Like it or Not: State Oil Company Becomes ‘Flag’ in South China Sea
By Gabe Collins and Andrew Erickson
Sometimes oil companies follow the flag, sometimes the flag follows them — and sometimes they themselves become the flag.
The third scenario has come to pass in the highly contested South China Sea with the recent launch of a new deepwater rig by China’s state-run China National Offshore Oil Corporation (CNOOC) roughly 320 kilometers south of Hong Kong.
On May 9, CNOOC Chairman Wang Yilin described the company’s new rig in terms befitting of an aircraft carrier, calling it “mobile sovereign territory” and a “strategic weapon” for developing South China Sea energy resources — a statement that has led many to wonder whether CNOOC is in effect serving as a tool of state policy in the South China Sea.
At the very least, it seems Beijing is permitting CNOOC to increase operations in a maritime arena in which the Chinese government has actively sought to prevent other nations from conducting similar operations–even as close as 70 miles from their own coasts. And it puts CNOOC equipment and personnel in a position in which it would be very difficult for Beijing not to defend them in the event of tensions or crisis.
Beijing probably has not directly ordered CNOOC to drill. That would be redundant given the company’s longstanding plans to expand its deepwater production in the South China Sea. That said, the close correlation between China’s official policy stance and national interests and CNOOC’s desire to expand its South China Sea oil & gas production effectively make it a tool of state policy whether or not it sees itself as a private actor.
In addition, tacit state backing could embolden CNOOC to consider pushing deeper into the South China Sea. We do not see this as a high probability at present, but the apparent coincidence of state and corporate interests displayed in the current case suggest that the risk of China deciding to drill outside its internationally-accepted exclusive economic zone has risen.
The new rig, dubbed the Haiyang Shiyou 981, greatly expands CNOOC’s drilling options. China’s old rigs are typically only able to drill in waters less than 200 meters deep. In contrast, the HYSY 981 can drill in up to 3,000 meters of water, giving CNOOC the ability to extract oil and gas virtually anywhere in the South China Sea apart from the deepest parts of the abyssal plain.
Notable locations include deep waters near the Paracel and Spratly islands and other areas within what is known as the “nine-dotted line,” a u-shaped dotted line printed on maps published in China that covers the vast majority of the South China Sea and which Beijing seems to view as a boundary within which China has priority rights of resource development.
CNOOC’s current drilling area clearly lies within Chinese-administered waters, but is close enough to disputed zones that China’s neighbors will likely interpret CNOOC’s actions as the commercial maritime equivalent of a show of force near a disputed border. The new deepwater rig provides a national flag platform that extends Chinese companies’ options for drilling in the South China Sea and has aroused widespread concern among China’s neighbors, who likely fear it represents the first step in China’s unilateral assertion of control over maritime zones and resources in contested portions of the sea.
Like any listed company, CNOOC generally seeks to maximize profits and keep shareholders happy. Beyond East Asia, in fact, CNOOC’s actions appear to be relatively independent of specific Chinese foreign policy objectives. In the South China Sea, however, both direct and indirect factors may cause CNOOC to function effectively as a tool of China’s foreign policy.
Since June 2011 Beijing has tried a more measured approach to managing claims. Yet influential voices affiliated with the People’s Liberation Army continue to express positions at odds with this more peaceful approach. Some–such as senior PLA officer Long Tao–even advocate surgical strikes to reclaim reefs and waters occupied by the Philippines and Vietnam as a means of teaching the smaller nations a lesson. While Long’s hawkish stance, cited recently in an essay by Henry Kissinger, does not represent official Chinese policy, it reveals a significant strain of thought among PLA officers that their civilian leaders are either unwilling or unable to suppress. Against this backdrop, China’s maritime neighbors may well see CNOOC’s new exploration program as a double standard favoring Chinese development at others’ expense.
Chinese oil producers typically behave in a market-oriented, profit-driven manner. However, “typically” does not mean “always.” The timing and wording of CNOOC’s statements about the rig deserve special attention because they take place in a well-armed neighborhood where multiple governments must manage intense nationalist pressures and because the risks of miscalculation that could spark armed conflict are uncomfortably high.
In a commodity market, investors’ risk perceptions (and consequently the market) are often most forcefully moved by surprises and events that represent the exception to the generally-accepted view and spark feelings of fear and uncertainty. Thus, CNOOC’s decision to move its new deepwater drilling rig into an area near an internationally-disputed zone merits a thorough assessment, not a glib dismissal that strategic concerns don’t matter.
A commercial entity can play vital roles in advancing national interests and providing services that the government itself may not be able to provide. Private oil companies based in Western countries often play a substantial, if unstated, role in shaping and advancing national foreign policies, particularly regarding energy security. One example is the close cooperation and communication between the U.S. government and Exxon and Chevron when the Caspian Sea oil reserves opened to outside investors in the early 1990s.
Recent events in China have showed that during a time of crisis the government has the power to press state-controlled companies analogous to CNOOC into national service. In the wake of the massive snowstorms that disrupted coal supplies in early 2008, Premier Wen Jiabao called on transport providers to press all available assets into service. China Ocean Shipping Co. subsequently deployed 34 extra bulk carriers to help replenish dwindling thermal coal stocks.
CNOOC’s actions suggest that the company has the potential to serve as a de facto arm of state policy in a much more direct manner than the China National Petroleum Corporation ever did in Sudan. The recent rig deployment merits careful discussion and analysis because the issue is likely to repeat itself as CNOOC pursues greater production in the South China Sea amidst rising tensions between China and its maritime neighbors.
China’s move raises the likelihood that its maritime neighbors will consider similar assertive moves to assert sovereignty over their claims in disputed zones — moves Beijing is likely to try to shut down. How might China respond if PetroVietnam attempts to initiate a drilling program in the Spratlys or Philippine Department of Energy renew its exploration near Scarborough Shoal (Huangyan Island), where Chinese and Philippine vessels have repeatedly confronted each other since March 2011?
Given the stakes involved, CNOOC will likely find that the South China Sea–however inviting in terms of potential resources–is a politically-complex place in which to operate, and that it will not be able to make decisions on market factors alone.
Andrew Erickson is a professor at the U.S. Naval War College and a research associate at Harvard’s Fairbank Center. Co-founder of China SignPost ( ), he blogs at www.andrewerickson.com.
Gabe Collins is a co-founder of China SignPost and is a J.D. candidate at the University of Michigan Law School.
Copyright © 2012 Dow Jones & Company, Inc.
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