Offshore in depth

The recent controversy in the Spratly Islands of the South China Sea is a reminder that the presence of natural resources in disputed waters can be a source of conflict, even when sharing them could provide economic benefit and political stability for countries with competing claims.

750 islets. The Spratly Islands are an archipelago of 750 islets, atolls and cays, many of which are submerged at high tide. The relatively shallow seas around the Spratlys have been a prime fishing ground for centuries. Since the 1970s, the area has been a potential target for oil and gas exploration. Without drilling any wells, China has declared that the area has potential reserves of 225 Bboe, 70% of which are natural gas. More important are the shipping lanes that pass through the area. The Christian Science Monitor reported that half the world’s ocean tonnage passes through this part of the South China Sea, and the U.S. EIA estimates that 11 MMbbl of oil and 6 Tcf of LNG are moved through the Spratlys every day.

Some 45 of the Spratly’s outcrops are occupied by Vietnam, Malaysia, the Philippines, Taiwan, Brunei and China. China claims all of the South China Sea as its Exclusive Economic Zone (EEZ), based on the “Nine-Dash Line” encircling the area surrendered by Japan and granted to China after World War II. Since 2013, China has been dredging sand from the seafloor to turn small reefs (also claimed by the Philippines) into islands, and building an airstrip and other permanent installations, so that it can be “the protector and promoter of peace and stability” in the area. While China has announced a halt to its land reclamation program, most observers are convinced that the country intends to use its new bases to project its military power.

Historical disputes live on. The Spratlys aren’t the only international conflict over offshore resources. The 1982 Falklands War, though sparked by an Argentine incursion on the British-claimed islands, also was motivated in part by potential offshore oil production. Though no fields have been developed, British companies Premier Oil and Borders & Southern have made discoveries of oil and gas condensate, which are not likely to see first production before 2018.

In 2002, soon after East Timor gained its independence from Indonesia, it had a dispute with Australia over offshore reserves. Based on a 2005 agreement between the two countries, production from the Joint Petroleum Development Area and the Greater Sunrise fields bankrolls the East Timor government and has accumulated nearly $10 billion in the Timor-Leste Petroleum Fund. The Guardian reports that recent disclosures about Australia’s alleged bugging of the East Timor cabinet meetings, during the 2005 negotiations, have led to public protests on the island nation to seek a larger production share from the two fields, and for construction of an LNG facility on East Timor soil, instead of a planned floating facility.

Eastern Mediterranean. This is another area where energy production in disputed waters has created economic opportunity while increasing tensions. According to a March 2015 Policy Brief by the German Marshall Fund of the United States (GMF), Israel’s Leviathan gas field has given the country a measure of energy security while increasing economic ties with Jordan, Egypt and the Palestinian Authority. Lebanon, in a state of war with Israel, has claimed economic rights to a disputed 330-mi² area near Leviathan that could contain 25 Tcf of gas.

The Republic of Cyprus’s EEZ has up to 5 Tcf of discovered gas. In 2014, however, disputes with Turkey and the Turkish Republic of North Cyprus resulted in Turkish warships chasing away a Norwegian seismic vessel, and then escorting Turkish-sponsored seismic crews surveying in its overlapping EEZ. Russia also has increased its military presence in the Eastern Mediterranean, in part to protect over $30 billion of Russian investments in Cyprus.

Seaflower and TEN. According to a Platts report, Colombia and Nicaragua squared off in 2013 over their maritime border and possible oil exploration in a disputed block. Colombia moved to protect an unspoiled reef area called Seaflower, which appeared to be threatened by a planned Nicaraguan lease auction. In 2012, the International Court of Justice ruled that Colombia had sovereignty over seven islands, but extended Nicaragua’s maritime boundary into areas claimed by Colombia. Subsequently, in 2013, Noble Energy drilled a dry, deepwater wildcat in Nicaraguan waters.

In March 2015, at the International Tribunal of the Law of the Sea in Hamburg, Ivory Coast argued that Tullow Oil’s TEN project, carried out on behalf of neighboring Ghana, is actually on Ivory Coast’s side of their maritime boundary. Reuters reported that the Tribunal subsequently ruled that Ghana could finish developing current projects, but could not start up new fields in the area.

China vs. Vietnam. In May 2014, The New York Times reported on the confrontation between Vietnam and China over a deepwater drilling rig operating in disputed waters near the Paracel Islands, which both countries claim is within their respective EEZs. After a standoff between coast guard vessels, the CNOOC rig was moved to uncontested waters, where it made a gas discovery.

Because of limited exploration, there are no proven oil reserve estimates for the Paracels or Spratlys. The EIA does not share China’s optimistic estimates about potential production in either chain. The agency cites industry sources that suggest the Spratlys hold almost no oil and less than 100 Bcf of natural gas in proved and probable reserves, and the Paracels likely have even less.

China has shown its willingness to compromise, at least on paper. In 2008, it agreed with Japan to jointly develop Chunxiao/Shirakaba gas field in the East China Sea, 309 km from the disputed islands called Diaoyu by China and Senkaku by Japan. CNOOC and Inpex were expected to be partners on the project, but, according to Bloomberg, joint development never started.  

About the Authors

Ron Bitto

Contributing Editor

Ron Bitto has more than 30 years of experience as a technology marketer and writer in the upstream oil and gas industry. RON.BITTO@GMAIL.COM