The most recent, and serious, dispute in the South China Sea involves Vietnam’s energy vessels. In late May these vessels conducted exploratory maneuvers for potentially high yielding hydro-carbon deposits in the Spartly islands. Parts or all of the Spartly Islands, however, are claimed by the Philippines, Malaysia, Brunei, Taiwan as well as China. Although tensions are raised when these claimant countries patrol the contested territory with naval vessels, the presence of energy exploration craft significantly ups the ante; a warship will eventual leave the area after rattling it’s saber, however, energy vessels indicate a country’s resolve to permanently establish territorial rights. In that sense, these energy ships are much more serious, and in China’s case a direct provocation.
On two separate occasions Chinese civilian fishing boats cut the cables of the Vietnamese exploratory craft. Although China Daily, Xinhua and the Global Times all say it was an accident, that Chinese fishing boats were unwittingly tangled in the cables and had to cut themselves free, Vietnam perceived the incident as coordinated interference. Vietnam has subsequently declared warships will escort future energy boat movements, and conducted live-fire drills as a show of force.
http://www.google.com/hostednews/afp/article/ALeqM5jC2NlCcBK5_w-_O43a60NLOV8EWg?docId=CNG.4533bdd2ca0ac7898dbba6d650dc2420.4e1
The stakes are high as China decides how it will respond.
To put things in perspective, the Spartly Islands are 650 km from the eastern coast of Vietnam, 1,000 km to the south of China’s Hainan, 160 km to the west of Malaysia, and 100 km to the west of the Philippines. Brunei and Taiwan are also stakeholders.
Contested territory in the South China Sea
Significant deposits of hydro-Carbons in the South China Sea, especially among the Spartly Islands, has led to high tensions.
The question on everyone’s mind is, who owns what and how can these disputes be resolved?
China, which claims 80% of the South China Sea, would prefer bilateral agreements with neighboring countries. The Philippines, for instance, has been approached by China to jointly develop oil and natural gas fields. This would be a win-win deal for China, which would theoretically split the resources with only one country. If this plan were carried out to the fullest, engaging every country on a 50-50 basis, the net result would be China’s receiving the lion’s share of the South China Sea resources.
China's claims to the South china are based on ancient maps, some of which supposedly date back to 200BC. Below, a Song Dynasty map of China's territory at land and sea.
On a personal note, I tend to disagree with countries that cite historic precedence for territorial claims. Taken to the logical extremes, Vietnam should still be Chinese territory (it was for 1,000 years)
The other approach, preferred by the United States, involves a multi-lateral resolution. In a sense the end game might require multiple countries splitting the same resources, in which case neither China nor any country would acquire a majority of resources. It could also take the form of a 19th century European diplomacy solution, in which the South China Sea is carved into territorial slices. Brandy and cigars anyone?
Grounding the security dilemma by openly conveying national interests is essential to any permanent solution; the picture, however, is not complete without including all the stakeholders. This includes, among other things, non-state actors.
Royal Dutch Shell: A Regional Game Changer
On May 21st, 2011, Royal Dutch Shell (RDS) announced plans to develop a Floating Liquefied Natural Gas (FLNG) platform, to be constructed by Samsung Heavy Industries in Korea. The project, when completed in 2013, will deploy at the Prelude natural gas fields in Australian waters. Three weeks after the initial announcement, RDS went public with plans to build a second FLNG platform at the Sunrise fields in the Timor Sea. This second FLNG project, however, has come under fire by the Timor Leste government; how the company responds will be a sound indicator of how RDS deals with small nations as it seeks to expand the program in the Asia Pacific region. The expansion of FLNG programs needs to be taken seriously.
So, what is FLNG and why does it matter? According to the RDS press release, the FLNG platform is six times larger than the largest aircraft carrier, and once the platform is stationed at the Prelude site it will produce 110,000 barrels equivalent of natural gas per day for 25 years.
http://www.shell.com/home/content/investor/news_and_library/2011_media_releases/fid_flng_20052011.html
The second FLNG project at the Sunrise field will produce an additional 100k barrels equivalent per day.
Royal Dutch Shell's Floating Liquefied Natural Gas super-structure is six times larger than the largest aircraft carrier
What’s more, according to the General Manager of FLNG Neil Gilmour, “there are opportunities for upstream ventures… in places like the South China Sea when agreements are reached in terms of who can access what”.
http://www.channelnewsasia.com/stories/singaporebusinessnews/view/1134934/1/.html
This news is shocking because the introduction of FLNG platforms, capable of reaching previously inaccessible deepwater deposits of hydro-carbons, adds a new dimension to the South China Sea security dilemma. Engineered to withstand category 5 typhoons, FLNG technology is a game changer for Asian energy supplies.
