Time Bomb in the East
Will China be the next oil giant?
The complex legal issues involved in the continental shelf controversy are discussed in the definitive works of Choon-ho Park of the Harvard East Asian Legal Studies Program. See especially "Oil Beneath Troubled Waters," Harvard International Law Journal, 1973. The author is indebted to Park for his help in dealing with these issues and related aspect, of the China offshore controversy.
The complex legal issues involved in the continental shelf controversy are discussed in the definitive works of Choon-ho Park of the Harvard East Asian Legal Studies Program. See especially "Oil Beneath Troubled Waters," Harvard International Law Journal, 1973. The author is indebted to Park for his help in dealing with these issues and related aspect, of the China offshore controversy.
The rapid emergence of China as a major oil producer is fundamentally transforming the geopolitical map of Asia. Already, by drawing only on its onshore reserves and those of the Po Hai Gulf. Peking appears likely to reach the current production level of Saudi Arabia by 1988 or soon thereafter. By exploiting its rich continental shelf reserves as well. Peking could rival the present production leaders within two decades. Chinese preparations for offshore oil development have become increasingly intense, giving new sensitivity to long-simmering disputes with Taiwan and South Korea over parts of the shelf widely believed to contain the most promising unexplored oil and gas deposits in the world. At the same time, China is utilizing oil exports to buy off other claimants to disputed offshore deposits, notably Japan, North Korea, and North Vietnam.
For the United States, the rise of China as an oil giant is not likely to mean a new source of crude oil in significant quantities or a sudden opportunity to "break OPEC." The net effect of expanded Chinese oil exports would be to reduce global dependence on the Middle East and the Persian Gulf; but the principal direct beneficiaries of a Chinese export thrust are likely to be Japan and other politically favored customers, especially in Asia. China has persistently rebuffed efforts by American oil companies to line up Chinese crude in return for technical help in expediting undersea development. Instead, Peking is actively seeking to acquire its own offshore equipment and know-how, and it is the prospect of unilateral Chinese activity on the continental shelf that makes the Peking drive for oil power a matter of immediate concern to U.S. policy-makers.
As we shall see, the United States finds itself squarely in the middle of the explosive continental shelf controversy. Nine American oil companies hold offshore concessions granted by Taipei and Seoul in waters claimed by Peking, and many of these companies would rather get while the getting is good, under present arrangements, than wait for a hypothetical future change in the Chinese attitude. Washington, for its part, is more than ordinarily anxious to avoid provoking Peking in advance of the Presidential visit to China this fall. In two cases this year to be discussed later in this article, the White House and the State Department were able to dissuade leading oil companies from drilling in contested waters only after varying degrees of behind-the-scenes pressure and a helpful, eleventh-hour assist, in each case, from lady luck.
For the past 11 years, Chinese crude production has increased at an average annual rate of 24.6 percent, jumping from 6.4 million tons in 1963 to 20 million tons in 1970 and nearly 70 million tons in 1974, the latter figure including exports of 5 million tons to Japan. How much longer this rate can continue, however, remains a subject of debate. The attempt to project future Chinese production and export levels is a risky game fraught with more than the customary quota of the booby traps that bedevil petroleum futurology. Japanese spokesmen inflate their projections to improve their bargaining posture with OPEC and the Western majors; the Chinese encourage Japanese optimism as part of their anti-Soviet strategy; and the Western oil companies, given their interests elsewhere, tend to minimize Chinese prospects and technical capabilities. In order to evaluate such projections, one should take into account a wide range of economic and political variables, among them China’s industrialization plans, domestic energy needs, alternative energy sources, and the role of differing export strategies in various economic policy scenarios. At the same time, one should consider these factors against the larger regional background of the continental shelf issue. OUI attention here will be focused primarily on the struggle over offshore resources, not only as a politically dangerous dilemma for the United States but as a pivotal variable molding and shaping many of the other factors that will govern Chinese oil prospects.
Assessing the Reserves
Depending on the outcome of the offshore boundary scramble, the addition of an offshore dimension could at least double the Chinese oil potential even by relatively conservative estimates. Thus, geologist A. A. Meyerhoff, who estimates recoverable onshore reserves to be "not less" than 20 billion barrels and says that they "may" reach 40 billion, has recently made a 30 billion estimate for recoverable offshore reserves.
