2008 RECAP OF THE SINO-VIETNAM SOUTH CHINA SEA

C O N F I D E N T I A L SECTION 01 OF 02 HANOI 000052

SIPDIS

STATE FOR EAP/MLS AND DAS MARCIEL; USDOE FOR INTERNATIONAL
AFFAIRS

E.O. 12958: DECL: 01/20/2019
TAGS: ECON ENRG EPET PBTS PREL VM
SUBJECT: 2008 RECAP OF THE SINO-VIETNAM SOUTH CHINA SEA
TERRITORIAL DISPUTE

REF: A. REF:

B. (A) HANOI 1094: DESPITE RESENTMENT

C. CHINA POLICY MARKED BY PRAGMATISM & CAUTION

D. (B) HANOI 1287: BP SEEKS TO TERMINATE LEASE

E. (C) HANOI 0579: BP TRANSFERS OPERATORSHIP TO
PETROVIETNAM

F. (D) HANOI 1016: NORWEGIAN VESSEL SPOTTED NEAR
DISPUTED BLOCK

G. (E) HANOI 1241: VIETNAM NEGOTIATES DEAL WITH
GAZPROM

HANOI 00000052 001.2 OF 002


Classified By: AMBASSADOR MICHAEL MICHALAK FOR REASONS 1.4 (B) AND (D)


1. (C) Summary: Despite final land border demarcation and
progress settling the maritime boundary beyond the Gulf of
Tonkin, 2008 ended without evident progress in the
Sino-Vietnam territorial dispute in the South China Sea. In
November, BP gave notice that it would seek to terminate its
leases in Blocks 5-2 and 5-3, where BP was leading a planned
$2 billion project with ConocoPhillips (CoP) and Japan's
Idemitsu. CoP subsequently informed PetroVietnam (PVN) that
it too would divest its interest in the blocks. China has
warned ExxonMobil (EM) about potential future activity in two
sets of disputed blocks, but EM has signaled it plans to
proceed. In 2007, Chevron suspended activity in Block 122
after warnings by China. Chevron has requested a contract
extension from PVN but has not yet received a reply.
Houston-based Plains Exploration and Production, formerly
Pogo Producing Company, said recently that it has completed
seismic work in disputed Block 124 and planned to drill
during the upcoming 2009 season. End summary.

THE TYRANNY OF THE NINE DOTTED LINES
--------------


2. (C) Despite agreement on the final demarcation of their
land border and progress settling the maritime boundary
beyond the Gulf of Tonkin (REF A),Vietnam and China made no
evident progress in 2008 in resolving the offshore
sovereignty dispute in the South China Sea (or "East Sea" as
the Vietnamese term it). The offshore dispute continues to
entangle multiple multinational energy companies, including
U.S.-based ExxonMobil, Chevron, ConocoPhillips and Plains
Exploration & Production. 2008 also produced the dispute's
first major investment casualty, as BP notified PVN in
November that it would seek to terminate its leases in Blocks
5-2 and 5-3 in the Nam Con Son Basin, where BP had been
leading a planned $2 billion integrated gas field and
pipeline project with ConocoPhillips and Japan's Idemitsu
(REF B).

BP, CONOCOPHILLIPS THROW IN THE TOWEL
--------------


3. (C) In 2007, China warned BP that its activity in the
blocks infringed Chinese sovereignty. The government of
China did not directly threaten BP's expansive energy
portfolio in China, but the implication was clear. The lease
in 5-3 expired in December 2008 with the lease in 5-2 set to
expire at the end of 2009, and there were questions whether
the government of Vietnam (GVN) would renew the partnership
given the ongoing delays and BP's significant economic
interests in China. The protests by China led
BP/CoP/Idemitsu to first suspend and then cancel the 2007
work season and transfer operatorship for the 2008 season to
PetroVietnam to avoid missing critical deadlines (REF C).
PetroVietnam proceeded to hire a Norwegian-flagged 3D/4D
seismic vessel to carry out geophysical mapping and 3D
seismic surveys during the Beijing Summer Olympics, which
came and went without major new protests by China (REF D).


