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Commentary (November 19, 2004)

Japan and China: Quest for Oil That Knows No Bounds

Michael Richardson (Visiting Senior Research Fellow, Institute of South East Asian Studies in Singapore)

Underlying the furious response of Japan to the recent intrusion of a Chinese submarine into its waters is the growing competition between two energy-hungry Asian giants as they seek oil and gas supplies that are much closer to home and will help ease their dependence on the volatile Middle East. The incursion took place not far from the Chunxiao gas field in the East China Sea that is the centre of a bitter dispute between Tokyo and Beijing.

This month, the largest of the Chinese state-owned oil companies, China National Petroleum Corp, formed an offshore oil engineering subsidiary in the latest move to develop energy fields in these waters. Last July, one of its units, PetroChina, applied for official oil and gas exploration and development licences in the southern area of the South China Sea, where sovereignty is disputed with Southeast Asian countries.

In the East China Sea, Tokyo is strongly resisting Beijing's energy claims. Japan, which is even more heavily dependent on imported oil and gas, puts the boundary of its Exclusive Economic Zone midway between the shores of the two countries.

However, China maintains that the border is where its continental shelf ends - much closer to Japan than China. The Xihu Trough gas project being developed by China, which includes the Chunxiao gas field, lies entirely within the EEZ claimed by Beijing.

But if Tokyo's median-line principle applied, most of the prospective gas would go to Japan. As it is, the Chunxiao field, which is due to start piping gas to China next year, is within 4km of the boundary claimed by Japan. Tokyo says that the field could extend across the frontier and that gas from its side might be taken by China.

The two nations are also vying for access to gas from fields on Russia's Sakhalin Island, and access to a planned export pipeline that will tap large oil reserves in eastern Siberia.

Many analysts believe that Beijing's offshore petroleum push is driven more by the politics of Chinese energy security than commercial considerations. In September, the Royal Dutch/Shell Group and Unocal Corp pulled out of the Xihu Trough project, reportedly because it would not be a sufficiently profitable venture. Each held a 20 per cent stake. The two Chinese stakeholders, China National Offshore Oil Corp and China Petrochemical Corp, say they will proceed alone.

China's largest onshore oil fields are in decline, while onshore gas fields cannot meet demand in the major urban and industrial centres on the east coast. If rapid economic growth is to continue, China must have enough oil to fuel the rising number of vehicles. It needs gas to generate electricity to reduce reliance on polluting coal.

Chinese oil imports are rising fast, coming mainly from politically unstable countries in the Middle East and Africa. The Xinhua news agency reported this week that oil imports could reach 120 million tonnes for the year. This would be about 40 per cent of China's total oil consumption.

On numerous occasions this year, the official Chinese media has reported the results of offshore geological surveys, pointing to huge amounts of crude oil and natural gas beneath the seabed off China's coast. The People's Daily online edition said on November 4 that offshore oil reserves amounted to nearly 28 billion tonnes. Such estimates are highly questionable, but if reserves of anywhere near this magnitude exist and can be exploited, they would equate to more than 200 years' supply at the current rate of oil imports.

(Originally appeared in the November 19, 2004 issue of South China Morning Post in Hong Kong, reproduced here with permission.)

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