Exxon’s South China Sea Oil Project Tests Chinese Influence
An Exxon Mobil oil and gas project off the coast of Vietnam is becoming a test of Beijing’s growing power in the South China Sea.
Vietnam’s foreign ministry this month sought to shoot down rampant speculation that Exxon will sell its 64% stake in the country’s largest offshore energy project Ca Voi Xanh, or Blue Whale, a joint venture with state-owned Vietnam Oil & Gas Group some 80 kilometers (50 miles) from the coast of Danang. While the project sits just outside of China’s claims in a nine-dash map of the waters, it would tap the same basin that Beijing is seeking to develop.
Vietnam has become increasingly isolated in its efforts to push back against China, which is nearing a deal with the Philippines for joint energy exploration in a contested area of the sea and just set up one-on-one talks with Malaysia to settle disputes in the waters. At stake are unexploited hydrocarbon resources the U.S. says could be worth $2.5 trillion.
China has recently stepped up pressure on Vietnam, repeatedly sending coast guard ships and a survey vessel to an energy block operated by Russia’s state-owned Rosneft Oil Co PJSC. Last year, PetroVietnam ordered Spain’s Repsol SA to halt work on a project off Vietnam’s southern coast, costing the company and its partners as much as $200 million. It was “an unexpected capitulation to geopolitical pressure applied by China,” Bloomberg Intelligence said in March.
“If Exxon leaves, that’ll be a blow to Vietnam because this follows the Repsol case, and could possibly send a ripple effect within the international energy industry,” said Collin Koh Swee Lean, research fellow at the Singapore-based S. Rajaratnam School of International Studies. “China would have achieved its goals and probably reap long term dividends of dissuading other energy majors from striking up ventures in those waters.”
Touted as a source of energy that could fuel the Vietnamese economy for decades, the Blue Whale project is expected to generate $20 billion in government revenues from gas reserves able to power a city the size of Hanoi for more than 20 years. That would help to alleviate an electricity deficit that could lead to widespread blackouts within two years if key projects are not delivered on time, Prime Minister Nguyen Xuan Phuc told officials in July.
Exxon hasn’t responded to several requests for comment on the project.
As the world’s largest publicly traded oil company in terms of revenue, Exxon’s exploration activities off the coast of Vietnam have come under pressure in the past. It was reported in 2008 that Chinese officials verbally warned the conglomerate to abandon exploration projects they said pose a breach to China’s sovereignty. The Blue Whale project was signed three years later.
Vietnam has fought back against what it perceives as China’s meddling in its offshore development plans. Foreign ministry spokeswoman Le Thi Thu Hang on Thursday called the encroachment a violation of the United Nations Convention on the Law of the Sea.
“Any activities that hamper Vietnam’s oil and gas exploration in Vietnamese water are violations of international laws,” she said. The foreign ministry and PetroVietnam also said the Exxon project was being “implemented as planned.”
Exxon could have other reasons to sell its stake in the project. The company is currently in the midst of a global $15 billion divestment plan in a bid to raise cash to fund a suite of higher-growth projects from Papua New Guinea to Texas and Brazil.
“With a focus on divesting from non-core positions or challenged assets, it makes it difficult to see Exxon progressing this project anytime soon,” said Andrew Harwood, Asia-Pacific upstream research director at Wood Mackenzie. “In terms of potential buyers, it’s difficult to see who would be interested. Not only in terms of the technology side of the project, but also from a political standpoint.”
PetroVietnam has meanwhile said international companies have spent almost $10 billion searching for crude oil with little success. Vietnam’s $3 billion a year industry has also been plagued by high taxes, dwindling reserves and red tape, Tran Sy Thanh, chairman of PetroVietnam, was quoted as saying in local media in July. For example, the Law on Water Resources mandates each exploration lot to pay $10 million to $15 million in taxes.
The U.S. has sought to challenge Beijing in the South China Sea with regular freedom-of-navigation operations near land features claimed by China. It has also repeatedly accused China of bullying energy companies in Vietnam.
China’s Ministry of Foreign Affairs did not reply to a request for comment.
“There is no logical way that China could have a legitimate claim to it, so China’s actions seem to violate the UN Convention on the Law of the Sea,” Chatham House fellow Bill Hayton said of Beijing’s potential involvement in pressuring Exxon out of the Blue Whale oil block. “If it manages to set a precedent that it can do what it likes in the South China Sea, regardless of international treaties — that ‘might beats right’, then the international rules take a big hit, and the world is less secure.”