These are cautiously low figures in comparison with many other Japanese and American estimates, especially with respect to offshore reserves, though they are broadly similar to offshore estimates by Soviet geologists and by a Norwegian oceanographer. Jan-Olaf Willums, who has utilized a different method of calculation. Meyerhoff divides his total into 12.84 billion barrels for the East China Sea; 8.03 billion for the South China Sea, inclusive of the Taiwan Strait; and 5.6 billion each for the Yellow Sea and the Po Hai Gulf. By contrast, many Japanese estimates go as high as 10 billion for the Po Hai Gulf alone. In the case of the Yellow Sea, a U.S. Geological Survey China specialist, Maurice Terman, has recently completed unpublished tectonic studies that point to substantially higher estimates.
Meyerhoff excludes from his estimates potentially rich areas that are implicitly defined as part of its shelf jurisdiction by China but have not been treated as such by the United States in Law of the Sea discussions. Other areas in the South China Sea claimed by China for different reasons have also been excluded. In any case, as the North Sea experience suggests, the full dimensions of the recoverable Chinese offshore potential could prove to be much higher (or lower) than 30 billion barrels. Prior to drilling, the highest North Sea estimate was 15 billion barrels. Now company estimates range from 17 to 22 billion.
In the absence of extensive drilling under the concessions so far granted, what is known outside of China about the reserve potential of waters adjacent to the mainland has been largely based on seismic surveys and other geophysical studies conducted under the auspices of a United Nations agency, the Committee for the Coordination of Joint Prospecting for Mineral Resources in Asian Offshore Areas (CCOP); oil companies, big and small, mostly American, Japanese, and British; geophysical companies operating independently, mostly American, German, and French; and government oil enterprises in Tokyo, Seoul, Taipei, Saigon, and Hanoi, Peking, on its own, has conducted technically limited offshore surveys since 1958 and has been quietly acquiring sophisticated French, American, and Japanese equipment during the past three years for an expanded survey program that will be separately treated in a later part of this article. None of these surveys has resulted in the public disclosure of quantified projections. However, the CCOP has published a flow of generalized findings that has kept expectations high.
In 1968, a survey conducted jointly by CCOP and the U.S. Naval Oceanographic Office led to the announcement of a "high probability … that the continental shelf between Taiwan and Japan may be one of the most prolific oil and gas reservoirs in the world. It is also one of the few large continental shelves of the world that has remained untested by the drill, owing to military and political factors."
The excitement generated by this report in the areas involved was a source of great irritation to many of the concerned oil companies. They had been cool to the very idea of a regional intergovernmental agency conducting public oil survey operations and were upset, in particular, to find their bargaining position complicated in then pending negotiations for offshore concessions. As a result of company pressures, K. O. Emery of the Woods Hole Oceanographic Institution, the primary author of the report, was eased out as the American representative on the CCOP staff. In their estimate of the offshore potential, however, most oil companies appear to share the optimism reflected in the Emery report. Their technical data is closely held, to be sure, and their public posture does not generally correspond to their actual plans and intentions. With this in mind, I have interviewed exploration executives and geologists in Asia-minded oil companies in the United States, Europe, and throughout Asia itself as part of a larger inquiry into the economic and political implications of the China offshore question. I have made a point of talking separately with different officials working in different places within the same company and of checking them not only against one another but against what they say to the governments concerned.
In some cases, officials of leading American and Japanese companies have made partial data available on a confidential basis after satisfying themselves that my research was not a cover for someone’s commercial or other intelligence operations. In others, where companies holding concessions had attempted to sell an interest to other companies. I have been able to see proprietary seismic data used during the negotiations.
As my knowledge has grown over the past year, more and more doors have opened, and it now appears clear that the offshore areas adjacent to China are appraised with a remarkable degree of unanimity in informed quarters. Taken collectively, they are ranked as the most promising of the unexplored areas in the world. At the same time, there is widespread feeling that the high costs of exploration and development in many of these areas, added to the political uncertainties involved, may delay the commercial exploitation of these reserves. This is especially true where structures are small and complex ("fault-blocked") and where deep or tempestuous waters complicate test-drilling operations. Where exploration does occur and gas is found in areas far from shore, the peculiarly steep costs of offshore gas exploitation could also act as a deterrent to major private investments in the near future, Many American companies complain that the current confusion in U.S. energy policy has left it unclear whether they will be helped or hindered in exploring new areas abroad. Among other things, the new tax bill enacted by Congress this year abolishes the "per country" tax credit, which had hitherto made it profitable to conduct test-drilling operations within a given national jurisdiction even when no oil was found.
