The Geopolitics of Energy Security: China’s energy interest in ASEAN countries

EXECUTIVE SUMMARY

Both China and ASEAN countries envisaged high economic growth rates for several years with economic growth tied to stable supplies of energy resources. The upheavals and instability in the Middle East has strengthen China’s perception that energy reserves available in Southeast Asia and the South China Sea could become China’s most reliable resources.

The central argument of this paper is that Southeast Asia is a strategic region for China’s energy security. Therefore, the paper tries to assess China’s energy interests in the ASEAN countries. To serve our analysis, we assess the energy profiles of each ASEAN member states, the Chinese energy investments in Southeast Asia, and China’s territorial claims in the South China Sea.

Finally, we present several policy recommendations with regards to the energy cooperation between the ASEAN countries and China in Southeast Asia and the South China Sea. These proposals concern: an ASEAN energy security strategy; a ‘common voice’ within ASEAN regarding the energy negotiations with China; more joint development projects without sovereignty concessions; self-restraint and the harmonization of positions within regional forums, and the improvement and full implementation of existing agreements.

Introduction

The Association of Southeast Asian Nations (ASEAN), founded in 1967, is a strategic region for China’s energy security. Firstly, Southeast Asia has untapped oil and natural gas resources, inclusively in the disputed South China Sea. During the past few years, Chinese national oil companies (NOCs) have invested heavily in Indonesia, Malaysia, Myanmar, Philippines, and Vietnam. Secondly, the region is the fourth world’s supplier of liquefied natural gas (LNG), with Malaysia being the world’s second largest LNG exporter after Qatar. Finally, Southeast Asia encompasses China’s energy shipping routes from the Middle East, Africa and Latin America. Among them, the most vital sea-lane is the Malacca Strait, which currently carries around 80% of China’s annual oil imports. (Zhang X, 2008)

In this research paper, we highlight the role of ASEAN member states in China’s energy supply chain. We start by reviewing the energy profiles of the ASEAN countries according to their proven energy reserves and production. Then, we will focus on the Chinese energy investments in these countries through their sizes and targets and concentrate on the South China Sea dispute from the perspective of energy nationalism. The final aim of this analysis will be to discuss China’s energy interests in the ASEAN countries and conclude on how these interests are integrated in China’s regional and global geopolitics, as well as the perceptions of the ASEAN countries and the United States of America versus China’s foreign policy in Southeast Asia.

Energy profiles of the ASEAN countries

The ASEAN countries have diversified energy resources, ranging from fossil fuels, hydropower, geothermal, bio-fuels, biomass, and solar, which are unevenly distributed across the region. In 2014, ASEAN’s oil and gas reserves represented less than 1% and 3.6% of the world’s total reserves. Indonesia and Malaysia together hold 56% and 74% of the region’s proven oil and gas reserves. However, oil is the region’s most critical energy security challenge. Malaysia, Philippines, Singapore, and Thailand still rely on the Middle East which accounts for over 70% of their oil imports. These countries lack sufficient refining capacities and therefore have to cooperate with foreign companies for oil refining. (Thomson, 2009: 25).

Southeast Asia has significant coal resources, mostly located in Indonesia – one of the world’s largest producers and the largest exporter – and to a lesser extent in Vietnam.  (IEA, 2015: 52) In 2014, Indonesia was the world’s largest exporter of thermal coal, with nearly 80% of production leaving the country. Most coal exports go to China and India, but also to Malaysia, Philippines, Singapore, and Thailand. (EIA, 2015: 13).

Electrical power is generated in different ways, however, given its abundant water resources, hydroelectricity has become the most popular form of renewable electricity used within the ASEAN. The main producer of hydropower is Vietnam while substantial potentials also emerged in Cambodia, Indonesia, Laos, Malaysia, Myanmar, and Philippines. Geothermal power, created from fossil fuels, including oil, natural gas and coal, also has a huge potential in Indonesia and Philippines, countries which are part of the Ring of Fire. In fact, Philippines is the second largest geothermal energy producer in the world. Yet, electricity issued from nuclear fusion reactions remains overly undeveloped in the region.

