Chevron Corp. (NYSE:CVX) has decided to join the oil and gas free-for-all that is otherwise known as the South China Sea. The company has purchased the operating rights to three exploration blocks about 250 kilometers offshore of Hong Kong from Devon Energy Corp. (NYSE:DVN) for an undisclosed sum. Chevron acquired about 59% of one block and 100% of the rights in two others in the deal.
If oil or gas is found, Chevron will now need to sign a production sharing agreement with China National Offshore Oil Corp. and CNOOC’s publicly traded arm, Cnooc Ltd. (NYSE:CEO), maintains the right to take a majority interest in any commercial discovery in the three blocks. Other E&P companies preparing to explore in the South China Sea include Anadarko Petroleum Corp. (NYSE:APC) and Britain’s BG Group PLC. Canada’s Husky Energy Inc. has discovered as much as 6 trillion cubic feet of natural gas in the sea and Cnooc Ltd. estimates that the area claimed by China holds as much as 22 billion barrels of oil equivalent.
And therein lies the catch. The potential oil and gas deposits in the South China Sea are the subject of dispute among six countries: China, Philippines, Vietnam, Malaysia, Taiwan, and Brunei. While the blocks acquired by Chevron are not in dispute, a portion of the total deposit in the field is disputed between China and Taiwan. The largest potential field is partially claimed by all six disputants.
The tensions in the South China Sea are also exacerbated by a buildup in the Chinese navy, which is developing a blue-water force that is intended to project the country’s influence and power over the sea lanes that are critical to China’s trade routes. This is especially true of the Straits of Malacca, that narrow gap between Singapore and Indonesia through which passes nearly every drop of oil that China imports from the Middle East and Africa. The Chinese fear an embargo by the US in the event China and the U.S. have a particularly nasty disagreement over some issue, like, say, Taiwan.
In August 2008, the Chinese warned Exxon Mobil Corp. (NYSE: XOM) to back out of an exploration deal the company had signed with Vietnam, saying that the project breached Chinese sovereignty. So far, Exxon still has the deal with the Vietnamese, and the Chinese haven’t done anything further.
The Chinese have claimed virtually the entire South China Sea as an exclusive economic zone and have insisted that the US stop surveillance activities in the sea. The US insists that the sea is not a Chinese lake, but is in fact international water and that the surveillance activity is routine.
What’s shaping up here is not just a battle for rights to drill for oil and gas, but an international struggle for what is a strategic area not only to the six nations have claims in the area, but to the US as well. If this doesn’t sound familiar, it should.
As of this writing, Paul Ausick did not own a position in any of the stocks named here.
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