To Drill or Not to Drill
Given the political constraints involved, the limited drilling that has so far occurred has been inconclusive. The most promising finds have been in the South China Sea oft’ Vietnam, where foreign companies had invested $64 million prior to the Communist victory, and in the Taiwan Strait, where a Conoco-Amoco venture has resulted in a major gas discovery that could make Taiwan almost self-sufficient in energy within
10 years. The gas find is 60 miles off the southwest coast of the island, but it is separated from Taiwan by an undersea canyon that would have to he circumvented in piping the gas to shore. The initial development outlays required would reach at least $650 million, and the two companies are still debating whether to go ahead if test drilling continues to prove successful. Peking has greeted past drilling off Taiwan with reminders that any oil or gas found, like the island itself, belongs to China.
Conoco, Amoco, and Gulf have all deliberately chosen concession areas relatively close to Taiwan in the belief that Peking will wink at exploration and development there pending an overall settlement of the status of the island. Their hope is that the island will remain independent and that petroleum discoveries will help to guarantee this outcome; but even if it does revert to Peking, they are gambling that an increasingly moderate China would, by that time, agree to tolerable terms in renegotiating their concessions. Gulf has accordingly drilled its second and third offshore wells northwest of Taiwan this year, including one less than 125 miles from Fuchou.
Reflecting its claim to jurisdiction over the entire mainland, Taiwan has not only granted close-in concessions but has also allocated offshore rights over a 500 mile belt, north of the Gulf concession, reaching to a point in the East China Sea opposite Shanghai to the west and the South Korean and Japanese coasts to the northwest and northeast. These are even more provocative to Peking than the close-in concessions because they could only have been granted by Taipei in the capacity of an all-Chinese rather than a strictly Taiwan regime. To complicate matters further, the same areas where Taipei has granted concessions are also claimed by Tokyo as a consequence of the Japanese claim to the Senkaku islands (Tiao Yu-tai in Chinese), a group of rocky islets at the tip of the Ryukyuan chain that lies on the continental shelf and thus gives Japan a basis for claiming rights as a shelf power. Despite scowls from Peking and Tokyo alike and cautionary words from Washington. Taipei is nevertheless pushing concession-holders to go ahead with drilling, and the prosperous government oil monopoly, the Chinese Petroleum Corporation, is rapidly developing its own offshore know-how with an eye to doing its own drilling in areas where foreign companies fail to deliver on their commitments.
AU three of the most sensitive East China Sea concessions to the north of Taiwan are held by relatively small U.S. companies lacking the financial capability to conduct expensive deep-water drilling operations on their own. It is standard practice in oil exploration for such small promoters to locate promising possibilities, spend a few million dollars on surveys, and then try to find a better heeled partner to put in the multimillion dollar investment needed for sustained drilling operations. In the Taiwan case, one of these companies, Clinton International, was able to enlist the collaboration of the Superior Oil Company, among the larger and more solid independents operating abroad. Superior and its self-made president, H. B. Keck, still retain some of the gung ho spirit of their earlier, wildcatting days, and the Houston-based company had decided that it was worth taking some chances to get an inside track on one particular undersea configuration in the Clinton concession 350 miles north of Taiwan (straddling Zones 4-E and 4-F) where the geological odds for a major find were "10 to 1." Superior had lined up a rig and was scheduled to drill in April and May until the White House and the State Department intervened.
The confrontation between Superior and the U.S. government was the first and less strenuous of the two episodes this year in which Washington has blocked projected offshore drilling near China. Joseph Reid, the president of Superior’s international division, had begun to have doubts when he led a delegation to Washington in early February. The group was aware that U.S, policy is to discourage drilling in disputed areas by denying the use of government satellites for navigation purposes and by forswearing any responsibility for the defense of U.S.-owned rigs or survey ships in possible clashes with Chinese naval craft. What they were not prepared for was the grim report on the current Peking attitude that they heard from ranking U.S. officials concerned with China. They were startled to learn that Peking laid serious claim to their concession area, had a substantial case, in U.S. eyes, and was making preparations for an offshore program of its own. Secretary Kissinger would take the matter up personally with Keck, they were cautioned, if the company persisted. In Taipei, a Clinton official asked the U.S. Embassy where it would be permissible to drill under Taiwan auspices. He was unable to get a direct reply but was told that it would not be advisable more than 200 miles from the island. Back in Houston, an anguished reappraisal had just begun when a threatening letter arrived from a Japanese oil firm (linked to Gulf) also claiming jurisdiction over Zones 4-E and 4-F.