In 2013, Southeast Asia accounted for about 4% of global energy demand, a share that is set to increase as the region’s energy use expands at 2.2% on average per year.

Finally, the ASEAN countries have good potential in renewable energy resources, namely biomass and solar. Laos, Myanmar and Thailand have demonstrated a great capacity in producing significant amount of bio-fuels. In 2013, Southeast Asia accounted for about 4% of global energy demand, a share that is set to increase as the region’s energy use expands at 2.2% on average per year. Southeast Asia’s total primary energy demand remains heavily reliant on fossil fuels (as we see in Figure 1). Their share will expand from 74% in 2013 to 78% in 2040. (IEA, 2015: 30) Oil demand is expected to rise from 4.7 million barrels per day (mb/d) in 2014 to 5.4 mb/d in 2020 and 6.8 mb/d by 2040.

Natural gas demand will increase by almost two-thirds, from 161 billion cubic metres (bcm) in 2013 to 265 bcm in 2040. But its share in Southeast Asia’s total primary energy demand will decline by almost two percentage points by 2040.

Coal demand will grow at 4.6% per year on average. By 2020, coal’s share of primary energy demand will rise to 21%, overtaking natural gas. (IEA, 2015: 31)

The case of Brunei remains unchallenged in the region. It is an energy self-sufficient country and its hydrocarbon exports account for 85% of its GDP. (ASEAN, 2014: 47) Most ASEAN countries are net oil importers, while few are natural gas importers such as Singapore or Thailand. For example, Malaysia exports crude oil to Indonesia, Philippines, Singapore, and Thailand, while Brunei exports to Singapore and Thailand.

Much of the ASEAN’s energy is in fact exported to Northeast Asia, but very little of Northeast Asia’s energy comes to the ASEAN

Southeast Asia is currently an important exporter of LNG to the world markets. In 2014, the region had around 20% of global LNG production capacity, located in Malaysia, Indonesia, and Brunei. In terms of LNG volumes exported, Malaysia and Indonesia were respectively the second- and the fifth-largest LNG exporters in the world. (IEA, 2015: 74) The ASEAN’s LNG exports are going to China, Japan, and South Korea under long term contracts. (ASEAN, 2014: 49)

So, much of ASEAN’s energy is in fact exported to Northeast Asia, but very little of Northeast Asia’s energy comes to ASEAN. Especially China continues to scour the ASEAN region for whatever energy resources it can find. For example, China obtains 63 % of its total steam coal imports from ASEAN, 10 % of its crude oil imports and 35 % of its oil products imports. (Thomson, 2009: 25) The ASEAN member states have also become new destinations of China’s new energy products. (Shi and Yang, 2015: 47)

Currently, more than $70 billion is spent annually on energy supply investment in Southeast Asia. Energy supply projects include fossil-fuel extraction, the construction of gas pipelines, oil refineries, biofuel facilities, thermal generating plants, hydropower stations, wind turbines and solar installations as well as electricity transmission and distribution lines. The level of energy investment has increased by almost 60% over the last decade in real terms.  The power sector accounted for more than half of the increase in investment over the period. Investment in natural gas supply was also a large contributor, driven by growing demand for electricity generation and rising capital costs. By contrast, investment in oil supply fell by more than one-third, as most of the producing countries in the region face declines in their fields and production. (IEA, 2015: 111)

China’s Energy Investments in the ASEAN Countries

   • Trade and Foreign Direct Investment in ASEAN

The Asian financial crisis (1997-1998) strengthened the economic relations between China and the ASEAN which led to the launch of a currency swap initiative: The Chiang-Mai Initiative. Under this programme, the concerned parties began negotiations on an ASEAN/China Free Trade Area (ACFTA), which ultimately entered into force in 2010. Presently, China consistently appears among the top five trade partners for the ASEAN countries, nevertheless the degree of dependence on China as a source of exports, imports, or both varies between wealthier and poorer ASEAN countries. 

