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Chinese National Offshore Oil Corporation, Strategies in the South China Sea

Allen McClintock, Brandon Steinkuehler, Paul Thorburn

Professor: Dr. Nikolaos Mykoniatis

MARA 440

Texas A&M University at Galveston

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Abstract:The Chinese National Offshore Oil Corporation (CNOOC) is one of the three

major oil companies based out of China. These companies play a vital role in the

country’s plans to evolve into a self-reliant state. The strategies and dealings of these

corporations are largely influenced by the state, and often times, especially in the case

of the CNOOC, have military support in the implications of their operations. This paper

will focus on the operations and strategies of China and the CNOOC with special regard

to their dealings and plans in the South China Sea (SCS). This paper will discuss the

costs, advantages, and disadvantages of their current strategy, as well as provide

insight into other, possibly more beneficial, alternatives to these strategies.

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Introduction:

In order to initiate an accurate analysis of the CNOOC, one must first obtain a

basic understanding of the corporation’s organizational make up, mission, and related

topics, as well as its plans for the future. Likewise, in order to fully understand the

drawbacks of the CNOOC’s current strategies in regards to the SCS, one must have a

basic understanding of the history of the largely disputed stretch of ocean. With an

understanding of these pieces of information, a proper analysis of potential alternative

strategies can be provided.

Background:

History of the Dispute:

In order to better understand why The CNOOC’s methods are being questioned,

it is necessary to provide a brief history of the dispute at hand. The SCS contains

numerous amounts of small, modest islands. The vast majority of the islands are an

extremely miniscule outcropping of sand barely breaking the surface of the sea at times.

These islands, though small and seemingly insignificant, are the center of an ongoing

territorial dispute between

numerous countries in the area.

Not only are the countries of

China, Brunei, Malaysia, the

Philippines, Taiwan, and Vietnam,

fighting for control of the tiny

islands, but they are also in

dispute over who controls the area

below the sea, as well as the

potential resources that these

areas may provide. The SCS is an

extremely busy, primary route for

international trade. The vast

potential resources, and high level of trade power, while being the main motivators for

Figure 1: Map of the South China Sea

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China, are not the only things that draw these countries to gain control of the area.

Many of the countries place a high level of intrinsic and historic value on these territories

that they say “far exceeds their objective material wealth” (Haung, 2014). As if the

disputes with the countries in the adjacent areas weren’t enough, the United States has

also been getting involved in the resolving of this dispute in order to maintain the peace.

In Figure 1 it is made apparent that the SCS’s many islands can be divided into

two main groups of chained islands: the Paracel Islands and the Spralty Islands. In the

first half of the twentieth century, the area was relatively free of conflict as the

surrounding countries were occupied with disputes taking place elsewhere at the time.

None of the islands had any claimants up until 1946 when China established a

presence on a few of the land features in the area of the Spralty Islands. At the

beginning of 1947, China also took an interest in Woody Island, a small part of the

Paracel Islands. The claiming of the Woody Islands actually undermined the French and

Vietnamese who were intending to settle there. Having been beaten to it by China, the

French and Vietnamese settled for another island nearby called “Prattle Island” (Huang,

2014). Even in this time period the SCS was not a priority. The Vietnam War was taking

most of the attention of the nearby states.

In the second half of the century, there was a rush of interest in the SCS . Taiwan

and China began establishing a permanent presence on major islands in “1955 and

1956” (Huang, 2014). It was not until the 70s that the SCS adjacent countries realized

that there was a potential for a massive amount of oil reserves lurking beneath the sea.

This realization, naturally, amplified the nearby states resolve to control the areas, and

take advantage of the potential resources. In the midst of this newly fueled fire for

control ignited the first armed conflict of the disputed territories. China implemented a

strategic seaborne invasion of the Paracel Islands. In this strike, several Vietnamese

were killed and a ship was sunk. This caused North and South Vietnam to reinforce

their remaining territories and occupy a few other unoccupied islands in the area. After

this conflict there was a decade long lull in the dispute until 1988 when China moved in

on the “Johnson Reef in the Spralty Islands” (Huang, 2014), again killing several

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Vietnamese sailors. Another lull in conflict took place, but, in 1995, China initiated

another escalation when they built bunkers on the Mischief Reef.

