discourage foreign investors from teaming up with small emerging economies. China may be abandoning the policy of Deng Xiaoping who once proposed “put aside differences and jointly develop resources.” Manning concludes that compromising on historical memory and national pride is the challenge awaiting Asia’s great economies. – YaleGlobal

In Disputes Over Asian Seas, Winner May Take Zilch

Territorial disputes in the South and East China seas could derail the Asian Century
Robert A. Manning
YaleGlobal, 14 January 2013
Boiling water: Japanese maritime patrol P3C fly over Senkaku/Diaoyu islands (top), as the Chinese deploy their deep sea drilling platform in South China Sea

WASHINGTON: It may be Asia’s 21st century equivalent of the assassination of Austria’s  Archduke Ferdinand that sparked World War I. Growing tensions over territorial disputes in the East and South China Seas threaten to disrupt the oft-heralded Asian Century. Whatever the outcome, many see more than just competing nationalisms, the scars of national memory and the rise of an increasingly assertive China behind clashing interests.

To many, this is about oil: a widely-shared perception that beneath these disputed waters lays a treasure trove of oil and gas able to satisfy energy needs of dynamic Asian economies.

Unfortunately, there is no basis for this conventional wisdom. The reality is that the winner of East or South China Sea disputes is unlikely to gain enough energy to make any significant difference to any of the claimants’ growing energy needs. This is particularly true in regard to China. And in any case, exploiting what resources exist will require legal and political certainty and stability.

Tensions over territorial issues have ebbed and flowed in recent years. There have been nearly two dozen military clashes in the South China Sea since 1974 when China seized the Paracel Islands from Vietnam, killing 18 Vietnamese troops in the process. Most of the action occurred in the 1990s, followed by relative calm until fairly recently. Although China has signed and ratified the Law of the Sea Treaty, or LOS, its recent assertiveness is based on claims contradicting it – “nine dotted lines,” encompassing more than 80 percent of the South China Sea, well beyond the 200-mile economic exclusion zone recognized by the treaty.

One new factor that may be raising the stakes is continued improvements in deep-sea drilling technology. Until the 1990s there was little drilling for offshore oil or gas deposits deeper than 304 meters. Over the past two decades, increasing amounts of oil worldwide have come from what is known as “ultra-deepwater” – depths of 1500 meters or more. Until recently, the technology was limited to mainly major Western energy multinational firms. Then last May the Chinese National Offshore Oil Company, CNOOC, announced it had developed a deep-sea oil platform at a cost of roughly $1 billion capable of extracting oil at a depth of 12,000 meters.

One new factor that may be raising the stakes is improvements in deep-sea drilling technology.

To date, there has been no authoritative survey of oil and gas potential in either the East or South China Seas. Chinese estimates of oil and gas reserves in both disputed areas appear exaggerated compared with those of major multinational energy firms and other analysts. China estimates East China Sea reserves at 160 billion barrels of oil, nearly double that of US Energy Information Agency estimates.

As for South China Sea reserves – likely 70 percent gas, according to most experts – Chinese claims of oil appear wildly inflated. CNOOC estimates some 213 billion barrels of oil – almost the size of Saudi Arabia’s proven reserves. This is nearly 12 times larger than that estimated by the US Geological Service, and energy consultancy Wood-Mackenzie estimates a total of 2.5 billion barrels equivalent of proven oil and gas in the disputed South China Sea islets and shoals –nearly 100 times less than China claims!    

With the possible exception of China and Chinese firms that have entered in joint ventures with foreign firms, East Asian states seeking to exploit the resources of claimed islets and atolls would need to partner with foreign investors. Indeed, several ASEAN claimants in the South China Sea have signed oil-exploration contracts with foreign firms. However, the political risk and legal uncertainty of the disputed territories make it problematic for large-scale investment.

This logic may have been behind the policy China pursued until recently, as suggested by the late Chinese leader Deng Xiaoping who proposed “put aside differences and jointly develop resources.” Given the opaque Chinese decision-making process, it’s tempting to speculate whether the combination of maritime military ambitions, mercantilist resources policies, inflated hopes of energy and new oil technology capabilities may account for the apparent abandoning of Deng’s policies.

As for South China Sea reserves, most of which are likely gas, Chinese claims of oil appear wildly inflated.

Ironically, Deng may have had it right. It is difficult to see how to resolve the disputes: How do countries compromise on national honor and historic national memory? And it is equally difficult to imagine how to create legal and political certainty to reduce risk enough for global energy companies to commit what would be multibillion dollar investments. Most exploration contracts entered into by energy firms have been by small companies looking to get in on the ground floor. So joint development “without prejudice“ on claims would seem to make a lot of sense.

There are ample precedents of joint development of resources. There is an agreement among claimants in the Arctic. In East Asia, Thailand and Malaysia have joint oil-and-gas development accord and there is a similar treaty between Australia and East Timor.