Foreign Direct Investment (FDI) flows to ASEAN rose several consecutive years despite a global decline in investments. With $136.2 billion invested in 2014, mostly by major investors such as the European Union, Japan, the United States of America, India, and China, the ASEAN became the largest recipient of FDI in the developing world (UNCTAD and ASEAN, 2015: xv). However, China’s investment pattern is radically different from the other four powers: Although, China’s major FDI partner in the ASEAN, is Singapore - which receives the “lion’s share” of Chinese FDI, it has established stronger economic ties with countries usually not aligned with U.S. politics, such as Cambodia, Laos, Myanmar, and Vietnam without being able to further raise the size of its investments. According to China’s Ministry of Commerce (MOFCOM), the country only contributed a mere 2.3 % of ASEAN’s total FDI inflows in 2013. (Salidjanova et al, 2015: 6).

Figure 2: FDI in the ASEAN countries (2012)

In order to increase its investment portfolio in the ASEAN, China founded the China–ASEAN Investment Cooperation Fund (CAF), which sets the focus on energy, infrastructure and natural resources in the region. Moreover, the creation of a new Asian Infrastructure Investment Bank (AIIB) was formed as a counterweight to the U.S.-dominated World Bank and the Japan-dominated Asian Development Bank (ADB). The AIIB also aims at supporting the newly founded New Development Bank, also known as the ‘BRICS’ bank. 

China’s energy investments 

Chinese FDI in Southeast Asia are much diversified. Its growth reflects China’s rising demand for energy resources and raw-materials and translates a desire to weaken their energy dependency from the Middle East and Africa. Furthermore, rising tensions in these regions have reinforced Beijing’s perception that energy resources available in Southeast Asia could become China’s most reliable long term resources. 

During the past few years, Chinese companies have invested heavily in transport and energy, including electricity generation and transmission, and oil and gas pipelines, in countries such as Indonesia, Malaysia, Myanmar, Philippines, and Vietnam. Usually, Chinese companies operate as contractors, but also invest in, or buy and operate energy infrastructures. Some of them have an extensive regional presence through contracts and subsidiaries. 

 Brunei

Brunei has a strategic importance for China. In terms of energy security, Brunei can become a significant provider of oil and natural gas to China’s economy. For example, fuels accounted for 92% of Brunei’s exports to China in 2013, however, Chinese FDI remained low and accounted for less than 1% of total FDI in Brunei in 2013. To raise their FDI, in February 2014, the Chinese petrochemical giant Zhejiang Hengyi Group Co. formed a 70-30 joint venture with Damai Holdings Limited to undertake the Oil Refinery and Aromatics Cracker Plant Project at Pulau Muara Besar. (Salidjanova et al, 2015: 14)

Cambodia

There is an increasing number of foreign power producers in Cambodia. For instance, the electricity industry is dominated by Chinese companies, such as State Grid Corporation of China, Sinohydro Corporation, China Southern Power Grid, China Hydropower Corporation, Huadian, China National Heavy Machinery Corporation. (UNCTAD and ASEAN, 2015: 104). China’s Perfect Machinery Industry and Cambodian Petrochemical are jointly building a 2.3 billion dollars oil refinery, to be completed by 2016. Similarly, China’s National Heavy Machinery Company is involved in building the Tatay River Hydropower Dam, which is worth 540 million dollars, and China Huadian Corporation is building the Lower Stung Russei Chrum Hydropower Station, estimated to cost 580 million dollars. Cambodia has planned to build 10 dams between 2010 and 2019, of which 6 involve financing from Chinese banks. (ASEAN a, 2014: 65)

Indonesia

Indonesia is a key supplier of coal and LNG to China’s energy-intensive coastal areas, and the Chinese companies are heavily involved in the energy sector. Sinopec is building an oil storage terminal in the Batam Free Trade Zone, which is estimated to cost about 850 million dollars. China Power Investment and Anhui Conch Cement are involved with a $17 billion hydropower project in North Kalimantan that is to be completed by 2021. Sinohydro is involved in dam construction; Gezhauba Group and China Power International are building coal and hydropower plants, while China Power International and China International Corporation have maintained operations in coal mines in various parts of Indonesia. (ASEAN a, 2014: 66) However, Chinese companies have a lot of competitors, such as: Solar Guys International (Australia), Daewoo Engineering and Construction (Republic of Korea), Itochu (Japan), Kyushu Electric Power (Japan), Kansai Electric Power (Japan), and Tata Power (India).

