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Indonesia’s Natuna: South China Sea Joint Development Area? – Analysis

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The South China Sea’s most significant potential Joint Development Area (JDA) lies around Indonesia’s Natuna Islands.

The JDA would be established to the northeast of Natuna in an area where territorial claims of Indonesia and Vietnam border each other. Across both, China’s ill-defined Nine-Dotted Line adds a confused additional claim.

The Natuna area holds what may be Asia’s richest offshore deposits of undeveloped natural gas. It’s also highly strategic transit way between the South China Sea and the Straits of Malacca.

Known as the East Natuna Gas Fields, development would occur to the northeast and east of Natuna Island itself. The area contains various subfields known as Tuna, Sokang, Belut and other names.

The gas fields would be connected to Natuna through new and existing shallow water gas pipelines. These would be connected to a Pan-Asian Gas Pipeline (PAGP), which is a more extensive version of the Association of Southeast Asian Nations’ (ASEAN) proposed Trans-ASEAN Gas Pipeline (TAGP).

The East Natuna oil and gas fields may hold as much as 46 trillion cubic feet of gas, but are believed to need oil prices of US$100 per barrel or higher to be economic. Given this, they aren’t expected to be developed until 2030.

Multilateral cooperation could reduce this cost, speed development and reduce territorial tensions. For its part, Indonesia has lofted trial balloons regarding ‘joint operation’ of various Natuna blocks.

Nowhere else in the South China Sea are China’s territorial claims more vague than east of Natuna Island. China’s Nine-Dotted Line is drawn so ambiguously here it clearly suggests an ambit claim. This perception is reinforced by studious Chinese ambiguity. Official Chinese statements about the area go only as far as saying China lays no claims to the Natuna Islands themselves.

That, of course, says nothing. The islands are not in dispute.

In the past five years, three incidents at sea have occurred in the East Natuna area. These have involved Indonesian maritime authorities and Chinese ‘fishing boats.’ These occurred in 2011, 2013, and in March of this year (2016).

As a result, Indonesia is moving military assets to Natuna Island after vocally asserting China’s Nine Dotted Line encroached on Indonesian territory. Indonesia’s also stepping up efforts to develop the area economically to prevent its incremental occupation by China.

Indonesia’s Pertamnia is now surveying the area. The work is expected to be completed later this year.

Pertamina has teamed up with US-based ExxonMobil, France’s Total and Thailand’s PTT Exploration and Production (PTT EP).

This creates a formidable coalition as a combined commercial front that could force China to clarify its claims. It could also represent an intriguing coalition under which Indonesia Thailand, Malaysia and Vietnam could provocatively seek Asian Infrastructure Investment Bank (AIIB) funding for downstream pipeline delivery infrastructure of oil and gas from the East Natuna Area.

The above would link publicly — perhaps for the first time — constructive resolution of South China Sea territorial issues and the success of the AIIB. The AIIB is China’s initial foray into big status international economic leadership. Its success is of paramount importance to China’s Communist Party leaders.

Given that joint development would almost certainly gain broad support among AIIB members other than China, it could create the ideal forum through which to exert constructive political pressure on China to come to territorial terms with its neighbors over the South China Sea.

Seeking AIIB funding for JDAs — of which Natuna could just be the first — would force the South China Sea territorial issue toward resolution in a positive way.

Indonesia would likely have little trouble gathering support from other AIIB shareholders for such a plan.

Most ASEAN and European AIIB member countries would be likely to support an initiative like the above. Russia, South Africa and Brazil’s positions would be harder to gauge.

China, meanwhile, would face potential isolation and loss of credibility if it stonewalled or rejected funding purely on political grounds.

The best outcome would be for Chinese capital in the form of AIIB loans for joint development in both Natuna and elsewhere in the South China Sea. All of this would establish a template for economic cooperation in the South China Sea that could last decades and avoid war.

For China, it would represent initial steps toward realizing its One Belt, One Road and Maritime Silk Road slogans. For Southeast Asia’s smaller countries, it would set multilateral precedents for cooperative collective economic relations with China. Everyone would gain.

Should the AIIB refuse funding, other multilateral institutions might step in — like the Asian Development Bank.

Another alternative would be the formation of an ad hoc coalition of energy majors (Exxon, Total, PTT) and interested countries (Indonesia, Malaysia, Thailand, Vietnam) to agree among themselves to go ahead with the project.

This would politically and economically isolate China. It would create just the kind of unified front China has sought to avoid forming in the South China Sea through its ‘salami-slicing’ strategy of incremental encroachment.

It’s not hard to see why the Natuna area of offshore Indonesia is gaining so much attention.

In addition to rich resources of oil and gas lying in shallow water, the remote area already is served by gas pipeline infrastructure and lies roughly equidistance from Singapore and Ho Chi Minh City in south Vietnam.

All of the South China Sea’s problems, and its potential to lead to peaceful development (or ugly war) manifest themselves here.

This article was published by Grenatec.


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Stewart Taggart

Stewart Taggart

A former economic and energy market journalist in the United States, Western Europe and Asia, Stewart is the founder and principal of Grenatec. Sydney-based Grenatec is a research organization studying the viability of a Pan-Asia Energy Infrastructure. This infrastructure would be comprised of parallel natural gas pipelines, high capacity power lines and fiber optics cables stretching from Australia to China, Japan and South Korea.

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