How China May Still Win Despite Pulling Out its Rig

Deep Pal

The following article appeared on cogitASIA on July 23, 2014

China’s decision to pull out deep water rig HYSY 981 from Vietnam’s Exclusive Economic Zone last week was as sudden as the decision to deploy it near the Paracel Islands in the first place. The owner of the rig, China National Offshore Oil Corporation (CNOOC) and the block rights holder, China National Petroleum Corporation (CNPC), issued a statement claiming that it has completed the tests it had set out to achieve and now plans to “check geological data” back in Hainan.  Xinhua quoted CNPC officials as claiming that preliminary analysis promises potential for oil exploration in the area.

Though the rig is gone, not everyone is ready to believe claims by CNOOC that it has completed exploration at the location. For one, the company had set itself an August deadline to complete its activities. It is possible that just as the decision to deploy was more political than economic, so is the decision to disengage. If that is true, then China will be back soon – perhaps when it is least expected. It has left the door open to return anytime it wills – the Chinese Foreign Ministry said CNOOC will “map out a specific work plan in the next step” after studying the data.

Pulling out three weeks before the ASEAN Regional Forum (ARF) in Myanmar presents China with significant benefits. It blunts Vietnamese plans to corner China and galvanize support from others. For the first time since 1995, ASEAN issued a statement in May 2014 expressing “serious concerns” over clashes between Vietnam and China without naming anyone. Continuation of the standoff could have encouraged a decision to name China this time. In a similar situation in 2012 after a standoff with the Philippines at Scarborough Shoal, China is believed to have successfully opposed a mention of the dispute in ASEAN’s joint communiqué. The meeting ended without a joint statement for the first time in 45 years. China drew flak for its apparent role, and would not want to be in the same position again.

Moving the rig after claiming success allows China a distinct advantage. China’s leadership can claim they have offered their neighbors the opportunity to jointly explore the South China Sea over the last few years. As recently as July 2013, Xi Jinping reiterated the strategy of “shelving disputes and carrying out joint development” to achieve “peaceful development.” Premier Li reached out to Brunei and Vietnam during his tour of the region soon after. Even the Philippines was invited before it hauled China to an international arbitration court in early 2013.

China’s offer has received lukewarm responses at best. Brunei has signed only one agreement so far. Vietnam and China established three working groups including one on maritime development, but failed to create sufficient trust to work together. Before relations with China went rapidly south, the Philippines had indicated that it would agree to joint development, but only under Philippine law.

This time, by moving unilaterally and declaring success, China has put Vietnam and others on the clock. While passing off the risk to international firms in such projects is usually the norm, it self-financed the operation through state-owned CNOOC displaying its ability to go alone. China has also demonstrated that it is willing to escalate by deploying in contested waters next to international projects – by Canada, Russia and the United States. In similar conditions in 2009, BP pulled out of a joint venture with PetroVietnam citing “commercial and technical reasons.” A repeat will severely jeopardize interests of Vietnam and others in the region as they are mostly dependent on international partners for both funds and drilling technology. A Philippine firm, Forum Energy, is the only company that has so far expressed interest in carrying out exploration without a partner, but that too, only in 2016. Till then, China continues to be the only country capable of moving unilaterally in these waters. The message from Beijing is simple – either cooperate and explore the region on China’s terms, or, be left high and dry while it operates on its own and benefits from ensuing finds.

If history is any indication, China is likely to reiterate the message of joint development soon. And this time, Beijing will expect its neighbors to be less resistant to its version of “peaceful development.”


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