China’s $60 Trillion Estimate Of Oil and Gas In The South China Sea: Strategic Implications

U.S. hydrocarbon estimates imply a maximum of $8 trillion worth of oil and gas in the region, explaining part of the strategic divergence of the two superpowers.

Journal of Political Risk, Vol. 6, No. 1, January 2018

Oil rig. China’s largest offshore oil and gas producer CNOOC Ltd. announced on July 3, 2015 that its Xingwang deep-sea semi-submersible drilling platform started drilling at 1,300 meters underwater in Liwan 3-2 gas field in the South China Sea. Source: Pxhere.

Anders Corr, Ph.D.
Publisher of the Journal of Political Risk

China’s estimates of proved, probable and undiscovered oil and gas reserves in the South China Sea imply as much as 10 times the value of hydrocarbons compared with U.S. estimates, a differential that has likely contributed to destabilizing U.S. and Chinese interactions in the region. While China estimates a total of approximately 293 to 344 billion barrels of oil (BBL) and 30 to 72 trillion cubic meters (TCM) of natural gas, the U.S. only estimates 16 to 33 BBL and 7 to 14 TCM. Considering that the inflation-adjusted value of oil vacillated between approximately $50 and $100 per barrel (in 2017 prices) since the mid-1970s, U.S. estimates imply a hydrocarbon value in the South China Sea between $3 and $8 trillion, while Chinese estimates imply a value between $25 and $60 trillion. In addition to other factors, China’s greater dependence on oil imports and higher estimates of hydrocarbons in the South China Sea have driven it to invest more military resources in the region. An overly economistic approach by the Obama administration probably led the U.S. to allow China’s expansion in the South China Sea too easily.

China’s more aggressive military and diplomatic posture in the South China Sea, compared to that of of the U.S., should be seen in this economic and geographic context, rather than purely as a function of the decline of U.S. relative power more generally. In 2009, oil prices rose sharply from $40 to $75, and by 2014 had experienced four sustained peaks over $100 per barrel. This matched China’s 2009 note verbale to the U.N. claiming the South China Sea within its 9-dash line, and a sustained military buildup in the region, including construction of militarized artificial islands, from 2014 to 2016. The Obama administration, perhaps thinking oil and gas of the South China Sea claimant states, including some allies, not worth the political capital, focused instead on supporting U.S. business with China. This was consistent with administrations since Nixon’s opening to China in 1972, and led to China’s continued encroachment in the area.

Table: U.S. and China Estimates of Oil and Gas in the South China Sea, 2010-2015




Sources: EIA, USGS, Wood and Mackenzie, CIIS, China Ministry of Land and Resources, CNOOC.

Despite the South China Sea’s proximity to China, growing navy, and artificial island building, the country’s military is overstretched and vexed on its own turf by the U.S., Japan, Australia, France, India, and claimant countries Vietnam, Taiwan, Indonesia, and the Philippines. While China’s military power relative to that of the U.S. has increased since the early 1990s, China’s slowing economic growth, and the strengthening of U.S. military alliances since the advent of the Trump administration should counter China’s influence and military expansionism for at least the next few years.

U.S. allies and claimant countries in the South China Sea, by dint of circumstance if nothing else, nevertheless need to do more in terms of military deployments in Asia, public relations, burden sharing, intra-alliance technology sharing, and improved alliance cohesion. This would help stabilize security in Asia and roll back China, including from its military occupation of features in the exclusive economic zones (EEZs) of other South China Sea claimants, for example off the coasts of the Philippines and Vietnam.

The Trump administration has changed the U.S. strategy in Asia from Obama’s focus on economic engagement of China, back to military containment, bargaining linkages, and economic tit-for-tat. The South China Sea has been put on the back burner by the Trump administration to address near-term and existential threats from North Korean nuclear missiles. The U.S. wants China’s assistance on North Korea, so is for now relatively quiet on the South China Sea. The Trump administration is nevertheless increasing pressure, e.g. the destroyer transit near Scarborough Shoal in January 2018, and the Mischief Reef exercises in May 2017. These increase the heat on China compared to the more staid transits of the Obama administration.

The Trump administration rightly sees the South China Sea not just as an economic asset, but as a military asset that might contribute to China’s increasing relative power. That increase is threatening the balance of power in Asia that held since 1945. If ruptured, military conflict could result. Given an expansionist but still rational China, the best protection of peace and democracy in Asia will be a strong, broad and resolute counterbalancing alliance, along with not only a greater military deterrent, but a demonstrated threat of economic sanctions.

Anders Corr, Ph.D., is publisher of the Journal of Political Risk, and editor of Great Powers, Grand Strategies: the New Game in the South China Sea (U.S. Naval Institute Press, 2018). JPR Status: Working Paper.