East China Sea Energy And Geopolitical Profile: Territorial Disputes Hinder Exploration – Analysis

The East China Sea is a semi-closed sea bordered by the Yellow Sea to the north, the South China Sea and Taiwan to the South, Japan’s Ryukyu and Kyushu islands to the East and the Chinese mainland to the West. Evidence pointing to potentially abundant oil and natural gas deposits has made the sea a source of contention between Japan and China, the two largest energy consumers in Asia.

The sea has a total area of approximately 482,000 square miles, consisting mostly of the continental shelf and the Xihu/Okinawa (Chinese name/Japanese name) trough, a back-arc basin formed about 300 miles southeast of Shanghai between the two countries. The disputed eight Daioyu/Senkaku (Chinese/Japanese name) islands lie to the northeast of Taiwan, with the largest of them two miles long and less than a mile wide. Though barren, the islands are important for strategic and political reasons, as ownership can be used to bolster claims to the surrounding sea and its resources under the United Nations Convention on the Law of the Sea. To date, China and Japan have not resolved their ownership dispute, preventing wide-scale exploration and development of East China Sea hydrocarbons.

Oil & Natural Gas

The East China Sea basin, particularly the Xihu/Okinawa Trough, is a potentially rich source of natural gas that could help meet Chinese and Japanese domestic demand.

China recently became the second largest net oil importer in the world behind the United States and the world’s largest global energy consumer. Gas imports have also risen in recent years, and China became a net natural gas importer for the first time in almost two decades in 2007. EIA forecasts that China’s oil and natural gas consumption will continue to grow in coming years, putting additional pressure on the Chinese government to seek out new supplies to meet domestic demand (See China country analysis brief). Japan is the third largest net importer of crude oil behind the United States and China, as well as the world’s largest importer of liquefied natural gas (LNG), owing to few domestic energy resources. Although EIA projects oil consumption in Japan to decline in coming years, Japan will continue to rely heavily on imports to meet consumption needs (See Japan country analysis brief). Therefore, both China and Japan are interested in extracting hydrocarbon resources from the East China Sea to help meet domestic demand.

Oil

Hydrocarbon reserves in the East China Sea are difficult to determine. The area is underexplored and the territorial disputes surrounding ownership of potentially rich oil and natural gas deposits have precluded further development. The EIA estimates that the East China Sea has between 60 and 100 million barrels of oil (mmbbl) in proven and probable reserves. Chinese sources claim that undiscovered resources can run as high as 70 to 160 billion barrels of oil for the entire East China Sea, mostly in the Xihu/Okinawa trough. However, “undiscovered resources” do not take into account economic factors relevant to bring them into production, unlike “proven and probable reserves.”

China began exploration activities in the Each China Sea in the 1980’s, discovering the Pinghu oil and gas field in 1983. Japan co-financed two oil and gas pipelines running from the Pinghu field to Shanghai and the Ningbo onshore terminal on the Chinese mainland through the Asian Development Bank and its own Japanese Bank of International Cooperation (JBIC).

More recently, both China and Japan have concentrated their oil and gas extraction efforts in the contested Xihu/Okinawa trough. Most fields are operated as a joint venture between the Chinese National Offshore Oil Corporation (CNOOC) and the China Petroleum & Chemical Corporation (Sinopec) with support from foreign firms and other partners, such as the Shanghai government. CNOOC listed its East China Sea proved oil reserves at 18 million barrels in 2011, according to an annual report, while other partners have not publicly released their reserve figures.

Only the Pinghu field, operational since 1998, has produced oil in significant quantities to date. Pinghu’s production peaked at around 8,000 to 10,000 barrels per day (bbl/d) of oil and condensate in the late 1990’s, and leveled off to around 400 bbl/d in recent years. In the medium-term, the East China Sea is not expected to become a significant supplier of oil.
Natural gas

EIA estimates that the East China Sea has between 1 and 2 trillion cubic feet (Tcf) in proven and probable natural gas reserves. The region may also have significant upside potential in terms of natural gas. Chinese sources point to as much as 250 Tcf in undiscovered gas resources, mostly in the Xihu/Okinawa trough.

