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Beijing's military threats in South China Sea could hurt energy firms

  • Beijing's willingness to use military threats in the South China, as revealed in a July incident that involved Spain's Repsol, is a worrying development for energy players
  • Firms that ignore Chinese demands could face on-site harassment, de facto exclusion from the Chinese market and threats to company staff, according to Verisk Maplecroft

As the world's second-largest economy threatens military action in the South China Sea, oil and gas players with interests in the disputed zone are put in a bad place.

That was the case for Spanish energy firm Repsol. In July, its subsidiary Talisman-Vietnam was ordered by Hanoi to stop gas drilling in a China-claimed area after Beijing warned the Southeast Asian country that it would attack bases if operations continued.

Map courtesy of Stratfor.

President Xi Jinping's administration's use of military retaliation is "a worrying escalation" and could result in further pressure on future business dealings, said Hugo Brennan, Asia analyst at Verisk Maplecroft, in a Wednesday note.

Companies that have interests or operations in blocks licensed by Southeast Asian governments but located within China-claimed waters are likely to face pressure from Beijing, according to Brennan.

There are many overlapping claims in the region. China relies on a concept known as the nine-dash line to mark its territorial claims — a massive area that extends roughly 1,000 miles from its southern shores — in the South China Sea. But Vietnam, the Philippines, Malaysia, Brunei and Taiwan also assert sovereign rights over parts of the international waterway, which is rich in resources and boasts key maritime routes.

Against that backdrop, firms licensed by other countries to operate in disputed ares will face Chinese protestations. Any company ignoring those would likely face consequences such as on-site harassment, de facto exclusion from the Chinese market and even implicit threats to company staff and assets, Brennan said. BP experienced the latter option in 2007, he added.

"Operators also have to analyse the resolve of Southeast Asian governments to stand up to China. Otherwise, companies with rights to develop blocks or fields in contested waters may find that they are prevented from exercising them as host government become wary of rocking the boat."

The next potential flash-point could be Vietnam's Red Emperor oil and gas field, also called Ca Rong Do. Repsol is active in the project, which is located within China's nine-dash line, and drilling is slated for 2019. But in light of Chinese threats, it remains to be seen how much progress the Madrid-based firm will make, Brennan said.

Regional players are already taking defensive action in response to China's aggressive behavior.

Indonesia, which isn't a claimant in the South China Sea drama but maintains an exclusive economic zone there, recently announced intentions to use its military to provide security for resource exploration activities.

However, "blurring the lines between commercial and naval activities in this way raises the potential for oil and gas assets to become targets in any militarized confrontation," Brennan said.

Even as China prevents others from tapping hydrocarbon deposits located within its nine-dash line, it's in no rush to develop those assets. That's likely because 71.2 percent of total discovered reserves within the nine-dash line are "not currently considered commercially viable," according to Brennan.