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A New Player is Meddling in the South China Sea Crisis

by | published March 29th, 2017

For years, I have worked with the U.S. Department of State (DOS), providing advice to developing countries on oil and natural gas issues. The connection goes back some 46 years.

It began when I was recruited into a division of the DOS Bureau of Intelligence and Research (INR), initially involving insertion into the Vietnam War theater of operations as a field counter-intelligence officer.

That deployment resulted in the first of my three Presidential Intelligence Awards and launched more than two decades of active service in the intelligence community. Eventually, most of the more recent work has ended up dovetailing into matters related to the geopolitics of energy.

As a result, I have traveled to a number of countries over the years to work with officials on establishing energy policies and practices.

On occasion, that’s involved closing some loops from my past. Take the latest example: Vietnam…

America is Growing Closer to Vietnam

About two years ago, DOS requested that I return to Vietnam to provide support to their oil and gas policy planning process. It will mark the first time I’ve gone back since the war and the prospect has brought back memories.

There has been a huge shift in American attitudes about Vietnam, with the former adversary structuring a capitalistic economy despite lingering ideological differences. It has been an effective hybrid and certainly one of the stranger manifestations in recent memory.

Here at home, Washington had opted to support Hanoi in its ongoing disagreements with China over offshore drilling rights in the South China Sea.

Had anybody forty years ago suggested we would be in any kind of alliance with the Vietnamese on anything, I would have thought it pure literary fiction.

But the assistance initiative has stalled more recently…

A New Player is Playing Geopolitics in the South China Sea

The view of the new Trump administration on the project remains unknown. Yet even before the recent U.S. election, the project has been opposed by Chinese actions in the region. And those have most recently been complicated by moves from another quarter.

Russia.

The crisis in the South China Sea is once again intensifying. Intelligence reports released over the weekend and again yesterday indicate China is nearing completion of three man-made islands.

These provide bases for military aircraft to hit targets throughout most of the contested basin, support Beijing’s expansion of its own energy interests, even bring pressure to bear on very important sea lanes and ocean transit routes.

It’s hard to overemphasize the importance of this region for trade – fully one third of global crude oil, and more than 50% of the world’s liquefied natural gas (LNG), pass through the South China Sea each year.

I have discussed aspects of this crisis and its impact on energy markets before here in Oil & Energy Investor. The latest Russian involvement, however, results in a whole new set of unknowns…

Moscow is Looking to Gain a Foothold in Tomorrow’s Oil and Gas Hotspot

It’s hardly a mystery that the Kremlin has shown an interest in South China Sea developments. Asia has become a major emphasis in the Russian drive to sell more domestically produced oil and natural gas.

With its central budget remaining dependent on export proceeds from hydrocarbon sales, and that budget further requiring that Russia sell increasing amounts into the international market, Asia is the focus.

You’ve seen me say many times that all projections indicate that the bulk of energy needs worldwide will be shifting to Asia at least through 2035. Major pipeline projects to China have clearly signaled Russian intention to compete in the region. The completion of the East Siberia-Pacific Ocean (ESPO) network has opened up a major port facility from which rising oil exports are flowing to Asia.

But when it comes to oil, Moscow is not only relying on trade. In the South China Sea controversy, they have their own local production base…

Russia’s Relationship with Vietnam Goes Back Decades

Its name is Vietsovpetro. This is a well-established joint venture between Russian state-controlled production company Zarubezhneft and Vietnam’s state PetroVietnam.

And when it comes to American policy in Vietnam, this is fast becoming a real impediment. At the same time, it’s a significant source of leverage for Russia in South China Sea operations, and gives it the ability to stymie U.S. initiatives there.

As the “sov” in its name indicates, Vietsovpetro has been around since Soviet times. It comprised one of the main economic connections between Moscow and Hanoi following the American departure from Vietnam in 1975.

In fact, Zarubezhneft was established to pursue that tie.

For years, the company operated only on continental shelves offshore other countries, primarily Vietnam. It was only when the Kremlin decided several years ago to prioritize developing its own offshore shelf that Zarubezhneft started working in Russia proper.

Then, Russia needed to attract outside investment for such an expensive undertaking. It still does today. Yet the Kremlin didn’t want to lose control over the projects emerging. What emerged was the requirement that projects be controlled by Russian state-run companies having at least five years of experience in shelf production.

The list was short – Rosneft, natural gas giant Gazprom (and its oil wing Gazprom Neft) and Zarubezhneft. However, the last also needed experience inside Russia to qualify. So – surprise! – it was quickly awarded domestic field leases. The company brought in PetroVietnam as a partner.

Offshore Vietnam has emerged as a lynchpin in any attempt to thwart Chinese expansion in the South China Sea. Vietsovpetro has clearly demonstrated the size of offshore oil and gas fields. Several have been operating for years and the volume extracted remains significant.

Now, there have been other limits on Chinese expansion in the South China Sea…

America Can Help Offset China’s Expansion – If We Want To

Both BP plc (BP) and ExxonMobil Corp. (XOM) had been working in the area. But BP was forced to sell its interests when the company was setting up a legal war chest in the aftermath of the Deep Horizon disaster in the Gulf of Mexico.

Thrusting ExxonMobil into the primary fallback position may seem like a possibility, given the new U.S. Secretary of State is the former CEO of the company. In reality, however, that makes the policy more difficult.

China’s expansion must be offset by local national policy, not by international oil companies or foreign governments. Washington can certainly assist, but it cannot lead.

Bringing us back to my holding pattern on the DOS liaison plan with Hanoi.

At the moment, Vietsovpetro is the established bulwark against the Chinese in the western South China Sea. I also have considerable experience working in the Soviet Union/Russia both before and after the January 1992 breakup of the USSR.

But in the current climate, it’s difficult to see any cooperation between Washington and Moscow. It seems possible that narrower national interests will instead prevail, with Russian policy moving to another détente with China and dividing up of the region.

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  1. Chuck Henley
    April 14th, 2017 at 20:32 | #1

    I appreciate this interesting article updating the critical importance oil and its products from Southeast Asia continues to play in our world’s future. I look forward To future updates as well as updates on what options the US will have available both in actions it is taking as well as possible future actions available. However, it seems that we have taken the lead in seeking to advance alternatives available such as man made petrol products. Where does the USSR stand in this field?

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