4. (C) A BP Vietnam official told us last week that
multinational energy firms from Russia, Canada and Japan were
interested in taking over the BP leases, but that PVN had
thus far made little progress in securing a new operator for
the blocks. The official speculated that Vietnam was leery
about inviting new participation for fear of provoking China.
BP, which will take a $200 million loss on the project, has
said its move is strictly a "commercial decision." Japanese
Ambassador to Vietnam Sakaba recently told the Ambassador
that Idemitsu would like to remain involved in the project
but could not go it alone.


5. (C) ConocoPhillips held the right under its contract to
either retain its 20 percent share or push for a majority
stake in the blocks, including operatorship. The company,

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however, informed PVN in December 2008 that it too would
divest its interest in the blocks. Nguyen Ba Hung, Director
General of the GVN's Ministry of Foreign Affairs America's
Department, subsequently complained to the DCM that CoP's
action "sent a very bad signal all the way to the Prime
Minister," given the PM's discussions with President Bush
about the investment and trip to Houston in 2008 to visit CoP
headquarters.

CHEVRON DEFERS PROJECT; EXXON AND PLAINS MOVE AHEAD
-------------- --------------


6. (C) The dispute continues to thwart other U.S. investments
as well. In August 2007, Chevron suspended exploration in
Block 122 near Nansha Island, 250 kilometers east of the
Vietnamese port of Qui Nhon, after the Chinese Embassy in
Washington warned Chevron and its Malaysian partner Petronas
to halt activity. A Chevron official told us last week that
Chevron had no plans to conduct physical work in the block in
2009 or 2010. The official said Chevron has requested a
contract extension from PVN to allow Chevron to fulfill its
contractual commitments in 2011, but had not yet received a
reply.


7. (C) China has also warned ExxonMobil about its planned
activity in Blocks 117-8-9 (offshore Da Nang) and 156-9
(located due east of BP's former blocks). ExxonMobil has
signaled that it plans to proceed and the company is
currently negotiating with PetroVietnam to incorporate all
seven blocks, all of which are still in the preliminary
phase, under a general framework agreement. ExxonMobil had
also been engaged in periodic discussions for more than a
year with PVN to negotiate a deal for Blocks 129-132, before
PVN unexpectedly awarded a 30-year operating lease to
Russia's Gazprom in a direct bilateral deal on October 27,
2008 (REF E).


8. (C) Houston-based Plains Exploration & Production,
formerly Pogo Producing Company, holds a concession in Block
124 offshore central Vietnam (south of Chevron's Block 122).
In September 2007, the Chinese Consulate in Houston warned
then-leaseholder Pogo to cease its exploration activity,
although the company resumed work during the 2008 work
season. Plains officials told us recently that the company
has completed the seismic work required by its production
sharing contract with PVN and would soon finish a site survey
in preparation for drilling during the 2009 season.


9. (C) Soon after announcing the completion of their land
border demarcation, Vietnam and China convened this month for
the fifth round of talks to discuss cooperation, demarcation
and mutual development in the Tonkin Gulf. Related
discussions to resolve the South China Sea dispute, however,
remain elusive. In August 2008, then-BP Vietnam General
Director Gretchen Watkins complained to the Ambassador that
state-run Chinese oil company CNOOC and PVN refused to
discuss the offshore disagreement during the two companies'
regular commercial talks, and appeared to want BP to mediate
or craft a commercial resolution to the dispute, a role that
BP was unwilling to play. Japanese Ambassador Sakaba told
the Ambassador that he has encouraged the GVN to negotiate
with China via ASEAN, but that related offshore territorial
conflicts between China and other ASEAN member states were
hindering the ability of the group to work together on the
issue. We have similarly urged Vietnam to better use ASEAN
to increase its leverage with China; however, GVN officials
bluntly concede that ASEAN's consensus-driven decision-making
process renders a firmer collective response all but
impossible.
MICHALAK