In January of 2011 Royal Dutch Shell released a grim outlook of the world energy situation. Codenamed the “scramble” scenario, Shell predicts that starting around 2017 the pressures related to surging Asian energy demand will boil over, and nations will take unilateral action to secure resource-rich areas. Among other places would be the vast natural gas fields in the Spratly islands.
The RDS document, “Signals and Signposts”, takes a look at the South China Sea, and maintains that SCS resources are of greater concern to smaller countries than to China. Despite China’s broad claims to the region, it has yet to establish a tangible and permanent foothold. (Source: FP Niel Goldberg,
http://www.foreignpolicy.com/articles/2011/07/11/the_south_china_seas_georgia_scenario) China’s motivation has everything to do with the American navel presence in the region. Unlike ASEAN countries, China views the American 7
th fleet as a hostile force capable of destroying 90% of the Middle Kingdom’s energy imports (according to an analyst with CSIS the US Navy already has the capability to do so by chocking the straights of Malacca).
US 7th Fleet: between 60 and 70 ships, 200-300 aircraft and upwards of 40k personnel.
Straight of Malacca, 90% of Chinese energy imports currently flow through the straights
The resources in the South China Sea are immense, with the potential to supply SCS countries with natural gas for the foreseeable future. There are over 25 trillion barrels of proven natural gas reserves in the SCS, more than sufficient to supply the estimated 3.5 trillion barrels per year of expected consumption by 2020. (Source: Global Security:
http://www.globalsecurity.org/military/world/war/spratly-oil.htm)
Competing territorial claims, however, remain the crux of the problem. If “scramble” is to be avoided, then there must be energy cooperation and agreement between countries regarding who can access what. Rather than shore up resources, a developed natural gas market would be key to easing tensions. This goes hand in hand with energy cooperation, and is more secure and open than secretive long-term energy contracts currently the norm in Asia.
The importance of Floating Liquefied Natural Gas platforms:
The key factors at play regarding FLNG platforms are two fold. These floating natural gas extraction platforms can stay in place over natural gas fields for 25 years until the field is can no longer produce sufficient quantities of NG, at which point the structure will simply disengage and float to another field. Royal Dutch Shell is the only player that can produce such an engineering marvel at this time.
As Professor Ronald Ripple bluntly stated at an Australia Embassy event on the future of Asian natural gas markets, no other energy company has the resources or the will to implement a competitive FLNG program. Chevron, however, will be looking to gauge the success of its competitor, and should all go well this multinational oil firm would follow suit.
The importance of FLNG platforms cannot be overstated. Capable of withstanding category five typhoons, these platforms have an exceptionally long lifespan of 50+ years averaging 100,000 barrels of liquefied natural gas per day. To put this into perspective:
2010 NG Output and Demand in barrels equivalent per year:
Vietnam: Output: 50 billion Demand: 50 billion
China: Output: 522 billion Demand: 547 billion
Taiwan: Output: 2.3 billion Demand: 75 billion
One FLNG: Output: 365,000
Midterm sweeping FLNG program (four platforms): 1.5 billion
Source: 2010 World Fact Book
Furthermore, increasing bulk orders of FLNG platforms will eventually drive the costs down. Samsung Heavy has disclosed the total cost of producing an FLNG is a mere 3 billion USD compared to the selling price of 13 billion USD for the initial FLNG platform. (Source: Fox Business News,
http://www.foxbusiness.com/markets/2011/06/01/samsung-says-shell-prelude-flng-vessel-cost-3-billion/) Samsung is clearing a ten billion dollar profit from the deal. Further down the line, as more companies, like Chevron, compete for FLNG contracts the price could very well fall within the means of many SCS countries.
Why Energy Deals are important to understanding the political developments in Asia: Asian petroleum companies are state owned enterprises, and need the go-ahead from the top levels of government.
Energy deals in Asia are inherently political, for no other reason than the national petroleum firms are national firms. The actions of these firms must be blessed from top government officials, especially when sensitive topics are involved. In terms of Taiwan, a top tier core interest of the PRC, any form of energy cooperation would have to be agreed on and negotiated with the utmost forethought. This leads to geopolitical ramifications in the form of balanced and unbalanced energy deals.
