”Oil and Gas: Energy Prices, Geopolitics and Implications for

Resource Competition and SLOCs”8th South China Sea International Conference “Cooperation for Regional

Security And Development”, November 13-­15, 2016, Nha Trang City/Vietnam

Dr. Frank UmbachResearch Director of EUCERS, King’s College, London and Senior Associate,

CESS GmbH, MunichE-­Mail: FraUmbach@AOL.COM

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§ Moving into new uncharted waters? New uncertainties in regard to the territorial and resource conflicts in the South China Sea (SCS) since July 2016:Ø PCA-­ruling of July 12, 2016;;Ø China:

Ø its reaction to reject the ruling on the basis of UNCLOS and international law;;

ØNationalistic tendencies in its domestic policies and impacts on its foreign and security policies;;

ØChanges of in its traditional foreign policies;; long-­standing taboos either have been changed or under discussion;;

Ø Future U.S. foreign policies (i.e. “pivot to Asia”) in East Asia after the election of D.Trump to U.S. President;;

Ø Contradicting:Ø bilateral relations between China and the Philippines and Malaysia improving after the visits of the Philippine President and the Malaysian Prime Minister;;

Ø But could further deepen divisions and fragmentations within ASEAN;;

Introduction I

§ Energy Dimensions of the SCS-­Conflicts: § the regional oil and gas resources;; § geo-­economic and geopolitical Impacts on and implications of the strategic changes of the global oil and gas markets for the energy resource competition and territorial conflicts in the SCS;;

§ the energy dimensions of the regional Sea Lanes of Communications (SLOCs) and Choke Points.

Introduction II

South China Sea – Undiscovered Oil and Gas Resources

Source: U.S. Energy Information Administgration (EIA) 2013

§ Energy Dimensions of the SCS-­Conflicts: § Different Estimates:

§ EIA/USGS;;§ China National Offshore Oil Corporation (CNOOC): much larger (at 125 bn barrels of oil and 500 tcf) – up to one third of China’s total oil and gas resources?

§ complicated by additional three factors: § (1) EIA: SCS may hold much more undiscovered) oil and gas resources in underexplored areas;; USGS: additional resources of 5-­22 bn barrels of oil and 70-­290 tcf of natural gas;;

§ (2) only exploration and drilling projects can ultimately answer the question how much of those resources can be exploited in a commercially profitable way;; and

§ (3) that question is dependent on the available technologies, the political as well as industrial will and interest to implement those drilling projects as well as the worldwide oil and gas prices determining the commerciality of those projects.

Importance of the Regional Oil and Gas Resources in the South China Sea

§ Joint development of oil and gas resources;;§ Positive examples:

§ 1979: Malaysia and Thailand agreement for disputed waters for joint exploration projects in an overlapping area (“Joint Development Area/ JDA)”,

§ 2013: CNOOC-­PetroVietnam agreed to extend through 2016 an agreement of 2006 to jointly explore oil and gas reserves on the Tonkin Gulf, and expand the area of exploration from 1,541 to 4,076 square kilometers.

§ China:§ joint development often dependent on the recognition of its “undisputed sovereignty” and historical claims;;

§ Despite becoming more self-­confident, it does not have become more pragmatic, but even more assertive and provocative in its strategy of “creeping occupation” as well as militarization of small island and reefs;;

§ New drilling technologies translate into new commercial projects from shallow to deepwater projects – expanding its economic interests in the SCS and bolstering its territorial claims;;

§ Changing conditions of the global oil and gas markets (over-­supplies and dramatic fall of oil and gas prices) and reduced demand forecasts in Asia.

Importance of the Regional Oil and Gas Resources in the South China Sea

U.S., Russia‘s and Saudi Arabia‘s Oil and Gas Production (2005-­2015)

Source: EIA 2016

U.S. Crude Oil Production: Gradual instead of Drastic Decline in 2016

Source: EIA 2016

Comparison of Breakeven Cost Estimates of U.S. Shaleand Conventional Oil Reserves in Other Countries in as

Low-­Cost Options (06/2016)

Source: Jean-­Baptiste Renard/Olga Bakardzhieva, ‘The New Oil Order‘, Energy Intelligence, October 2016 (http://www.energyintel.com/pages/worldopinionarticle.aspx?DocID=938436

U.S. Recoverable Oil Reserves Top Those Of Saudi, Russia (July 2016)

Source: Rystad Energy 2016 (http://www.rystadenergy.com/NewsEvents/PressReleases/united-­‐states-­‐now-­‐holds-­‐more-­‐oil-­‐reserves-­‐than-­‐saudi-­‐arabia), 4 July 2016

Asia‘s Oil Demand (1965-­2015)

Source: Reuters 2016

Source: Bloomberg 2016

LNG-­Demand of Japan, China, South Korea and India (2016-­2020)

§ All SCS claimant states (i.e. China) have become increasingly interested to exploit offshore oil and gas reserves;;

§ During the last decade:§ Increase of technological capabilities of their national oil and gas companies;;

§ became more interested not only at oil and gas projects in shallow waters, but also those in (ultra-­)deepwater.

