Where the Chinese oil rigs are really going to and more importantly why? 7/1/2014

Where the Chinese rigs are really going to and more importantly why? 7/1/2014

Nubian Observer status report

According to the Institute for Security and Development Policy  “It has been suggested in the international media, in this regard, that China's positioning of CNOOC 981 (also referred to as HYSY981) near the Paracels on May 2 could be, in part, linked to Vietnam's 2013 announcement of its intention to build a US$20 billion power plant to be supplied by oil and gas from Vietnamese Blocks 118 and 119, which are adjacent to where CNOOC 981 is deployed. As for the Philippines' latest stated intentions in Reed Bank, it is unclear if Beijing would, in the short term, retaliate by having CNOOC announce its own plans to develop this area. Given, however, those Chinese vessels have in the past disrupted Forum Energy's operations there, they will most likely do so again if operations resume”.

The description

When China first announced the deployment of its oil rig, it stated that its operations would terminate on August 15. This provides plenty of time for both sides to orchestrate and manage the confrontation in Block 143 and provide a face saving means for ending the confrontation.

Then things changed.

Following Beijing meetings between Chinese state owned oil and gas majors and ExxonMobil in June, Beijing leadership ordered the deployment of five more oil rig naval protected  and missile armed groups to waters off Viet Nam. Beijing also order the first oil rig taskforce to moving through block 142 and 143 toward the ExxonMobil owned and operated Viet Nam Ca Voi Xanh oil and gas field. The forward elements of the first Chinese oil rig taskforce is within 100 miles of the Viet Nam Ca Voi Xanh oil and gas field.

According to The Diplomat, “Diplomatic sources in Beijing also report that CNOOC officials revealed they were ordered to place the rig in Block 143 despite their misgivings on commercial grounds. CNOOC officials pointed to the costs of keeping the rig on station until mid-August when oil exploration is scheduled to cease. Other observers point out that the prospects of finding commercial reserves of oil and gas in this area is quite low”.

So why has Beijing deployed four oil rig naval taskforces with hundreds of ships and submarines?

Charlie Zhu  of Reuter suggest: Experts said if the rig found commercial reserves, China would bring in platforms for production and pipe-laying ships to build the infrastructure to transfer gas to vessels. That process could take several years while production could last decades. The four oil rigs are already deployed and can brought to the ExxonMobil owned and operated Viet Nam Ca Voi Xanh oil and gas field within days, if not weeks.

Status report

Currently the massive Chine oil rig missile armed naval escort of 137 ships is slowly making course via block 142 and 143 toward the massive and strategic ExxonMobil blocks 118 and 119 south of Da Nang, Viet Nam into a Vietnamese missile kill zone. Viewers can track its progress on Google Maps. A resisting Vietnamese Coast Guard naval force of 40 ships is being compressed against the Vietnamese’s coast losing critical tactical space. Currently, the rig is 240 km (126 miles) off the Vietnam’s coast and 330 km (206 miles) from the southern coast of China’s Hainan Island. More importantly, the Chinese naval taskforce is less than a 100 miles from the ExxonMobil Viet Nam Ca Voi Xanh oil and gas field.

High speed Chinese missile ships in the advanced elements of the Chinese taskforce are within four hours sail time of the ExxonMobil Viet Nam Ca Voi Xanh oil and gas field. Unknown numbers of Chinese missile armed submariners are embedded with the taskforce. The eastern most part of Vietnam’s Blocks 118 and 119 fall within China’s so-called nine-dash line, a boundary Beijing uses on its official maps to show its claim to 90 percent of the South China Sea.

Few western military analyses have allowed their readership  insight into China’s military doctrine in terms of the energy war with Viet Nam in the East Sea, near the ExxonMobil Viet Nam Ca Voi Xanh oil and gas field.

