It may be Asia's 21st century equivalent of the assassination of Austria's Archduke Ferdinand that sparked World War I. Growing tensions over territorial disputes in the East and South China Seas threaten to disrupt the oft-heralded Asian Century. Whatever the outcome, many see more than just competing nationalisms, the scars of national memory and the rise of an increasingly assertive China behind clashing interests.
To many, this is about oil: a widely-shared perception that beneath these disputed waters lays a treasure trove of oil and gas able to satisfy energy needs of dynamic Asian economies.
Unfortunately, there is no basis for this conventional wisdom. The reality is that the winner of East or South China Sea disputes is unlikely to gain enough energy to make any significant difference to any of the claimants' growing energy needs. This is particularly true in regard to China. And in any case, exploiting what resources exist will require legal and political certainty and stability.
Tensions over territorial issues have ebbed and flowed in recent years. There have been nearly two dozen military clashes in the South China Sea since 1974 when China seized the Paracel Islands from Vietnam, killing 18 Vietnamese troops in the process. Most of the action occurred in the 1990s, followed by relative calm until fairly recently. Although China has signed and ratified the Law of the Sea Treaty, or LOS, its recent assertiveness is based on claims contradicting it - "nine dotted lines," encompassing more than 80 percent of the South China Sea, well beyond the 200-mile economic exclusion zone recognized by the treaty.
One new factor that may be raising the stakes is continued improvements in deep-sea drilling technology. Until the 1990s there was little drilling for offshore oil or gas deposits deeper than 304 meters. Over the past two decades, increasing amounts of oil worldwide have come from what is known as "ultra-deepwater" - depths of 1500 meters or more. Until recently, the technology was limited to mainly major Western energy multinational firms. Then last May the Chinese National Offshore Oil Company, CNOOC, announced it had developed a deep-sea oil platform at a cost of roughly $1 billion capable of extracting oil at a depth of 12,000 meters.
To date, there has been no authoritative survey of oil and gas potential in either the East or South China Seas. Chinese estimates of oil and gas reserves in both disputed areas appear exaggerated compared with those of major multinational energy firms and other analysts. China estimates East China Sea reserves at 160 billion barrels of oil, nearly double that of US Energy Information Agency estimates.
As for South China Sea reserves - likely 70 percent gas, according to most experts - Chinese claims of oil appear wildly inflated. CNOOC estimates some 213 billion barrels of oil - almost the size of Saudi Arabia's proven reserves. This is nearly 12 times larger than that estimated by the US Geological Service, and energy consultancy Wood-Mackenzie estimates a total of 2.5 billion barrels equivalent of proven oil and gas in the disputed South China Sea islets and shoals -nearly 100 times less than China claims!
With the possible exception of China and Chinese firms that have entered in joint ventures with foreign firms, East Asian states seeking to exploit the resources of claimed islets and atolls would need to partner with foreign investors. Indeed, several ASEAN claimants in the South China Sea have signed oil-exploration contracts with foreign firms. However, the political risk and legal uncertainty of the disputed territories make it problematic for large-scale investment.
This logic may have been behind the policy China pursued until recently, as suggested by the late Chinese leader Deng Xiaoping who proposed "put aside differences and jointly develop resources." Given the opaque Chinese decision-making process, it's tempting to speculate whether the combination of maritime military ambitions, mercantilist resources policies, inflated hopes of energy and new oil technology capabilities may account for the apparent abandoning of Deng's policies.
Ironically, Deng may have had it right. It is difficult to see how to resolve the disputes: How do countries compromise on national honor and historic national memory? And it is equally difficult to imagine how to create legal and political certainty to reduce risk enough for global energy companies to commit what would be multibillion dollar investments. Most exploration contracts entered into by energy firms have been by small companies looking to get in on the ground floor. So joint development "without prejudice" on claims would seem to make a lot of sense.
