Vietnam’s crucial offshore energy industry is being squeezed as US-China tensions rise in the South China Sea.
According to reports, China is pressing for the termination of a Vietnamese offshore development with Rosneft Vietnam, a joint Russia-Vietnam venture that recently canceled its contract for London-based Noble Corp’s semi-submersible exploration rig.
Noble announced the cancellation in a fleet notice without explicitly naming the company, while saying it would still be paid for the contract. The notice came just days before US Secretary of State Mike Pompeo claimed China’s wide-ranging claims in the disputed maritime region were “illegal.”
Hanoi reportedly told state oil firm PetroVietnam to cancel the rig contract due to Chinese pressure, according to BBC’s Vietnamese Service. Rosneft Vietnam had reportedly been concerned since 2018 that its Lan Do “red orchid” project in block 06.1 lies within China’s sweeping “nine-dash line” claim to the sea and that drilling there could upset Beijing.
“Before direct aggression offshore, by diplomacy, China sent a note to Rosneft Vietnam’s parent company, Rosneft Corporation,” the Vietnam Energy Review’s Editorial and Review Council’s Nguyen Le Minh told the BBC Vietnamese last week.
Chinese pressure on the project was already building. China’s Foreign Minister Wang Yi reportedly asked his Russian counterpart Sergei Lavrov on the sidelines of an ASEAN ministerial meeting in August 2019 for Moscow’s Rosneft to abandon its offshore exploration with Vietnam. Lavrov reportedly declined.
The pressure is China’s latest move to shut down further resource development in energy-hungry Vietnam, as Beijing aims to force all foreign oil companies out of the South China Sea, leaving itself as the only potential joint development partner for rival sea claimants.
Last year, a US State Department spokesman estimated China is effectively blocking the development of $2.5 trillion worth of oil and gas resources in the South China Sea. Other analysts have put that figure even higher.
The pressure has hit Vietnam’s gas production, power generation, royalty revenues and underlying sovereign risk, while causing a measure of instability given perceived Chinese aggression is often met with nationalistic public protests Hanoi is reluctant to repress or allow.
When China positioned a massive exploration rig within sight of Vietnam’s coast in May 2014, violent anti-China protests erupted and forced Beijing to evacuate its nationals. Vietnamese dissidents often accuse the Communist Party government of going too soft on Beijing in the sea disputes.
At the same time, Vietnam’s oil and gas reserves are declining and new developments have faced headwinds while energy demand is set to grow in an economy that was one of the biggest decoupling winners before the pandemic.
But China’s ongoing pressure also means few other nations or their energy companies are likely to take new blocks or make final investment decisions on their existing holdings, though 2020’s depressed oil prices and slack demand have made project sanctions rare this year.
China has also harassed energy explorers in Malaysian waters while earlier this year it sank Philippine and Vietnamese fishing boats in contested sea areas. In 2017, it forced Spain’s Repsol from Vietnam’s Red Emperor project through threats and pressure on Hanoi.
Pompeo’s tough new rhetoric, however, may or may not be a game-changer for the sea’s energy calculus. International law based arguments have carried little weight to date.
When the Philippines won its Permanent Court of Arbitration at The Hague case in 2016 against China’s nine-dash line that encroaches deep into multiple littoral nations’ exclusive economic zones, including areas rich in fossil fuels, the US kept relatively quiet.
At the time, Washington hoped for peaceful solutions and insisted freedom of navigation would not be affected by territorial spats over the Spratly and Paracel island chains, which are variously contested by China, Vietnam, the Philippines, Brunei, Taiwan and Malaysia.
That US reticence, including over rights to energy resources in the sea, all but ended with Pompeo’s announcement last week. “Any (Chinese) action to harass other states’ fishing or hydrocarbon development in these waters, or to carry out such activities unilaterally, is unlawful,” Pompeo said.
The US envoy added Washington stood “with our Southeast Asian allies and partners in protecting their sovereign rights to offshore resources.”
