China’s Energy Development in the East China Sea

China is doubling down on its hydrocarbon resource development in the East China Sea. The China National Offshore Oil Corporation (CNOOC) wants to double overall oil and gas production to 100 million metric tons per year by 2020 (Petroleum Economist, October 2012). CNOOC’s first licensing round in June 2012 triggered a diplomatic crisis with Vietnam because the nine blocks offered were located in Vietnamese claimed waters in the South China Sea. Three blocks in the East China Sea were included among the 26 CNOOC opened for bids the second round of licensing in August 2012 (Platt’s Oilgram, August 29 2012). Furthermore, CNOOC recently announced plans to begin production at seven existing fields in the East China Sea (Reuters, July 17 2013). Amidst recent tensions with Japan over the Senkaku/Diaoyu islands it is worth taking stock of China’s offshore resource development efforts and assessing the impact on relations with Japan.

China’s Resource Development in the East China Sea

China opened the East China Sea for exploration in 1994 following its shift to net oil importer status in 1993. Despite early prospects for oil, natural gas is the most commercially viable hydrocarbon. According to CNOOC, proven gas reserves in the East China Sea are 300 billion cubic feet (Bcf), while oil reserves sit at 18 million barrels. Production at the Pinghu field began in April 1999 with gas piped to Shanghai and Ningbo. The field is wholly Chinese operated, with 40% ownership with the operator Shanghai Gas and Oil Company and the remainder split equally between Sinopec and CNOOC subsidiary Donghai Oil. Pinghu has total proven reserves of 26 Bcf of gas and 2.4 million barrels of oil. [1] Natural gas production at Pinghu peaked at 40 million cf per day and has declined. The operator announced the discovery of an additional 176.6 Bcf of natural gas and 9.5 million barrels of oil in October 2010 that is expected to reach markets by 2014 (Platt’s Oilgram, November 15 2010).

The Chunxiao field is located 70 km southeast of the Pinghu field and has been co-owned by CNOOC and Sinopec since September 2004, after UNOCAL and Shell withdrew from the project. Chunxiao is composed of four primary fields: Chunxiao, Can Xue, Duanqiao and Tianwaitian. As of April 2007, Tianwaitian produced 17.65 million cf of gas per day. Ambiguity persists as to whether CNOOC is producing, or has ever produced, gas at Chunxiao. A CNOOC executive said production was ongoing in February 2010 (Platt’s Oilgram, February 3 2010).

Other fields under development in the East China Sea include Baoyuting and Wuyunting, which are directly north of Pinghu, and the Longjing field, located farther north. No commercial discoveries have been made at these three fields. Not all fields are in disputed waters, however. Gas production at Pinghu has been noncontroversial, although Japan considered protesting work there in 1996. Indeed, the Asian Development Bank helped fund the construction of the pipeline to Ningbo. Two independent oil companies operate in the East China Sea in partnership with Chinese state oil companies. Primeline Energy, a small Chinese company, has been active in the Lishui basin, approximately 91 nautical miles (nm) off the coast of Wenzhou, and has made commercial discoveries there. Husky Oil, a Canadian firm, operates one field in the East China Sea. International expertise was integral when China opened the East China Sea for bids, but CNOOC is no longer reliant on foreign capital or technology to produce gas in the East China Sea.

Competing Claims in the East China Sea

Japan and China have overlapping maritime claims in the East China Sea. China claims a 200nm Exclusive Economic Zone (EEZ) and has recently submitted evidence to the relevant UN organization to support its claims to an extended continental shelf as far as the Okinawa Trough (China Brief, July 9 2009). Japan claims a 200nm EEZ, but its 1996 EEZ law notes that a median line will mark its limit should its claims overlap with those of another state.