CNOOC listed its East China Sea proved gas reserves at 300 billion cubic feet (Bcf) in 2011, according to an annual report. In 2012, an independent evaluation estimated probable reserves of 119 Bcf of natural gas in LS 36-1, a promising gas field north of Taiwan currently being developed as a joint venture between CNOOC and U.K. firm Primeline Petroleum Corp.

The uncontested Pinghu field began producing in 1998, reaching a peak of approximately 40 to 60 million cubic feet per day (Mmcf/d) in the mid-2000’s and declining in recent years. Chinese companies discovered a large oil and gas field group in 1995 in the Xihu/Okinawa trough. Chunxiao/Shirabaka is the largest gas field in this group and is used on occasion to reference all fields in the area. China began producing at the contested Tianwaitian/Kashi field in 2006, claiming it as part of its Exclusive Economic Zone. According to industry sources, Tianwaitian/Kashi produced between 10 and 18 Mmcf/d in the past several years. China has not released production data from the Chunxiao/Shirabaka field, citing concerns about the regional dispute.

The Chinese government prioritizes boosting the share of natural gas as part of total energy consumption to alleviate high pollution from the country’s heavy coal use. To that end, Chinese authorities intend to ramp up production and increase East China Sea gas to flow into the Yangtze River delta region, which includes Shanghai and Hangzhou, two large cities with growing gas demand. According to an industry source, gas from the East China Sea supplied approximately 12 percent of Zhejiang Province natural gas needs in the first half of 2012, though natural gas remains a small part of the region’s total energy mix.

Foreign ventures

Foreign energy companies have had mixed success in the East China Sea. In the 1990’s, several foreign companies drilled a series of dry holes in uncontested waters. In 2003, Unocal and Royal Dutch Shell announced a joint venture (JV) with CNOOC and Sinopec to explore gas reserves in the Xihu/Okinawa trough. However, Unocal and Shell withdrew from exploration projects in late 2004, citing doubts over the commercial viability of developing energy resources in the disputed area.

Husky Oil China, a subsidiary of Canadian Husky Energy, holds an exploration block in East China Sea but has had more success in the South China Sea. Primeline Petroleum Corp. and CNOOC started joint development in the promising LS 36-1 gas field near Taiwan, with Primeline’s subsidiaries assuming all exploration costs. The companies plan to build pipelines and a 42 Mmcf/d onshore processing terminal at Wenzhou to accept the future gas supplies from the LS 36-1 field.

In August 2012, CNOOC opened up three new offshore blocks for joint-development with foreign companies in the East China Sea but has not awarded any contracts to date.

Territorial issues

China and Japan have two separate, but interlinked disputes: where to demarcate the sea boundary between each country and how to assign sovereignty over the Daioyu/Senkaku Islands.

Despite multiple rounds of high-level negotiations between China and Japan, the two countries have thus far been unable to resolve territorial issues related to the East China Sea. Taiwan’s claim parallels China’s with regard to the islands, although Taiwan has not actively pursued resources in the region. Until these disputes are resolved, it is likely that the East China Sea will remain underexplored and its energy resources will not be fully developed.

Daioyu/Senkaku Islands

The Daioyu/Senkaku Islands consist of five uninhabited islets and three barren rocks. Approximately 120 nautical miles southwest of Okinawa, the islands are situated on a continental shelf with the Xihu/Okinawa trough to the south separating them from the nearby Ryukyu Islands.

Japan assumed control of Taiwan and the Daioyu/Senkaku islands after the Sino-Japanese War in 1895. Upon Japan’s defeat in World War II, Japan returned Taiwan to China, but made no specific mention of the disputed islands in any subsequent document.

For several decades after 1945, the United States administered the islands as part of the post-war occupation of Okinawa. The islands generated little attention during this time, though U.S. oil companies conducted minimal exploration in the area. In 1969, a report by the UN Committee for Coordination of Joint Prospecting for Mineral Resources in Asian Offshore Areas (CCOP) indicated possible large hydrocarbon deposits in the waters around the Daioyu/Senkaku islands, reigniting interest in the area. Although China had not previously disputed Japanese claims, the PRC claimed the islands in May 1970 after Japan and Taiwan held talks on joint exploration of energy resources in the East China Sea. When the United States and Japan signed the Okinawa Reversion Treaty returning the disputed islands to Japanese control as part of the Okinawa islands, both the PRC and Taiwan challenged the treaty.

