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Stirring up the South China Sea (IV): Oil in Troubled Waters
Stirring up the South China Sea (IV): Oil in Troubled Waters
Table of Contents
  1. Executive Summary
East China Sea: Preventing Clashes from Becoming 
East China Sea: Preventing Clashes from Becoming 
A Chinese coast guard vessel (L) sails near China's oil drilling rig in disputed waters in the South China Sea, 14 May 2014. AFP/Hoang Dinh Nam
Report 275 / Asia

Stirring up the South China Sea (IV): Oil in Troubled Waters

The race for hydrocarbon reserves in the South China Sea is aggravating conflicting territorial claims. The regional players need cooperation, yet have increasingly open confrontations at sea. For peaceful joint energy development, all parties need to stop acting unilaterally and do more to understand the others’ goals and limitations.

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Executive Summary

The South China Sea’s hydrocarbon resources are hotly contested though its reserves are unproven. While their potential economic benefit may be considerable, their foremost significance is political, as their division has implications for sovereignty and fundamental law of the sea principles. Exploration frictions have deepened geopolitical fault lines. Competition once framed by verbal warnings and diplomatic pressure today frequently takes the form of physical confrontation. A key factor is China’s growing capability and accompanying desire to expand its own exploration while preventing other claimants’ activity. In parallel, Beijing has advocated setting aside disputes and developing resources jointly, but as collaboration remains elusive, analysts in China have called for unilateral measures to pressure uncooperative parties. Better would be greater efforts to create mechanisms for preventing competition from becoming conflict, while seeking better understanding of motivations needed for eventual cooperation. 

China’s state-owned oil majors, known collectively as the “three buckets of oil”, have grown rapidly in financial strength and technical capability, especially deep-water drilling. Driven by political zeal and internecine competition, their executives have for years pressed the government for policy and financial support to enable exploration farther from the Chinese shore and deeper into disputed waters. Vietnam, for which crude oil is vital for exports, government revenue and GDP, has made development in the South China Sea a national priority. To insulate itself from Chinese pressure, it actively courts foreign partners, some of which baulk due to Beijing’s warnings. The Philippines badly need new sources of domestically produced energy, as they import nearly all their crude oil and petroleum products, and their only natural gas field will soon run dry. 

While each party’s energy hunger could be an incentive for cooperation, joint exploration and development face obstacles. China’s precondition that its sovereignty be recognised over the areas concerned raises fear that collaboration amounts to accepting its claims. Vietnam insists on defining overlapping claims pursuant to the UN Convention on the Law of the Sea (UNCLOS) before defining joint development areas. China’s maps do not conform to UNCLOS principles, and it refuses to clarify the extent or nature of its claims. Compliance with Philippine law that oil and gas projects must be 60 per cent Philippine-owned, might appear to accept Manila’s ownership and by extension sovereignty. 

Despite the obstacles, collaboration has been tried. The most advanced partnership, the Joint Marine Seismic Undertaking (JMSU), began as a bilateral agreement between Beijing and Manila in 2004 to survey the seabed for hydrocarbon deposits in some disputed areas. Vietnam joined in 2005, as the area overlapped with its claims. The parties shared expenses and responsibilities equally and worked together. But in late 2007-2008, nationalists in the Philippines accused the government of secret, corrupt concessions that violated the constitution. When the pact expired in July 2008, Manila did not renew it. 

The JMSU was conducted under particular circumstances. Most importantly, each party prioritised maintaining stable relations over asserting claims. That ingredient has been missing in recent years marked by frequent friction, heightened tensions and volatile ties. Another promising opportunity for a joint development agreement of comparable scope is unlikely to appear soon. Beijing (political) and Manila (economic) have incentives to cooperate, but their frigid relationship, resulting from China’s assertive actions and the Philippines’ subsequent request for international arbitration, has made collaboration an even harder public sale for Manila, and Philippine law remains a problem. Hanoi is less constrained but also economically less motivated to collaborate with China, though they consult on joint exploration outside the mouth of the Gulf of Tonkin. 

There are two key challenges. The first is to establish mechanisms to prevent current competition from escalating to the point of conflict, whether by accident or design; the second – the subject of this report – is to understand the motivations and limitations of the players in order to lay the foundations for greater collaboration, first in exploration, then in development. 

To preserve the long-term prospect of collaboration and minimise the danger of clashes, parties should refrain from unilateral exploration and exploitation, particularly around land, such as islands in the Paracel and Spratly groups, whose sovereignty is hotly contested. When a more favourable regional environment is restored, steps can be taken to lower the obstacles. China’s preconditions might be countered by specifying in legal terms that participation in joint exploration and development does not imply sovereignty concessions. 

Misgivings about its maps could be mitigated if China were to move in the direction of framing its claims under UNCLOS, even implicitly. To incentivise Vietnam, for example, it should follow UNCLOS principles in quiet negotiations on the area of joint exploration outside the mouth of the Gulf of Tonkin. In exchange, Vietnam should refrain from trying to open negotiations on the Paracels.

Beijing/Hanoi/Manila/Brussels, 26 January 2016

Chinese marine surveillance ship Haijian No. 51 (C) sails near Japan Coast Guard vessels (R and L) and a Japanese fishing boat (front 2nd L), East China Sea, 1 July 2013. REUTERS/Kyodo
Report 280 / Asia

East China Sea: Preventing Clashes from Becoming 

Dangerous aerial and naval encounters are rising as China and Japan spar over disputed islands in the East China Sea. A promising reconciliation process has floundered. To prevent an accident tipping the dispute into open hostility, both sides urgently need a credible crisis management protocol to insulate any negotiations from their broader rivalry.

