6/28/12 PetroVietnam Protests Chinese Plans as South China Sea Spat Deepens - WSJ.com

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Vietnam Spars With China Over Oil Plans

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By WAYNE MA And JAMES HOOKWAY

A spat between China and Vietnam over energy rights in the South China Sea

intensified on Wednesday as Vietnam's biggest company called on China to scrap its

plans to develop areas near the Vietnamese shore.

The disagreement, the latest in a string of

arguments over the potentially energy-rich sea,

erupted earlier in the week when China National

Offshore Oil Corp. said it was offering a new

batch of oil-exploration blocks inside the 200-

nautical-mile exclusive economic zone granted

to Vietnam under the United Nations' Law of the

Sea.

Vietnam's government quickly objected, saying

the Chinese state oil firm was moving into its

territorial waters. On Wednesday, state-run

Vietnam Oil & Gas, or PetroVietnam, weighed

in, showing how territorial claims in the sea are

increasingly being backed up by powerful

companies in addition to rival governments, and

potentially adding new sources of tension to the

conflict.

PetroVietnam Chairman Do Van Hauon

Wednesday described the Chinese firm's strategy as illegal and urged it to cancel the

bidding, adding that two of the blocks offered by China National Offshore Oil, known as

Cnooc, overlap with those offered by PetroVietnam.

"We strongly protest Cnooc's offering to international companies and we request foreign

firms not to get involved," Mr. Hau told reporters.

Cnooc's spokesman in charge of legal affairs wasn't available to comment. At an earlier

news briefing, China's Foreign Ministry said Cnooc's tender represented "normal

business activities" in line with Chinese law and international practice.

Cnooc's move is likely influenced by a desire to see how far it can press its claims in the

sea rather than entirely commercial considerations, analysts and diplomats say. Few

foreign firms are likely to engage in drilling in such disputed waters, especially after

Vietnam's protests.

"There is no way any foreign company will go there," said Laban Yu, head of oil and gas

research at Jefferies Hong Kong Ltd., a securities and investment banking firm. "This is

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just Cnooc being used by the central government to make a statement."

An official from a third country that also has claims in the sea said the bidding

announcement appeared to be designed to buttress China's territorial claims to the area

while nearby countries such as Vietnam and Philippines press ahead with their own

plans to drill for oil and gas in other parts of the South China Sea.

The Cnooc blocks, in water 300 to 4,000 meters (1,000 to 13,000 feet) deep, cover an

area of about 160,000 square kilometers (62,000 square miles). Previously, most blocks

offered for joint development by the state-owned firm were located well within Chinese

waters, and mostly in shallow water.

"Either Cnooc is doing national service and helping Beijing push the boundary of the

South China Sea maritime dispute, or it's doing what analysts have been calling for" and

pursuing foreign help to increase the size of its reserves, said Simon Powell, head of

Asian oil and gas research at CLSA.

Mr. Powell added that the resources there are more likely to be gas than oil, and thus

less attractive to potential foreign partners. "Given how low natural-gas prices are in

China, the distance of these blocks from the mainland and how uneconomic it is to lay

pipelines and run gas from such distances, maybe the offerings are more about politics

than about earnings," he said.

The spat looks set to further shake relations between Vietnam and China, which, while

both having Communist governments, view each other with suspicion. Relations

between the two countries worsened after Hanoi's legislature passed a new law last

week claiming Vietnam's sovereignty over the Spratlys and Paracels archipelagos, which

are also in the South China Sea.

China summoned Vietnam's ambassador to Beijing to protest the new law, which will be

enacted at the beginning of next year but will have little real impact on who controls the

island chains.

Some of the atolls are partially occupied by small garrisons from some of the claimant

nations, including China, Vietnam and the Philippines.

Vietnam dismissed China's objections as "absurd," with a Foreign Ministry spokesman

last week describing Vietnam's move as "normal lawmaking activity."

Vietnam also has objected to apparent recent Chinese moves to assert jurisdiction over

portions of the South China Sea; China recently bestowed higher, prefectural-level

powers upon a city in its Hainan province to administer some South China Sea islands,

state media reported.

The stakes in the South China Sea have grown significantly in recent years as East

Asia's energy-hungry economies roar ahead. For China, the energy resources that

geologists believe to lie below its waters are means to potentially reduce its dependence

on imports from the Middle East and elsewhere. The contested waters contain 28 billion

to 213 billion barrels in proven and undiscovered oil resources, according to figures

cited by the U.S. Energy Information Administration. It isn't clear, though, how much is

easily accessible.

China, Vietnam and the Philippines all have stepped up exploration and drilling in the

sea in recent years. Earlier this week, Italy's Eni SpA bought 50% stakes in two

exploration blocks in Vietnamese-controlled waters. Eni's partner, Australia's Neon

Energy Ltd., said Monday that Eni will carry out early technical work and finance

exploratory drilling in each block. ExxonMobil Corp. also has acquired Vietnamese

blocks in the South China Sea. Last October it said it found oil and gas in its second

exploration well.

British-Philippine firm Forum Energy Plc, meanwhile, plans to begin drilling off Reed

Bank in the Philippines' U.N.-declared waters later this year.

In addition to China and Vietnam, the Philippines, Malaysia, Taiwan and Brunei also

claim parts of the South China Sea. The U.S. in recent years has angered China by

urging multilateral talks to resolve the overlapping claims in the area, and also to ensure

safe navigation for some of the world's busiest shipping lanes as China's commercial

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and military power grows.

Write to Wayne Ma at wayne.ma@dowjones.com and James Hookway at

james.hookway@wsj.com

A version of this article appeared June 28, 2012, on page A11 in the U.S. edition of The Wall Street

Journal, with the headline: Vietnam Spars With China Over Oil Plans.

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