Economic interdependence cannot ensure good relations between China and the ASEAN countries if these are uncertain about China’s foreign policy intentions

Laos

This country has a very significant hydropower potential of about 26 GW, but only 3 GW of capacity have been built. Around 75% of Chinese FDI in Laos goes to power generation activities. China Three Gorges Corporation and China International Water and Electric Corporation are involved in the Nam Ngiep 1 Hydropower project, which is to be completed by 2019 at an estimated cost of $ 868 million. China National Electric Engineering Company is building the Laos Hongsa coal-fired power plant, estimated to cost some $ 1.68 billion. China Huadian, China National Heavy Machinery Corporation, and China Electric Power Technology, Import and Export Corporation are also building power plants. (ASEAN a, 2014: 66) Other multinational enterprises (MNEs) involved in the construction of power plants and operation of power concessions in Laos include: EDF (France), Velcan Energy (France), Glow Energy-GDF Suez (France), SK Engineering and Construction (Republic of Korea), Korean Western Power (Republic of Korea). (UNCTAD and ASEAN, 2015: 107)

Malaysia

Fuels accounted for 11 % of Malaysia’s exports to China in 2013. (Salidjanova et al, 2015: 21) Chinese companies have been involved in large-scale infrastructure projects in Malaysia for some time. China Three Gorges Corporation and Sinohydro Corporation continue to participate in various hydropower projects. Additionally, PETRONAS and China’s oil companies are partners for many projects in third countries, such as Sudan and Indonesia.

Myanmar

China has been very active in Myanmar, in oil and natural gas pipelines, hydropower projects and mining. China National Petroleum Corporation (CNPC) and Myanmar’s Ministry of Energy have signed an agreement to build a $2.3 billion crude oil pipeline and a $2 billion natural gas pipeline in June 2009. (China Petroleum Daily, 20 May 2014) Both pipelines start from Kyaukryu and enter China in Yunnan Province. The natural gas pipeline has been operational since 2013 and it is designed transport 10 billion – 13 billion cubic meters of gas annually. The oil pipeline started to operate in 2015 and it aims to transport 22 million tons of oil per year.  Furthermore, CNPC, Sinopec, and China National Offshore Oil Corporation (CNOOC) are all engaged in oil exploration projects and have successfully competed against India and the Republic of Korea to gain access to new gas fields in the Gulf of Martaban. 

Secondly, Chinese companies are major players in Myanmar’s power generation sector. They include Sinohydro, Datang United Hydropower, China Southern Power, Gezhouba, China Heavy Machinery Corporation, Yunnan Machinery Export Import, and Huadian. (ASEAN a, 2014: 67) Finally, a typical example for coal is the 600-megawatt (MW) Kalewa mine–mouth power station, constructed by China Guodian Corporation and Tun Thwin Mining Company, Ltd. (Myanmar's largest coal company). 

Philippines

China-Philippines energy cooperation began more than 30 years ago. Compared to energy investments in other ASEAN countries, Chinese energy companies in Philippines are not quite active. The situation has improved, however: China’s National Power Grid, the Shenhua Group, and CNOOC have invested in Philippines in recent years. (Xue, 2009: 34) Other foreign companies invested in power generation in the country, such as: AES (United States), KEPCO (Republic of Korea), LG (Republic of Korea), Mitsubishi Corporation (Japan), Tokyo Electric (Japan), Marubeni (Japan), Kyushu Electric (Japan) and Team Energy (Japan).

Singapore 

Due to Singapore’s role as an energy transit hub, about one-third of its imports and exports consist of fuels and petrochemicals. These products, however, play a reduced role in Singapore’s trade with China. (Salidjanova et al, 2015: 6) There are few examples of Chinese investments in Singapore. PetroChina was involved in the construction of the Universal Terminal, the largest commercial oil terminal in Asia. Tuas Power is owned and operated by Huaneng Power International (China). (Xue, 2009: 37) PacificLight, a company owned by FPM Power Holdings and Petronas Power (Malaysia), participated in power generation. The former in turn is owned by First Pacific (Hong Kong, China) and Meralco (Philippines). 