In 2002 a declaration was created in order to help maintain the peace and

prevent further complications or conflict in the SCS. While the dispute did stop open

conflict for a while, the countries began to make attempts at the territories through

demarches. Vietnam and Malaysia sent in a submission to the “Commission of the

Limits of the Continental Shelf (CLCS)” (Huang, 2014) in order to set out some of their

claims to the islands. This caused the other countries to object to their claims and send

out their own claims for territories. These claims resulted in China’s creation of the

famous nine-dash line; a line that goes around the edges of the Sea and encloses a

vast amount of the water area as well as a large portion of the SCS’s land features.

Since the creation of the nine-dash line, China has taken many more territories in the

area and caused numerous other significant conflicts through its actions concerning the

area.

It is clear that the majority of armed conflicts in the area have been initiated by

China, making it transparent that the country must have some sort of plan in design for

the area. The question remains: why is China so intent upon taking these areas by force

and causing so much international conflict for the potential resources? There are plenty

of other, less risky, and internationally accommodating options to retrieve the same

resources that China clearly so badly desires.

Business Strategy/History of the Chinese Offshore Oil Corporation:

From its inception, the CNOOC began as an international corporation, it has to

deal with and cooperate with overseas partners. Besides the cooperation with its

partners, the CNOOC was essentially a domestic firm with the full might of the Chinese

government backing it in every decision. In 1982 the CNOOC began expanding and

opened up several local branches throughout different geographic areas of China. Each

of these branches was responsible for exploration and extracting resources from their

respective locations. Now the company has a branch called CNOOC Petrochemical

Import & Export Co., Ltd. which is in charge of trading internationally for the CNOOC.

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Two of the company’s most successful overseas trading branches include Singapore

and London. With all of the international trade and expansion, the CNOOC exposed

itself to foreign exchange risk; however, the company has successfully increased its

capital through successful uses of exchange hedging. The CNOOC also has utilized an

acquisition foreign direct investment (FDI) strategy in its international expansions. For

example, in 2013 the CNOOC took over the Canadian oil and gas corporation called

Nexen for “$15.1 billion” (Sternberg, 2012).

Current Events and Their implications:

More recently, the CNOOC has been getting itself involved in the tense political

disputes that come with doing business in the SCS. The company recently “placed a

deep-water drilling rig” (Fravel, n.d.) in an area that is not only claimed by China, but

Vietnam as well. This not only caused violence between China and Vietnam, but also

increased tensions between America and China. As mentioned earlier, the CNOOC has

an unnatural association with its domestic government for an international corporation.

This business strategy has caused them some trouble in their international expansions.

Many countries, especially the US, are not entirely sympathetic with the Chinese

government’s policies. This was made especially apparent in 2005 when the CNOOC

attempted to buy out Unocal Corp. in California for “$18.5 billion” (Sternberg, 2012).

This move would have placed a significant foot hold for the company in the United

States energy sector, however, the U.S. Congress opposed this take over due to the

excessive ties the CNOOC has with the Chinese government. The opposition ultimately

blocked the deal and Unocal was instead bought out but Chevron. The rest of the

industry looked upon this failure as an indication of the CNOOC’s lack of international

experience. This begs the question, Is it profitable for the CNOOC to be this involved

with the Chinese government, and would it not simply be cheaper for the company to

alienate itself from the government and focus on its own international FDI strategies? To

answer this question, an analysis of the true purpose of the CNOOC’s existence is

required.

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According to the company’s website, the CNOOC’s purpose is “To explore for

energy in China’s coastal waters” (International, 2014). However, recent and previous

actions seem to indicate alternative motives for the company. Companies like Shell,

Chevron, and BP began with entrepreneurs looking to exploit oil reserves domestically.

After succeeding in this regard, the companies began to expand internationally in order

to exploit the resources (natural, financial, and experience) of other countries to

increase their own productivity, and profit. The CNOOC, on the other hand, has been

tasked by the Chinese government to use its capital in order to control overseas oil

supply. This has been accomplished through acquisitions of foreign producers (like the

purchase of the Canadian company mentioned above). This may seem like a

reasonable thing to do, however if a closer look is taken, it may seem unreasonable.