Tensions erupted when Japan discovered the drilling platform at Chunxiao in 2004 and protested on the grounds that there was potential for resources to be siphoned off the Japanese side of the median line, located approximately 5km away. China retorted that the Chunxiao field is located in Chinese waters and that the waters east of Japan’s median line are disputed. [2] According to Japanese scholars the median line was never supposed to be a final boundary, simply a starting point for negotiations. [3] Indeed, the precise coordinates of the line have not been specified. Japanese officials recognize that this has not been communicated well. Much of the media and most pundits and scholars assume that Japan’s EEZ claim extends only as far as the median line. In claiming jurisdiction as far as the median line, rather than the 200nm limit, Japan effectively conceded part of its maritime claim to China.

However, Japan has since moved to a 200nm EEZ claim, which has complicated the politics surrounding the dispute. Foreign Minister Matsumoto Takeaki reportedly conveyed a 200nm EEZ claim to Yang Jiechi during his visit to China in July 2011. [4] This expanded claim alters the basis of Japan’s opposition to Chinese resource development projects near the median line. This modified claim places Chunxiao, and its related fields, well within disputed waters. The concern now is not just that Japanese resources are being tapped, but that China is exercising EEZ jurisdiction in Japanese-claimed waters. As part of this shift, Japanese leaders started protesting Chinese progress at all fields near the median line, including Tianwaitian in addition to the Chunxiao field (Kyodo News, March 8 2011; Associated Press, February 1 2012].

The 2008 Consensus on Resource Development

Following four years of threats and negotiations, Japan and China announced a consensus on resource development in the East China Sea on June 18 2008. The consensus allowed Japanese companies to enter the Chunxiao project under Chinese law and created a 2700km² joint development zone (JDZ) that straddles the median line. Implementation talks have been hamstrung by the deterioration of bilateral relations following the collision between a Chinese fishing trawler and a Japanese Coast Guard vessel. However, it is worth noting that confusion about Japan’s claims have muddied each party’s interpretation of the consensus, which limited progress on talks prior to the September 2010 crisis.

The consensus does not mention other gas fields near Chunxiao; it merely calls for nonspecific continued consultations. Japanese leaders interpreted this as a Chinese commitment to cease operations at Tianwaitian and other fields pending further talks. [5] When China continued to produce gas at Tianwaitian, Japan protested (Platt’s Oilgram, January 6 2009; January 19 2010). China argued that, as Tianwaitian was outside the scope of the consensus, it was perfectly acceptable to proceed with development.

In a further product of the shift to a 200nm EEZ claim, Japanese enthusiasm for the first clause of the consensus has waned because the clause effectively concedes jurisdiction to China. CNOOC began making upgrades to the Chunxiao field in July 2009, arguing that no bids were forthcoming from Japanese companies. After winning power in September 2009, the DPJ government accused China of violating the agreement after Japanese Maritime Self-Defense Force (MSDF) patrol flights reported that it appeared that the Chunxiao field was producing gas (Petroleum World, December 9 2009). Japanese Foreign Minister Okada Katsuya subsequently stated that Japan would take “appropriate measures” if China continued to exploit gas at Chunxiao (Kyodo News, January 18 2010).

This series of events triggered a very public disagreement about the terms of the consensus. In January 2010, the Chinese Foreign Ministry pointed out that there were distinct terms used for the arrangement:  Hezuo kaifa (cooperative development) implies one party participating in the project of another while gongtong fazhan (joint development) implies that sovereignty is shared between the two parties. [6] The Chunxiao gas field was subject to cooperative development. Japan has refused to recognize Chinese sovereignty over the Chunxiao field despite the fact that the first clause implicitly recognizes Chinese sovereignty over it as part of its 200nm EEZ claim. According to one Chinese official, many in China interpreted these protests as an attempt by Japan to change the terms of the June 2008 consensus. [7] Japan’s shift to a 200nm claim is typically interpreted as an effort to better protect it claimed maritime space. However skeptical analysts have become about China’s sincerity in implementing the agreement, the vagaries of Japan’s maritime claims, combined with tensions over the islands in 2010 have given China the pretext to walk away from implementation negotiations.