Despite doubts aroused by the static from Washington and Tokyo, Superior was hesitant to renege on such a geologically attractive deal and was finally deterred from its drilling only by a last-minute complication indirectly linked with events in Vietnam. Since sophisticated. "semisubmersible" rigs cost some $50,000 a day to operate, and since it was so uncertain how China would react, Superior was prepared to drill only one well and had arranged to sublease the deep-water Margie from Shell. Shell had planned to use the rig extensively off Vietnam, but made an unannounced decision in early February to cut back on its Saigon commitments and canceled its contract for the Margie. At that point, in order to get the rig, Superior would have had to take over Shell’s costly, long-term contract. The deal finally fell through amid a cloud of legal recriminations between Superior, Clinton, and bitter Taiwan government oil officials who blamed it all on Kissinger and talked of drilling on their own if necessary.
Danger in the Yellow Sea
In contrast to Superior, Gulf is accustomed to staring down the U.S. government and has kept its options open in the face of continuing State Department efforts to head off drilling in a sensitive area of the Yellow Sea. Gulf has two concessions off the west coast of South Korea, and the most promising geological structure in one of these lies relatively equidistant from the Korean and Chinese coasts in a potentially disputed zone just south of the 31st parallel.
China has not yet agreed to the median line principle in Law of the Sea discussions II and could well insist on geological criteria for sea boundaries more favorable to its interests. Moreover, in the case of the Yellow Sea. Peking does not recognize Seoul and is not likely to do so. Even if it did agree to a median line with South Korea, however, the projected Gulf drilling site near the 31st parallel would be on what the Chinese would be likely to claim as their side of the line. The Peking stand is readily deduced from Chinese maps indicating the islands that define Chinese coastal limits. But Gulf’s lawyer, Northcutt Ely, argues that a case can be made against recognition of the islands in question under international law, and there are top Gulf officials who believe that the company should drill in any case, compelling Peking to make an issue of the matter if it chooses to do so.
"No oil company will withdraw from that part of the world until oil has been found and we’ve forced a resolve," one of these officials has explained. "Not until the claims have been resolved and we’ve been told by the governments concerned. Finding oil would act as a catalyst."
In a series of meetings with representatives of Gulf and its ex-partner in Korea, Zapata Exploration, between January and April, State Department officials urged Gulf not to drill in September, as planned, pressing instead for a new drilling location indisputably within the South Korean side of any future median line. Deputy Secretary of State Robert S. Ingersoll made a series of phone calls to Gulf Board Chairman Bob R. Dorsey, but Dorsey made no promises. Gulf has reportedly been under strong pressure from President Park Chong-hui to accelerate the search for oil in view of rising crude prices, and the pressure from Seoul was a matter of concern for Gulf in view of the company’s many-sided stake there (e.g . $325 million in sales of Kuwait crude during 1974) . Gulfs attitude abruptly changed in May, however, after Dorsey’s revelation in Senate testimony that the company had been forced to pay $4.2 million in slush funds to Park’s ruling Democratic Republican Party. Since then, Gulf has hinted that it will not drill this year, as part of a "low-profile" policy, though the door has been left open for the future fulfillment of its remaining drilling obligations to Seoul. Shell and Texaco, it might be noted, also have West Coast concessions but do not display a comparable desire to force a "resolve."
At the very least, renewed drilling in the Yellow Sea could provoke a Chinese political reaction that would aggravate the already delicate interplay between Peking. Pyongyang, and Washington. At worst, it could trigger a military incident. The danger of a Chinese military response to unwelcome drilling was underlined by the appearance of Komar-class gunboats less than a mile from a Gulf rig on three different occasions during the last drilling by the company off South Korea in February and March of 1973.
Peking and Pyongyang would both appear to have an interest in forestalling foreign drilling activities off South Korea. Pyongyang has consistently objected to the "country-selling" terms of South Korean offshore concessions and is anxious to frustrate oil discoveries that would help to make the Seoul regime viable. Peking, as a regional giant, would rather face Koreans than Americans in determining how the Yellow Sea is to be parceled out and how its development is to be organized. Already, Pyongyang is leaning heavily on Peking for its oil supplies, and China’s bargaining power seems sure to grow in relation to the two Korean regimes as its offshore know-how increases.
China Goes Offshore
The Yellow Sea is a peculiarly inflammable arena of possible conflict over oil because Chinese offshore ambitions are currently centered there as a natural extension of the experimental activity hitherto undertaken in the Po Hai Gulf. It was at an undisclosed location in the "southern part" of the Yellow Sea that China’s first domestically built offshore rig, Kaman (Prospector) I, drilled its much-heralded first test well last December in "fairly deep waters." Some of the most productive areas of the Takang and Shengli oil fields have proved to be in coastal marshlands along the Po Hai Gulf and the Yellow Sea coast, strongly suggesting the existence of offshore fields geologically linked to the onshore discoveries. The initial assignment of one of the new seismic survey boats recently acquired by Peking has been to see whether-and how far-the Takang and Shengli fields extend offshore.