Thailand

China’s energy companies, such as CNPC, Sinohydro Corporation, China Light and Power, and Suntech Power Holdings, are competing with foreign MNEs, such as as J-Power (Japan), GDF Suez (France), Mitsubishi (Japan), Tokyo Electric Power (Japan) and Marubeni (Japan), especially in power generation. (Xue, 2009: 41)

 Vietnam

Vietnamese energy market attracts Chinese energy companies, such as CNPC, Sinopec, China’s Southern Power Grid, and China’s Harbin Electricity Engineering Company, which have invested in oil, natural gas and electricity. (Xue, 2009: 45) But other foreign companies are investing in Vietnam’s power industry. These companies include EGAT (Thailand), Toyo Ink Group, Sembcorp Utilities (Singapore), PHI Group (United States), Tata Power (India), Sumitomo (Japan) and Doosan Heavy Industries and Construction (Republic of Korea).                                                                  

In conclusion, Chinese energy investments in the ASEAN countries bring the partners closer together. But economic interdependence cannot ensure good relations between China and the ASEAN countries if these are uncertain about China’s foreign policy intentions. As Paul Stevens argues, cross-border pipelines and related projects can generate conflicts and local resentment, as parties with different interests and motivations are involved, and land use cannot be compensated properly. (Stevens, 2010).

China’s Energy Interests in the South China Sea

The role of energy in the South China Sea tensions can be appraised from two perspectives. Firstly, territorial control and maritime jurisdiction give ownership rights to oil and natural gas resources. China’s nine-dash line claim encircles many zones of abundant oil and gas officially owned by key regional producers, such as Malaysia, Philippines, and Vietnam. Secondly, the disputes in the South China Sea have impact on the transit of energy to Asia, inclusively for Japan and South Korea. 

  • Legal status and territorial claims

The South China Sea is a body of water where four archipelagos are located:

  ♦ The Pratas Islands in the northeast;

  ♦  the Macclesfield Islands in the centre and east;

  ♦  the Paracel Islands in the west;

  ♦  The Spratly Islands in the south.

Disputes in the South China Sea existed for many years, always with the hope these would not escalate into armed conflicts. However, serious outbreaks of conflicts, such as the naval battles between China and (South) Vietnam took place in 1974 or in 1988. 

To contain the existing tensions, ASEAN countries and China signed the Declaration on the Code of Conduct of Parties in the South China Sea in 2002 that encourages signatories to use restraint and cooperate in the South China Sea (EIA, 2015: 8). However, this declaration did not fully stop series of incidents and neither did it prevent proclamations of sovereignty.

China, Brunei, Indonesia, Malaysia, the Philippines, and Vietnam have long claimed sovereignty over areas in the South China Sea, with China claiming 80% of the sea within a self-declared zone marked by the so-called “nine-dash line”. The Paracel Islands and the Spratly Islands are two of the most disputed areas. The Paracel Islands are claimed by China, Vietnam, and Taiwan (Fravel, 2012), while the Spratly Islands are claimed to various extents by China, Malaysia, Philippines, Taiwan, and Vietnam. In addition, the Scarborough Shoal is claimed by China, Philippines, and Taiwan. (Buszynski and Roberts, 2014). 

Under the United Nations Convention on the Law of the Sea (UNCLOS), coastal states can claim a territorial sea and contiguous zone, an exclusive economic zone (EEZ), and a continental shelf. Within its EEZ and the continental shelf, a coastal state is entitled to a range of economic rights, including the rights to explore, exploit, conserve and manage living and non-living natural resources. All South China Sea claimants are parties to the UNCLOS and submitted accordingly their claims on their EEZ and continental shelf by May 13, 2009. This led some countries to issuing new formal claims on disputed islands.

