The World's Fast-Changing Oil Map: the South China Sea

Our current world tour has taken us to such locations as South America and Africa, oil-producing venues where -- along, of course, with the Persian Gulf region of the Middle East -- capability exists for at least minor political and geopolitical skirmishes.

We'll now head for the South China Sea, which just this week is being hit by escalating tensions among those countries that claim ownership of all or part of it. From an energy perspective, however, the difference between the Asian body of water and our previous stops involves sizable discoveries in the latter, while the former is still generally on the proverbial come.

Big and bountiful
The South China Sea encompasses part of the Pacific Ocean, and is defined roughly by Singapore and the Strait of Malacca to the southwest, and northward to the Strait of Taiwan -- which separates Taiwan from mainland China. The significance of its 1.4 million square miles lies in the fully one-third of the world's shipping that traverses its waters each year, along with the likelihood that it contains vast quantities of oil and gas.

Countries now participating in skirmishes involving rights to the sea's promising waters include China, Vietnam, the Philippines, Taiwan, Brunei, and Malaysia. Their primary perceived treasure involves an estimated 213 billion barrels of oil and two quadrillion cubic feet of natural gas that may lie beneath its floor. It probably won't surprise you to learn that, among the interested countries, China has emerged as the unquestioned bully on the block.

It's also not as if the oil and gas potential in the area is entirely prospective. Slightly more than a year ago, for instance, it was announced by ExxonMobil (NYSE: XOM  ) that it had discovered hydrocarbons off the coast of Vietnam's Danang City. Others that have found oil and gas in the sea include Russia's Gasprom and France's Total (NYSE: TOT  ) . Beyond that, China's largest offshore producer, CNOOC (NYSE: CEO  ) and China Petroleum and Chemical Corporation (NYSE: SNP  ) have been active in reconnoitering the sea's vast waters.

As long as a decade ago, Murphy Oil (NYSE: MUR  ) and Royal Dutch Shell (NYSE: RDS-B  ) found natural gas fields offshore Malaysia in an area that -- surprise, surprise -- is also claimed by China. Those discoveries also set off disputes between Malaysia and Brunei.

The big bad bully
But it is China that has found it impossible to play nicely with the other kids. As in the East China Sea, where it continues its tug-of-war with Japan over disputed islands -- Sankaku in Japan and Diaoyu in China -- the big country claims most of the South China Sea as its own and has taken swipes at other countries in doing so. For instance, just this week, Vietnam's state oil and gas company, PetroVietnam accused Chinese boats of cutting seismic cables being towed behind a Vietnamese boat, thereby sabotaging the smaller country's exploratory efforts.

It's also noteworthy that Philippine authorities recently held a party and almost nobody came. Specifically, the country's energy leadership conducted an auction covering three offshore blocks in July. While 20 companies had been judged eligible to submit bids, one of the blocks received but one bid, while another garnered a whopping two. While I haven't examined the geology of the blocks in question, I'm willing to wager that the paucity of interest was tied to disputed ownership of the targeted area.

All aboard
Especially ominous are the newly released "regulations" permitting Chinese police to board foreign ships in portions of the South China Sea. As you can clearly imagine, what's known about the new rules has been anything but well received by the other countries with claims to parts of the sea.

The regulations in their entirety -- or China's version thereof -- have yet to be published. However, it appears that they apply to a 12 nautical mile territorial waters zone surrounding islands that China claims, especially largely uninhabited Yongxing Island in the Parcels, which in China are referred to as the Xisha islands. Importantly, the Parcels are also claimed by Vietnam. They were seized by China in a brief dispute with its southern neighbor in 1974.

In July, Beijing created a new city, Sansha, on Yongxing, where it has placed a military garrison to watch over the islands and their surrounding waters. Now, as part of its new rules, China maintains the right for its police to board and search foreign vessels that it finds to be in territorial waters around islands it claims in the South China Sea.

None of the interested parties is taking the new regulations lightly. The governments of the Philippines and the U.S. have requested clarification on their specifics. Singapore has communicated its displeasure at their issuance, and the chief of India's navy is threatening to deploy warships to the affected area to watch over his country's interests there.

Foolish takeaway
While the South China Sea remains an immature venue from the perspective of oil and gas exploration and production, it's current contentious goings-on merit attention from Foolish energy investors. Before we know it, the area could join the likes of the U.S. Gulf of Mexico and offshore Brazil as the locus of substantial oil and gas activity.

As global energy expands, look for those companies with an international footprint, such as National Oilwell Varco. This company is poised to profit in a big way; its customers are both increasing the number of new drilling rigs as well as updating an aging fleet of offshore rigs. To help determine if NOV is a nice fit for your portfolio, check out our premium research report with in-depth analysis on whether NOV is a buy today. For instant access to this valuable investor's resource, simply click here now and claim your copy today.


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