Chinese interest in the potential of the Po Hai-Yellow Sea area as the natural starting point for offshore activity goes back to extensive oceanographic and marine geological studies of the continental shelf during the 1958-1961 period. While fascinated by the potential of the East China Sea, the oceanographer who directed these studies, Ch’in Yun-shan, emphasized the contrast between the shallow water of the Po Hai-Yellow Sea area, rarely exceeding 200 feet, and water three times deeper on the easternmost extremities of the East China Sea shelf.
Little is known concerning the extent of subsequent Chinese exploration activities during the 1960s, especially during the Cultural Revolution, but most evidence suggests that the Chinese Beet of some 35 oceanographic vessels has included at least three marine geological ships for at least a decade.
Given Chinese sophistication in seismological and computer sciences. Peking may have known more about its offshore oil potential for much longer than has generally been assumed in the West.
By 1972, Peking had slightly lifted the veil of secretiveness over its operations in Po Hai where at least five and possibly as many as eight offshore rigs have been in use. Working at first from fixed platforms in the shallowest water. Chinese oil technicians had then contrived their own jerrybuilt, barge-style rigs, utilizing Rumanian and other imported components. The normalization of relations with Japan in 1972 opened the way for the acquisition of at least one foreign "jack-up" rig through Tokyo channels as well as several drill ships and possibly a "semi-submersible" as well. Simultaneously. Peking was proceeding with its own domestic rig manufacturing program, using its new rigs, in effect, as working models. In addition to Kantan, Peking has also announced a relatively advanced self-escalating "jack-up," the Po Hai I. said to have a capability of drilling to 200 feet.
At this stage, China is not equipped to carry on extensive offshore test drilling beyond Po Hai and relatively close-in Yellow Sea areas. By next summer, however, Peking will have the first of two Singapore-made, U.S.-equipped, $33 million "jackups" capable of drilling in 275 feet of water. At least one other comparable rig has been ordered in Japan, and more are under active discussion not only in Japan but elsewhere. Supporting vessels and undersea pipe have been acquired or ordered from Denmark, Japan, and Italy. Most significant, China has been negotiating a $310 million order with a West German-French consortium for six "semi-submersible" rigs capable of drilling in the deepest and stormiest waters of the continental shelf concessions allotted by Taiwan.
In the rig trade, there are some cynics who accuse the Chinese of a canny variety of "window-shopping" that borders on patent theft. Peking’s "negotiations." it is alleged, are mainly a way of getting a feel for the latest foreign technology and of gathering ideas for use in Chinese rig-making. This suspicion is widespread, but is not shared by many of those who have dealt most intensively with the Peking agencies involved. The Chinese are afraid of being bilked, it is said, and are cautiously studying the ups and downs of the world rig market. Even if the "window-shopping" interpretation should prove valid, though, this would be of greater significance to rig companies than to U.S. policy-makers.
What matters in political terms is that China appears likely to have a substantially augmented fleet of rigs in the foreseeable future and will. Accordingly, be able to conduct its own test drilling in contested areas where others have hitherto had a clear field. If Peking does buy rigs on the world market in quantity, this would speed things up; but in any case, rig purchases abroad would go hand in hand with accelerated domestic rig construction, based on foreign prototypes.
Peking’s "self-reliance" approach is not meant to shut out foreign technology but rather to avoid technological dependence. This has been clearly foreshadowed by the way in which China has been upgrading its onshore oil capability with foreign help. By 1972, when Peking began to buy Western and Japanese equipment, China had a nucleus of trained personnel capable of incorporating foreign technology into a Chinese-controlled administrative infrastructure. More than $20 million of American equipment alone has subsequently been imported in order to maximize recovery from existing wells and to speed up the development of new oil fields.
So far, the Chinese have apparently been able to move into the more arcane areas of offshore survey work without letting foreign involvement get too far ahead of their own expertise. In a little-known but significant transaction, a leading French geophysical firm (Compagnie General de Geophysique, or CGG) has sold Peking at least one late-model seismic survey ship, the Lady Isabel, a somewhat unconventional departure from the usual industry practice of furnishing services rather than know-how or equipment. The quid pro quo for the French appears to have been separate service contracts for ongoing survey work conducted in tandem with on-the-job training for Chinese technicians. Similar arrangements have also been concluded with CGG for one or more additional boats and with Sumitomo for several Japanese survey vessels, one of them just delivered.