Implications for China-Japan Relations

The recent announcement of new blocks on offer in the East China Sea likely reflects CNOOC’s continued imperative to compete with PetroChina for a share of the growing natural gas market in Eastern China. Last year marked the first year that CNOOC held two rounds of licensing, making it likely that the first round, composed of only nine blocks located in Vietnamese-claimed waters leased to international oil companies, was politically motivated. Under a recently released plan, CNOOC approved funding for seven new fields in the East China Sea including, Huangyan II and Pingbei. The location of the fields will prove controversial. CNOOC recently began planned upgrades at Huangyan I, located 26km west of Japan’s median line, which sparked a Japanese protest on the grounds that the field was within Japan’s 200nm EEZ (Kyodo News, July 3 2013). CNOOC has long considered Huangyan as part of the Chunxiao and Tianwaitian development [Reuters, December 28 2001] and the delays in its development likely reflect both political concerns and uncertainties about the resource base. Because Huangyan II is adjacent to Huangyan I, it will likely elicit a Japanese protest if development begins. Pingbei is adjacent to the Pinghu field and has been described as located in an “uncontested area” of the East China Sea (Reuters, July 17 2013).

Japanese leaders have not specified what measures, if any, they would take if China continued to produce gas in Japanese claimed areas. Japan has tolerated Chinese gas production in disputed areas of the East China Sea to this point despite China’s improvements to Chunxiao, which are at minimum inconsistent with the spirit of the consensus. However, Tokyo has not repeated its 2005 threats to drill in the East China Sea. Nevertheless, there have been numerous confrontations and close calls between MSDF vessels and Chinese coast guard and navy ships in the East China Sea. News that the seven new fields were being opened sparked renewed Japanese interest in exploring the median line area, according to Reuters (July 18 2013).

Despite appearances to the contrary, resource development does not drive Chinese behavior in the East China Sea, or elsewhere. East Asia’s proven offshore natural gas reserves are a fraction of the region’s energy demand. According to BP, the Asia-Pacific region consumes 39 percent of global energy, but has less than eight percent of global gas resources (British Petroleum, 2012). Furthermore, contested jurisdiction can delay or even prevent commercial exploitation. Therefore, despite all the politics surrounding resource development, resources are only one part of the East China Sea dispute. CNOOC recently downgraded its production expectations for its East China Sea holdings and conversations with energy analysts in the Japanese government reveal a profound pessimism about the commercial viability of East China Sea gas, particularly when weighed against imported Liquefied Natural Gas.

Rather, Beijing perceives resource development as a manifestation of the economic rights afforded by the EEZ. It therefore needs to be understood as the same rationale as fisheries bans, detaining fishermen from other countries, and protecting Chinese fishermen from other claimants’ authority. Importantly, this understanding is not limited to China. Japan threatened to drill in the East China Sea in 2005 as part of the exercise of its own EEZ jurisdiction and this was likely not far from the minds of Vietnamese leaders when PetroVietnam entered into contracts with foreign companies in Chinese claimed waters. Tensions over resource production are ultimately a manifestation of a wider legal and political dispute, rather than driver of conflict in and of itself.

Notes

[1] "East China Sea," US Department of Energy, updated September 25 2012. < www.eia.doe.gov/emeu/cabs/East_China_Sea/Background.html >.

[2] Liao, Yameng. "China Refuses to Accept the Idea of ‘Middle Line’ but Proposes ‘Common Development’ as a Solution to the Recent Row between China and Japan over the Gas Field on the East China Sea." Wen Wei Po, July 11 2004.

[3] Sakamoto, Shigeki. "Japan-China Dispute over Maritime Boundary Delimitation: From a Japanese Perspective." Japan Yearbook of International Law 51 (2008), p. 103.

[4] Japan Ministry of Foreign Affairs, “Japan-China Foreign Minister’s Meeting (Summary).” July 4 2011. < www.mofa.go.jp/mofaj/kaidan/g_matsumoto/china1107/jc_gk1107 >.  Accessed July 8 2011.

[5] Discussion with Japanese official, Tokyo, July 4 2011.

[6] “China Emphasizes Sovereignty Over Chunxiao Oil and Gas Field, Opposes the Saying of Joint Development,” Zhongguo Xinwen She, January 19 2010.

[7] Discussion with Chinese official, Tokyo, June 17 2011.