China’s Pressure Costs Vietnam $1 Billion in the South China Sea

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China’s Pressure Costs Vietnam $1 Billion in the South China Sea

Vietnam is compensating international oil companies after cancelling their contracts in the dispute region over pressure from China.

China’s Pressure Costs Vietnam $1 Billion in the South China Sea

Vietnamese protest outside the Chinese Embassy on May 11, 2014 in Hanoi, Vietnam, against Beijing’s deployment of an oil rig in the contested waters of the South China Sea.

Credit: AP Photo/Chris Brummitt

Vietnam has agreed to pay around a billion dollars to two international oil companies after cancelling their South China Sea operations following pressure from China. A well-placed oil industry source has told The Diplomat that Vietnam’s state-owned energy company PetroVietnam will pay the money to Repsol of Spain and Mubadala of the United Arab Emirates in “termination” and “compensation” arrangements. In a statement, a Repsol spokesman said he “would not be willing to confirm or deny the figures” but an analysis of the company’s financial statements suggests that a very large amount of money is involved.

The news comes amid a new round of confrontation in the South China Sea. The Russian energy company Rosneft has been forced to suspend its plans for drilling offshore, reportedly also because of Chinese pressure. China Coast Guard vessels have been operating in the area where the drilling was due to take place. Earlier this month, both the American and Chinese navies simultaneously conducted separate large-scale exercises in the area, reminding the region of the wider strategic competition between the two. One Western oil executive with long experience in the region told the BBC that he had “never seen so much political interference in the offshore oil and gas industry in the South China Sea.”

Repsol was once one of the largest players in Vietnam’s offshore industry, owning rights in 13 blocks of seabed. With minimal interests in China, Repsol appeared ready to withstand political pressure from Beijing. Two of its best development prospects were particularly bold: located at the far edge of Vietnam’s claimed exclusive economic zone (EEZ) and well within the U-shaped, nine-dashed line drawn on Chinese maps since 1948.

However, in July 2017, Repsol’s partner, the state-owned company PetroVietnam, ordered it to cancel a planned exploration drill within Blocks 135-136/03. Then, on March 22, 2018 Repsol was ordered to stop a separate drilling operation while it was actually underway in the neighboring Block 07/03 (a project area known as Ca Rong Do). Repsol executives were told that this was a political decision, ordered by the very top Vietnamese leadership, following extreme pressure from China. China had assembled a flotilla of 40 naval ships off the coast of Hainan Island, about two days’ sailing from the drill site, and it appeared to be ready for confrontation.

That now appears to have been a very costly decision for Hanoi. A regional oil industry source with knowledge of the settlement says Vietnam is paying Repsol and Mubadala $800 million for their rights in the blocks and a further $200 million in compensation for all the investments they have made in the exploration and development process. This will be a billion dollars that PetroVietnam would otherwise have paid into the Vietnamese government’s budget.

In its 2019 financial statement, Repsol noted that it had made provisions for combined losses of 786 million euros on projects in Vietnam, Algeria, and Papua New Guinea. The Vietnam loss was not individually detailed. In the same statement, Repsol also reported total book values of 586 million euros for its three subsidiary companies working on the affected blocks in Vietnam.

In a June 12, 2020 statement announcing its exit from Blocks 07/03 and 135‐136/03, the company said “The transaction [with PetroVietnam] will have no significant impact on Repsol’s financial statements.” This seems to suggest that the company will recoup its costs and losses. Although no financial details were included in the statement, the total value of those costs and losses could easily reach several hundred million dollars.

China’s efforts to prevent Vietnam-based companies developing oil and gas resources in the South China Sea are continuing. A drilling rig that had been standing by in the Vietnamese port of Vung Tau for two months has been stood down. Its owners, Noble Corporation, noted that the contract “includes a termination payment.” This is likely to cost Vietnam several million dollars more.

The rig was due to drill for the Russian company Rosneft on Block 06-01, an area just north of Repsol’s former block, 07-03, and also within China’s U-shaped line. The new well was to be drilled in almost exactly the same place as an existing one – but to a deeper level. This is a site that has been in commercial production for 18 years as part of the Nam Con Son gas project, but China now feels able to prevent development there.

In early July, a China Coast Guard vessel, Haijing 5402, was observed “provocatively” maneuvering in the area of the proposed drill site. AIS data tracked by Twitter user @SCS_news showed the vessel travelling at 15 knots to within 1.5 nautical miles of the existing Lan Tay platform. It had been assumed by most analysts that China would not want to antagonize Moscow by blocking Russian operations in Vietnam. Now it appears that Beijing feels just as comfortable scaring away Russians as it does western Europeans.

There is also some mystery about Japanese operations off Vietnam. Two Japanese companies, Idemitsu and Teikoku/Inpex, in partnership with PetroVietnam, are operating on two fields, Sao Vang and Dai Nguyet, that straddle the U-shaped line in Blocks 05-01b and 05-01c. They have completed development drilling and preparatory work but have yet to install their main extracting equipment. Idemitsu says it expects to “commence producing gas and condensate in the third quarter of 2020” but they are keeping very quiet about what progress they are making.

There is an added wrinkle in that Teikoku is currently facing a lawsuit from a London-listed company, Jadestone. Jadestone says it agreed to buy Teikoku’s share in the block four years ago but Teikoku, a subsidiary of Japan’s energy giant Inpex, has reneged on the deal. There is some speculation that the consortium, at the behest of the Japanese government, wants to keep the block as an all-Japanese arrangement to manage any threats from China that might prevent development of the fields in the future.

Incidents like these are a key reason why the U.S. government issued a new statement on the South China Sea last week. In that statement, Secretary of State Mike Pompeo described China’s “campaign of bullying” to control offshore resources across most of the South China Sea as “completely unlawful.” The statement suggests the United States is willing to help countries like Vietnam protect their offshore oil and gas industry against Chinese intervention. The Chinese embassy in Washington described the accusation as “completely unjustified.” Nevertheless, it appears that the fight over the resources of the South China Sea is about to get hotter.

Bill Hayton is an associate fellow in the Asia-Pacific Programme at Chatham House. He is the author of The South China Sea: The Struggle for Power in Asia (2014) and the forthcoming The Invention of China.