Since it arrived in early 1974, the Lady Isabel has done initial seismic surveys in the Liaotung Bay (a corner of Po Hai), the Yellow Sea (between Tsingtao and Shanghai), and the South China Sea near Hainan. The seismic tapes from the boat are being interpreted in Peking with the help of CGG advisers, some of them Tokyo-based, and will eventually utilize a Raytheon 703 computer and related American equipment obtained in a $5.3 million deal with the Geospace Corporation of Houston. Twenty Chinese have been to Geospace headquarters for training, and 70,000 pounds of seismic processing equipment was recently airlifted to Peking in the first commercial jet cargo flight between the United States and China.
On their own, the Chinese have already gone far in computer technology and recently announced a "hybrid analogue" computer said to combine the advantages of the analogue and digital varieties. In operational terms, however, their computer processing center for seismic data in Peking is not yet equipped to cope with the enormous volume of data now coming in as a result of the explosion of offshore survey work. In addition to the Raytheon installation, meant mainly for onshore seismic data. Peking hopes to get additional processing equipment utilizing a Cyber 172, one of the largest
U.S. computers. But like certain types of gravity meters, magnetometers, and other U.S.-licensed items sought by the Chinese as part of their CGG arrangements, the Cyber 172 has militarily applicable components and has yet to clear U.S. export control procedures. In general, the United States has adopted a policy of "not standing in the way" of the Chinese acquisition of oil-related technology. Some sales have been actively encouraged, partly for balance-of-payments reasons and partly in the belief that any increase in oil production anywhere will at least indirectly ease U.S. energy difficulties.
Playing for Time
As Western oilmen see it, the sensible thing for China to do would be to turn over its whole offshore exploration and development effort to a consortium of leading foreign companies who would work on a management contract basis and be paid in crude. This would expedite the process by years or even decades, it is argued, greatly multiplying the amount of oil available to China both for its political purposes and for financing its industrial imports. In this approach, the issues governing Chinese oil policy are posed from an "onshore" perspective, as it were, with a decision to "go offshore" seen as a function of economic variables alone. Thus, it is said, China will go offshore if it adopts an overall industrialization strategy calling for a growing volume of imports that necessitates, in turn, an ever-rising influx of foreign exchange. As the converse of this, it is argued that China will defer costly offshore risks indefinitely if it opts for a slower rate of modernization. An either-or choice is offered between one policy implicitly presupposing large-scale foreign involvement and another in which offshore activity is delayed as part of an inward-focused economic policy.
My own investigation suggests a middle ground between these extremes in which China moves systematically offshore for a combination of economic and political reasons. The pace of this process is likely to be governed not only by how much oil is desired but also by the rate at which China can absorb foreign technology. So long as China can meet its domestic energy needs, it can afford to suffer delays in the expansion of its oil production for the sake of preserving its basic commitment to "self-reliance." At the same time, to the extent that offshore production can be increased under Chinese auspices, this would relieve pressure on onshore reserves and would be attractive in long-range economic terms. As a totalitarian state, one should bear in mind, China can engage in the speculative business of offshore drilling with less concern for an early payoff than foreign private operators.
On purely economic grounds, there might be a case for postponing offshore activity in order to concentrate available resources on the development of onshore oil, gas, coal, and hydroelectric power. Politically, however, offshore oil development offers a way to avoid concentrating too much oil activity near the Soviet border: and in any case, the continental shelf controversy would make delay difficult. Most of China’s neighbors have unilaterally allocated concessions in areas where Peking has implicit or explicit claims and. sooner or later, China seems likely to respond to this affront in its own fashion. Military action would be one way of doing so where oil overlaps with other factors, as in the take-over of the Paracels last year, but would be at variance with the general tenor of current Chinese policy in Asia. Diplomatically, China seems reluctant to dignify its offshore disputes by agreeing to formal negotiations, especially since it regards two of the regimes concerned. Seoul and Taipei, as illegitimate and impermanent. Peking seems to be playing for time until its own offshore capabilities are more fully developed. In a few short years, China will be able to signal its intentions in specific areas with survey ships and rigs rather than gunboats. Just as its rivals are now seeking to stake their claim by doing seismic studies and drilling wildcat wells, so China will be newly equipped to do the same; and in such a war of nerves, others might well decide to back off in some of the key areas concerned. Already, in the Superior incident, the United States showed a degree of deference to incipient Chinese claims that have not even been formally spelled out yet.