China argues that its claims to sovereignty, exclusive economic zone and continental shelf rights in most of the South China Sea are based on historical records of the Han (110 AD) and Ming (1403-1433 AD) Dynasties. In fact, China has control over all islands in the area of the Paracel Islands since 1974, and occupies 11 islands of the Spratly Islands. (Xue, 2009: 51). Besides, Chinese authorities state that there had been no disputes in the South China Sea until the discovery of large amounts of oil and natural gas reserves in the 1970s. They also point out that no countries disputed Chinese claimed islands at the time they were officially claimed by China through Article 2 of the Law of the People’s Republic of China on the Territorial Sea and Contiguous Zone of 1992. Yet, several other countries are declaring their rights over islands.

Brunei claims sovereignty over the Louisa Reef, a small island located in the southeastern part of the Spratly Islands which also lies within China’s nine-dash line (EIA, 2016).

Malaysia, which occupies six of the Spratly Islands, claims sovereignty over a cluster of islands within the Spratlys, close to its coast, and offshore gas fields in the Sarawak, which are also claimed by China. 

According to the Chinese authorities, The Philippines only started making public claims after mid-1997, culminating in the amendment of the Philippines Territorial Sea Baseline Act in 2009. Presently, the Philippines claim the western section of the Spratlys – the Kalayaan Island Group, and the Scarborough Shoal and also renamed maritime areas on the western side of the Philippine archipelago as the West Philippine Sea, over which the country exercises its sovereignty.

Lastly, Vietnam insists on clearly defining overlapping claims according to the UNCLOS before establishing joint development areas. This is because China’s maps are not conforming to UNCLOS principles and it refuses to clarify the extent or nature of its claims. (International Crisis Group, 2016: i) In June 2012, the Vietnamese National Assembly adopted a law incorporating the Paracel and Spratly islands as being localised within its sea borders and demands that all foreign naval ships register with Vietnamese authorities. (EIA, 2013: 12)

Although, China has tolerated Brunei and Malaysia to jointly develop energy resources in an area the three claim because they downplay their differences with China, the authorities feel their actions are unjustly criticized: The provocative activities and calls for international rally – in particular to the U.S. - of the Philippines and Vietnam are being ignored to the extent China views the disputes as a tool used by the U.S. to contain China. (Zhang Y., 2016: 847)

China has proposed joint development as a provisional measure before settlement of sovereignty disputes. But it has met resistance from most other claimants. Therefore, the Chinese government responded with unilateral actions, such as: development of a prefecture-level city named Sansha for the administration of the Paracel Islands, Spratly Islands, and Macclesfield Bank (EIA, 2013: 11); construction of artificial islands since 2014  (International Crisis Group, 2016: 2); attacks on Vietnamese fishing boats; naval modernization, or military exercises in the region. 

China’s maritime capabilities are growing rapidly, including maritime law enforcement, military power projections, offshore drilling, and lightly-armed civilian enforcement vessels. (Manicom, 2014: 8-9) This belligerent foreign policy, from verbal warnings and diplomatic pressure to physical confrontations frightens regional states.

 •  Exploration and production

The South China Sea’s hydrocarbon resources are highly contested because of under-exploration and territorial disputes. The U.S. Energy Information Administration has estimated proven and probable reserves in the South China Sea at around 11.2-28 billion barrels of oil and 190 trillion cubic feet of natural gas (Tcf). The U.S. Geological Survey has estimated in 2012 that an additional 12 billion barrels of oil and 160 Tcf of natural gas might exist as undiscovered resources in the South China Sea, excluding the Gulf of Thailand and other adjacent areas. (Metelitsa and Kupner, 2014: 3) In contrast, China’s state-owned CNOOC has estimated the South China Sea holds 125 billion barrels undiscovered oil and 500 Tcf gas. (EIA, 2013: 2)

China

The country’s three largest national oil companies, CNOOC, Sinopec, and CNPC, are responsible for developing South China Sea’s resources. CNOOC has the most experience with offshore oil production. It also produced about 175 billion cubic feet of gas in 2014 in the South China Sea. The western South China Sea is home to the Yacheng 13-1 field, China’s largest offshore natural gas field. But CNOOC explores and develop other nearby blocks and explores more deepwater areas to replace diminishing reserves. CNOOC’s long-term development plans include exploration of deepwater fields in the Pearl River Mouth and Qiongdongnan

Basins. 