Balanced:
At a Carnegie Endowment for Peace conferences on China/Taiwan relations, Foreign Minister Dr. Shin Yuan Lai was enigmatic regarding the current state of play regarding energy cooperation with the mainland. CPC Corp, (Taiwan’s national oil firm) and CNPC (China National Petroleum) entered an energy partnership to jointly develop gas fields in the Taiwan straights back in October of 2010. The minister’s lack of an answer is also an answer.
A conspiracy theorist may argue she was holding back information on purpose. If her response is taken at face value, however, it can mean one of two things. If she really is out of the loop, the importance of the energy deal could be above her need-to-know status and thus something quite serious. Another possibility would be that the national oil firms were simply working together and there is nothing note-worthy to speak of. As the saying goes, business is business.
There are telling signs, however, that the energy pact is indeed happening at the highest level. According to the US-China economic and security commission, the PRC is taking a “carrot and stick” approach to Taiwan. The carrots include beneficial economic arrangements, including trading privileges, as well as cultural exchanges that favor Taiwan. While Taiwan has a 2,000 Chinese student quota in place, China has no such restriction. As a result, there are nearly one million Taiwanese living in China. The willingness of China to except anything less than a 50-50 deal shows the preferred way forward is friendship and integration, even when that means operating on uneven grounds.
Unbalanced:
The company may have swallowed the sunk costs of developing joint projects with Vietnam Petroleum, realizing the end game would be far too costly. This is troubling news for the development of Asian gas markets.
The company may have also been unsettled with the security situation in the SCS, and fear any degree of association with political happenings. Chinese vessels fired on a British exploratory ship near the Philippines last year in contested waters. Being in partnership with Vietnam’s national oil firm, which hedges its maneuvers with the Vietnamese Army and Navy in ways that provoke China, could hamper trade relations with the Middle Kingdom.
As a result of ConocoPhillips ending its partnership, Vietnam Petroleum has decided to scrap the project all together. The national oil firm has instead reached
an agreement with China Petroleum. These two national oil firms have agreed to a joint pipeline venture, in which the Qinzhou fields of Guangxi Province will supply all of Vietnam’s energy needs for the near and mid term. (Source:
http://www.reuters.com/article/2011/07/11/vietnam-petroliex-refinery-idUSL3E7IB0A020110711) Top Vietnamese officials were needed to sign off on the deal, a decision that may jeopardize Vietnamese energy security.
China has already proven it is willing to restrict critical material as a policy tool. The decision to halt rare earth elements to Japan following territory disputes is a clear indication that national firms are subject to political orders from Beijing. Should China be in a position to supply Vietnam’s entire natural gas and petroleum needs, and territory disputes arise, there is a clear likelihood energy resources will be halted.
If Vietnam Petroleum does not choose to develop traditional gas fields, an alternative would be the acquisition of FLNG platforms. Over time, once the FLNG program is successful, the high price tag of FLNG will drop dramatically as Chevron enters the fray, and more FLNG producing companies are able to compete. Samsung Heavy Industries is one of four companies in Asia capable of producing FLNG platforms. In the future Samsung Heavy Industries may find it desirable to produce FLNG at lower costs.
The Solution: Develop Asian gas markets
Unlike North America, where the gas markets are firmly established with developed spot pricing based on gas-to-gas trading, Asian gas markets rely entirely on long-term contracts. As a consequence, firms such as Shell sign secretive deals with countries guaranteeing long-term supply. An important example is the agreement between Shell and Taiwan, in which Shell will provide 2 million barrels of liquefied natural gas per day until 2020, starting in 2017. This deal will provide a significant percent of Taiwan’s total NG demand. Shell has said it will supply the LNG from supply fields throughout its global supply network, however, the FLNG platform at Prelude and others in the Asian Pacific region will undoubtedly play a strong supply role; there are no pipelines to Taiwan and LNG must be shipped, making transportation costs a factor. If all goes well, Shell will begin operating the initial FLNG platform before the 2017 date.
Asian gas is currently supplied by long term contracts, shipped to destinations
Expansive supply sources will help develop the market, while also mitigating the risk of SCS tensions from spinning out of control. An energy secure Asia is a stable Asia, and one where “scramble” is avoided.
