The South China Sea (25 page)

Watkins had had enough. The gas field development was stalled and her skill-set didn't include geopolitical negotiations. Her career was going nowhere with BP Vietnam so, in July 2008, she traded a medium-sized role with a mega-corporation for a bigger role with a relative minnow as Vice-President of International Production Operations for Marathon Oil, a company with fewer sovereignty disputes to deal with. Her successor was another American, Luke Keller, former president of BP's subsidiary Atlantic Richfield and possessed of years of experience with argumentative governments from Texas to Azerbaijan. By this time though, BP's management had realised the game was up and in late November 2008 they broke the news to PetroVietnam. BP wanted out. It quietly handed over its stakes in Blocks 5.2 and 5.3 to PetroVietnam for nothing and wrote off the
$200 million it had invested in them. The decision forced ConocoPhillips to do likewise in December. Madame Fu had won her ultimate victory.

Could BP have played it differently? The experience of another oil company – the world's biggest – suggests it could. ExxonMobil also received threats from the Chinese authorities – and ignored them. Over the years, ExxonMobil had been less successful in penetrating the Chinese market than BP. Its only sizeable investment was a 22.5 per cent stake in a refining and petrochemical project in Fujian. The local US consulate noted that this project had more to do with ‘the relationships and potential political capital they give the Chinese government’ than any vital contribution from ExxonMobil. Even the location of the project, just across the water from Taiwan, was seen as a means of gaining diplomatic leverage over the United States if there was ever another crisis between Beijing and Taipei.
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The company had other cards to play too. China was desperate to increase its supplies of natural gas and ExxonMobil was developing a huge project just over its northeastern border on the Russian island of Sakhalin. Its Russian partner, Gazprom, wanted to sell the gas internally but ExxonMobil wanted to export it. Beijing couldn't afford to alienate Exxon too much. Equally importantly, and in stark contrast to the British and Japanese companies, ExxonMobil could rely on the US government to press its case with the Chinese authorities.

In January 2008 a new head of exploration arrived in Vietnam: Russ Berkoben. He'd been with ExxonMobil for 32 years, including a stint as head of exploration in China. Shortly afterwards the company signed a Memorandum of Understanding with PetroVietnam to explore Blocks 156 to 159. The blocks were by far the furthest offshore that Vietnam had ever leased. The southeastern corner of Block 159 was more than 500 kilometres from the Vietnamese coast – well into disputed waters. ExxonMobil was also in serious talks about leasing Blocks 117, 118 and 119 just off Vietnam's central coast. On 20 July 2008, Greg Torode of the Hong Kong-based
South China Morning Post
reported that Chinese diplomats in Washington had warned ExxonMobil that its business prospects in mainland China were at risk.
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Torode's source was a senior Obama administration official who'd been briefed by an ExxonMobil executive.

At the end of August it looked as if the Chinese were getting serious. ExxonMobil's planned joint venture to build a $1 billion liquefied natural
gas facility in Hong Kong was unexpectedly cancelled. Company executives told American diplomats they didn't think the Vietnam dispute was the reason – the deal was strongly opposed by local environmental activists – but it appeared that the Chinese were making good their threats. Then, ironically, ExxonMobil got punished by the Vietnamese because they were being punished by the Chinese. The company had negotiated with PetroVietnam for over a year about four blocks (Blocks 129 to 132, between Blocks 156–9 and the coast) but in October 2008 PetroVietnam awarded them to Gazprom of Russia instead. Berkoben told Ambassador Michalak that PetroVietnam feared that ExxonMobil would buckle under pressure from Beijing.
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In July 2008, Russian diplomats had told their American counterparts that China hadn't put any pressure on Russian companies – and presumably the Vietnamese authorities were aware of that too.
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ExxonMobil wasn't the only company to shrug off Chinese coercion. The Indian energy company ONGC Videsh (which was a partner with BP in Block 6.1 and also the leaseholder in Blocks 127 and 128), KNOC of Korea and some smaller companies without significant interests in China – such as Premier of the UK and Talisman of Canada – also ignored it. Beijing tried other ways to exert pressure. In October 2007, Mike Bruce, Chief Financial Officer for Pearl Energy in Singapore, received a call from the Chinese embassy. The diplomat told Bruce that his company was illegally prospecting in Chinese waters and invited him to the embassy for discussions. Bruce declined and instead invited the Chinese to visit him. A few days later a delegation duly arrived and informed the Pearl managers they knew that the company had a survey ship at work (in Block 6.94, which almost surrounds BP's Block 6.1). According to Bruce, they ‘threatened to put pressure on the Singapore government because Pearl was listed on the Singapore stock exchange’. But when Bruce informed them that Pearl was no longer listed in Singapore, having been bought by Aabar Energy of Abu Dhabi a year before, their faces fell. ‘Oh, that's different,’ said the woman leading the group and Pearl never heard from them again.

