Expected rise in Asian energy consumption
The U.S. Energy Information Administration (EIA) projects total liquid fuels consumption in Asian countries outside the Organization for Economic Cooperation and Development (OECD) to rise at an annual growth rate of 2.6 percent, growing from around 20 percent of world consumption in 2008 to over 30 percent of world consumption by 2035. Similarly, non-OECD Asia natural gas consumption grows by 3.9 percent annually, from 10 percent of world gas consumption in 2008 to 19 percent by 2035. EIA expects China to account for 43 percent of that growth.
With Southeast Asian domestic oil production projected to stay flat or decline as consumption rises, the need for access to imported/offshore oil sources will become greater. China in particular promotes the use of natural gas as a preferred energy source and set an ambitious target of increasing the share of natural gas in its energy mix from 3 percent to 10 percent by 2020.
How much oil and gas in the SCS? Varying estimates:
It is difficult to determine the amount of oil and natural gas in the South China Sea because of under-exploration and territorial disputes
EIA estimates the South China Sea contains approximately 11 billion barrels of oil and 190 trillion cubic feet of natural gas in proved and probable reserves. Conventional hydrocarbons mostly reside in undisputed territory.
USGS estimates may contain anywhere between 5 and 22 billion barrels of oil and between 70 and 290 trillion cubic feet of gas in as-yet undiscovered resources (not including the Gulf of Thailand and other areas adjacent to the South China Sea. These additional resources are not considered commercial reserves at this time because it is unclear how economically feasible it would be to extract them)
In November 2012, the Chinese National Offshore Oil Company (CNOOC) estimated the area holds around 125 billion barrels of oil and 500 trillion cubic feet of natural gas in undiscovered resources, although independent studies have not confirmed this figure.
Cnooc’s figures for South China Sea reserves are higher than earlier forecasts from the US Geological Survey, and within the range of previous estimates from China’s Ministry of Land and Resources. Energy consultancy Wood Mackenzie says there are currently 2.5bn barrels of oil equivalent of proven oil and gas reserves in the South China Sea, a tiny fraction of the potential unproven resources estimated by Cnooc.
The Chinese Land and Resources Ministry is the most bullish, putting the figure at 400 billion barrels of oil and 20 trillion cubic meters of gas, although without citing sources. That would equal half of the oil reserves of the entire Middle East and a quarter of its natural gas reserves
Details of EIA Assessment:
EIA estimates the region around the Spratly Islands to have virtually no proved or probable oil reserves
Evidence suggests that most of these resources are likely located in the contested Reed Bank at the northeast end of the Spratlys, which is claimed by China, Taiwan, and Vietnam. The Philippines began exploring the area in 1970 and discovered natural gas in 1976. U.S.-based Sterling Energy won the concession in 2002, and U.K.-based Forum Energy acquired the concession in 2005 and became its operator. However, Chinese objections halted further development, and the concession remains undeveloped.
The Paracel island territory does not have significant discovered conventional oil and gas fields and thus has no proved or probable reserves. Geologic evidence suggests the area does not have significant potential in terms of conventional hydrocarbons.
EIA’s analysis shows that most fields containing discovered oil and natural gas are clustered in uncontested parts of the South China Sea, close to shorelines of the coastal countries, and not near the contested islands.
Difficulty in Exploring
From an industry perspective, the Spratly and Paracel islands are interesting mainly because of the low water depth in the area, which significantly reduces exploration costs compared to deep-water developments. The islands would likely receive substantial attention from international petroleum companies were it not for political obstacles.
EIA estimates the South China Sea to be more viable as a source of natural gas than as a source of oil, so producers would have to construct expensive subsea pipelines to carry the gas to processing facilities. Submarine valleys and strong currents present formidable geologic problems to effective deepwater gas infrastructure. The region is also prone to typhoons and tropical storms, precluding cheaper rigid drilling and production platforms
South China Sea looks set to be rich in natural gas rather than oil. Also, the gas often comes with a high CO2 content. As gas incurs considerably more transport costs than oil, a relatively high gas price and regional cooperation are in order to render gas development profitable.
The estimates of energy reserves in the SCS are too varied to be able to draw definite conclusions from. The assessments of the surveys seem self-serving in a way – China benefits by exaggerating claims of energy reserves, and the converse for the US.
Some commentators say that the oil and gas resources are not likely to become a major source of conflict. ‘Rather, they function as political symbols, as material for political actors to rationalize a nationalist strategy and to crystallize conflicts.’ It is interesting that China chooses to exercise restraint over oil field disputes with Malaysia while following a confrontational policy with Vietnam, Philippines etc. This suggests relative disinterest in the oil/gas
However, I don’t think that’s entirely true. Although deep water exploration is not going to be easy, this is not just a strategic competition, energy definitely plays a part in it. The oil & gas reserves might not be as bountiful as touted and might prove commercially nonviable as well; but will still be significant enough for states to covet, especially in shallow waters. CNOOCs activity and investment in deep-water drilling technology is indicative of their interest in future deep-water extraction.
My tentative conclusion is that interest in energy resources, albeit an important factor, is not the chief driver of Chinese assertiveness in the region. Geo-strategic imperatives play a larger role in policy formulation.