South China Sea Dispute Could Fuel Global Energy War

The South China Sea dispute, a fight over the 1.4 million-square-mile area crossed by one-third of world shipping routes, played out at the recently concluded Association of Southeast Asian Nations (ASEAN) summit in Cambodia among China, Taiwan, Vietnam, Malaysia, Brunei and the Philippines.

What's behind the fight is a vast quantity of oil and gas believed to lie beneath the South China Sea.

China and the other nations desperately want the energy resources beneath the South China Sea, and the dispute has caught the attention of global financial markets.

China's biggest offshore oil company, CNOOC Limited (NYSE ADR: CEO), recently updated its projection of energy assets in the South China Sea. It said the area could hold 17 billion tons of oil and 498 trillion cubic feet of natural gas.

All those resources could not be extracted, but enough could be taken out to double China's current reserves of oil and natural gas.

For its part, China's Ministry of Land and Resources says the area contains more than 40 billion tons of oil equivalent. Most of that is believed to be in the form of natural gas.

Another Chinese estimate says 2,000 trillion cubic feet of natural gas lie under the South China Sea. That would be enough gas to meet the country's needs for the next 400 years, based on 2011 consumption levels! No wonder energy-hungry China is so interested in pushing its claims in the region.

Exploration in the South China Sea has been very limited so far because few major international oil companies want to get involved in the territorial dispute. China has already successfully pressured companies like BP plc (NYSE: BP) and Exxon Mobil Corp. (NYSE: XOM) to abandon its deals with neighboring Vietnam.

CNOOC itself caused a diplomatic row with Vietnam in June when it put up for auction nine oil and gas blocks that Vietnam says are in its territory. The blocks had already been auctioned by Vietnam to companies including ExxonMobil and Russia's Gazprom.

CNOOC Taking the Lead in South China Sea

CNOOC plans to push ahead in the South China Sea.

Its goal is to produce 500 million barrels of oil equivalent a day from the South China Sea by 2020. It currently produces nothing from the disputed territory.

CNOOC is quickly building up its capabilities to develop the resources in the challenging deepwater conditions. It launched its first domestically built deepwater drilling rig - the CNOOC 981 - in May.

The company already announced it made a big gas discovery in the Yinggehai Basin, which lies off the west coast of Hainan Island, near the territory of Vietnam. CNOOC drillers in August tested a well and reported more than 1 million cubic meters of daily natural gas output came from it. This made the well one of the largest gas discoveries ever offshore in China.

The Growing Risk in the South China Sea Dispute

The more discoveries that are made, the greater the risk the South China Sea dispute may escalate into more than a diplomatic tiff.

Standoffs between Chinese vessels and the navies of Vietnam and the Philippines are becoming more common.

And China is swiftly turning into a maritime power. The successful takeoff and landing of China's J-15 fighter jet on the country's first aircraft carrier, the Liaoning, provide evidence of that.

There's concern China will enforce its view of the disputed territory in the South China Sea on its neighbors. The outgoing secretary-general of ASEAN, Surin Pitsuwan, told the Financial Times the South China Sea dispute could become "Asia's Palestine."

The hope is that it will not.

As CNOOC's head, Wang Yilin, said at the 18th Communist Party Congress, the company wanted to "lay aside disputes and develop it [South China Sea] jointly" with international oil companies and other countries in the region.

Hopefully, that will be the outcome for the territory in the South China Sea.

To understand more about what's at stake in the South China Sea dispute, check out this brilliant analysis by Money Morning Executive Editor William Patalon III.

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