Some observers have suggested that the development of the contested offshore areas will be delayed until sea boundary settlements can be reached. Perhaps it would be more meaningful to say that development will come when China is ready to participate in planning and executing the process on a basis of greater technological parity. This view is supported by the element of vagueness in the Chinese stand on Law of the Sea issues as they apply to Asia. By avoiding a precise definition of its attitude toward possible boundary settlements. Peking helps to paralyze offshore oil and gas production until it is prepared to play its hand.
Significantly. China makes a distinction between exploration and production. Chou En-Iai has done so on the record, and the informal Chinese attitude is that Peking has nothing to lose by letting foreign exploration activities proceed up to the very brink of actual development. When Chinese offshore claims are asserted, it is said, Peking can then seek to obtain the data resulting from these exploration efforts by offering generous compensation to the foreign interests involved. This attitude could produce a deceptively mild Chinese approach to offshore controversies during the next several years. Given the apparent limitations of the seismic survey program it is developing. Peking appears unlikely to complete a preliminary assessment of its vast continental shelf before 1978. By that time, however, Peking may have acquired the first of its new foreign rigs and additional, domestically made rigs may also have been completed. The possibility of a more assertive Chinese stance would then be a real one, especially if there should be dramatic oil discoveries or embarrassing "blowouts" resulting in pollution. The offshore issue could readily become entangled with unresolved power struggles in China and interlocked controversies over "self-reliance" and relations with the United States.
Taiwan and Oil Power
The linkage between offshore oil development and the future viability of a non-Communist Taiwan and South Korea makes these cases inherently more volatile than the narrower disputes over boundaries between China and its Communist neighbors. North Korea and North Vietnam, or between China and Japan. The future of Taiwan, in particular, would appear to be closely linked with the offshore issue. Peking would not necessarily oppose offshore development by Taiwan and its foreign collaborators in the context of a gradual movement of the island over time into the economic, diplomatic, and defense orbit of the mainland. By the same token, the use of offshore riches to move toward a sovereign Taiwan could trigger a hardening of the Chinese posture.
One significant factor affecting the Chinese attitude might be whether any oil and gas produced in offshore areas is tied directly into the welfare and development of Taiwan or is exported. Since China expects Taiwan to be mainland-controlled sooner or later, any contribution to its development is regarded, in principle, as desirable. By contrast, export earnings from oil could be viewed as a new source of foreign exchange for armaments and for other trappings of state power serving to strengthen the position of the Kuomintang regime.
Another key factor in Chinese eyes is likely to be where drilling occurs and what status for Taipei each location implies: an all-Chinese regime with jurisdiction over the mainland; a sovereign Taiwan coequal with Peking in international law; or provincial status within a Chinese framework. In the Superior incident, drilling was scheduled in an area that could only be claimed, juridically, by a government purporting to rule the mainland. The United States reacted unambiguously to this but has avoided further definition of the proper limits of Taiwan’s offshore jurisdiction. Implicit approval of drilling within 200 miles would have major policy import, reflecting international law concepts applied to sovereign entities: as a province of China. Taiwan would have less extensive authority. To drill a well in the East China Sea 200 miles from the island would be a calculated political gambit in the Taipei-Peking chess game, just as a continued decision to stay within, say, 100 miles would imply acceptance of some form of provincial jurisdiction.
In the case of North Korea and North Vietnam, as I have indicated. China is utilizing its oil exports as a means of softening offshore boundary disputes. So far as is known, Pyongyang has been the more malleable of the two and has not yet made efforts to explore its own offshore areas comparable to the closely guarded arrangements commissioned by Hanoi. Peking and Hanoi have both conducted seismic surveys in the Tonkin Gulf and are not known to have a median line agreement there. More important, the China-Vietnam collision involves not only the median line issue in the Tonkin Gulf-Hainan area but also a basic territorial conflict in waters beyond the continental shelf over ownership of coral archipelagos and island groups. Hanoi, unlike Saigon, has not made an overt issue of the Paracels, where Peking began onshore drilling soon after its take-over last year; but one of the Spratlys was reported occupied by the new Communist regime in Saigon soon after it won power. Nominal Chinese claims in the South China Sea reach almost as far south as the Philippines. Sabah. Brunei. and Sarawak, though it is not clear how seriously these are meant. In any case, with the shelf dropping off relatively close to shore, the South China Sea is generally much deeper than the East China Sea and much of it is likely to be beyond the reach of offshore drilling technology for some years. On the surface, Japanese demands for recognition as a continental shelf power might appear to offer the most serious danger of offshore oil conflict in Asia. As part of its larger effort to offset Japanese-Soviet ties, however, China is soft-pedaling its claims to the disputed Senkaku islands and hopes to induce Japan to pigeonhole its own claims by stepping up oil exports. China does not occupy the Senkakus (as the Soviets do in the case of four disputed islands in the Kurile chain), and Japan can keep tabs on the situation, in any case, from the nearby Ryukyus. Tokyo appears ready to let the Senkakus hang in limbo, at least while the oil tap continues to flow from Peking.
