China And Japan Compete For Oil

Friday, April 01, 2005

The Ramform Victory, chartered by Japan, is performing natural gas surveys in the East China Sea.

March 29, 2005 Drawing the Line on Energy

By JAMES BROOKE

NAHA, Japan – Midway between Okinawa and China, the Ramform Victory, a Norwegian seismic ship, is performing routine survey work, trawling with long seismic cables and using sound waves to create three-dimensional images of oil and gas deposits. But nothing is routine when Japan commissions a survey of what is hidden below the contested waters of the East China Sea.

Chinese coast guard ships treat the surveyors as spies, radioing warnings to leave and shadowing the ship for days on end. On one occasion, the Chinese ships nearly collided with the vessel. Japan’s trade minister, flying in a Japan coast guard plane, conducted an ostentatious survey, circling over the bright yellow gas production platform that China is building a mile west of waters claimed by Japan.

Confronting the Chinese face to face, the trade minister, Shoichi Nakagawa, later sat in front of a Chinese negotiator, dropped two straws in a glass of orange juice, and, forgoing customary Japanese politeness, complained that China was about to "suck out Japan’s resources with a straw." The seismic ship, he said, according to ministry officials, found that two deposits under development by China extend into Japanese economic waters.

In days of sharply higher energy prices, long-dormant border disputes have suddenly come alive for Japan, the world’s second-largest energy-consuming nation after the United States. Galling Japan is a realization that large deposits of oil and gas lie on the nation’s watery fringes. Long cocooned by these water buffers, Japan is suddenly bumping shoulders over undersea oil and gas resources with China, South Korea and Russia.

[In talks in Tokyo on Monday between Japan and China, the world’s second- and third-largest oil consumers, Japanese negotiators again demanded that China share its drilling data or drop the project, news agencies reported. The Chinese side rejected the demands and repeated an earlier proposal for a joint venture.

[But calls are mounting for a Japanese-only project in waters of the East China Sea that both nations claim. On Friday, a ruling party panel urged Japan’s government to invite Japanese companies to drill in the area, a call bolstered by the simultaneous release of a Foreign Ministry report that China conducted 22 "illegal" surveys of Japanese economic waters last year, triple the number in 2003.]

Tensions are also flaring between Japan and South Korea over a disputed island group. The Korea Gas Corporation announced in mid-March a 10-year, $225 million investment program to develop what the state-run company said was $150 billion worth of gas hydrate deposits, roughly equivalent to South Korea’s natural gas needs for 30 years.

To the north of Japan, Japanese companies are investing about $1 billion a year to develop oil and gas reserves off Sakhalin, a Russian island that was half-owned by Japan until the end of World War II.

But in the fall of 2004, Asia’s broadest economic shoulders, China and Japan, bumped over a pipeline to ship Siberian oil. Japan won the first round when Russia went for billions of dollars in Japanese financing to build the line to the Sea of Japan.

In response, the Chinese prime minister, Wen Jiabao, announced at a recent Beijing news conference that over the next 18 months, Russian oil exports to China by rail would increase by 50 percent, to 300,000 barrels a day. The Russian government and President Vladimir V. Putin, he added, "have made it very clear that first consideration will be given to China when they build the Siberian oil-gas pipeline."

Spurred by high energy prices, China is pursuing a new energy realpolitik. Entering the Americas, Chinese energy officials are running rings around the United States, exploring deals with Canada, Cuba, Mexico and Venezuela. In Northeast Asia, the fact that China now is Japan’s largest trading partner is not stopping China from potentially draining gas from what Japan calls its exclusive economic zone.

"The exclusive economic zone is a microcosm of the Sino-Japanese rift," said Jeffrey Kingston, an American historian who directs Asian studies at Temple University Japan in Tokyo. "Japan won Round 1 on the pipeline. Now, China is getting increasingly desperate."

In the energy brinkmanship on the high seas west of Okinawa Island, China’s $1 billion project is to pump its first gas in August, sending the fuel through a 300-mile pipeline to Shanghai. Compounding Japan’s loss of face, Mr. Nakagawa told Parliament in February that the first 260 miles of the line was built with $120 million of Japanese development aid. He confessed, "It is truly regrettable that this sort of thing happened."