In the eastern South China Sea, CNOOC partnered with Husky Energy to develop China’s first large-scale deepwater gas project at Liwan 3-1, which started production in early 2014. CNOOC also made two significant gas discoveries in the Qiongdongnan Basin, Lingshui 17-2 and Lingshui 25-1, and the company claims Lingshui 17-2 is one of China’s largest offshore discoveries with proved reserves estimated to be 4 Tcf. CNOOC has not offered any plans to drill in the contested Spratly Islands area. (EIA, 2015: 18)

CNPC and Sinopec are less active in the area, but both companies value the importance of the sea for both upstream and delivery. CNPC largely focuses on offshore drilling activities in the Bohai Bay, which is not in the South China Sea, although it provides offshore drilling equipment to other companies. Sinopec has not invested directly in the South China Sea, but it has expressed interest in deepwater drilling in the Qiongdongnan Basin off Hainan Island. (EIA, 2013: 5)

Brunei

Exploration has become easier since Brunei and Malaysia formally resolved their offshore territorial dispute in March 2009. When Brunei gave up claims of sovereignty for the Limbang area of Sarawak, Malaysia agreed to develop energy resources in the disputed offshore area with Brunei. 

Brunei National Petroleum Company (Petroleum Brunei) and Petronas of Malaysia signed a 40-year agreement in 2010 to jointly explore formerly disputed deepwater areas in the Baram Delta, namely Commercial Areas 1 and 2. The two NOCs began drilling in several offshore oil and gas fields of Brunei in 2011. In 2013, Petroleum Brunei and Petronas of Malaysia signed several cooperation agreements for joint development of oil and natural gas fields in both countries’ deepwater offshore areas. (EIA, 2013: 5)

 Malaysia

Petronas of Malaysia is the biggest domestic oil and gas producer. Malaysia has several greenfield deepwater projects with international oil companies, such as Exxon Mobil, Royal Dutch, Shell, and Hess, in the Sabah and Sarawak Basins. On the other hand, Malaysia and Thailand agreed to develop a section of the Gulf of Thailand jointly without either party ceding legal rights to it. This Joint Development Area (JDA) is an important source of Malaysian gas exports. (EIA, 2013: 6)

Philippines

Philippines National Oil Company (PNOC), Shell, and Chevron operate the Malampaya gas platform located in the northern Palawan basin. Commercial drilling began in October 2001 and it provides power for domestic use. Philippines had begun exploring the Reed Bank area of the Spratly Islands in the 1970s and successfully tested a gas well in 1976. Before commercial drilling began, Chinese protests forced the operation to shut down. (EIA, 2013: 6)

Vietnam

PetroVietnam holds responsibility for major exploration and production activities in the South China Sea. The Vietnam government awarded a large number of contracts to foreign firms. PetroVietnam and Chevron operate three production-sharing contracts in the Cuu Long and Phu Khanh Basins. In 2012, Perenco, France, bought six offshore blocks of ConocoPhillips in the South China Sea.

PetroVietnam also partners with smaller foreign ventures to develop offshore fields, both in the South China Sea and Gulf of Thailand. Italy’s Eni has three 50% stakes in offshore Vietnam blocks, most recently from July 2012 in Block 114 in the Song Hong Basin. Smaller companies, from South Korea, China, and Singapore, have organized into several joint operating companies to develop offshore blocks, particularly near the Malaysian border. (EIA, 2013: 7) In June 2012, CNOOC offered nine oil and gas blocks to foreign bidders in a part of the South China Sea overlapping with Vietnam’s 200-mile exclusive economic zone in the Jiannan and Wan'an Basins. The Vietnam government disapproved of the offer, and no foreign firms have bid on blocks. (EIA, 2015: 8)