China claims the disputed land based on historic use of the islands as navigational aids. In addition, the government links the territory to the 1895 Shimonoseki Peace Treaty that removed Japanese claims to Taiwan and Chinese lands after World War II.

Japan claims that it incorporated the islands as vacant territory (terra nullius) in 1895 and points to continuous administration of the islands since that time as part of the Nansei Shoto island group. According to the Japanese, this makes ownership of the islands a separate issue from Taiwan and the Shimonoseki treaty. Japan cites the lack of Chinese demands on the area prior to 1970 as further validation for its claim.

Disputed maritime boundary in East China Sea

China and Japan apply two different approaches to demarcating the sea boundary in the East China Sea, both based on the UN Convention on the Law of the Sea (UNCLOS). Japan defines its boundary as the UNCLOS Exclusive Economic Zone (EEZ) extending westward from its southern Kyushyu island and Ryukyu islands. China defines its boundary using the UNCLOS principle of the natural extension of its continental shelf. The overlapping claims amount to nearly 81,000 square miles, an area slightly less than the state of Kansas. Japan has proposed a median line (a line drawn equidistant between both countries uncontested EEZs) as a means to resolve the issue, but China rejected that proposal.

Under UNCLOS, Article 121 (3), “Rocks which cannot sustain human habitation or economic life of their own shall have no exclusive economic zone or continental shelf”. The Japanese have claimed that the disputed islands generate an EEZ and continental shelf. China has not taken an official position on the status of the Daioyu/Senkakus as rocks or islands.

Mediation efforts

China and Japan began holding bilateral talks over the East China Sea issues in October 2004, although Taiwan did not participate. Japan has repeatedly requested seismic data from China on Xihu/Okinawa trough fields and asked China to desist production until both sides reached an agreement. China has consistently rejected this claim, insisting that the trough and its associated fields are within its territorial sovereignty.

The two sides have considered joint development of the resources as a means of moving forward with energy exploration but have not yet agreed on what territory such a contract would cover. China has offered joint development of the gas fields north of the disputed islands, sidestepping the sovereignty issue. Japan offered joint development of the Chunxiao/Shirakaba gas field, sidestepping the sea boundary dispute. To date, neither side has accepted the other’s offer.

In 2008, China and Japan agreed to explore jointly four gas fields in the East China Sea and halt development in other contested parts of the regions. Both sides agreed to conduct joint surveys, with equal investment in an area north of the Chunxiao/Shirakaba gas field and south of the Longjing/Asunaro gas field. However, China began to develop the Tianwaitian/Kashi gas field unilaterally, launching a protest from Japan in January 2009. In early 2010, Japan threatened to take China to the International Tribunal for the Law of the Sea if China began producing from the Chunxiao/Shirakaba gas field.

The Japanese government began to lease the islands from their private Japanese owners in 2002, sparking protest from China. In April 2012, Tokyo’s governor proposed a plan to buy three of the five uninhabited islets from the owners, to the chagrin of the Chinese. The Japanese government officially announced a deal to purchase the islands in September 2012, prompting a wave of protests throughout China and further escalating tensions in the sea.

Other regional actors

The PRC and Taiwan have strengthened their energy relationship in the East China Sea through a joint venture (JV) between Taiwan’s CPC and China’s CNOOC. In September 2009, the JV drilled a second well in what was previously a contested area between China and Taiwan. Both sides have been contributing to exploration and production activities in the Taiwan Strait, although no major fields have been discovered in the Tainan Basin.

South Korea has signed a provisional agreement with Japan outlining the Korean/Japanese border but has not reached a similar agreement with China. South Korea makes no claims on the disputed area of the East China Sea.

In early September 2012, U.S. Secretary of State Hillary Clinton visited China to meet with Chinese leaders on the issues of disputed territory in the East and South China Seas. The United States has not taken an official position on the issue and has urged both sides to reach a peaceful settlement.