 
Introduction/Assessment
The
Senkaku Island dispute will not go away. Both China and Japan claim the islands and neither will back off. The US, which returned the islands to Japan along with Okinawa in
1972, believes China's claim is the stronger of the two, but prefers
to stay out of it. This
said, the warming of relations between the countries, combined with
China's need for foreign investment to exploit its offshore energy
resources, augers well for joint ventures with US and other foreign
companies. The trick is
not to get too close to the sensitive Senkaku Islands.
China
is offering bids on 73,000 sq km in the East China Sea, in roughly the
same locations shown on our 1988 map. China is exploring on its own in the waters between the two
plots. Bidding on this
(fourth round) will end in July 1993, with drilling to begin in 1994.
CNOOC is now more experienced in dealing with foreigners, and
is offering attractive fiscal and tax terms to interested companies.
Japan
has apparently raised no objections to the Chinese offerings. The
Senkaku Dispute
The
history of the Senkaku Islands (Diaoyutai in Chinese) provides no
clear guide to resolving the dispute between China and Japan as to who
owns the islands. Japan
took control of the islands in 1895 when it seized Taiwan, and it
retained control until it surrendered to the Allies at the end of
WWII. At the time of the
surrender, General Chiang Kai-shek's Nationalist Forces were in
control of China. When
Chiang's forces escaped to Taiwan in 1949, they took their claim to
the Senkakus with them, resulting in the competing claims of today.
The
US retained control of the islands from 1945 to 1972, officially
returning the islands to Japan in 1972 along with Okinawa.
In 1971 China restated its formal claim to the islands.
The islands remain at the center of a territorial dispute
between China and Japan. Today, the US State Department officially recognizes Japan as
the administrator of the Senkaku Islands.
This said, State privately believes that China's claim to the
islands is stronger than Japan's.
The US Department of Commerce knows of no projects being
completed by US companies on the islands at the present time.
The State Department believes the islands are uninhabited and
undeveloped.
China
has a history of taking its territorial claims very seriously.
For example, China has used force in territorial disputes with
Vietnam (over the Spratly Islands) in the past.
While the use of force in this dispute is extremely unlikely
(the US has a mutual defense treaty with Japan), State Department
officials believe China feels as strongly about this territorial
dispute as any other.
China's
Foreign Ministry issued a statement on 15 March 1973, claiming a
continental shelf in shallow waters of the East China and Yellow Seas.
Maps show a boundary of a hypothetical equidistant line between
Japan and China. China has publicly denounced Japanese claims as
infringing on its continental shelf.
China's claim to the Senkaku Islands includes the water; China
has offered Japan joint development of the waters around the islands,
but Japan has not yet accepted. China's
claims to the islands were reinforced as recently as February 1992,
when it enacted a law claiming jurisdiction over the islands.
The new law was backed by the Chinese military and other
hard-liners, but opposed by the Foreign Ministry.
Japan
can also be extremely determined in the handling of its territorial
disputes. A good example
is the way Japan has pressed its claim to Sakhalin with the former
Soviet Union and now Russia. The
return of that territory is central to a normalization of relations
between the two countries.
It
is important to note that Sino-Japanese relations have warmed
significantly in the last twelve months.
In 1992, Japan invited Chinese Communist Party Secretary Zemin
Jiang to visit Japan. This
was the first such offer from a major industrial power since the
Tiananmen Square incident in 1989.
Emperor Akihito visited China last summer, and the Japanese
government went as far as to express "regret" and
"contrition" for war crimes committed in China and Korea
during WWII. While Japan
has not gone as far as Germany in apologizing, discussing wartime
Japanese behavior at all represents a significant policy shift for the
government. Japan also became the first of the western nations to lift
sanctions on China that were imposed in the wake of the Tiananmen
Square incident. This month China presented Japan with a giant panda in another
display of friendship. While Japan has numerous reasons for developing closer
relations with China (e.g. market reforms in China resulting in an
expanded market for Japanese goods, coupled with an increasingly
competitive economic relationship with the US), a return of disputed
territories would be almost completely out of the question.
As
recently as October 1990, a small group of Taiwanese athletes who
attempted to place an Olympic Torch on the Senkakus for the Taiwan
Area Athletic Meet, were repelled by Japanese coastal patrol boats in
short order. Although
there was talk at the time of a flotilla of hundreds of fishing
vessels traveling to the islands in protest, nothing came of the plan.
Japan may have given approval for a lighthouse erected in 1978
by a right-wing political group on one of the islands. There is also a giant Japanese flag painted on the cliff of
the main Senkaku Island.
Thus,
history combined with Japan's close security relationship with the US
makes a return of the Senkaku Islands either by Japanese acquiescence
or Chinese force highly unlikely. General Claims to the South China Sea
China's
claims in the South China Sea are of three distinct types:
Territorial, Maritime and Continental Shelf/Seabed.
A
delegation of five Chinese attended the US Department of Energy
conference on US Technologies for Environmentally sound Offshore Oil
Exploration and Production on 9 through 11 November 1992. Exploration Facts & Activities
According
to State, applications for mineral and drilling rights on the Senkaku
Islands should be made through the Japan External Trade Organization
in New York City (tel. (212) 997-0400).
State's guidance to oil companies has been to avoid these
actual or potential areas of dispute.