By early 2009, the only company with interests in China still exploring off Vietnam was ExxonMobil. On 30 June it signed a production-sharing contract with PetroVietnam for two sets of blocks (Blocks 156 to 159 in the wild southeast and Blocks 117, 118 and 119 off Danang), making it the largest offshore acreage holder in Vietnam. A week beforehand Russ
Berkoben had been to the US embassy in Hanoi to explain that the ceremony was going to be held ‘quietly’ to avoid upsetting the Chinese. He admitted being uncertain about their likely reaction but said ExxonMobil was ‘ready if China reacts’. Berkoben's reward came just over a year and a half later, in October 2011, when the company found potentially huge gas reserves in Block 118. Exploration work continues in the other blocks.

With the exception of ExxonMobil every oil company has had to make a choice between operating in China or in the waters claimed by one of the other countries. ConocoPhillips had left Blocks 5.2 and 5.3 in December 2008 but retained stakes in two other blocks just next to the Vietnamese coast, far from any trouble with China. In February 2012 it left the country completely to concentrate on more profitable ventures. Chevron retained its 20 per cent stake in Block 122 but suspended all activities there until it finally sold out in early 2013. That seems to have pleased Beijing because, in 2010, Chevron was awarded stakes in three fields in the northern part of the South China Sea, off Hainan Island.
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At the time of writing, in mid-2014, Chevron was reported to be trying to offload its remaining Vietnamese interests – two blocks off the southwest coast, close to the maritime borders with Indonesia and Malaysia.

BP remained in business in Vietnam, running its original gas-to-power operation from Block 6.1. But then, in July 2010, Tony Hayward's Gulf of Mexico bonanza turned into a disaster. The company suddenly needed $30 billion to pay compensation after the Deepwater Horizon explosion and spill. On 18 October 2010 BP sold its interests in Vietnam and Venezuela to its Russian joint venture, TNK-BP, for a total of $1.8 billion. Perhaps it felt the Russians would be able to take the heat. BP had another mission for Luke Keller's steady hands. He was appointed Executive Vice-President of BP's Gulf Coast Restoration Organization – helping to clean up the mess. A few weeks before the sale, on 21 September 2010, Tony Hayward met Madame Fu Ying again. After her successes in London, she had been appointed China's Vice-Foreign Minister. Hayward brought his successor Bob Dudley. It was one of Hayward's last official duties for BP. Nine days later he was no longer Chief Executive.

Fu Chengyu's fate was neither high office nor disgrace. In spite of all its arm-twisting, the China National Offshore Oil Corporation had once again failed to gain access to the potential oil resources around the far
reaches of the South China Sea. There was to be no political reward for its ambitious boss. His consolation prize, in April 2011, was a move to CNOOC's sluggish rival Sinopec, Asia's biggest oil refiner. Fu's business abilities were clear: CNOOC's profits had quintupled during his reign; the Communist Party of China felt he would be more valuable as an industrial rather than a geopolitical fixer.

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By late 2010 Beijing's campaign had forced BP and ConocoPhillips to cease exploration inside the ‘U-shaped line’ and the Joint Marine Seismic Undertaking had established a precedent for China's preferred alternative. However, a new government in the Philippines and the same old governments in Vietnam, Brunei and Malaysia were not budging on sovereignty and the lure of potential profit remained strong enough to attract other companies, less worried by Chinese pressure, to try their hand in the contested waters. Beijing had exhausted its commercial leverage; asserting its territorial claims would now require less subtle techniques.

On Wednesday, 2 March 2011, the seismic survey ship MV
Veritas Voyager
(owned by the French geophysics company CGG Veritas) was firing its powerful airguns over the Reed Bank, an area of shallow sea about 160 kilometres off Palawan. Four ‘streamers’ – hydrophone cables – extending 2,700 metres behind, picked up sound waves reflected back from layers of rock thousands of metres below the sea floor. Sitting in his combat operations centre in the Palawan provincial capital, Puerto Princesa, Lieutenant General Juancho Sabban, Chief of the Western Command of the Armed Forces of the Philippines, was waiting for something to happen. The
Voyager
had been surveying for nearly two months and notices warning of its activities were posted on the coastguard website. The crew had sighted a Chinese ship on 28 February and the following day had acquired an unwanted escort. A China Marine Surveillance (CMS) vessel had come within 100 metres of the
Voyager
and ordered it to leave.