With CNOOC’s purchase of the Canadian Nexen, it is now paying a premium that

is 60% over Nexen’s pre-deal sale price (Sternberg, 2012). This fact makes the

purchase seem like it is not worth the costs; especially considering the fact that the oil

and gas produced by Nexen were already available for sale on the global market. This

makes it seem as though China may be using the CNOOC as a means to achieve a

more mercantilist economy through the purchase of companies with access to enough

resources to make the country self-reliant. With massive resources of oil in the control

of the CNOOC, China will no longer have need to trade with other countries to obtain its

oil and gas, thus shutting off the rest of the world to the benefits and potential gains

from trading with China. The strongest evidence that backs this theory is brought about

through a comparison to the missions of other oil companies.

Most oil companies make it their goal to make energy cheaper through the

development of better exploration methods, or increased technologies. Improvements in

these areas make the locating and producing of oil cheaper, thus allowing it to be sold

at a better price. The CNOOC has instead allocated its funds and resources to

accumulate a global supply of the resources. According to the Wall Street Journal,

mercantilists that have acted in similar ways tend to end up overpaying for their global

supplies and ultimately bring about their own downfalls. Given this information it seems

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clear that the CNOOC is far too controlled by the state and is not truly working with the

best interests of the corporation in mind.

Foreign Policy/Goals:

In late 2013 Chinese President Xi Jingping, announced a promotion for a new

maritime silk-road involving the SCS (Denyer, 2014). According to the Foreign Policy

Journal, the silk-road proposition has become something of a political “master

plan”(Zhang, 2015) for expanding China’s diplomatic and economic prowess,

connecting China to the west, as well as helping them secure their resources in energy.

With that in mind, it is obvious that this proposition is extremely important to China. In

order for this new silk-road proposition to be effective, China will be required to make a

number of business deals with its surrounding countries. This will obviously require

good relations between the countries, and given the current disputes in the SCS , it

seems rather unlikely that any country involved in those areas will show much sympathy

towards China’s plans.

With the current strategy being implemented in the SCS, China is seriously

damaging its relations with the Association of Southeast Asian Nations (ASEAN). The

cooperation of these countries is absolutely vital to the success of China’s plans for the

new maritime silk-road. The continued construction and increase of military fortification

of the islands in the SCS has brought tensions between the Philippines and Vietnam to

an all-time high, and relations to an all-time low, as these actions make the above

countries feel threatened in their own disputed claims of the islands in the SCS.

Without a change in its SCS policy soon, China could soon be facing detrimental

effects not only for the silk-road proposition, but for the rest of China’s foreign policy

interests. According to the Foreign Policy Journal, if a change in foreign policy towards

the SCS is not implemented soon, there is major potential for ASEAN countries along

with the U.S. to form an “Anti-China alliance”(Zhang, 2015). Such an alliance would

greatly disrupt trade and economic efficiency for China in one of its largest trade areas.

That being said, it is clearly far too costly for China to continue as it has with its current

policy. It would greatly behoove China’s foreign interests and economic well-being to

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bring about a more peaceful and agreeable strategy that will return foreign relations to a

reasonable level of cooperation between them and ASEAN countries. This will be the

main purpose of the research done in this paper.

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Analysis:

The Chinese National Offshore Oil Corporation (CNOOC) and by extension the

Chinese government need to rethink their method for acquiring oil in the SCS area.

They may choose from two major options. The first option is to recognize that they wish

to operate in the waters of other nations, and take steps to rightfully include those

nations in the business. This would involve creating foreign subsidiaries and using FDI

to expand the areas that the CNOOC could drill. The other option is to purchase oil from

foreign suppliers for importation.

The FDI would leave the CNOOC with large amounts of control, give them easier

access to capital and allow them to gain the human capital and intellectual property to

operate with high efficiency and lower the cost of production. This lower cost would

offset the raise in cost caused by having to share profits within a foreign joint venture or

paying export tariffs. They also may run into the ethical choice of whether to provide

incentives to the government officials of less stable and democratic countries to ease

the investment.

The option to import oil drilled by foreign companies is less favored by the

CNOOC and the Chinese government. It has a higher cost per unit of oil but this option

has a lower initial capital outlay. Its risk is low in the short term but rises in the long term

due to political actions that may occur. This option gives the Chinese the lowest control

over their supply of oil, a major national security problem for a growing regional

superpower like China.

