Ever since Xi Jinping took power in 2013, China’s leader has led an increasingly aggressive push in the South China Sea, a policy aimed in part at controlling development of the maritime area’s rich oil and gas reserves.
Of all the rival claimants, Vietnam arguably has the most to lose and has thus pushed back the hardest, witnessed in the past two months in a tense standoff with Chinese vessels at the contested gas-rich Vanguard Bank.
While the sea tensions unfold, US energy giant ExxonMobil finds itself increasingly intertwined in the geopolitical row, amid rising speculation Chinese pressure may drive it from a $10 billion natural gas project in Vietnam-claimed waters.
Next year, the Texas-based oil and gas company is scheduled to reach a final investment decision with its local partners PetroVietnam and PetroVietnam Exploration Production Corp on the Ca Voi Xanh project, also known as Blue Whale. ExxonMobil has said the decision will be based on regulatory approvals, government guarantees, gas sales agreements and economic competitiveness.
In January, the company said said on its website that it had awarded a contract for front-end engineering and design, and was seeking permits, filing planning applications and conducting other preparatory work for the proposed development. An ExxonMobil promotional video of the project says the project “could power the Vietnamese economy for decades.”
Blue Whale is Vietnam’s largest gas venture and is scheduled to come online in 2022 as the rapidly growing nation confronts an energy crunch.
The off-shore site is located in deep-water Block 118, about 88 kilometers off the Vietnamese coast in the South China Sea, and is estimated to hold some 150 billion cubic meters of reserves, according to energy industry reports.
Until recently, most regional industry analysts believed that the ExxonMobil project would be out of China’s crosshairs, beyond the reach of its notorious nine-dash line map that encompasses nearly 90% of the contested sea.
That reasoning was based on straightforward and convincing assumptions.
First, ExxonMobil is an American oil major with the power of the US government behind it. The logic was that China may have pushed Spanish energy exploration and production company Repsol out of Vietnamese waters, twice in the last two years, but to do so to an American oil major would be unthinkable.
Second, the Blue Whale project is situated just outside of China’s notorious nine-dash line map. Though ExxonMobil and its partners would likely tap a certain amount of gas inside China’s self-proclaimed jurisdiction due to its proximity, its location nonetheless would purportedly offer the project another level of protection.
Third, it also seemed that China would not want to upset an American oil major that is integral to the global oil and gas sector, particularly since China is increasingly dependent on energy imports to drive its manufacturing-driven economy.
In 2017, China passed the US to become the world’s largest crude oil importer, and at the beginning of last year passed South Korea to become the world’s second largest importer of liquified natural gas (LNG).
China’s rising LNG imports come amid a government mandate that at least 10% of the country’s energy mix be comprised of natural gas by 2020, and at least 15% by 2030, to help offset record air pollution levels due to over-reliance on coal for power generation.
China is also projected to bypass Japan’s once thought untouchable top global LNG importer status within the next three or four years according to various market projections.
Beyond its lack of indigenous resources, China also faces a resurgent US oil and gas production superpower that is already the world’s top oil producer and is fast gaining ground in global gas markets.
Earlier this year, the US bypassed Malaysia to become the third largest global LNG exporter and is poised to rival both Qatar and Australia as the world’s top LNG exporter by 2025 or even earlier, depending on how soon several greenfield gas export projects come online.
Now, however, new dynamics are challenging old market assumptions about the Blue Whale project, including Beijing’s new push to exclude any extra-regional players from developing energy resources in the South China Sea.
University of New South Wales emeritus professor and Vietnam and South China Sea expert Carl Thayer says that the pressure China put on Vietnam to stop its exploration with Spain’s Repsol is different than the situation surrounding the Blue Whale project.
“Vietnamese sources indicate that China and Vietnam reached an informal understanding that they will not interfere in activities by the other party if it falls on their side of a hypothetical median line,” he said.
“This understanding should reduce the risk to ExxonMobil in its present operations,” said Thayer, referring to the median line. “[But] China is more likely to press Hanoi to stop ExxonMobil’s Blue Whale project and thus drive a wedge between Hanoi and Washington.”
Rumors have thus spread fast and furious on Vietnamese social media that ExxonMobil could indeed cave to pressure from Beijing to cease its involvement in the Blue Whale project.
Thayer notes that social media spurred speculation is still rumor since ExxonMobil has not made any announcement. He expert sees five possibilities behind the heated speculation.
First and foremost, the rumors could be wrong. Second, China is putting behind-the-scenes pressure on either or both Hanoi and ExxonMobil to cease oil and gas exploration as part of its widening conflict with the US.
Third, ExxonMobil could be exiting Vietnam for broader issues related to its global restructuring and divestment drive. Fourth, ExxonMobil and Vietnam cannot agree on the price of gas to be produced in the project. Fifth, any combination of possibilities two, three or four.
Thayer said it is likely that the US Embassy in Hanoi is fully aware of the rumors and have been in contact with ExxonMobil’s offices in both Hanoi and the US. “If reports of Chinese pressure are true,” Thayer added, “it is possible this issue could be raised at the impending next round of [trade war] talks between the US and China on tariffs.”
Many in Vietnam’s oil and gas sector interviewed for this report said they are disturbed by the ExxonMobil exit rumors.
Contacts inside the country are becoming increasingly concerned that the rumor is indeed fact and that Vietnam will have lost yet another battle with its giant neighbor to the North. ExxonMobil’s exit, they say, would be a blow to the country’s already faltering energy security.
Vietnam faces mounting power shortages, particularly in the country’s south, that could pinch as early as next year, the country’s Ministry of Industry and Trade said in June. The power shortage in the south would be largely created by the delay of gas projects, including Blue Whale, it added.
Annual power consumption growth in 2016-2020 is projected to range between 10.3%-11.3%, according to official estimates. With less gas resources to draw on, Vietnam will have to turn to solar, wind, imported LNG – and possibly even Chinese coal imports – to make up the shortfall in its energy mix.
A source with a Vietnamese energy company said on condition of anonymity that if ExxonMobil pulls out of the Blue Whale project, it will drive a rise in gas prices – significantly and pointedly at a time when many multinationals are looking to relocate their manufacturing facilities from China to Vietnam.