The
Voyager
was on contract to a British-registered (though Filipino-controlled) company, Forum Energy. In 2005, just as the above-mentioned JMSU survey was about to begin, Forum had taken over an exploration
block from another British company, Sterling Energy – right in the middle of the JMSU area. Eduardo Manalac had assured his Chinese counterparts that Forum's exploration lease would be allowed to lapse but others in the Philippine government had been swayed by Forum's lobbying. On 10 February 2010, the lease was upgraded to a full Service Contract, SC-72. Manalac was furious, Forum was buoyant. Earlier surveys had suggested the Sampaguita prospect inside the block contained 3.4 trillion cubic feet of gas. Now it just needed to work out exactly where to drill.

As the
Voyager
’s survey continued, Forum's President Ray Apostol was in daily contact with General Sabban. On 2 March he called Sabban in a panic. Two CMS ships (numbers 71 and 75) had sailed across the
Voyager
’s bows and ordered it to leave the area. ‘We're packing up,’ he told the general. Sabban told him to order the crew to stay put and scrambled a pair of unarmed OV-10 spotter planes. By the time they reached the area, two hours later, the Chinese ships had gone. He then deployed the BRP
Rizal
, a minesweeper built in 1944, and the BRP
Rajah Humabon
, built in 1943. The ships were elderly but effective enough to keep the CMS vessels away from the
Voyager
for a further seven days, enabling it to complete the survey ahead of schedule.

Twelve weeks later, CMS tried a more aggressive tactic on the other side of the sea. The survey ship, the
Binh Minh 02
, owned by a joint venture between PetroVietnam and CGG Veritas, was working in Block 148, 120 kilometres east of the Vietnamese port of Nha Trang. In the early morning of 26 May 2011 three CMS ships, numbers 12, 17 and 84, appeared on the horizon and then closed in. A pair of fishing trawlers were guarding the
Binh Minh 02
but they couldn't protect the entire 17,000-metre cable trailing behind it. CMS ship number 84 cut across the cable, deliberately severing it. Fortunately for the Vietnamese, the multi-million dollar streamer was equipped with emergency floats that brought it to the surface for recovery. The damage was repaired and the
Binh Minh 02
returned to sea the following week, accompanied by eight escorts.

Two weeks after that, another seismic vessel, this time contracted jointly by PetroVietnam and the Canadian company Talisman, was intercepted in Block 136-03, in the extreme southeast of Vietnam's claimed Exclusive Economic Zone. The block was just south of the three that ConocoPhillips had abandoned in 2008 and included part of Randall Thompson's
WAB-21. Once again CGG Veritas owned the ship, the
Veritas Viking 2
. This time, however, the attackers weren't from China Marine Surveillance but from the Fisheries Law Enforcement Command (FLEC). And this time the Chinese put on an elaborate charade to justify the cutting of the cable. A small flotilla of Chinese fishing boats appeared in the survey area and remained, despite warnings from a Vietnamese Coastguard ship to leave. The next day, 9 June, while FLEC vessels 303 and 311 sailed in front of the
Viking
, trawler number 62226 sailed across its streamers behind. The trawler snagged its net and was dragged backwards through the sea. The FLEC ships then rushed to help the trawler cut the streamers in what the Chinese authorities would later claim was an act of self-preservation.

These three incidents in the first half of 2011 provoked angry criticism of Chinese ‘bullying’ around Southeast Asia and beyond. Four more followed: the
Binh Minh 02
had its cables cut a second time on 30 November 2012 in Block 113 (near the Paracel Islands and leased to Gazprom) and there were two incidents in the Malaysian EEZ off Borneo on 21 August 2012 and another on 19 January 2013 where Chinese government vessels blocked oil survey work.
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Some seized upon the actions of China's maritime agencies as proof of Beijing's hostile intentions. They also provided yet more evidence that parts of the Chinese state – the China National Offshore Oil Company, China Marine Surveillance and the Fisheries Law Enforcement Command – regarded the ‘U-shaped line’ as a real claim to 80 per cent of the South China Sea. All the incidents took place far from any Chinese-claimed land feature and therefore seemed incompatible with any claim based on UNCLOS. As the criticism mounted, the Beijing leadership seems to have recognised that CMS and FLEC went too far. In March 2013 the government announced plans to bring all the different maritime agencies (the State Oceanic Administration, including China Marine Surveillance, under the Land and Resources Ministry; the China Coast Guard, under the Public Security Ministry; the Maritime Safety Administration, under the Transport Ministry; the Fisheries Law Enforcement Command under the Ministry of Agriculture; and the General Administration of Customs) under a single management. Since then, at least until the time of writing, there have been no more such incidents.