Japan now is tripling its research budget in the East China Sea, to $125 million in 2005. Japan is also spending $100 million to build its own seismic survey ship. On Feb. 22, the day after Prime Minister Junichiro Koizumi appealed to make the East China Sea "a sea of cooperation, not a sea of conflict," Mr. Nakagawa told reporters, "We will definitely call on China to stop its work." He added that he might soon authorize two Japanese companies to start drilling in the contested area.

To strengthen oil and gas exploration worldwide, Japan is to disband the Japan National Oil Corporation, its state-run energy exploration company, on April 1. With a record of drilling largely dry holes in its 305 projects around the world, this company ends 38 years of existence with almost $7 billion in losses. Its successor, the Inpex Corporation, was listed on the Tokyo Stock Exchange in the fall of 2004 and is to be run on profit-making lines. Inheriting some of the state company’s oil and gas reserves, Inpex will start as a midsize multinational exploration company, similar in reserves to Unocal.

Over the next three years, Japanese oil companies and trading houses are to invest about $20 billion in oil and gas exploration and production, roughly double the level of the last three years, according to Nihon Keizai Shimbun. Since the late 1960’s, China and Japan have suspected that the waters between China and Okinawa Island contain large deposits of oil and gas.

"In the Japanese area, there is high possibility we can find not only gas, but oil," Tsutomu Toichi, managing director of the Institute of Energy Economics, a nonprofit group in Tokyo, said in an interview.

With the economic boundary in dispute, Asia’s two giants had let the energy riches lie untouched. Instead, they focused on their larger economic relationship.

Soon, China became Japan’s largest destination for foreign investment. Last year, China displaced the United States as Japan’s largest trading partner. But with China’s economy growing at 9.5 percent last year, and at an annual rate of 8.4 percent since 2000, Chinese officials fret that energy shortages will cap growth.

Over the next 25 years, China’s dependency on imported oil is forecast to double, hitting 80 percent of its total consumption, according to forecasts by the International Energy Agency, an intergovernmental agency based in Paris.

In one setback, two foreign companies, the Royal Dutch/Shell Group and Unocal, dropped out in the fall of 2004 from the Chinese gas development west of here, then China’s largest gas joint venture with foreign partners. Both companies cited commercial reasons.

A high-ranking Japanese energy official who insisted on not being identified, however, took a different view: "Commercial reasons include political risks. I think they judged that it’s not worth doing, even taking political risks."

Undeterred, the Chinese partners, the China National Offshore Oil Corporation and the China Petrochemical Corporation, said they would march ahead with plans to start producing in the summer of 2005. The Chinese may have the last laugh. China National is considering a $14 billion takeover of Unocal.

As Chinese workers extend the seabed pipeline to the edge of Japan’s claimed economic waters, Chinese diplomats reject Japanese demands that China share drilling data on the reservoirs. On Feb. 18, Mr. Nakagawa, the Japanese trade minister, said that preliminary results from his agency’s 2004 survey work indicate that two of three major gas fields China plans to develop in the area extend into Japan.

"We demand that China hand over data and stop exploration in the East China Sea until this problem is resolved," said Mr. Nakagawa, a conservative with prime-ministerial ambitions.

China’s Foreign Ministry spokesman, Kong Quan, replied that the two fields "completely fall under the framework of China’s rights."

As the coast guards of both countries brace for confrontations, Yomiuri Shimbun has reported that Beijing has awarded Chinese energy companies exploration rights over 12 blocks that extend into Japanese economic waters. Three of the 12 are entirely inside the Japanese economic area.

At the heart of the dispute are different legal interpretations of each nation’s exclusive economic zone. The United Nations Convention on the Law of the Sea gives each coastal nation an economic control zone extending 200 nautical miles, or 230 standard miles, from shorelines.

But the distance between Okinawa and China is about 400 miles. Japan advocates a median line between the two countries. China advocates using as its economic border the eastern extension of the continental shelf, an approach that moves the economic border to an area 50 miles west of the Okinawa archipelago.

"The center line is only a Japanese proposal and isn’t a mutually agreed border as a result of negotiations between the two countries," Wang Yi, China’s ambassador to Japan, told reporters last October at a news conference in Tokyo. "It isn’t fair to use this borderline to judge which side is right or wrong."

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