November 2015

Oil and gas in the capitals

China vs. Japan E&P dispute now militarized
Jeff Moore / Contributing Editor

World Oil last reported on Chinese-Japanese E&P tensions in January 2007. Since then, the issue has become as contentious as the South China Sea row between China and its Southeast Asian neighbors. China and Japan have both deployed warships over their dispute, and E&P companies in the Asia-Pacific region need to be aware of the risks.

To recap, China and Japan’s 200-mi exclusive economic zones overlap in the East China Sea. Contained in this overlap is an island chain—Diaoyus to China, Senkakus to Japan—that the two nations are disputing. They also are bickering over all the hydrocarbons in the vicinity. CNOOC began E&P in this area in the early 2000s, at Chunxiao gas field, which Japan calls Shirakaba. It sits about 150 km off the western side of Okinawa.

Recent Energy Information Administration (EIA) estimates say that the East China Sea, overall, has 200 MMbbl of oil. Chinese estimates are much higher at 70-160 Bbbl. The EIA also estimates that there are 1-2 Tcf of natural gas reserves.

Historical perspective. In 2008, Japan accused China of siphoning gas from its side of Chunxiao/Shirakaba field, which resulted in a pact to jointly develop it. An historic event, it was supposed to turn these contested waters into a “sea of peace [and] friendship,” according to the agreement. This, however, didn’t happen. In 2010, a Chinese fishing vessel, captained by a “Mr. Zhan,” sailed into the Senkakus area to harvest tuna and, subsequently, rammed Japanese Coast Guard (JCG) vessels when they told him to leave Japanese territory. The JCG detained Mr. Zhan, which drew howls of protest by China, and the Chunxiao/Shirakaba agreement fell through.

In July 2013, China began developing seven new gas fields in the Senkakus area, as part of CNOOC’s Pingbei Huangyan Offshore Phase II projects. Switzerland-based oil and gas services company, Parcol, says that it will begin servicing these projects in 2016.

Frustrated with China’s unilateral E&P initiative, Japan published photos and a map of 14 Chinese platforms in Chunxiao/Shirakaba field during July 2015. Tokyo again raised concerns that China was siphoning gas from its side of the field. Chinese Foreign Ministry spokesperson Hong Lei countered, saying, “Japan has no right to make irresponsible remarks on it.” By July 24, however, China offered Japan an opportunity to join its projects, to develop Chunxiao/Shirakaba field.

Japan has yet to answer, in part because it thinks the offer is a ruse to cover Chinese military deployments in the disputed area, and in Japanese territory. The Japanese Ministry of Defense (MoD) believes that these moves are designed to weaken Japanese control, making it easier for China to passively take over this area.

Current militarism. China’s actions include aggressive air patrols, naval patrols, and shows of force, and they have alarmed Tokyo. Japan’s air defense forces had to scramble fighter jets against Chinese incursions more than 464 times during 2014, mostly in the Chunxiao/Shirakaba area. In years past, Japan had to do this less than 100 times. Japan also has had to deploy its navy and coast guard against not only the Chinese navy, but also Beijing’s armed Maritime Surveillance and Fisheries Law Enforcement Command vessels.

In two cases in 2013, Chinese naval vessels that sailed into the disputed zone “painted” Japanese aircraft with fire control radar, meaning, “We are about to fire at you, so vacate the area…” This is a dangerous, “finger on the trigger” type of escalation. It’s how wars happen.

Also, in November 2013, China established an Air Defense Identification Zone in the East China Sea that annexed the Diaoyus/Senkakus chain into China’s airspace. In principle, any government or commercial aircraft flying over that area must get permission from China to pass through or risk military reprisal, which has yet to happen. However, fears loom of a repeat of the 1983 Russian shoot-down of KAL Flight 007.

Most recently, on Oct. 3, three Chinese coast guard ships intruded into Japanese territory for two hours in the Senkakus Islands, and a Chinese marine survey ship was spotted off Kune Island, 50 mi west of Okinawa. On top of all of this, China and Japan are beefing up their military infrastructures, Japan’s MoD has been upgraded to cabinet level, and China has been spewing out venomous anti-Japanese propaganda for the past year. To put it mildly, things don’t look good.

So which energy companies dare conduct E&P in this area? Not many. Hong Kong-based Primeline and Canada-based Husky are the most prominent foreign firms in the vicinity, but most of their operations are closer to China’s mainland.

Tokyo-based Inpex Corp announced in July that it had been tapped by the Japanese government to drill an exploratory well for the Heisei 26-28 Domestic Offshore Drilling Program. The project will begin in May 2016. It is 140 km off the coast of Yamaguchi, roughly halfway to South Korea. This well is north of the Chunxiao/Shirakaba dispute, but in a worst-case scenario, is any maritime E&P activity in this area safe?

Potential consequences. If conflict breaks out in the region, East China Sea maritime commerce and E&P activities will suffer, and there is reason to believe that the South China Sea might become involved in the fighting, as well. At the very least, China and Japan would extend their naval and air patrols hundreds, and maybe thousands, of miles out, to protect their respective territories. This would impact scores of international oil and gas companies.

There’s a popular saying in Asia: “When the elephants fight, the grass gets trampled.” Operators in the East and South China Seas should evaluate both the short- and long-term regional risks and act accordingly, lest they become the grass. wo-box_blue.gif

About the Authors
Jeff Moore
Contributing Editor
Jeff Moore runs Muir Analytics, a risk consulting firm specializing in deciphering threats in conflict zones. He is author of the book, Spies for Nimitz, which depicts America’s first modern intelligence agency. He holds a PhD from the University of Exeter in the UK.
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