Option for Foreign Direct Investment:

In its search for oil to produce, the CNOOC may wish to use FDI as a method to

gain access to the resources in the SCS and Yellow Sea. This method allows them to

have complete control over the equipment and people producing the oil while they

operate in another county’s economic exclusion zone. The CNOOC could act in a

similar manner to the oil companies, Royal Dutch Shell and Exxon-Mobil, when these

companies used FDI to gain access to the oil resources in Nigeria. Using FDI would

also ease the use of the Global Capital Market to fund the expansion.

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The CNOOC is likely to pursue a Greenfield investment in the SCS as there are

currently few companies drilling in the area. Oil production in the SCS has until now

been limited to near shore operations. These operations are not suited to drilling in

deep-water environments. It would be unlikely that the CNOOC could find a local

company whit which merge to provide access to the resources or for a company to be

available for acquisition. The Greenfield investment does carry risk for the CNOOC.

Greenfield investments have a higher cost and also take more time to implement.

The CNOOC would become an outflow of FDI. This would help balance the

Chinese stock of Foreign Direct Investment, as many companies use China as a host

country and send FDI into China. The inflow of revenue from the earnings of the FDI

could also offset the earnings that other foreign companies send out of China every

year, improving the economy. Using the FDI route may also improve relations with other

countries in the SCS area. Giving other countries an economic boost will boost

corporation on other levels. This will also create a level of interdependence between the

countries, lessening the threats to Chinese national security.

Importing oil or hiring a foreign company to extract oil would not give the Chinese

the control and stability the Chinese need in oil production. The reason for the current

route of the CNOOC is to maintain control. Oil is a vital resource for the Chinese

economy and Chinese national security. Importing oil would always run the risk of the

exporting country imposing restrictions. If the CNOOC was to hire another company to

perform oil extraction in the SCS, they would run similar risks because the company’s

home country could impose sanctions. FDI could side step some of this risk by having a

Chinese subsidiary performing the work. This would force the FDI host country to block

the movement of oil. Using FDI allows the CNOOC to get the resources they want while

those resources are in another country’s waters.

The first company to enter the oil production market in the SCS could choose the

best production locations to produce. This would give the company a location specific

advantage. When the location needed is outside the country’s borders, the easiest way

to gain the resources is through Foreign Direct Investment. The experience the

CNOOC gains by operating in the SCS could help it be more competitive in other

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offshore production markets. Using the FDI route may also allow the CNOOC to gain

valuable knowledge to improve its ability to operate subsidiaries further away from

Chinese shores without the need for military intervention.

While FDI has many advantages for the CNOOC, there may be problems

associated with its undertaking. The main problems facing the CNOOC preforming FDI

are created by the host country. The host country may force any expansion to be a joint

venture with a local company. The host country may restrict where the CNOOC may

drill. The host country might even ban the exporting of crude oil, forcing it to be refined

in the host country before export.

Foreign Direct Investment in Nigeria:

The CNOOC may wish to follow the path that other companies have taken in

Nigeria. In 1956 a joint venture by Royal Dutch Shell and British Petroleum discovered

an oil field in the Niger Delta and began production. The wells started on land but

because of guerrilla activities and corruption, the oil production began to move into near

shore and off shore areas. This production counted for a large portion of the Nigerian

economy and allowed the county to experience growth.

FDI into oil production in Nigeria had many controls paced by the Nigerian

government. All multinational enterprises had to make joint ventures with the Nigerian

National Petroleum Corporation (NNPC). The foreign companies would provide the

capital and experience. The NNPC would allow the company to operate, and the NNPC

take a fee based on the amount of oil produced and the current market oil price. Even

with these limitations, oil production in Nigeria has boomed. Many companies have

production facilities in Nigeria, these include: Royal Dutch Shell, Chevron, Exxon-Mobil,

Agip and Total.

Much like these companies did in Nigeria, the CNOOC could move into the

waters of other countries in the SCS by creating joint ventures with companies in the

other countries. In Nigeria the NNPC, in its joint ventures with the foreign oil companies,

would receive a meager 12% of the market value of the oil exported. Even after Nigeria

joined the Organization of the Petroleum Exporting Countries (OPEC) in 1971, the

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country could only control the amount exported and not the price paid. This caused

debate within the populace of Nigeria.

This type of FDI is easiest in countries with non-democratic governments as

hosts. These governments would have lower expectations of profit shares with the

CNOOC. The two top choices for FDI host countries would be Thailand and Vietnam.