The
China National Offshore Oil Corporation (CNOOC) moved its offices to
Guangzhou about two years ago. It
controls all offshore oil and gas fields of a depth beyond five
meters. CNOOC is divided
into four main subsidiary companies: two for the South China Sea, and
one each for the East China Sea and the Bohai Gulf. CNOOC's oil production in 1991 was 2.39 million tons, less than
two percent of China's total production.
CNOOC operates a number of oil fields itself, but has great
foreign investment. Offshore
bidding began in China in 1982. Three rounds of bidding have been completed, and the South
China Sea is under active development. The CNOOC has less clout with the Chinese government than the
larger China National Petroleum Corporation (CNPC), which is the major
producer of crude oil in China. Its President (currently Zhong Yiming) is ranked equivalent
to a Vice Minister. It is
more of a commercial operation than the CNPC, and looks to the
Ministry of Energy for policy guidance.
It's greatest success thus far has been in attracting foreign
investment. Most of the
US$3.1 billion investment has been spent offshore. There currently is a round (fourth) of bidding going on for
blocks in the East China Sea. The bid was announced on 30 June 1992, and data packages went
on sale in late August. The
bidding will probably close in June or July 1993.
Exploration is likely to begin in 1994. A total of 63 companies have expressed interest in the bid
round; of these, 25 are US companies.
Texaco, ARCO, Pecten and Shell are among companies that have
purchased data. CNOOC
offers three seismic data packages and one package of well data (Wenzhou
Well 611). Due to recent
reforms, offshore oil has a major advantage over onshore drilling; it
faces a market price. It
is also permitted to charge Chinese consumers foreign exchange rather
than Chinese Yuan. Bohai, China's oldest oil company, currently has operations
with four international companies:
Japan China Oil Development Company, which has three operating
wells off the coast of Shengli oilfield; BP, which has a large
cooperative block in the western portion of the Gulf; and Texaco and
BHP, which hold the two largest blocks - 8,000 and 10,000 sq km in
area. CNOOC has put up for bid two groups of acreage in the East
China Sea that total 73,000 sq km.
The northern acreage (230 km east of Shanghai) covers 18,800 sq
km and is divided into four blocks.
The southern acreage (110 km east of Wanzhou) covers 54,000 sq
km and is divided into 16 blocks.
The area waters are 50-lOOm deep and are relatively calm the
year round. Both areas
have thick sediments, good source rocks and strong conditions for oil
traps. The Chinese have
conducted 60,000 line km of seismic surveys and drilled five wildcats
in the two areas.
While
foreign companies are exploring in the two areas of the East China
Sea, China plans to spend about US$400 million to develop oil and gas
reserves discovered between the two clusters of acreage up for bid.
Chinese explorers discovered oil and gas in 1983-84, including
four high-yielding wells, but development was shelved for lack of
capital. Proven reserves
are estimated at 517 bcf of gas and 63 million bbl of oil.
Plans call for production to begin in 1994 and build to 28-42
MMcfd of gas and 2,400 b/d of oil, sustainable for 15 years.
CNOOC
has improved financial terms for foreign operators of joint venture
development projects in the East China Sea.
Any oil field with annual acreage production of 20,000 b/d will
be exempt from royalty payments.
For fields producing 60,000 - 80,000 b/d, the royalty rate
remains at 10 percent. Foreign
companies participating in East China Sea projects will pay only 33
percent income tax, down from the previous 55 percent.
In short, CNOOC has sweetened fiscal and tax terms for
operators in the fourth round.
According
to the latest public statement by the State Department, CNOOC has now
learned to deal successfully with international oil companies and is
sensitive to both domestic and international market considerations.
The energy sector is completely government-owned, with a
strikingly high degree of central government control, especially in
the oil industry. It has
changed significantly in the past decade due to reforms.
It is regarded as one of the key resources, which government
leaders have always said must remain under government control. Other
Tidbits
Three-quarters
of China's total petroleum production (137 million tons) comes from
three oilfields, all around 30 years old. The only top producer outside of the northeast is the Karamay
oilfield in Xinjiang's Junggar Basin.
The
oil in China's northeast is dependable, but not of the finest quality.
It tends to be heavy and has a high wax content. Concerning offshore exploration, China is heavily dependent on
foreign capital to finance the relatively costly exploration and
development. A number of
firms were disappointed with their finds in the South China Sea, but
as of 1991 the area was showing promise.
The ACT group brought their wells in the Pearl River Mouth
Basin onstream in November 1991, and expect peak production to be
approximately 1.5 million tons annually.
South China Sea fields produced almost 1.5 million tons of oil
in 1991.
By
mid-1992, Foreign companies spent about US$3.1 billion on Chinese
offshore exploration and development, several times the domestic
investment, and confirmed an oil resource of about 7.81 billion bbl,
of which 4.38 billion bbl are under development.
In all, six jointly developed fields are producing oil and
another nine are under development.
China's
offshore region produced about 48,000 bid of oil in 1991, and was
expected to produce an average of about 60,000 b/d in 1992.
By 1997, CNOOC expects offshore productive capacity to reach
160,000 - 200,000 b/d of oil and 355 MMcfd of natural gas. Useful Names & Addresses China
National Petroleum Corporation China
National Offshore Oil Corporation Ministry
of Energy |
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