Chinese oil exports to Japan are expected to reach eight million tons this year and 25 million tons by 1980 on the basis of already ongoing plans for port and pipeline improvements with Japanese assistance. This could quickly go much higher if China agrees to give Japan Takang oil rather than the presently supplied Taching variety, which competes directly with Indonesian imports already ordered on a long-term basis. On the whole, Chinese oil is prized in pollution-conscious Japan for its low sulphur content, though some grades are too waxy.
Peking has been teasing Japan with hints that it may get 10 percent of future production on a regular basis, and there are competent Japanese analysts who see a chance for considerably more, as China’s need for foreign exchange multiplies. The Japanese projection of 440 million tons by 1985, cited earlier, assumes an export volume in the neighborhood of 200 million tons. Japanese crude imports are now running about 300 million tons annually, and the maximum increases now anticipated would bring this near 600 million tons.
Conceivably, given a Taiwan settlement satisfactory to Peking, the U.S. West Coast might get token amounts of Chinese oil. An examination of this issue is beyond the scope of this article, but large-scale Chinese exports to the United States appear unlikely. In economic terms, this is easy to envisage; politically it would run counter to the underlying Chinese nationalist objective of building competitive power vis-a-vis the Western world.
At the very least, Japan sees an opportunity to obtain the lion’s share of offshore oil and gas production in east Asia without incurring the attendant exploration risks. More optimistic Japanese leaders hope for a lucrative technical partnership role in the development of offshore resources not only in the Po Hai-Yellow Sea area but in the East China Sea as well. China has carefully left the door open for some form of Sino-Japanese understanding with respect to the continental shelf that would permit oil development to go forward even if title questions cannot be finally resolved.
Under one provision of the deliberately open-ended draft treaty issued by the Geneva Law of the Sea conference. China could agree to a median-line agreement with Japan, treating the East China Sea as a "semi-enclosed sea." Under another provision, China could claim control of the entire shelf up to the undersea "continental margin" just west of the Ryukyus (the provision in question permits title up to the margin in cases where the shelf is longer than the 200-mile economic zone envisaged in the draft treaty). Even under this latter provision, however, as Chirra has intimated in informal Law of the Sea exchanges with Japan, there may be scope for negotiations on the division of the spoils beyond the 200-mile zone. What China seems to be suggesting is benign neglect of Japanese legal claims to the shelf and a face-saving neighborly agreement instead, couched in terms of mutual economic interest. The Senkakus would fall on the "Japanese" side of the 200-mile zone, but the title problem would be put aside indefinitely. A Sino-Japanese agreement for some form of condominium in the East China Sea would unavoidably bring the Taiwan issue to a head. China’s claims to the Senkakus are in part an extension of its claims to Taiwan, and it is difficult to conceive of an oil-related Senkaku compromise that would not carry with it a Peking-Taipei agreement redefining the status of Taiwan as a province of China. So far, however, most Taiwan leaders discount the possibility of Sino-Japanese collaboration and predict, on the contrary, continuing tension between Peking and Tokyo. In this view, Peking is not bothered by Taiwan’s claims in the East China Sea and would rather see drilling there under the auspices of anti-Communist Chinese than inroads by Japanese of any persuasion. Tokyo has allocated "shadow" concessions that overlap the Taiwan claims (one of those in the Senkaku area is backed by Nippon Steel) but hitherto has withheld authorization for drilling.
What is the prospect for Sino-Japanese relations? How far is Tokyo prepared to go in offsetting its Middle East dependence with a new dependence on Peking? A long and complex bargaining process lies ahead, and the outcome is far from clear. The intensity of recent Chinese efforts to push Japan into an overtly anti-Soviet stance has induced a new note of caution in the Japanese attitude. At the same time, Japanese distrust of the Soviet Union has deep historical roots and stands in striking contrast to the positive cultural chemistry pervading the Sino-Japanese relationship. Many of the same conservative leaders who were most opposed to the 1972 normalization are now the most fervent advocates of cooperation with Peking, their anti-Communism dissolved not only by the findings of petroleum geology but by a resurgence of pan-Asian pride. Even before Takang and Po Hai, it should be remembered, there were powerful psychological factors drawing Tokyo toward Peking. It is in this context that China’s oil potential should be most carefully measured in the decades ahead.
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