Thailand is currently under the rule of its military after decades of political unrest that led

to a coup d'état in 2014. Vietnam, as a single party socialist country, would also be a

likely host for FDI in oil.

Challenges of Foreign Direct Investment:

FDI would have been a proper choice for the CNOOC to gain access to oil in the

SCS, but due to its actions it is now unlikely. The military push into the national waters

of other counties has angered the governments and people of those counties. It would

now be challenging to receive governments’ approval for FDI in many of the countries

that have claims in the SCS. To gain permission at this time would require larger shares

of profits along with restrictions on quantities available for export. The larger problem is

that the Chinese government may be forced to make political moves to facilitate FDI

that would be unfavorable to China. These may be admissions of wrongdoing,

apologies, or agreements on the economic boundaries in the SCS.

Capital Requirements:

Offshore oil drilling and production is a capital intensive industry as is the

transport of crude oil. Funding for any operation in the SCS must be obtained. On the

current Chinese route of military back expiation, the CNOOC’s only option for gaining

capital would be internal sources because of the military nature of the operation. If the

company used a FDI, method the CNOOC could gain access to the Global Capital

Market, where they could get capital at a lower cost. This low cost is achieved by the

vast increase in supply of capital on the global market as compared to a single nation’s

capital market. This also opens the ability for the CNOOC to use Eurodollars or

Europounds to purchase technology and skills from foreign offshore oil companies to

expand its production capacities or improve efficiency.

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Political Economy

With a rapidly growing economy, large population, and supersized nation, China

is a massive consumer of the world’s hydrocarbons and other viable natural resources

both renewable and non-renewable. Their need for resources is obvious via population

reasons alone. As top consumer of the world’s goods, and a massive exporter as well

as importer, energy consumption is not only high but also completely necessary for

China in relation to their annual GDP and overall profitability as a nation in the global

economy. Chinas top three oil companies are massive entities but do not currently

produce nearly enough domestic oil and gas to supply their needs as a nation. Energy

security is of utmost importance to China, which offers some explanation as to why the

levels of government guidance and backing are so high, “Beijing considers oil a

strategic role which plays an integral role in China’s economic growth and development”

(Yi-chong, nd).

In regards to political economy the state owned CNOOC (CNOOC) is

comparable to more of a subsidiary of the Chinese government than simply a state

owned enterprise. State control over the commanding “heights” of the economy help

China to ensure dominance remains predominately domestic. This is important to China

and views domestic controls a way to maintain their social goals, and arguably national

sovereignty and security. In doing this China supplies CNOOC with a favorable position

in the economy and industry, with preferential treatment and rather extensive financial

and military support. By doing this China is expecting the CNOOC and companies alike

to flourish in their respective industries but also to help advance China’s strategic and

political objectives.

The vast majority of China’s future energy security is seen in the SCS and with that

vision comes a higher political relation to the CNOOC, which is China’s only offshore

hydrocarbons company. The Central Organizational Department (COD) serves as a

control that helps to determine intra-corporations adjustments such as promotions and

personnel appointments through internal mechanisms. The COD also offers internal

mechanisms like party committee members and secretaries who will often double as

chairmen of corporations like the CNOOC. These institutions will affect corporate

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decision making, thus further paving the way for China’s objectives. The government

remains the majority shareholder in all three of the People’s Republic of China’s oil

companies with no private sale of stock in sight. The CNOOC is actually the lesser

owned of the three companies at only 64.41% owned by the government (Yi-ching,

2012). China’s weariness about allowing any type of foreign control over their oil

corporations is obvious, and crippling to them in their quest for energy security. The

CNOOC is not officially traded globally but created a subsidiary for this particular reason

under the name CNOOC Ltd. CNOOC Ltd is traded domestically in the Hong Kong

stock exchange and overseas in the New York Stock Exchange. By doing this China

maintains control over the company while still reaping some of the financial benefits

from the global market. China holds a strong grasp over the CNOOC and they offer a

seemingly unfair ultimatum in regards to other foreign companies who also wish to

exploit the resources available in the SCS.

