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China to oppose Philippine moves to exploit oil, gas in South China Sea alone

Highlights

China would oppose any move by the Philippines to exploit oil and gasresources on its own in disputed areas of the South China Sea, an academicsaid Thursday.

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Speaking on exploration prospects at a conference in Guangzhou, LiuFeng, deputy head of research for marine science at China's NationalInstitute for South China Sea Studies, said any cooperation among thedisputing countries on joint exploration "must include China" and that was theonly arrangement that China would be willing to accept.

Vietnam, China, the Philippines, Malaysia, Indonesia, Brunei and Taiwanhave long claimed sovereignty over overlapping areas in the South China Sea.Disputes over the region arise mostly because of its suspected vast oil andgas reserves.

Liu was referring in particular to UK-listed Forum Energy's announcementlast month that a prospect in Block SC72, awarded by Manila, could holdcontingent resources of 37 million barrels of liquids and 1.5 Tcf of gas. Thelicense's main prospectivity is in the Sampaguita gas field, which is nearthe disputed Reed Bank.

"The best solution is for all parties to work together. I'm optimisticabout a resolution, but this is not something that can be concluded in theshort term," Liu said.

Weatherford Petroleum Consultants based its estimate seismic dataacquired in 2011 in SC72, which is to the southwest of the Philippines. "Ifthe company goes ahead and works on its own, China will likely stop thoseefforts," Liu said.

SC72 is just to the southwest of two exploration blocks -- Areas 3and 4 -- that the Philippines is offering in its current licensing round.

China has warned oil companies not to bid for those blocks, claiming they lie in Chinese waters.

Forum's majority owner Philex Mining said May 9 its chairman ManuelPangilinan had flown to Beijing a few days earlier to meet with a number ofChinese companies, including monopoly offshore operator China NationalOffshore Oil Corp., to accelerate the development of its block.

Chinese surveillance ships and fishing boats clashed with the Philippinenavy last month near the disputed Scarboruough Shoal after the Philippinesfound eight Chinese fishing vessels near the shoal and sent a warship toarrest them.

Liu's view was echoed by Norwegian company Sevan Drilling's ChiefExecutive Scott Kerr, who told Platts that the boundary dispute was the majorimpediment to drilling activity in the South China Sea.

"Geologically there are lots of opportunities but [the disputes] need tobe fully resolved before these opportunities can be realized... otherwiseit's very difficult for companies to take that kind of risk to step intothose areas," he said.

MORE DEEPWATER RIGS AVAILABLE

Sevan is currently anticipating the completion of two ultra deepwatersemisubmersible rigs by Chinese shipbuilder Cosco, to be delivered in2013-2014. The Sevan UDW3 and UDW4 will cost $526 million, up to 15% lowerthan if they were to be built in Singapore or South Korean yards.

Kerr said having them built in China could also be an advantage whenmarketing the rigs to Chinese and other Asian operators. "If there are oilcompanies in Southeast Asia that want to have local content or are looking atusing local content in their bids... if they are coming into the South ChinaSea and want a state-of-the-art rig, we can make that available."

Foreign offshore operators have complained about high import taxes thatmake it costly to import foreign-registered rigs to operate in China.

A 6% import tax and 17% value added tax is imposed on the value offloating and semisubmersible drilling vessels, according to the Chinese taxministry.

That, coupled with global deepwater rig tightness in the last few years,has meant some drilling campaigns have had to be delayed.

CNOOC heralded its launch of the Hai Yang Shi You 981 semisubmersible rigearlier this month as a milestone in its deepwater efforts and the vessel isexpected to drill three deepwater wells in the South China Sea this year. Itcould also be leased to foreign operators in China, CNOOC said.

Sevan's Kerr said the company is negotiating with a variety ofoperators, including those in China, for contracts for the Sevan UDW3 andSevan UDW4. But he conceded that offshore China demand could remainrelatively limited over the short- to medium term. "I think that the bigdemand for rigs is really in Africa, Gulf of Mexico and Brazil right now. But[activity in China] will pick up after a year or so as drilling starts anddiscoveries are made."

--Song Yen Ling, yen_ling_song@platts.com
--Edited by Wendy Wells, wendy_wells@platts.com