According to Reuters, China optimistic of finding gas off Vietnam, could test ties further – experts, Wed May 28, 2014, Charlie Zhu outlined the Chinese strategic goals in the oil rig development mystified by most main stream media. He even frame the context of a potential war: But near the islands the chance of making a major gas discovery was high because there had been several gas finds already in the area, said James Hubbard, head of Asia oil and gas research at investment bank Macquarie in Hong Kong.

"It's not a huge leap of faith to think they might be targeting a gas-prone structure," he said.

Indeed, Vietnam has two fields to the left of the rig, much closer to its coast, where U.S. giant Exxon Mobil Corp discovered oil and gas in 2011 and 2012.

A part of Vietnam's Blocks 118 and 119 fall within China's so-called nine-dash line, a boundary Beijing uses on its official maps to show its claim to 90 percent of the South China Sea. The controversial line extends deep into the heart of maritime Southeast Asia.

Soon after Exxon made its announcement about Block 118 in 2011, China warned foreign energy companies against exploration in disputed areas. It did not name Exxon.

No production had taken place in Blocks 118 and 119, Do Van Khanh, head of state-run PetroVietnam Exploration Production Corporation, told Reuters. He declined to discuss the rig.

In a statement, Exxon said it was in talks with Vietnamese authorities about the feasibility of developing central Vietnam's natural gas resources. It did not respond to questions about the possible impact from China's exploration nearby.

Exxon CEO Rex Tillerson and CNOOC Group Chairman Wang Yilin met in Beijing on May 14, the Chinese company said on its website, adding they discussed "further cooperation" between the two energy giants. It gave no specific details.

A DECADE OF SURVEYS

Neither CNOOC Group nor CNPC could be reached for comment on the rig or the field despite repeated attempts. An executive at China Oilfield Services Ltd , the service arm of CNOOC Group and the rig's operator, declined to give details on drilling results so far.

But a Chinese oil industry official with knowledge of the field said a CNPC team which surveyed the block had told him the potential was "pretty good" based on data collected over a 10-year period.

"But of course we won't know the exact amount of reserves until we drill," added the official, who declined to be identified because he was not authorised to discuss the matter with the media.

Experts said if the rig found commercial reserves, China would bring in platforms for production and pipe-laying ships to build the infrastructure to transfer gas to vessels. That process could take several years while production could last decades.

"The tensions between the two sides will absolutely rise to the top if China finds oil in that area," said Duong Danh Dy, a former Vietnamese diplomat.

"There will be more collisions, more conflict. I would not exclude armed conflict."

Chinese military doctrine revealed

Chinese military doctrine is based on a Maoist application of Clausewitz notion "War is simply the continuation of political intercourse with the addition of other means. The Nubian Observer analysis deliberately use the phrase "with the addition of other means" because we also want to make it clear that Beijing views a war with Viet Nam in the larger frame work of the Chinese Century doctrine and control of the South China Sea economy via direct control of its oil and natural gas.

Chinese Century doctrine in itself does not suspend political intercourse or change it into something entirely different. Japan and South Korea are critical elements of Chinese near term planning. Rather, Beijing seeks to increase the regional dependency on China’s political economy. In this idealized Beijing Clausewitz context, Beijing seeks to integrate ExxonMobil blocks 117,118 and 119, with Chinese de facto blocks 142 and 143. The Da Nang oil and gas processing infrastructure is a secondary goal of Chinese energy planning. With direct control of trillion of cubic feet (TCF) of strategic South China Sea natural gas, Beijing hopes to create a new layer of asymmetric  control of the  regional political economy in particular Japan and South Korea.

China saw its aggregate volume of natural gas imported from overseas jump 25 percent year on year in 2013, approaching one-third of its apparent consumption, a new report has showed.

The country imported 53 billion cubic meters of natural gas last year, 31.6 percent of its domestic gas output plus imported volume, according to a report released by an economic and technological academy under China National Petroleum Corporation, the country's state-owned oil giant.