In the 2000s and early 2010s, then-nascent struggles for the maritime area were mostly viewed as spats over resources by fast-developing, energy-importing competing economies.
At the same time, China has been developing its own onshore resources, even as it imports record amounts of crude from the US and others, and plans to massively increase its LNG imports.
China is also importing rising amounts of pipe gas from Turkmenistan as well as via the vast 38 billion cubic meter per annum capacity “Power of Siberia” pipe operated by Russia’s Gazprom.
As such, China doesn’t immediately need the the South China Sea’s subsurface resources, though controlling the rich pools is a useful longer-term strategy and could be crucial in any conflict with the US that threatens its shipments from the Middle East.
A draft document on the Association of Southeast Asian Nations’ (ASEAN) still pending Code of Conduct for the South China Sea submitted recently by China asserted that all development of resources in the maritime area must be done via cooperation within the region and not with outside companies.
Last year, China signed provisional development deals with Brunei and the Philippines, which saw the relaxation of certain laws related to foreign investment to allow Chinese companies to jointly develop resources in their claimed waters.
Opponents in the Philippines have claimed the still on the drawing board deals are unconstitutional.
Malaysia and Indonesia both develop projects with Chinese national oil companies (NOCs), though often in partnership with other international companies in waters that sit outside of the sea’s territorial disputes.
Chinese involvement in major global oil and gas projects is common these days; CNOOC, for instance, is partner to ExxonMobil’s huge offshore Guyana oil development, known as Liza.
But the likelihood of PetroVietnam partnering with Chinese NOCs – or the Vietnamese public accepting any such arrangement – is low. But with declining reserves and rising power demand, Vietnam is in a tightening energy security bind.
It will be made worse as ExxonMobil, in a portfolio move to shed a non-core venture, likely leaves its huge gas-to-power project on Vietnam’s central coast known as Ca Voi Xanh, or Blue Whale. Finding a buyer for the project with an aggressive China pressing down in the region will likely be difficult.
Partly as a result, Vietnam is looking at a series of large-scale LNG import terminals to meet growing power demand at a time when hydro-power is declining and new coal-fired plants are off the table. In early February, the government said it plans to increase generation capacity from 54 gigawatts now to 125-130GW by 2030.
The Lantau Group, which researched a report for the World Bank in 2018, estimated that “Vietnam will require reliable, secure, diversified and cost-effective fuel supplies for its power sector” to sustain 8% GDP growth between 2021 and 2030. Its recommendation: more LNG imports.
Those fuel imports could come from American LNG producers and help to rebalance trade ties with the US, given that Hanoi has been singled out by President Donald Trump for having an exceptionally large trade surplus with the US.
The US, meanwhile, needs markets for its vast and growing LNG industry, which has moved from not exporting at all in 2015 to becoming the world’s third-largest this year, albeit before Covid-19 hit and disrupted global demand for the fuel.
Currently, European oversupply and a general glut coupled with low demand in traditional import nations like Japan have kept US LNG exporters running at just 25% capacity, according to recent data from the US Energy Information Administration (EIA).
As a trade war olive leaf, China agreed to take $52 billion worth of US energy exports over 2020-2021, but even prior to Covid-19 and a sharp deterioration in ties that amount seemed unrealistic.
China has imported little to no US LNG in recent months, but has taken advantage of recent record low oil prices, especially for the US onshore benchmark West Texas Intermediate (WTI), to import huge amounts of crude.
ExxonMobil is now looking at a separate huge gas-to-power development in Vietnam’s northern Hai Phong and Delta Offshore plans to develop one in the Mekong Delta’s southern Bac Lieu province.
Meanwhile, construction started in September on the nation’s first LNG import terminal in Thi Vai. US companies have expressed their interest to supply fuel to the projects.
But while the US now says it won’t stand for Beijing’s “campaign to bully and control” the contested sea, by keeping the region’s fossil fuels untapped and underwater, US energy producers could actually stand to benefit from China’s intimidation.