By Peter Navarro
In yet another skirmish over oil rights in the South China Sea, China has fired a stern warning shot across the bow of ExxonMobil Corporation. China is miffed that Exxon is seeking to enter into a deal with PetroVietnam to explore for oil in waters surrounding the disputed Spratly and Paracel island chains.
China has warned Exxon to pull out of the exploration deal, describing the project as a breach of Chinese sovereignty, according to the South China Morning Post at the weekend, citing unnamed sources close to the US company.
Chinese diplomats in Washington had made verbal protests to ExxonMobil executives in recent months, and warned them the company's future business interests on the mainland could be at risk, the report said. The protests involved a preliminary cooperation agreement, it said, without indicating when it was signed.
There is much at stake in this latest dispute, and much to be learned about China's growing blue water navy strategy. According to the US Energy Information Agency, the South China Sea has estimated oil reserves of around 7 billion barrels while the US Geological Survey has estimated there may be another 20 billion barrels to be discovered. For its part, China optimistically claims the undiscovered reserves could top 200 billion barrels. This latter amount would be enough to provide China with one to two million barrels of oil a day, or as much as 25% of its current daily consumption of close to 8 million barrels.
Much of the undiscovered reserves are believed to be beneath the disputed Paracel and Spratly island chains. The Paracels are roughly equidistant from China, Vietnam and the Philippines; and both China and Vietnam as well as Taiwan lay claim to the islands. However, to Hanoi's outrage, it is China that actually commands the Paracel turf.
In 1974, China took advantage of the ongoing civil war between South and North Vietnam to overrun a garrison on the Paracels manned by South Vietnamese troops, and China has held this position to this day, over the strenuous protests of the Vietnamese government.
As for the Spratlys, all or portions are laid claim to by China and Vietnam as well as Brunei, Malaysia, the Philippines, and Taiwan. They similarly consist of a large number of small islands and reefs and contain an undetermined but possibly vast amount of reserves.
Given the high energy stakes involved, it is hardly surprising that China has also engaged in military clashes with Vietnam over the Spratlys. In 1988, Vietnam and China fought a brief naval battle over the contested islands. This left China in control of six more islands and reefs for a total of nine. In 1994, Vietnamese gunboats forced a Chinese research vessel from a disputed area.
China's latest salvo against Exxon follows on the heels of a successful effort to push another foreign multinational oil company out of the Spratlys. Last year, a similar threat by China forced BP (formerly British Petroleum) to halt plans to cooperate with Vietnam on a US$2 billion natural gas project.
China's latest effort at intimidation can only escalate tensions between two countries that have longed maintained very large standing armies. China's army is the largest in the world while Vietnam's is the largest in Southeast Asia.
While economic relations have been blossoming of late between China and Vietnam, the longer term historical and political context is one of great enmity and mistrust. In this regard, neither side has forgotten that other "Vietnam War". In 1979, China invaded Vietnam with tanks and about 90,000 troops in retaliation for Vietnam’s pro-Soviet actions in Cambodia. In the space of fewer than 10 days of fighting, anywhere from 40,000 to more than 100,000 Chinese and Vietnamese troops were killed or wounded, depending on the estimates. These figures rival the entire number of American soldiers killed in battle during its more than 10-year war in Vietnam (about 52,000).
It's not just standing armies that enter into the geopolitical equation here. As noted, China has built a string of military bases in the South China Seas while the country is the only nation seeking to develop a deep water navy capability to challenge the United States is China. A major goal of such a deep water navy would be to protect and defend the Strait of Malacca against a US oil embargo in time of conflict.
In fact, the very narrow Strait of Malacca connecting the Pacific and Indian oceans is generally regarded as a maritime choke point. It is of supreme strategic significance because most of the imported crude oil that fuels China's mighty industrial machine passes through this Strait, and China has long feared a US embargo by America's Pacific fleet should relations sour over Taiwan or some other issue.
In the particular energy context, China's South China Sea bases and growing sea power also serve another synergistic strategic agenda. They not only help protect an important sea route. They allow for the "encirclement" of the potentially energy-rich Spratlys and Paracels - a realpolitik fact of life that has not been lost on Vietnam and a possibility noted as far back as 1998 by US Congressman Dana Rohrbacher.
Of course, the tragedy here is that continued China bullying and blustering is further delaying the development of oil and gas reserves that will be urgently needed by the region as oil markets continue to tighten. Cooperative development of these reserves would boost the fortunes of all of the countries involved in the dispute while reducing pressures on the supply side of the world oil market.
Peter Navarro is a business professor at the University of California-Irvine, a CNBC contributor, and author of The Coming China Wars (FT Press). www.peternavarro.com