In conclusion, several countries have opted to cooperate in the South China Sea, such as Brunei and Malaysia, or Malaysia, Thailand, and Vietnam. And most national oil companies have partnered with international companies to provide technology and equipment for deep water exploration and drilling. These success cases contrast with the parts of the South China Sea that are contested by multiple parties, which have seen little energy development. (Metelitsa and Kupner, 2014: 4)

China’s increasing demand for energy resources may lead to tensions in the South China Sea. This may be done in a cooperative fashion or it may be done in a more assertive way (Hale, 2004: 141). For instance, on May 3, 2014, China placed the Haiyang Shiyou 981 deep water drilling rig near the coast of Vietnam. This was the first time that any claimant had unilaterally explored waters for hydrocarbon resources in a disputed part of the South China Sea (Manicom, 2014: 8). This move demonstrated China’s ability and determination to tap resources in disputed area and discourage competition and international companies to invest in the region. However, unilateral attempts to stake territorial claims over parts of disputed waters will ultimately engender conflicts and threaten the peace and stability of the region. Self-restraint is absolutely necessary on the one hand, but it is definitely not enough to solve the disputes on the other. (Xue, 2009: 54)

Conclusion

China’s energy interests in the ASEAN countries can be summarized as follows: Firstly, China needs to maintain a stable political and security environment in its near abroad, which will allow its economic growth to continue. On land, China has borders with Laos, Myanmar, and Vietnam, but the South China Sea allows China to project its power all over the ASEAN countries.

Secondly, China’s economic growth depends on stable supplies of natural resources. The instability in the Middle East has strengthened China’s perception that energy resources available in Southeast Asia and the South China Sea can become China’s most reliable resources. 

Thirdly, China wants to maintain and protect the freedom of navigation in the South China Sea and through the Strait of Malacca. If the Strait of Malacca were blocked, nearly half of the world’s fleet would be diverted to the Indonesian archipelago. The former Chinese President Hu Jintao once raised the “Malacca Dilemma”, emphasizing that a stable energy transport route for China is a top security priority.

Fourthly, China is extremely sensitive to the “strategic encirclement or containment” by the U.S. China opposes to the U.S. military surveillance actions in the South China Sea, who increased their naval capabilities, and sought to establish military bases in this region since 2010.

Finally, China considers that its energy investments should be negotiated bilaterally with the ASEAN countries, as well as its claims in the South China Sea. Therefore, China has repeatedly acted to divide ASEAN with regards to these issues. recently at the ASEAN foreign ministers’ forum, from 25 July 2016, when the ASEAN countries failed to agree on maritime disputes in the South China Sea.

Rising demand for energy resources and foreign investments has given rise to energy nationalism. Every country prefers to negotiate bilaterally with China and other powers in order to protect their national interests. At the same time, ASEAN countries seek to maintain a balance of power between China and the U.S. in Southeast Asia, from a political, security and economic point of view. They welcomed both Chinese and American energy investments. 

The U.S. has made clear its interests in ensuring freedom of navigation and in the peaceful settlement of China’s disputes with smaller regional states in the South China Sea. Other American interests in Southeast Asia can be: safeguarding the interests of the US energy companies, protecting the strategic maritime routes for South Korea and Japan, and managing China’s naval modernization.

Recommendations for policy

Recommendations for improved cooperation on energy development between China and ASEAN countries in Southeast Asia and the South China Sea: 

1.    ASEAN countries have to improve their energy security at regional level. A regional energy security strategy can generate better security for each country because it will open up ASEAN to foreign investment;
2.    All parties should refrain from unilateral exploration and exploitation to prevent conflict escalation particularly around the Paracels and the Spratly Islands, whose sovereignty is constantly contested;
3.    All claimants need to gradually integrate their standpoints on the South China Sea issue within regional forums or through the set-up of multi-lateral frameworks;
4.    Southeast Asian countries should improve and fully implement The Declaration on the Code of Conduct of Parties in the South China Sea; 
5.    ASEAN countries can participate in joint development projects with China legally emphasizing that this does not imply sovereignty concessions.

Irina Ionela Pop is a Junior fellow at the CGSRS | Centre for Geopolitics & Security in Realism Studies. She may be contacted at irina.ionela.pop@cgsrs.org.

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