Vietnam’s Energy Exports Could Help Rebuild Ties With China

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Vietnam’s Energy Exports Could Help Rebuild Ties With China

Can oil and gas diplomacy be Vietnam’s strategic map to re-establish normal relations with China?

Vietnam’s Energy Exports Could Help Rebuild Ties With China

Dung Quat oil refinery is seen in Vietnam’s central Quang Ngai province (February 22, 2009).

Credit: REUTERS/Kham

To meet its growing need for energy, China needs all its neighbors. Beijing wants to be less dependent on oil from African or Middle Eastern countries, which the Chinese government considers unreliable producers. Yet currently China imports about 1.15 million barrels per day (bpd) of oil from Saudi Arabia, 611.338 bpd from Iran, and 695.148 bpd from Iraq to meet its domestic demands. All indications show that demand will increase over the next years , the International Energy Agency (IEA) estimated China’s consumption of oil would rise to 12.2 million bpd by 2020.

China, the world’s second largest oil consumer, must find a way to ensure a steady supply. There are not many possibilities for Beijing, especially as the country faces its lowest growth rate in more than 25 years and a domestic market showing signs of a slowdown. So far, however, China has made some progress. First, Russia overtook Saudi Arabia as China’s top supplier in 2016, providing 1.02 million bpd. With China able to pay in renminbi and not in dollars, Russian oil is much more attractive for China. Second, China has begun to purchase crude oil from neighboring countries to reduce transportation costs.

In this context, Vietnam has a good card to play with its giant neighbor. With an estimated 4.4 billion barrels of oil reserves, Vietnam will be a significant exporter of energy for years to come. Meanwhile, China’s domestic demand for energy is so large that Beijing must find all possible options to diversify supply, especially with OPEC poised to cut down on production.

Vietnam’s Communist Party leader, Nguyen Phu Trong, visited China in January at the invitation of General Secretary of the Communist Party of China and President Xi Jinping. The two leaders discussed military and security cooperation and both agreed that measures must be taken to forge stronger links between their countries. Economic exchange can provide significant stimulus to speed up that process of reconciliation. Furthermore, Vietnam can use its energy resources as one possible path to re-establish neighborly relations with China.

The gas deal between Vietnamese state-owned energy company PetroVietnam and ExxonMobil last month spotlighted Vietnam’s energy sector. Vietnam’s oil and gas industry is actually in a state of growth after a few years of decline. The third largest petroleum producer in Southeast Asia behind Indonesia and Malaysia, Vietnam is particularly favorable toward international cooperation as means as of scientific exchange — especially because the country does not have the necessary tools or technology to exploit its oil and gas resources by itself. The presence of foreign companies is also a guarantee for stability and security in the area.

Despite territorial disputes between China and Vietnam over islands in the South China Sea, business continues to grow in the energy sector. Even if Beijing was upset about the gas deal between ExxonMobil and PetroVietnam, it is clear that it has no interest in interfering. According to the Vietnam General Department of Customs, Vietnam sold 666,000 tons of crude oil to China for $203 million in March 2016 alone. It is more than likely that these figures will increase over the coming years. Hanoi has recently announced its intention to speed up the exploitation of oil and gas fields in the central and south basins to compensate for the lower production of some older wells. With 630 billion cubic meters (bcm) in proven gas reserves, Vietnam can also supply gas; Chinese gas demand was 192 bcm in 2015.

Due to the 1992 law and the government policy encouraging foreign investment in energy, this sector has grown to represent 13.6 percent of Vietnam’s annual government income. The advantage of Vietnamese oil fields is that they are not far from the coasts and are not very deep. Four main areas are being exploited: Song Hong Basin in the north, Phu Khanh Basin along the central coast, and Cuu Long Basin and Nam Con Son Basin in the south. All together, these fields provide 363.500 bpd of oil and 9.3 bcm of gas each year. According to official sources, 70 blocks in Vietnam’s EEZ and continental shelf are currently being exploited and 19 more in deep-water areas are still un-contracted. Thus Vietnam’s export capacity may clearly be increased over the next years.

Even if Vietnam’s current energy contribution to China is still quite modest considering the total volume of exchanges between both nations, it is a step toward an entente cordiale. The recent rapprochement between the Philippines and China forced Vietnam to opt for quiet diplomacy with its neighbor, especially given ASEAN’s failure to address the South China Sea issue. At the same time, a new president and new policies in the United States completely changed the game for the Vietnamese, who have now to consider a future without the U.S. as a partner.

By exporting energy to China, Vietnam helps normalize relations with its giant neighbor. On the other hand, by purchasing Vietnamese oil from offshore fields, China tacitly accepts that Vietnam is investigating and exploiting petroleum from the South China Sea inside China’s nine-dash line. A deal between PetroVietnam and China is a win-win situation.

Another point: the shipping lane along the Vietnamese coast is vital for China energy security. According to Mikkal E. Herbert, “securing reliable energy supplies and shipping to fuel Asia’s prosperity is tightly bound up with the maintenance of freedom of navigation through the South China Sea and Malacca Strait and is a core energy and national security interest for virtually every regional power.” History has taught us that Germany lost World War II due in part to a lack of oil; even now, no superpower can do without oil. Vietnam can leverage China’s energy needs to boost domestic production and, at the same time,  re-establish normal relations with its giant neighbor, at least until a lasting solution can be found to resolve South China Sea dispute.

Dr. Quoc-Thanh Nguyen is researcher at IrAsia, Aix-Marseille University, and holds a Ph.D. in Maritime Studies.