And not least, there is a joint-development arrangement reached in 2008 to exploit oil and gas between China and Japan in the area around the disputed uninhabited Diaoyu/Senkaku islets.  Beijing and Tokyo agreed to explore jointly four gas fields in the East China Sea and halt development in other contested parts of the regions. Both sides agreed to conduct joint surveys, with equal investment in an area north of the Chunxiao/Shirakaba gas field and south of the Longjing/Asunaro gas field. However, China began to develop the Tianwaitian/Kashi gas field unilaterally, launching a protest from Japan in January 2009. That contentious action, followed by a 2010 clash between a Chinese fishing boat and the Japanese Coast Guard put the agreement on hold.

East Asia is rife with speculation about how the new governments that have assumed power in Tokyo, Seoul and Beijing will impact the territorial disputes. The sheer increase in maritime traffic in the to-and-fro of surveillance ships in the disputed waters and air patrol suggests 2013 could see at least a few naval skirmishes. In an optimistic sign, Japanese Prime Minister Shinzo Abe, an ardent nationalist, quickly dispatched a senior envoy to Seoul with which Japan has been at loggerheads over territorial dispute to reassure the new government in Seoul led by Park Geun-hye and to mend fences.

In 2008 China and Japan initiated a plan to jointly exploit oil and gas around the Diaoyu/Senkaku islets.

Sino-Japanese relations have been particularly tense, with China sending daily maritime agency ships around the Senkakus and some Japanese threatening to send Air Defense Forces to fire warning shots. In his previous incarnation as prime minister in 2006, Abe made a special effort to ease Chinese concerns upon taking office. With a shaky Japanese economy as his priority and Upper House elections in July, many expect Abe to minimize confrontation – at least in the short run. But in the face of public outrage over China’s provocative tactics Abe and an avidly nationalist cabinet might stir things up.

The United States has called on both sides to reduce tensions and a team of senior security and diplomatic officials left today to consult Japanese and South Korean allies.

At the end of the day, the web of overlapping territorial claims in Asia is unlikely to produce an energy bonanza for anyone. It’s a case of “winner take little.” Unless the region can find a way to resolve or at least manage the underlying nationalist passions that drive what are otherwise minor disputes over largely uninhabited islets and shoals, the oft-heralded Asian Century will be shortlived.   

 

Robert A. Manning served as a senior counselor (2001-2004) and member of the US Department of State Policy Planning Staff from 2004-2008. He is currently a senior fellow at the Brent Scowcroft Center for International Security at the Atlantic Council.

Rights: Copyright © 2013 Yale Center for the Study of Globalization

Comments on this Article

20 January 2013
Thank you for the interesting read.
Just letting you know of a small error. In the article the Japanese PM is named as Shintaro Abe.
It's Shinzo Abe.... Shintaro was his father (a former Japanese FM).
Cheers.
YALEGLOBAL: Thank you, Dave - and YaleGlobal regrets the error.
-Dave , Australia
19 January 2013
"...China has primarily chosen a politically-driven and geostrategic (rather than economic) approach to energy security policy....One upshot of this political approach to enegy policy is that the role of market forces in determining supply, pricing, and distribution of energy resources throughout its economy is limited."
But "Some analysts now argue that China's energy security objectives are better achieved through fuller particiipation in global commodity markets, while others suggest that Beijing's oil diplomacy is driving it closer toward pariah states, to China's ultimate detriment (John Lee, China's Geostrategic Search for Oil, The Washington Quarterly, Summer 2012)."
http://www.hudson.org/files/publications/twq12SummerLee.pdg
The Sino-Japanese joint-development agreement of 2008 does not include the area around the Senkaku/Diaoyu Islands.
China had been 'sleeping on the promise' of the Chunxiao/Shirakaba and the Longjing/Asunara gas fields even before the 2010 clash.
-Yoshimichi Moriyama , Unnan City, Japan
16 January 2013
I wrote a similar article for Yale Global Online about this issue last month. Having lived in China for a long time, the government is very stalwart when it comes to 'sovereignty' issues (many times to mask underlying domestic issues and problems), yet Deng's directive, is similar to what I suggested: Unitization. See also my comment about the 'rule of capture'. Migration as an impact factor on both oil and gas wells produces a sense of urgency for all players, esp. the ones not as technically developed in oil exploration and production (E&P) activities such as Vietnam and the Philippines.
My article highlights this at: http://yaleglobal.yale.edu/content/east-asia-stop-squabbling-start-drilling
However, I would agree with Mr. Manning that perhaps there is not commercially valued oil or gas deposits in these areas. In that case his comment about "Winner take little" may be correct. Wood-Mackenzie has a vested interest in promoting as many probably reserves as possible in the area, as does CNOOC, but there can be WIDE fluctuations between proven, possible, and probable reserves.
Of course there is always the theoretical legal conceptual of 'condominium' whereby two (or more) sovereign states share administrative rights over a territory. I am surprised Mr. Manning doesn't mention it. Or the Svalbard Treaty of 1920, which ensures Norwegian sovereignty but also the open territorial access to many other countries. It is also a demilitarized zone, and nationals of any signatory treaty country (including India!) can visit without a visa. Of course real solutions to the S. China Sea and E. China China Sea issues will require upping the gamesmanship from all players.
Dr. Will Hickey
Chair, Global Management
Solbridge Int. School of Business
Daejeon, ROK
-Will Hickey , Daejeon, ROK