Ethics and Relations

The term ethics refers to accepted principles of right or wrong that govern the conduct

of a person or in this case a nation and its corporation. In business an ethical strategy

must be taken with other competitors to adhere to unwritten principles, and ideologies of

proper business in this day and age, in a way to not violate these principles. China and

its CNOOC are in a sense rebels when it comes to the way they operate with other

nations surrounding the SCS. With China now leading the world in oil imports to supply

a growing demand, their need for energy security is growing and with it their attitude

towards what they believe is theirs regarding the SCS. This need for more and more

energy has led China and its offshore corporation to become increasingly more

irrational in consideration of reasonable bilateral agreements over resource exploitation.

It is a way or the highway type of negotiation with China currently, taking an

increasingly aggressive stance towards other SCS nations. China has essentially

claimed hegemony over most of the waters in the SCS and uninhabited islands in the

regions, “the Chinese government has stated that the SCS is a core interest of China,

putting it on par with Tiber and Taiwan as a matter of national sovereignty”(The Strait

Times, 2010). Though China has such an aggressive stance both politically and

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economically they are apparently open to joint development of SCS resources with

other nations and claim that their intent is not to exclude nations from development.

The other SCS nations remain wary, as China has proven to offer unethical resolutions

for this matter. The hesitation of other nations cooperation in a bilateral agreement with

China and the CNOOC may be warranted due to China’s rather outlandish ideas of

what an ethical agreement involves. Suisheng of the Asia-Pacific Journal stated

“although China has offered joint development to other claimants, its concepts of joint

development seems to involve joint development of the producing oil and gas fields on

other claimants’ continental shelves – and then only after China’s sovereignty has been

recognized”(2008). The CNOOC and China take an approach most related to the Straw

Men approach of ethics when it comes to SCS relations. They ignore a lot of values

cemented in international business ethics, and more importantly seemingly ignore their

moral obligations and social responsibilities allotted to them due to their size and

dominance in the global market. With the power held by China and the CNOOC in the

global market surrounding the SCS their obligation to incite resolution dialogues and

agreements is necessary. Having the ability to push whatever objective they see fit for

the CNOOC in the SCS and essentially muscle out surrounding nations objectives is

morally wrong. They offer social resistance to change or cooperation through a take it

or leave it stance thus leaving exploitation of valuable resources to a standstill.

Import and Trade Issues

With the position the CNOOC and its parents, the Chinese government, take

regarding joint exploration and production in the SCS they are essentially hindering

themselves from their own objectives and deterring achievement of the ultimate goal,

energy security and exploitation from the SCS. The heavy involvement of government

via their military, financial, and political ways is causing them to currently lose energy

security. Their need to seek partnerships is absolutely necessary for them to increase

production in both upstream and downstream sectors and supply more domestic oil for

a rapidly growing nation. Chinas energy consumption maintains record levels, the

energy security desired and mercantilist state needed is unattainable through importing

vast amounts of a predominately foreign energy source. In 2012 China’s foreign oil

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dependence rose to 56.3% and its dependence on natural gas imports rose 21. 5%

according to gCaptain (2012), which helps spark CNOOC’s hesitant drive to import

foreign oil companies help in the SCS.

The SCS hold roughly one third of all of China’s oil and gas reserves with an

estimated 70% of which is located in what is categorized as deep water, an area of

specialization relatively new to China. The CNOOC lacks intimate deep water drilling

experience and the affiliated skills involved; yet stubborn, they are aware of this and

somewhat recently have involved outside entities in upstream processes benefitting

their efforts at energy security via the SCS. Due to previously stated high risk situations

most of which created through China’s policy regarding the SCS, many foreign

corporations are not interested in working with the CNOOC though few are assuming

said risk. CNOOC has typically relied on foreign partners such as “Canada’s Husky

Energy Inc. (HSE.T), U.S.-based Chevron Corp. (CVX) and U.K.-based BG Group

(BG.LN) to explore and operate deep water blocks off China” (gCaptain, 2012). With

only relative success from Husky the foreign interest has dried up considerably

accompanied by increased risk from lack of seismic data with conclusive results, a lot of

which is at the fault of China for creating such a hostile and high conflict zone

surrounding potential reserves.

The high regulation is affecting China, causing foreign exchange with useful

companies to diminish, and the importing of external ideas and needed know how to

distance itself from the CNOOC. For example in 2011 the CNOOC publicly offered up

four deep-water blocks for foreign partnerships in the SCS and only managed to catch

the successful bid of one company for one block 400 kilometers off Hong Kong. In

addition to CNOOC’s mildly unappetizing partnership, two of the four blocks offered for

foreign investment are in highly disputed, potentially Vietnamese owned waters.

