Beijing is looking for foreign contractors to help find oil and gas under the South China Sea but expects to meet resistance because other governments contest its claims and any discoveries may bring low returns.

China’s state-run China National Offshore Oil Corp. issued a tender last week for foreign companies to join it in exploring for fossil fuels in 22 tracts south of the country’s coastline. The blocks spanning a combined 47,270 square kilometers cover waters contested by Taiwan and Vietnam. Vietnam has been particularly outspoken since the 1970s about its claims.

Complicated matter

Foreign oil companies eyeing the bids, which close in September, probably worry that their ties to the Chinese maritime claim could spoil their reputation among rival South China Sea claimants or that any oil found would be a disputed asset, analysts say.

“Given the area in question, there are risks around the sovereignty issue,” said Thomas Pugh, commodities economist with Capital Economics in London. “If they enter a deal with China and Chinese firms, they could risk not being allowed to work with other countries in the region who are disputing ownership of the area.”

Disputes over ownership continue

Discoveries themselves could also be contested by other countries, said Raymond Wu, managing director of Taipei-based political risk consultancy e-telligence.

“The other contestant parties do not accept that China has sovereign claims,” Wu said. Foreign contractors, he said, must face “not just only the difficulty or uncertainty of finding oil, but who does the oil belong to? I don’t see many investors willing to get into it at this point.”

Vietnam and China rammed each other’s boats outside the disputed Gulf of Tonkin in May 2014 after Beijing allowed a Chinese oil rig to be placed there.

China has worried Brunei, Malaysia and the Philippines as well over the past decade by increasing its control over about 95 percent of the 3.5 million-square-kilometer, resource-rich sea with artificial islands equipped for combat aircraft and radar systems.

Looking for oil costs big money

Oil and gas exploration also require expensive machinery, tough for some would-be applicants, while no one is sure how much fuel will turn up, said Zhao Xijun, deputy School of Finance dean at Renmin University of China. CNOOC may hope to offset those risks by bringing on foreign partners, he added.

“The first thing is that risk is pretty high and second, the technical requirements are rather high,” Zhao said. “So perhaps the organizations or companies able to participate in this project would face a certain hurdle.”

Falling oil prices further limit the value of exports from any undersea discoveries, analysts say. World oil prices have fallen from more than $100 per barrel in 2013 to about half that now. “The terms will probably have to be pretty good to attract foreign firms,” Pugh said.

Oil riches under the sea

The U.S. Energy Information Agency estimates 11 billion barrels’ worth of oil under the sea and 190 trillion cubic feet of natural gas. Much of that lies under the continental shelves of Southeast Asian claimants and has not been tapped.

The Philippines began more than 40 years ago looking for oil west of Palawan island, at Reed Bank. In 1984, a Philippine company found an oil field off in the same region and it supplies 15 percent of the annual oil consumption in the Philippines. Malaysia has secured about 5 billion barrels of oil and 80 trillion cubic feet of natural gas, more than any other of the five South China Sea claimants.

There is opportunity

CNOOC, which is China’s biggest offshore oil and gas producer, says on its website it will pick foreign partners with a “vision of win-win cooperation” and “flexible and favorable measures in the exploitation in the deep water area.”

The state run Global Times news website quotes Chinese analysts saying that because most exploration blocks are close to China itself, they are stable investments for foreign contractors.

China also has a deal with Vietnam over joint use within the Gulf of Tonkin, site of one oil block being offered for a contract.

“I don’t think that will be a problem, because China and Vietnam have made some compromises or demarcation trying to divide the territorial waters, so if that is the case, I think this kind of exploration will certainly [be] in the Chinese territorial domain,” said Andrew Yang, secretary-general with the Chinese Council of Advanced Policy Studies think tank in Taiwan.

But one expert told the Global Times that large-scale foreign drillers may still use extra caution because of the disputes.
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