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Thayer Consultancy

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Background Brief: East Asia: Territorial Disputes and Natural Resources Carlyle A. Thayer October , 2012

[client name deleted] We are preparing a report about the situation in contradiction in Pacific Ocean between China, Japan and Taiwan. We request your assessment of the following: Q1. Now we see big conflict concerning Senkaku islands between Japan and China and contradiction Taiwan and Japan in this region too, could these border conflicts lead to diplomatic conflict or war straggle in this region? What territories could be new point of conflicts in Asia? ANSWER: So far the territorial dispute between Japan and China/Taiwan over the Senkaku/Diayou island has been largely political and diplomatic. The prospect for armed conflict is very low. All three sides have used non-military ships, such as the Coast Guard from Japan and Taiwan and China Marine Surveillance (CMS) from China. The fishing boat fleet from Taiwan was escorted by Coast Guard ships but could not remain on site for long due to bad weather. The Japanese Coast Guard effective used high-power water cannons to deter incursions into its territorial waters. Chinese CMS ships have intruded into the territorial waters around the Senkaku islands. Under international law they are entitled to innocent passage. Innocent passage must be continuous and expeditious unless rendering assistance to a vessel in distress. On the other hand, innocent passage must not be not prejudicial to the peace, good order or security of the coastal State. A foreign ships passage through the territorial waters of another state may be considered prejudicial to the peace, good order or security of the coastal state if the transiting ship engages in any one of the following: (a) any threat or use of force against the sovereignty, territorial integrity or political independence of the coastal State, or in any other manner in violation of the principles of international law embodied in the Charter of the United Nations; (b) any exercise or practice with weapons of any kind; (c) any act aimed at collecting information to the prejudice of the defence or security of the coastal State; (d) any act of propaganda aimed at affecting the defence or security of the coastal State; (e) the launching, landing or taking on board of any aircraft; (f) the launching, landing or taking on board of any military device; (g) the loading or unloading of any commodity, currency or person contrary to the customs, fiscal, immigration or sanitary laws and regulations of the coastal State; (h) any act of wilful and serious pollution contrary to this Convention; (i) any fishing activities; (j) the carrying out of research or survey activities; (k) any act aimed at interfering with any systems of communication or

2 any other facilities or installations of the coastal State; (l) any other activity not having a direct bearing on passage (emphasis added). Chinese actions could be construed as violating (a), (d) and (l) above. China is in effect using civilian ships to intimidate Japan, carry out propaganda to demonstrate Chinese sovereignty, and has no bearing on an expeditious direct passage. The United States has made clear that the Senkaku islands fall under the US-Japan Mutual Defense Treaty. Chia is unlikely to provoke an armed conflict that would draw in the more powerful United States Navy. It is unlikely that the dispute over the Senkaku islands will spill over an affect other islands or features in the East China Sea. There is a separate dispute between Japan and South Korea over Takashima/Dokdo island which South Korea occupies. Q2. Why now we can see intensification struggle for resources territories in Asia. What sort of resources could be interesting for different countries in this region? And who will be main actor in this tendency (conquest or baying new resource territory)? ANSWER: There are three types of resources in East Asias maritime domain that are or could be subject to dispute: hydrocarbons (oil and gas), fisheries, minerals. China provides estimates of oil and gas in the South China Sea that are seven times greater than estimates provides by the United States. Because of the lack of proper exploration the extent of hydrocarbon reserves is unknown. It is commonly estimated that nearly 70 percent of hydrocarbon reserves consists of natural gas. Oil deposits lie in deep water, a technology that China has not fully mastered. By some accounts the oil reserves in the South China Sea could meet Chinas current demand for about a decade. Indsutry analysts call this peak oil. If the oil were exploited it would soon run out. The fisheries in the South China Sea are being depleted due to overfishing and marine pollution. This is driving fishing fleets further from their shores. China has the largest boats and these are now regularly intruding into waters claimed by the Philippines and Vietnam. The is causing low level friction and occasional conflict as the strand off at Scarborough Shoal from April to June this year demonstrated. For many years China has imposed a unilateral fishing ban from May to August in the maritime area north of twelve degrees north latitude. This ban affects Vietnamese fishermen who regularly intrude into the waters around the Paracel Islands. Minsters are located on the deep sea bed mainly on the continental shelves of the littoral states. Conflict over minerals has not featured in recent disputes. In 2008 China and Japan reached agreement to jointly develop hydrocarbon reserves in waters north of the Senkaku islands. This agreement was never implemented. The two sides also agreed to cooperate in fishing but his has been a victim of political tensions. Japan is dependent of China for the import of rare earths. In 2010 when China cut exports to Japan after a fishing incident, Japan has sought to find alternate sources. Japans focus in the region is on rare earths in Malaysia and Vietnam. Q3. Private companies now seeking for new investment in territories with big resource base. To your point of view which companies in Asia will be active in this sphere, and what resources will be interesting for these companies?

3 ANSWER: Both Vietnam and the Philippines face energy shortages. Both have been active in trying to attract foreign investment in their hydrocarbon sector. Oil blocks in Vietnam Exclusive Economic Zone (EEZ) are presently being developed by ExxonMobile, Chevron, ONGC Videsh, OAO Gazprom and Vietsovpetro. Soco International Plc from the United Kingdom has expressed interest in exploring for oil off Vietnams coast. In April, the Philippines announced bids for 12 of 15 oil exploration sites. The Philippines Energy Department pre-=qualified more than forty foreign and local firms. In July the Philippines put out the remaining three sites for tender, Service Contracts 3, 4 and 5. Areas 3 and 4 lie in waters claimed by China. These are located near the Malampaya and Sampaguita areas where natural gas has been discovered. Malampaya is owned by a consortium led by Shell Philippines Exploration B.V. a unit of Dutch Shell Plc. Sampaguita, near Reed Bank, is being developed by Forum Energy Plc, a company listed in London, majority owned by Philex Petroleum Corporation in cooperation with Pitkin Petroleum Pls and Philodrill Corporation. All are local companies in the Philippines. In July the Philippines began awarding oil exploration blocks off the northwestern coast of Palawan island within its EEZ. On July 31, none of the fifteen foreign companies that were pre- qualified in April bid in the July round, including Italys ENI, Spains Repsol, Frances GDF Suez, Australias Nido Petroleum Ltd., Total SA, Exxon Mobil Corporation, and Royal Dutch Shell. Only six companies out of a total of nearly 40 pre-qualified companies took part in the bidding for the three Service Contracts. The Philippines accepted four bids for three oil and gas exploration blocks. Hellos Petroleum and Gas Corporation was the sole bidder for Area 3 and its bid was accepted. Hellos and a consortium led by state-owned Philippines National Oil Exploration Corporation, Philex Petroleum Corporation and Petro-Energy Resources Corporation both put in bids for Area 4. Philodrill Corporation and Pitkin Petroleum Ltd, both partly owned by Philex Petroleu, was the sole bidder for Area 5 and its bid was accepted.

Suggested citation: Carlyle A. Thayer, East Asia: Territorial Disputes and Natural Resources, Thayer Consultancy Background Brief, September , 2012. Thayer Consultancy Background Briefs are archived and may be accessed at: http://www.scribd.com/carlthayer.