Among the many questions to come out of Tuesday’s ruling on the South China Sea: What does it all mean for the potentially vast reserves of oil and gas that lie beneath the disputed waters?
The U.S. Energy Information Administration estimates the South China Sea holds 11 billion barrels of oil and 190 trillion cubic feet of natural gas, a significant sum for a region where energy demands continue to grow quickly.
Yet the oil market has reacted calmly to the ruling. Neither China nor anyone else are close to developing the resources beneath the waters. And while the South China Sea is a major oil supply route, the decision is unlikely in the near term to have much immediate effect on vessels that pass through the region, analysts said.
“There is a lot of oil that passes through, but China is not going to do anything more aggressive than they already have been…I don’t see much that has changed,” said Peter Lee, oil and gas analyst at BMI.
Internationally traded Brent crude fell 50 cents, or 1%, in Asia trading hours Wednesday, after rising Tuesday following new forecasts on global production.
Disputes over who owns what in the contested waters have stalled and obstructed exploration and drilling for many of the resources. Aggressive enforcement by Chinese maritime authorities of its claims has scared away many foreign investors whose technology and capital are needed to develop the reserves.
Tuesday’s ruling by a tribunal of the Permanent Court of Arbitration in The Hague is unlikely to change that situation, according to energy analysts and scholars. While the tribunal invalidated many of China’s claims to exclusive rights to South China Sea waters and their resources, the ruling is only enforceable through international pressure, and China has said it won’t budge.
One risk, said Michal Meidan, a China analyst at the consultancy Energy Aspects, is that a strong response from China to reassert claims in the ruling’s wake could in turn prompt more navy patrols from the U.S.
That would raise “the risk profile of the region at a time when the world is already quite jittery post-Brexit,” she said.
Energy traders in the days and weeks ahead will watch for any evidence that increased tensions could threaten its crucial shipping lanes. The U.S. Energy Information Administration says nearly one-third of global crude oil and more than half of liquefied-natural-gas trade passes through the South China Sea.
Another issue will be how aggressively oil drillers choose to test—and how China, Vietnam and the Philippines respond. China National Offshore Oil Corp. counts the South China Sea as one of its important production bases, and has claimed energy blocks in waters disputed by Vietnam.
Erica Downs, a senior analyst at the political risk consultancy Eurasia Group, said that China may choose to dispatch a drilling rig to disputed waters in response to the ruling. Back in 2014, a Cnooc subsidiary was at the center of a tense, monthslong dispute with Vietnam over drilling in waters claimed by both countries, an incident that touched off anti-Chinese riots in Vietnam and drew deep concern from Washington over China’s behavior.
Cnooc didn’t immediately respond Wednesday on whether the ruling would affect its drilling plans in the South China Sea.
Joint development of resources in disputed waters has long been viewed by experts and some political leaders in the region as a way to ease disputes over who owns what. Christopher Len, a senior research fellow at the National University of Singapore, said that despite the legal ruling, the answer to energy exploration in disputed South China Sea waters required greater political cooperation and compromise among claimant countries.
That may prove difficult in the near term if tensions continue to rise. For energy companies, they “will have to weigh the potential financial rewards against the political risks they are likely to face” in disputed waters, he said. “Given today’s low oil prices, I doubt there is any enthusiasm for such risky undertakings.”
—Dan Strumpf contributed to this article.
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