Executive Summary

As China-Japan relations oscillate between hostility and détente, a credible crisis management protocol is urgently needed to manage the increasing, unplanned contacts between their military aircraft and ships. Despite intermittent negotiations, the two have been unable to agree on a maritime and air communication mechanism to help fill this gap. After suspension due to the 2012 Diaoyu/Senkaku dispute, China agreed to resume talks on the mechanism, comprising a hotline, meetings between defence authorities and communication protocols between forward military units in 2014. Dangerously close military aerial encounters appear to have played a fundamental role in the decision, but negotiations soon stalled over the area the mechanism would cover, an issue with implications for the dispute over the islands’ sovereignty. Resentment arising from other aspects of the relationship hardened China against compromise. With a prickly bilateral détente now in place, however, the two governments should prioritise crisis management and insulate the negotiations from their broader rivalry.

The need for crisis management is growing. The air forces are coming into contact more frequently, as each attempts to administer the overlapping Air Defence Identification Zones (ADIZ). Several close calls have already occurred. The navies are also increasingly in contact, as China sends ships further from its shores with greater regularity. Encounters around the Diaoyu/Senkaku islands, East China Sea and Western Pacific will continue. Different national operating guidelines, applied in an atmosphere of mutual mistrust, exacerbate the risks of miscalculation. Nationalism, increasingly institutionalised distrust on both sides and limited opportunities to build trust through military exchanges make it harder to prevent rapid escalation of hostilities should a deadly incident transpire.

Meanwhile, both sides are enhancing their military capabilities in the East China Sea. China is expanding its naval and air operations further into open waters in a bid to extend its maritime footprint to the Western Pacific, and Japan is shoring up the defences of its south-western island chain in response. Bolstered by the Diaoyu/Senkaku dispute, the Abe administration pushed through more proactive security legislation – the most significant shift in Japan’s defence posture since the end of the Second World War.

Against this backdrop, China and Japan need to seize the opportunity proffered by their current fragile reconciliation to establish crisis management ties. China should delink the subject from the political relationship and sovereignty questions: an unplanned clash with Japan would neither benefit its goal of achieving peripheral stability nor safeguard its rights. Japan should continue to engage and avoid inflammatory remarks that increase political risks for moderates in China. Staged implementation of the proposed mechanism, beginning with the hotline, could be a near-term confidence-building measure. Fundamental mistrust makes true reconciliation unlikely in the near future, but there is common interest in preventing or limiting an accidental crisis that would harm the political, security and economic interests of both. China and Japan should thus launch the maritime and air communication mechanism as soon as possible.


To enable agreement on the Maritime and Air Communication Mechanism 

To the governments of China and Japan:

  1. Instruct front-line personnel, in the mechanism’s absence, to adhere to protocols in the Code for Unplanned Encounters at Sea (CUES), to which both are party. 
  2. Discuss concerns about risk of collision by fishing boats and/or coast guard vessels in waters around the disputed Diaoyu/Senkaku islands in the High-Level Consultations on Maritime Affairs, a multi-agency forum that includes the coast guard. 
  3. Restart vice-ministerial-level defence exchanges and resume exchanges between defence universities and research organisations.
  4. China should delink Diaoyu/Senkaku sovereignty from the mechanism negotiations. 
  5. Japan should refrain from comments or actions which suggest revisionist views of history and a departure from the Murayama Statement, its 1995 official apology for wartime aggression, and immediately distance itself from provocative statements made by officials and politicians. 
  6. Japan should maintain an open dialogue with Beijing over the enhancement of its south-western defences and refrain from negatively publicising China’s lawful military activities, such as legitimate overflights and naval transits. 

To ensure effective implementation 

To the governments of China and Japan:

  1. Keep the hotline open at all times and ensure responsible persons/units have authority to reach decision-makers and front-line personnel quickly in an emergency and to make decisions to contain and de-escalate the crisis; and utilise the hotline in case of an incident before resorting to public criticism.
  2. Give front-line operators adequate training and hold those who violate the rules accountable.
  3. Increase direct contact between front-line troops and personnel by:
    1. organising a second round of mutual naval visits; and
    2. stepping-up participation in multilateral training forums based on CUES, such as the Western Pacific Naval Symposium and others.
  4. Agree to address violations first bilaterally, including in defence authority meetings, so as to maximise space for resolution, rather than arguing them in the media.
  5. Consider incorporating guidelines for behaviour other than communications within the mechanism later, possibly based on those included within the 2014 U.S.-China defence memorandums or CUES.

To third-party governments and non-governmental institutions, such as research organisations, private groups and think-tanks with ties to both parties:

  1. Host forums that bring the parties together for discussions on crisis management and mitigation, including by;
    1. organising workshops to review CUES and other international naval and air agreements containing guidelines on rules of behaviour; 
    2. facilitating the sharing of best practices to avoid incidents at sea, whether in forums, symposiums or joint research projects; and
    3. encouraging participation by both coast guards and militaries, especially commanders in charge of front-line operations.
  2. Organise multilateral naval exercises on CUES implementation involving both China’s People’s Liberation Army (PLA) and Japan’s Self-Defence Forces (SDF).

Beijing/Tokyo/Brussels, 30 June 2016