The liquefied natural gas extracted by a single FLNG, for instance, would provide 90% of Hong Kong’s electricity for a year. FLNG could obviously be deployed towards the Chinese market, as demand for natural gas is expected to triple by 2020, from the current 9 million tons to 30 million.
http://www.channelnewsasia.com/stories/singaporebusinessnews/view/1134934/1/.html
At the same time, FLNG programs are unobtainable for the majority of countries in the South China Sea, given restraints on capital, technical know-how, or capacity to undertake the project. Royal Dutch Shell is essentially the only regional stakeholder with the means to implement a sweeping program of deep-water drilling. As a stakeholder with tremendous economic clout in the South China Sea, however, RDS is also the most secretive when it comes to announcing their preferences for the regional stability.
By the numbers, only a small portion of South China Sea claimant countries are capable of deep-water natural gas extraction platforms.
Capital:
The estimated cost of constructing a Floating Liquefied Natural Gas platform ranges between 10 and 13 billion USD. For Vietnam, the purchase of such a platform would cost 10% of the economy.
2009 Country GDP compared to RDS revenue in US Dollars:
China: 5 trillion Royal Dutch Shell, 2009
Taiwan: 379 billion Revenue: 458
Malaysia: 191.5 billion Assets: 282 billion
Philippines: 161 billion
Vietnam: 92 billion Brunei: 10.5 billion
*Source: CIA World Factbook
Royal Dutch Shell was ranked the #1 largest company in the world, according to CNN, earning 15 billion dollars more than the runner up, Exxon Mobil.
http://money.cnn.com/magazines/fortune/global500/2009/snapshots/6388.html
As the largest company in the world, RDS is in a unique position to invest 10 billion dollars per FLNG project. The only other countries with the capital to invest in deep-water natural gas extraction would be China and Taiwan.
Technical Know-How:
600 RDS Engineers worked on the design phase of the project. Barring corporate espionage or sophisticated cyber attacks, it would be particularly difficult for other regional players to design anything similar. (If hackers could break into Lockheed Martin, a military contracting company, then hackers can get anywhere) China has struggled for years to build an aircraft carrier, so to expect the country to engineer a floating super-structure overnight is too far fetched.
Source: RDS website, “Prelude FLNG in Numbers”
Capacity to undertake FLNG:
According to Claire Wilkinson, a spokeswoman for the FLNG project, there are only four companies in the region RDS considered capable of constructing the project. Although she was reluctant to identify the other three, there was at least one Japanese and another two Korean firms. Deep-water ports, capable of accommodating the 600,000 ton structure, are limited and proved to be a minimal qualification. Samsung Heavy Industries’ proven track record won the day.
“…when agreements are reached in terms of who can access what…”
So, what is the RDS position when it comes to resolving the South China Sea disputes? Under what circumstances would Shell consider these disputes resolved? Would the company accept a “Chinese solution”, a multi-lateral solution, or both?
As a significant player in the region, RDS opinions and company policy would greatly shape the course of resolving territorial disputes. RDS has worked with China for over 100 years, and this relationship could play out in China’s favor should the Middle Kingdom argue “agreements have been reached” on a bilateral basis, in lieu of a multi-lateral approach. Any comprehensive agreement in the South China Sea will produce unsatisfied parties, and potential holdouts to such a resolution will complicate “who can access what”. A partial agreement may green light RDS entry to the South China Sea, which in turn would exacerbate tensions as potential holdout countries decide how far they will go to protect national interests.
Money Matters, and so do the events on the ground:
In April RDS stock prices surged with the announcement that it will access Alaskan fields. The dramatic spike plummeted when news broke that RDS will be sued over a 2008 spill in Nigeria. Both FLNG project announcements caused modest gains, and Neil Gilmour’s vague intentions of entering the South China Sea on June 13 could be a lurking variable for the hike. There would be ramifications for RDS stock once any announcement to enter the sea is made official.
For the moment, RDS is holding it’s cards tightly. Claire Wilkinson, a spokeswoman for the FLNG project with direct communication to top company representatives from the Hague, provided few insights. In an email exchange, she said, “we of course have an internal view on such things, but it’s not something we’d comment on publicly”. The announcement would indeed have ramifications for RDS stock. Entering the South China Sea would be huge news for investors, which could produce an unprecedented surge in stocks as RDS magnifies it’s access to the Asian energy market. A premature stance in the region, however, could also have a significant effect if the security situation deteriorates. The view of the world’s largest company regarding one the most dangerous hotspots in the world, however, is an important element to the equation as countries work towards resolution.
This is an ongoing story, and I hope to pursue it as more information unfolds following the CSIS conference, including China’s take on FLNG.
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