May 23, 2018 / 7:07 AM / 3 months ago

Drilling down: Risky hunt for oil in Vietnam's South China Sea blocks

HANOI/HONG KONG (Reuters) - Some oil blocks off Vietnam’s sprawling coastline fall within an area of the South China Sea demarcated by China’s “nine-dash line”, the basis for Beijing’s controversial claims to most of the resource-rich waterway.

Last week, sources said Rosneft Vietnam BV, a unit of Russian state oil firm Rosneft, was concerned its recent drilling in one such block could upset Beijing.

That prompted Vietnam’s foreign ministry to assert the blocks are “entirely under Vietnamese sovereignty and jurisdiction”, and a warning from Beijing to respect its sovereign rights.

In March, Vietnam halted an oil drilling project in the nearby “Red Emperor” block following pressure from China.

The Red Emperor incident was a “blow to Vietnam’s upstream sector and the government’s bid to develop the offshore oil and gas resources that it is legally entitled to under the UN Convention on the Law of the Sea,” according to analysis by risk analysts Verisk Maplecroft.

The area is important for Vietnam’s economic development. State-run Vietnam Oil & Gas Group, or PetroVietnam, made up 20 percent of Vietnam’s GDP and 30 percent of Hanoi’s total budget revenue from 1986-2009.

Vietnam has between 3.3 billion and 4.4 billion tonnes of crude oil and gas reserves in the waters, according to PetroVietnam, which currently produces 22-33 million tonnes of oil equivalent a year from the blocks.

According to consultancy firm Wood Mackenzie, if China’s nine dashes were connected as one continuous line, it would bisect or incorporate 67 of Vietnam’s oil blocks.

Four of those blocks are currently producing, with others at varying stages of exploration or development, according to Wood Mackenzie.

OFFSHORE TENSIONS

China’s claims in the South China Sea overlap the exclusive economic zones of Vietnam, the Philippines, Malaysia and Brunei.

Despite fierce diplomatic objections by Beijing, the Philippines sought a ruling in 2016 against China in an arbitration case brought under the U.N.’s Convention of the Law of Sea.

The five international judges handed Manila a sweeping victory which dismissed China’s claims and removed any legal basis for Beijing to create a network of linked territorial and economic seas under its control, legal experts said.

Chinese officials, who refused to participate in the case, dismissed it as a farce and have continued to insist on jurisdiction over most of the waterway - although they have not yet defined the line as a continuous one.

China and other claimants have previously discussed joint development of energy projects in disputed waters, but have been scuppered by issues over sovereignty.

Last month, the Philippines said it was looking to seal a pact with China within a few months to jointly explore for oil and gas in waters claimed by both countries.

But while China has been ambiguous about precisely what it claims, the waters around Vietnam’s southeastern oil fields have long been a flash-point.

Beijing has often attempted to thwart activity through backroom diplomatic threats and, at times, pressure at sea.

Those backroom threats were particularly acute in 2007 and 2008, after which U.S. firm ExxonMobil Corp refused to bow to pressure but British oil giant BP and others withdrew from some blocks.

China’s reaction to Rosneft’s drilling will be “quite a test of just how far Beijing is willing to go,” said Ian Storey, a South China Sea expert at Singapore’s ISEAS Yusof Ishak Institute.

“This is a means for China to try to comprehensively trash, in a practical way, the legal ruling against its claims by the arbitral tribunal back in 2016.”

At the same time, Beijing and Moscow had an understanding that they don’t challenge each others’ core interests including the South China Sea, he said.

INTERNATIONALIZATION

Both Vietnamese and foreign diplomats have described Hanoi’s efforts to lure foreign firms as part of a strategy to counter Chinese pressure by “internationalizing” the South China Sea dispute.

In May and June 2011, Hanoi lodged formal protests over the actions of Chinese civilian vessels interfering with seismic survey ships, at one point cutting sonar cables towed from a Norwegian-registered ship exploring on contract to PetroVietnam.

Tensions spiked in May, 2014 as rival coastguard and fishing fleets clashed at sea in ramming and blocking actions after the Chinese National Offshore Oil Corporation (CNOOC) moved a large deepwater rig to drill test wells in exploration blocks off the Vietnamese central coast.

It later withdrew amid large scale protests and riots in Vietnam.

Vietnam’s crude oil production that year was 15.53 million tonnes, according to its General Statistics Office. By 2017, its crude oil output had fallen to 13.567 million tonnes - a decrease of 12.6 percent.

In April, PetroVietnam said maritime tensions with China will hurt its offshore exploration and production activities in 2018, making the Rosneft drilling particularly important.

It was partnership with Russia under which Vietnam began exploiting its oil reserves.

With both Vietnam’s gold star and Moscow’s hammer and sickle in its logo, the Vietnam-Soviet Petroleum Joint Venture, “Vietsovpetro”, was created in 1981.

Vietsovpetro began to explore Vietnam’s continental shelf and discovered the country’s first oil field, Bach Ho, in 1984.

Unlike other nations, Russian oil concerns in the region appear to have been largely left alone, said Moscow-based Southeast Asia analyst Anton Tsvetov of the independent Centre for Strategic Research think-tank.

It was unlikely that, beyond official rhetoric, China would directly pressure either Rosneft or the Russian government over the latest Vietnamese drilling, Tsvetov said.

“There is a strong relationship between China and Russia right now, and energy issues are high on the agenda, so I think it would be highly unusual for the Chinese to cause a problem for such a large Russian oil company.”

Reporting by James Pearson in Hanoi and Greg Torode in Hong Kong. Additional reporting by Khanh Vu in Hanoi. Editing by Lincoln Feast.

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