According to CNOOC Chairman Wang Yilin, “Harsh environments, technological

difficulties and high costs have prevented much of these resources from being

exploited” (2012) and ironically does not relate the lack of exploitation and foreign

investment to the CNOOC and China’s abrasive an unethical policy towards claims in

the SCS. China’s need for expertise in potentially extremely energy rich waters is

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obvious as the CNOOC lacks experience in what is a very costly and important

endeavor to China and their national sovereignty. Their attempts at importing foreign

experience have been halfhearted and rather unsuccessful, as have their negotiations

with surrounding nations about the claims in the SCS. With minimal knowledge from

foreign know how, the CNOOC has almost completely ceased the idea of teaming with

knowledgeable foreign entities and investors and in turn is taking on the attempted

deep-water exploitation domestically. In regards to China and the CNOOC’s import

strategy it is relatively non-existent as they still refuse to accept any boundary claims or

proposals by surrounding nations, and apparently even refuse to accept boundaries put

forth by The Law of the Sea via exclusive economic zone acknowledgment.

As if the business and moral ethics of China and the CNOOC were not already in

question the CNOOC has in recent years crossed respected exclusive economic zone

boundaries and made an attempt at accessing deep water energy off the coast of

Vietnam inside their respected boundaries. According to gCaptain, “China National

Offshore Oil Corporation placed a deep water semi-submersible rig 120 nautical miles

off of the Vietnamese coast” (2014) despite boundaries historically respected, China

called this rig “mobile sovereign territory”. This rig is capable of drilling up to 3,000

meters, the first of its kind in CNOOC’s fleet, the previous rigs have only been able to

drill up to a mere 200 meters. With the CNOOC advancing at this depth it would allow

them to drill effectively anywhere in the SCS. In placing this rig in Vietnamese entitled

waters CNOOC displayed its dominance when it comes to the SCS deep-water race,

essentially flexing the nations might and power in the region. In addition allowing

CNOOC to position a rig in such a place offers the idea that they would be backed with

Chinese military support if the need arose. Such a provocative move on the behalf of

the CNOOC, though temporarily securing China a source of domestic energy, will

undoubtedly affect future involvements from outside companies. Considering the size of

the SCS, and the amount of it which that has not been explored, the CNOOC will

eventually need help. To efficiently leverage the SCS foreign investors with experience

in deep water well completion and deep-water exploration will be necessary. With its

recent provocative actions and history of strong arm, abrasive politics the help may not

CNOOC 19

be readily available which in the long run will affect the initial objective of the CNOOC

and China of becoming a more energy secure nation.

CNOOC 20

Conclusion

The SCS is arguably the most disputed body of water on earth, and with

surrounding nations all staking their claims any current business involvement inside

these viable waters are almost sure to come with some sort of conflict, especially if it

involves the CNOOC. Though being heavily disputed, the SCS is also heavily laden with

natural resources sought after by every nation in its proximity. The most sought after of

these resources is what lies beneath water. A minimally explored seafloor expected to

hold massive oil and gas reserves lies in wait of exploitation. The race for resources has

hardly begun and yet a dominant competitor has already emerged, the CNOOC. A

primarily sate owned company and the smallest of the big three state owned oil

companies in China, it is the only of the three to deal with the offshore sector. The

CNOOC and the Chinese government aggressively pursue dominance in the SCS

through intimidation and with a lack of cooperation or negotiation with the surrounding

countries. Despite pursuit of such a vast body of water their economic strategy is

different from the rest and in turn crippling to their success. The aggressive push into

the SCS often with military accompaniment is clearly an effort to extend China’s reach

via numerous islands and most importantly find energy security for a nation heavily

reliant on foreign energy. Though their lack of ethics in doing business, heavily

politically controlled economy, flawed FDI approach as well as trade theory may leave

them with a lack of necessary resources both financially and socially to accomplish

China and the CNOOC’s goals. In conclusion regarding the SCS the CNOOC is an

offshore company different from the rest. It has distanced itself from many global

competitors, is backed by domestic money and a huge military force, playing by its own

rules with nominal government support and more importantly extensive government

control.

CNOOC 21

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