The political economy of uncoupling Viet Nam economy from China

If Viet Nam provided Chinese gas imports under free market conditions China would pay Viet Nam 60 billion dollars a year and in five years these payments would be almost a 100 billion dollars annually, in addition to 120 billion dollars Viet Nam would get from Japan and South Korea. Viet Nam would invest these funds in the construction of a modern industrial economy seeking to uncouple it’s self where possible from the Chinese slave economy dependency.

Regional energy free of Chinese control retards China’s goal of economic integration under its hegemony. Viet Nam is setting the stage for economic uncoupling of critical other supply chain partners in Asian from Chinese hegemony.

The development of the ExxonMobil discounted gas power grids in southern Viet Nam is allowing Japan, South Korea and other multinationals to relocate critical value added computer integrated component manufacturing from their home countries and China to southern Viet Nam. This transplantation process threatens to set the stage for economic uncoupling of critical supply chain partners across an increasing range of value added components in Asian. Chinese soaring cost of energy does not allow Chinese manufacturing to compete with Vietnamese energy discount component manufacturing.

The soaring cost of fuel imports let Japan to post a record annual trade gap of 11.47 trillion yen ($112.06 billion) in 2013, up from 6.94 trillion yen in the previous year and a third straight year of deficit. LNG imports increased 0.2 percent to 87.49 million tonnes last year, the Ministry of Finance said in preliminary trade figures on Monday. Japan, the world's top importer of liquefied natural gas (LNG), paid a record 7.06 trillion yen ($68.98 billion) last year for LNG, overturning a previous record in 2012.

In December, Japan imported 8.09 million tonnes of LNG, up 4.9 percent from a year earlier and the highest since January 2013.

The share of natural gas in Japan’s TPES increased significantly from 17% in 2010 (before the March 2011 earthquake) to 22% in 2011, due to growing demand from the electricity generation sector. Japan’s demand for natural gas steadily increased from some 26 billion cubic meters (71 mcm/d) in 1980 to around 109 bcm (298.6 mcm/d) in 2010, to 124 bcm (340 mcm/d) in 2012. Japan’s domestic natural gas production is limited – with production of around 3.3 bcm in 2012.South Korea is the second-largest importer of liquefied natural gas in the world behind Japan. The Korean government predicts overall natural gas demand to grow about 1.7% annually until 2035 according to its proposed long-term energy plan, as the fuel remains a significant source of cleaner energy for the country.

Viet Nam gas is a key element in both Japan and South Korea gas security.
Chinese control and development of Viet Nam Ca Voi Xanh oil and gas field will position China to sale 120 billion dollars of natural gas to Japan and South annually, while limiting relocation of critical value added computer integrated component manufacturing from their home countries and China to southern Viet Nam.

Beijing’s necessity for of control of Viet Nam Ca Voi Xanh oil and gas field is located in the frame work Chinese energy hegemony within the region, not just in the Chinese power grid or dislike of Vietnamese politics. It is within this neo Maoist application of Clausewitz notion "War is simply the continuation of political intercourse with the addition of other means Beijing locates an energy war with Viet Nam and ExxonMobil. The understanding of the economic imperative driving Beijing, frames the ruthless of the current military conflict between Hanoi and Beijing.

The South China Sea is the most dangerous place on earth and Beijing has increased the danger by posting thousands of seamen in a known Vietnamese missile kill zone as political bait to justified war.

A Maoist application of Clausewitz notion would suggest China show force, but allow Viet Nam to develop its oil and gas industry, while Beijing handles the immediate problem of Iraq oil supplies and new energy from Iran and Russia. Viet Nam is not going anywhere, nor is China’s energy problem. The fear of Viet Nam will look different in a few years after China locates its own Ca Voi Xanh oil and gas field.

The problem is with over 130 ships and submarines deployed to defend Chinese oil and gas fields, what is the political face saving reason to retreat? Viet Nam and ExxonMobil are hoping the Chinese do not find a reason to stay. It is Tycoon season.