Oil and gas in the capitals
The statement followed the shutdown of Repsol’s offshore Red Emperor project at the insistence of the Chinese government over the well-known “9-dashed line” territorial dispute in the South China Sea (SCS). None of this was too surprising. Chinese shutdowns of E&P activity in this area have happened before. The question now is, What’s next for E&P in the SCS?
Repsol’s project was in Block 07/03, where it had a 51.7% stake, and UAE-based Mubadala Petroleum and PetroVietnam owned the rest. Repsol was to drill five wells there, beginning in April, with the Ensco 8504 rig, which is based in Singapore. Malaysia-based Yinson was to provide Red Emperor with an FPSO vessel for 10 years. U.S.-based Keppel FloaTEC was slated to build a production platform there. The project is estimated to have 45 MMbl of oil and 172 Bcf of gas, and Vietnamese hydrocarbon output is peaking, so Hanoi needs all the production that it can muster, as decline sets in.
Why did the project shut down? There are two reasons. First—and this is commonly known—the Chinese government claims about 90% of the southern SCS as its own, which includes most of Vietnam’s 200-mile EEZ, and part of the EEZs of the Philippines, Indonesia, Brunei and Malaysia. China has engaged in military exercises and built artificial military island bases in the area to stake its claim.
Second, Vietnam has angered China by rejecting its unilateral maritime rule-making by rallying allies and partners to its cause. Beijing calls this “internationalizing the issue.” In January and March this year, for example, Vietnam engaged in highly publicized economic and defense meetings with India, a regional nemesis of China, to plan, among other things, future joint E&P in the SCS. The response from Beijing was pointed: “China does not object to the development of normal bilateral relations of relevant countries in our neighborhood. But China firmly opposes relevant party to use it as an excuse to infringe upon China’s legitimate rights and interests in the SCS, and impair regional peace and stability.”
Then on March 5, Vietnam accepted a five-day port call by the American supercarrier, USS Carl Vinson. Many in Beijing perceive America as an international nemesis, where war is increasingly possible over the SCS and politico-military disputes involving Taiwan and Japan.
While these developments are recent, Vietnam asserts that China has interfered with its E&P projects on multiple occasions. It cites the following evidence:
- May 2011: Chinese patrol vessels cut the seismic streamers of PetroVietnam seismic ship, Binh Minh 2, as it surveyed Block 148.
- June 2011: Chinese patrol vessels cut the seismic streamers of a foreign vessel, possibly the Veritas Viking II, of CGG Vertias, as it surveyed Block 136-03.
- September 2011: China unsuccessfully pressured a joint, unnamed Vietnam-India E&P project in the SCS, involving Essar Exploration and Production Ltd., and ONGC Videsh. Beijing declared the project “unlawful” and that it threatened, “…the stability and peaceful economic development of the entire SCS region.”
- June 2012: CNOOC offered nine offshore blocks in the SCS, including Vietnam’s Block 128, where ONGC Videsh was to begin E&P a month later.
- May 2014: China placed its giant Marine Oil 981 rig near Vietnam’s Phu Khanh and Nam Con Son basins and Block 118, with a massive armada of 80 escort vessels.
- January 2016: China placed Marine Oil 981 in an area outside the Gulf of Tonkin.
- July 2017: China ordered Repsol to stop drilling in Block 136/3, stating, “China urges the relevant party to cease the relevant unilateral infringing activities and, with practical actions, safeguard the hard-earned positive situation in the South China Sea.”
Collectively, these cases demonstrate that the South China Sea’s E&P risk profile has increased. While the two 2011 seismic vessel attacks could have cost as much as $5 million, Repsol’s Red Emperor shutdown cost approximately $200 million. The wasted planning by Yinson and Keppel FloaTEC probably had a combined price tag in the low millions of dollars. The former’s project was worth $1 billion over 10 years, and the latter’s project was estimated in the tens of millions of dollars.
Additionally, the above mentioned “intimidation cases” can wreck intricate E&P planning that precipitates such projects, which also costs millions. This price tag increases even more, when considering time wasted and missed opportunities that could have been spent planning and implementing E&P elsewhere.
Going forward, energy companies operating here must reconsider if they can declare a force majeure and/or tap insurance, if driven out of a block in or near Chinese-claimed sea areas, since such scenarios are now reasonably foreseeable.
Furthermore, E&P in the SCS is no longer mainly about geology and negotiating production contracts with SOEs. Politico-military factors must enter into E&P calculus here.
Finally, under these increasingly contentious conditions, energy companies in the SCS must look further ahead and ask hard questions, such as, “What are worst-case scenarios…if a naval battle or a war occurs?” They must take into consideration the impact on drilling rigs, personnel, support vessels, gas/oil storage, and the like, and assess the potential physical, legal, insurance and financial fallout.
- What's new in exploration (May 2023)
- Regional report: South Australia: New life in a mature basin: S.A.’s Cooper basin CCS and exploration opportunities (May 2023)
- Coupled prolongation in multi-scale pressure solver for high-contrast heterogeneous reservoir simulation (April 2023)
- Oil and gas in the capitals (April 2023)
- Regional Report: Brazil (February 2023)
- International drilling and production: Growth outside the U.S. continues at measured pace (February 2023)
- Applying ultra-deep LWD resistivity technology successfully in a SAGD operation (May 2019)
- Adoption of wireless intelligent completions advances (May 2019)
- Majors double down as takeaway crunch eases (April 2019)
- What’s new in well logging and formation evaluation (April 2019)
- Qualification of a 20,000-psi subsea BOP: A collaborative approach (February 2019)
- ConocoPhillips’ Greg Leveille sees rapid trajectory of technical advancement continuing (February 2019)