China Reaffirms Sovereignty over Disputed Offshore Gas Field Following Japanese Warning

Gas Spat in the East China Sea

China's Ministry of Foreign Affairs has reiterated its sovereign rights over the disputed Chunxiao/Shirakaba oil and gas field located in the northern part of the Xihu Trough in the East China Sea. According to Chinese government officials, Foreign Minister Yang Jiechi told his Japanese counterpart Katsuya Okada in their meeting in Tokyo, Japan on 17 January that China has sovereignty over the gas field. The announcement follows Okada's warning to China that action would be taken if China violates an agreement signed in 2008 for co-operative development of the field. In May 2008 China agreed on a 2,600-sq. km joint development zone (JDZ) in the north-eastern part of the Xihu Trough in which both sides would carry out development activity. The two sides agreed to develop the Chunxiao/Shirakaba field, while a further agreement was reached on 50:50 joint development of the Longjing/Asunaro area, which straddles the median line between the two states (see China – Japan: 19 June 2008: East China Sea Accord Reached on Two Gas-Rich Areas; Maritime Borders an Issue for Another Day). The 2008 in-principle agreement stipulated that Japan could participate in development of the field in accordance with China's relevant laws. Both parties involved in exploration would share equal investment, risks, and profits and pay tax to their own countries. The in-principle agreement was supposed to be followed up by bilateral agreements to implement joint development while both sides were supposed to co-operate on selecting further sites for exploration in the area. However, further progress proved elusive. Reports that China was unilaterally exploring the separate Tianwaitian/Kashi field in January led to accusations in the Japanese media that China was undermining the 2008 agreement, given that both sides agreed to seek consultation about other areas for joint development (see China – Japan: 5 January 2009: China Asserts Sovereignty over Disputed East China Sea Gas Field). Chinese vessels observed to be carrying materials including drilling equipment to the area in July 2009 created more concern in Japan, although China claimed it was not carrying out exploration but rather maintenance and management activities.

Over the past five years no exploration activity has occurred at the Chunxiao field due to the negotiations between China and Japan. However, rapid increases in Chinese domestic gas demand, which has been growing by more than 10% per annum in recent years, and large domestic shortages during winter 2009/10 will have led China National Offshore Oil Corp (CNOOC) to look towards the East China Sea as a new potential production area, perhaps to feed demand in Jiangsu and Zheijiang provinces. Four discoveries have been made at the Chunxiao field, which came online in 2006 at a rather modest rate of 20 mmcf/d, although gas reserves at the field have been halved from 2.5 tcf mentioned in the initial appraisal. The field is able to support further gas production, perhaps up to 1 bcm/y, although the relatively unexplored nature of the wider area is what continues to make disputed areas of the East China Sea attractive to both sides. According to IHS GEPS, the entire Xihu Trough was previously estimated to hold proven in-place reserves of 4-5 tcf with an upside of 5-10 tcf after extensive appraisal and untested segments. However, no proper appraisal plans have been carried out, so the reserve potential in the area remains somewhat of a mystery. Even in the 2,600-km JDZ, only a couple of wells have been drilled to date and this partially accounts for the importance attached to the area by China and Japan. The timing of Japan's warning is explained by CNOOC’s recent launch of development plans for the Chunxiao/Shirakaba gas field, which involves building a new wellhead platform on the field, due to be completed by July 2009. It is unclear what the motivations behind these developments are, although Japan worries that CNOOC could siphon off gas reserves from what it views as its side of the Exclusive Economic Zone (EEZ) located just east of the field.

Outlook and Implications

China has announced that it will stand by the 2008 agreement and that it is continuing to seek unofficial working level exchanges to enhance mutual understanding over the issue. China's at least public commitment to the 2008 agreement should help to temporarily stop a further build-up of tension over the issue by raising hopes on the Japanese side that China will follow up on co-operative development proposals despite cancelling for unknown reasons high-level talks on the issue in November 2008.

Over the longer term working exchanges can also help foster communication between the two sides, reducing the need for the trading of public accusations over the field, which can increase nationalist sentiment in both countries and complicate attempts to reach an agreement. However, much will ultimately depend on CNOOC's own actions at the site. The company’s activities at the site and the lack of progress in creating a regime to manage joint field development have raised Japanese concerns that the 2008 agreement was just a mirage. Japan will likely continue to closely monitor CNOOC's activities and if the agreement is perceived to be violated, Japanese naval vessels could be deployed to the area. However, for Japan and China the East China Sea issue is not just about gas. Chunxiao is of little economic value to Japan as the field is fully developed and any share of profits would only likely be small. Issues of sovereignty in the sea link to fundamental questions of security for both governments as well as other economic factors such as fishing rights. The linkage between gas reserves and these other issues partially account for the difficulties in resolving competing claims and the potential volatility of the situation. It is in both sides interests to push forward co-operation on the Chunxiao/Shirakaba field in good faith to avoid a deterioration in overall foreign relations between Asia's two largest economic powers.