Oil Companies Weigh S. China Sea Exploration Risks

MANILA — The disputed South China Sea is believed to hold huge reserves of hydrocarbon resources. Some estimates of potential oil reserves run as high as 213 billion barrels and natural gas at two quadrillion cubic feet - making it one of the world’s richest deposits.

Countries in the region are selling exploration contracts to oil companies interested in tapping into those potentially vast energy resources. Last week, the Philippines put two blocks in the sea up for auction. A day later, China announced it would sell nine blocks in an area Vietnam claims.

But, with China, the Philippines, Vietnam, Taiwan, Malaysia and Brunei involved in territorial disputes about who owns the rights to those hydrocarbon deposits, companies may be reluctant to bid.

Ian Storey, a senior fellow at the Institute of Southeast Asian Studies in Singapore, says with the escalation of tensions in the past year, certain oil companies that bid in the disputed parts of the South China Sea now face the risk of being harassed.

“My guess is, given that the companies that have bid for these blocks are not the major energy producers, then it’s likely that China could pursue more coercive measures against them,” said Storey.

Philippines Energy Department Undersecretary Jay Layug says the blocks recently up for sale are well within Manila’s exclusive economic zone, defined as the ocean up to 370 kilometers from a country’s coast. But China also claims the area based on ancient maps.

Layug says two blocks are disputed by China. They are situated near the contested Reed Bank, where Philippines ships have had run-ins with Chinese vessels.

Since the last Reed Bank incident, the government has taken precautions, Layug says.

“What we have done at the Department of Energy is to make sure that all exploration activities of our service contractors are coordinated with the Philippine Coast Guard and the Department of Defense.”

Although Philippine authorities deemed 20 companies eligible to bid on the remaining three blocks up for auction on July 31, just one company placed a bid on one of the disputed blocks. The other block drew two bids.

Some analysts say the lack of bidding indicates hesitation about the territory’s disputed ownership, Layug rejects that view.

“Certainly, based on our records, we did not receive any hesitation or apprehension from any of those who expressed interest,” he said.

According to Layug, interest in this latest offering was higher than the combined number of bids in the past three calls for contractors.

Kang Wu, a senior advisor on the China market at FACTS Global Energy, which assesses the demand for oil globally, says current tension about the disputes in the South China Sea is a major deterrent to companies, but the hydrocarbons can still be attractive.

“You have so many small drillers which are risk-takers for all kinds of reasons," Wu said. "High risk also means high reward, potentially. So, in the end, it’s every company’s policy, their own sort of methodology of weighing the risk.”

Wu points out some of those risks come with high reward such as when oil companies operated in the oil-rich Persian Gulf that became a combat zone during the Iran-Iraq war of the 1980’s.

Storey says the complication with the South China Sea is that countries have dug in their heels with their claims. And he warns the current trend is “moving in the wrong direction,” meaning that the disputes already underway could worsen in the coming years.