§ China: § has – like others -­ to invite U.S. oil and gas companies not just because of its own lack of ultra-­deepwater technologies, but also as an effort to neutralize the U.S. foreign policy position;;

§ it exercised political pressure on those Western oil and gas companies to give up their offshore hydrocarbon projects in those disputed waters on the side of other claimant states.

§ New offshore “ultra-­deepwater” (>1,500 metres under the sea) oil and gas drilling projects:Ø commercially hardly profitable with global oil prices of US$40-­50 per barrel;;

Ø but offers economic incentives for joint hydrocarbon develop-­ment projects.

The New Oil and Gas Era: Implications for SCS

Source: interfaxenergy.com 2016.

Deepwater Project of China § CNOOC tapped China’s first ultra-­deepwater natural gas discovery in the north-­western part of the South China Sea since October 2015;;

§ China’s most advanced deepwater rig, the Haiyang Shiyou 981 (CNOOC) re-­entered the disputed waters close to the Paracel Islands with Vietnam last January, which called for China to stop drilling and withdraw the rig.

Source: interfaxenergy.com 2016.

South China Sea: China Shelved New Deep-­waterGas Field Development (06-­2016)

§ June 2016:CNOOC announced that it could postpone the develop-­ment of its first independent deepwatergas discovery until after 2020 as the result of “current market conditions” and a slower gas demand in the government’s 13th Five-­Year Plan (2016-­2020).

§ It had already shelved plans to develop Lingshui 17-­2 using a floating LNG-­terminal (FLNG) project -­ lying in the northern part of the South China Sea (near the Hainan Island) with certified reserves of more than 100 bcm of gas (one of China’s largest offshore gas fields) -­ after the dramatic oil price decline

Source: Stratfor 2016.

Does the Global Oil and Gas Oversupply Affect the Future Strategic Importance of the Regional SLOCS?

§ SCS: one of the world’s most con-­tentious shipping zones as all regio-­nal states depend on stable and secure SLOCs and Choke Points.

§ As a “superhighway of the seas”, SCS is an important route for the international transport of goods, oil and gas supplies and raw materials.

§ Any wider regional instability of the SCS and SLOCS/Choke points would impact distant trade powers (i.e. Germany/EU) as well as leading regional trade nations (i.e. China, Japan, South Korea).

§ Worldwide oil and gas oversupplies, growing diversity of oil exporters and declining GDP growth in China and resulting shrinking of oil and gas consumption as well as imports all decrease overall import volumes of oil and gas as well as global re-­source competition,

§ But it does not automatically de-­crease the overall geopolitical im-­portance of SLOCs in SCS.

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Strategic Perspectives I • New Uncertainties: • China has started to build its first floating nuclear power reactor. • It plans to deploy it off its coast by the end of the decade to support China’s maritime outposts and drilling operations;;

• might be used to justify expanded safety zones.• Regional Oil and Gas Resources:• (ultra-­)deepwater projects: new drilling technologies translate into • new commercial capabilities (like new military technologies and capabilities) and projects,

• expanding economic interests, • bolstering political positions of territorial claims and • even creating new political options and strategies;;

• New Oil and Gas Era -­ Impacts on Regional Oil and Gas Resources:Ø decreased their geo-­economic and geopolitical importanceØ creating more incentives for joint development of oil and gas projects?

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Strategic Perspectives II • SLOCS/Choke Points of the SCS: • overall decline of forecasted volumes of oil and LNG transports does not automatically decrease their geopolitical importance.

• U.S. shale oil and gas exports to Asia, based on “free-­dom of navigation”, will increase their geopolitical importance for the U.S. in future;;Øoffers North-­ and Southeast Asia new oil and LNG import options for diversifying their energy supplies – including for China itself;;

Øcontributing to a more pragmatic policy in Beijing by avoiding following foreign and security policy strategies based on “zero-­sum thinking”?

Thank You Very Much for Your Attention!

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