Will China Scuttle ExxonMobil’s South China Sea Gas Project With Vietnam?

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Will China Scuttle ExxonMobil’s South China Sea Gas Project With Vietnam?

A planned investment in the Blue Whale field could make the U.S. energy giant the next target of Chinese threats.

Will China Scuttle ExxonMobil’s South China Sea Gas Project With Vietnam?

Saipem 7000, part of the ExxonMobile Sable Island Development in Åmøyford, Norway (April 2006).

Credit: Wikimedia Commons/ TeeGeeNo

Last week, economic leaders from around the Asia-Pacific region gathered for the 25th Asia-Pacific Economic Cooperation (APEC) Economic Leaders’ meeting held in the pleasant seaside resort city of Da Nang, Vietnam. Established in 1989, APEC is a regional economic forum comprising 21 member states, including Australia, China, Japan, South Korea, Thailand, the United States, and Vietnam, and the meeting this year attracted over 10,000 delegates.

Much of the media attention focused on the speech of U.S. President Donald Trump and his vision for a “free and open Indo-Pacific region” — with many regional leaders hoping for renewed U.S. interest in the region’s affairs. While Trump may have comforted many by sticking to a principles-based script and not tweeting, his “America First” policy left others worried they would end up on the losing end of any trade deal.

Beyond trade, Vietnamese leaders were also seeking U.S. backing for their claims in the South China Sea (known as the East Sea in Vietnam). Such support can come in more subtle forms than White House statements. In the months leading up to the APEC summit, U.S. energy giant ExxonMobil was encouraged by Hanoi to announce the official start of their $10 billion Blue Whale gas project during the summit.

The Blue Whale field, or Ca Voi Xanh, has an estimated 150 billion cubic meters of reserves and is estimated to add nearly $20 billion to Vietnam’s budget. As part of the project, an offshore pipeline will feed four power plants to be built in Vietnam’s Quang Nam province, with first production scheduled for 2023.

The Blue Whale field lies in Block 118, which extends from Vietnam’s shoreline and falls well within Vietnam’s 200-nautical mile exclusive economic zone (EEZ). Via its notorious nine-dash line, Beijing also lays claim to the same rights to Block 118; its claim starts 50 nautical miles (92.6 kilometers) off the coast of central Vietnam and comprises the eastern third of the block.

Exxon is reportedly planning to drill at least 10 nautical miles outside the nine-dash line, some 88 kilometers off Vietnam’s shore. So while Exxon’s reported drilling location does not technically fall within Beijing’s claims under its nine-dash line, the drilling will drain the same basin China was exploring in 2014 with its deep-water drilling rig Haiyang Shiyou 981 (HY981). Back then, movement of the HY981 to the hotly-disputed area sparked a series of protests and riots in Vietnam.

Last week’s expected announcement of the launch of Blue Whale, however, failed to move forward, with ExxonMobil Development Company’s President Liam Mallon telling a business forum at APEC on November 7, “there’re specific agreements that we still need to be put in place,” and delaying the final investment decision until 2019.

Given the nationalistic fervor over the drilling area, Hanoi may have opted for hosting a peaceful year-end APEC summit rather than drawing the ire of Beijing — or another military threat. Back in July, Beijing reportedly threatened to attack Vietnamese military bases in the Spratly Island chain if offshore gas-drilling efforts in the area did not cease. At that time, Beijing’s anger was directed at another offshore gas field operated by a joint venture among Vietnam’s state oil firm, Spain’s Repsol, and Mubadala Development Co. of the United Arab Emirates. The joint venture was drilling in Block 136-03, some 250 miles off the coast of Vietnam, yet also claimed by Beijing under its nine-dash line. Hanoi eventually agreed to stop the drilling, after Repsol had spent at least $27 million (one estimate went as high as $300 million). Beijing’s threat surrounding the Repsol offshore drilling first came to light after General Fan Changlong, deputy chair of China’s Central Military Commission, stormed out of a meeting in Hanoi just days before the planned resumption of drilling on June 21. Fan also reportedly then cancelled a planned “friendship meeting” at the China-Vietnam border, ostensibly over protocol concerns.

China made a similar threat to a British Petroleum gas concession off the coast of Vietnam in 2007, according to Bill Hayton, author of The South China Sea: The Struggle for Power in Asia. At that time, Beijing threatened BP’s entire $4.2 billion portfolio of assets held in China and told BP it could not ensure the safety of its staff working the disputed concession.

The military threat Hanoi faced over Repsol is of particular concern to Carl Thayer, emeritus professor at the University of New South Wales. Thayer called the threat “a marked and alarming step up of Chinese assertiveness” and a “major escalation in China’s posture.” He also questioned what the threat could mean for the future of Vietnam’s offshore oil industry, arguing “If Vietnam stops exploration permanently this would have long-term implications for present oil contracts with foreign companies and more significantly, Vietnam’s future energy security.”

Alexander L. Vuving, of the Daniel K. Inouye Asia-Pacific Center for Security Studies in Hawaii, took a less alarmist approach over the Repsol threat, suggesting Hanoi chose a “strategic retreat” over concerns of social unrest. “This time they were more aware of the threat from the inside, from their own population,” he argued. Vuving cited recent unrest stemming from the HY981 oil rig placement in May 2014 and the recent nationwide protests over wastewater pollution in April 2016 from the Formosa steel plant in central Vietnam.

Concerning last week’s failure to announce the launch of Blue Whale, Vuving considers it more of a negotiation tactic by ExxonMobil to seek better investment terms than a kowtow to Beijing. “If they did not want to anger China and disrupt APEC, they would postpone it for a while, but not until 2019,” Vuving said.

In the near future, however, Vuving believes U.S. foreign policy toward Asia will be “too weak to counter China.” Indeed, there was a growing sense in Da Nang and around Asia that Trump’s “America First” foreign policy will be too economically self-interested to counter growing Chinese hegemony. Xi Jinping consolidated his power at the Chinese Communist Party’s 19th National Congress, and argued for a stronger, more capable military. Now Beijing may choose to flaunt some of that strength.

Last week, the prospect of Beijing again threatening Hanoi may have been suppressed after ExxonMobil delayed its launch announcement. Yet should the Blue Whale project move forward, there may come a time when Hanoi is again threatened by Beijing over drilling rights in the disputed South China Sea. ExxonMobil’s gas concession may ultimately prove safer than that of Repsol given the larger size and global influence of ExxonMobil, the substantial economic potential of the investment, a favorable location closer to Vietnam’s landmass and outside the nine-dash line, and the company’s links to former head Rex Tillerson, now serving as U.S. secretary of state.

Yet by 2019, China’s military power will likely have grown; Washington’s “free and open Indo-Pacific region” strategy may be either strong or mostly forgotten; and the gas deal parameters will have changed. At that point, Hanoi may have to carefully weigh its options — either for another “strategic retreat” or to call Beijing’s bluff over a potential military threat and trust Washington has its back. Despite assurances to keep the peace, given at state visits to Hanoi in recent days by Trump and Xi, trust among the three leaders remains low and Hanoi will seek to build on its friendships throughout the region.

Gary Sands is a Senior Analyst at Wikistrat, a crowdsourced consultancy, and a Director at Highway West Capital Advisors, a venture capital, project finance and political risk advisory. He is currently based in Ho Chi Minh City, Vietnam. Follow him on Twitter @ForeignDevil666.