SINO-VIETNAM TERRITORIAL DISPUTE ENTANGLES

C O N F I D E N T I A L SECTION 01 OF 02 HANOI 001599 SIPDIS SIPDIS STATE FOR EAP/MLS AND EB; USDOE FOR INTERNATIONAL AFFAIRS E.O. 12958: DECL: 09/07/2017 TAGS: ECON ENRG EPET PBTS PREL VM SUBJECT: SINO-VIETNAM TERRITORIAL DISPUTE ENTANGLES MULTIPLE MULTINATIONAL ENERGY FIRMS REF: (A) BEIJING 02360 (B) HANOI 1119 (C) HANOI 1401 (D) HANOI 1593 HANOI 00001599 001.2 OF 002 Classified By: AMBASSADOR MICHAEL MICHALAK FOR REASONS 1.4 (B) AND (D) ¶1. (C) Summary. The Sino-Vietnam territorial dispute in the South China Sea has now entangled multiple multinational energy companies, including four American and eight other foreign firms. Chinese coercion has persuaded British Petroleum (BP),ConocoPhillips, and Chevron-Petronas/Carigali to pull out of offshore gas concessions in the region. In response, the Government of Vietnam (GVN) objected to a joint venture between PetroChina and the U.S. ocean drilling company, Transocean. While other southeast Asian nations grant offshore concession agreements in contested waters in the South China Sea, China has thus far confined its objections to Vietnam. End Summary. FIVE CONCESSIONS SUSPENDED SO FAR -------------- ¶2. (C) The Sino-Vietnam territorial dispute in the South China Sea (referred to as the "South Sea" by Vietnam) has now entangled four American energy companies: Chevron, ConocoPhillips, ExxonMobil, and Transocean. Other multinational energy firms affected by the dispute include Malaysia,s Petronas-Carigali; the UK,s British Petroleum; Japan,s Idemitsu, Nippon, and Teikoku energy companies; Australia,s Santos; Singapore-based Pearl Energy; and Sweden,s Lundin Petroleum. A ConocoPhillips executive recently told Econoff that BP has now abandoned one of its concession agreements in the South China Sea, bringing to five the number of contracts that have been suspended or cancelled since April. ¶3. (C) A Chevron executive told Econoff that in early August, Xiu Dong Jia, China's Political Counselor in Washington, summoned Chevron's Washington, DC executives to the Chinese Embassy to warn the company and its Malaysian partner, Petronas-Carigali, to halt exploration activity in Block 122, near Nansha Island, just 250 kilometers east of the Vietnamese port city of Qui Nhon. Jia, reading from a prepared script, told the energy executives that China "has indisputable rights over the area, including Nansha Island." He warned that further activity by Chevron would be a "grave violation of China's sovereignty" and he urged the energy company to reconsider its operations in the area. In a subsequent meeting the following week in Beijing, Chinese MFA officials were, according to the executive, "forceful" in advising Chevron to halt its activity in the area. ¶4. (C) Block 122 straddles the Sino-Vietnam line of demarcation. While China claims the eastern side of the parcel, less clear is which country controls the territory just west of the block -- the area that Chevron believes holds the most potential as a gas and oil producing basin. Yet, China rejected Chevron's requests to explore the west side of the parcel. A Chevron executive confessed that his company's recent entry into a large gas concession agreement with PetroChina in Sichuan Province -- a project he described as a "significant opening" for Chevron in China -- helped persuade the company to quietly accede to China's demands and suspend operations in 122. Meanwhile, the GVN and PetroVietnam, unhappy with Chevron's decision, urged the energy company to proceed and promised the Vietnamese Navy for protection. ¶5. (C) In 2004, PetroVietnam entered into a production sharing agreement with a Japanese energy consortium comprised of Idemitsu, as operator, and Nippon and Teikoku Oil companies for Blocks 5-1b and 5-1c located 350 kilometers southeast of Ho Chi Minh City. Scheduled to start seismic work in July, the consortium suspended activity over Chinese objections. ¶6. (C) In the GVN view its claims are beyond dispute given how close many of the parcels are to Vietnam's coastline compared to China. Illustrating what many in the GVN see as the absurdity of the demarcation, one PetroVietnam official described how in 1946 Chinese leader Chiang Kai-shek "took a pen and drew a circle around the entire South China Sea." In a recent meeting in Hanoi with Chairman Silvestre Reyes and other members of the House Permanent Select Committee on Intelligence, officials from Vietnam's Ministry of Public HANOI 00001599 002.2 OF 002 Security complained that China's actions in the South China Sea "threaten regional stability and Vietnam's sovereignty" (Ref D). ¶7. (C) While other southeast Asian nations grant offshore concession agreements in contested waters in the South China Sea, Econoff learned from Embassy contacts in the Philippines, Indonesia and Malaysia that China has not lodged complaints with multinational energy firms doing business in those countries. This leads some energy company executives to speculate that there may be more behind the current disagreement than mere hydrocarbons. RECENT HISTORY IN THE S. CHINA SEA DISPUTE -------------- ¶8. (C) In April 2007, the Chinese government issued a public statement calling Vietnam,s "new moves" in the Spratly Islands, including expanded bidding for hydrocarbons exploration and cooperating with BP on a pipeline project and with Russia on a continental shelf gas concession, "illegal and invalid." China accused Vietnam of violating the existing regional consensus, infringing on China's undisputed sovereignty of the Islands, and violating the Declaration on the Conduct of Parties in the South China Sea (Ref A). ¶9. (C) PetroVietnam, the state-owned energy firm, granted BP and its operator, ConocoPhillips, a gas concession for two parcels, Blocks 5-2 and 5-3, in the South China Sea. The two parcels straddle Vietnam's continental shelf approximately 250 kilometers west of the Spratly Islands. ConocoPhillips is BP's minority partner in 5-3. On June 8, China warned BP to cease work in 5-2/5-3 and threatened unspecified "economic consequences" if BP failed to abide (Ref B). BP, which has significant energy investments in China, particularly in the downstream sector, quickly acceded by suspending, and then cancelling, its PetroVietnam contract in 5-2 and ordering ConocoPhillips to suspend its planned development activity in 5-3. THE GVN RESPONDS -------------- ¶10. (C) On August 6, in a tit-for-tat response, the GVN and PetroVietnam "advised" the U.S. ocean drilling company, Transocean, to terminate its concession agreement with PetroChina for Block 2-4 (designated Block "Hua Guan" by the Chinese) west of the Chinese Paracel Islands (Ref C). MICHALAK