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Vietnam scraps new offshore oil project under pressure from China

26 March 2018

Vietnam has cancelled a major oil project in the South China Sea for the second time in a year in the face of Chinese pressure. State-owned PetroVietnam ordered Spanish energy firm Repsol to suspend planned operations in the Red Emperor field in Vietnam’s economic zone after coming under pressure from the Vietnamese Government, itself under pressure from China, according to a BBC report.

A rig similar to the one chartered by Repsol - Image ENSCO
A rig similar to the one chartered by Repsol - Image ENSCO

Vietnam has been seeking to develop the field (known in Vietnamese as Ca Rong Do) since 2009, and the Repsol-chartered rig Ensco 8504 had been scheduled to depart from Singapore for the drill site last week, but has been held back after the intervention of PetroVietnam, which also has a stake in the block.

A Reuters source with direct knowledge of the situation said government ministries in Vietnam had paused the project while the decision-making politburo debates whether to suspend or indefinitely terminate the contract.

The decision, which hangs on whether the fees incurred by contract cancellation will exceed the cost of resisting Chinese pressure, is on hold until the politburo meets, the source said.

China claims most of the South China Sea, in defiance of international treaties, and has fortified a number of islands to further its claim. It has also blocked previous attempts by Vietnam to drill for oil in the latter’s exclusive economic zone.

There have been hostilities between the two countries over the sea’s islands and reefs, one of which in the Spratly Islands in 1988 resulted in the killing of 64 Vietnamese soldiers.

Repsol's local subsidiary estimates that the field contains 45 million barrels of oil and 172 billion cubic feet of gas.

The Spanish company has already committed large sums to the development of the field. It has contracted a Malaysian-owned company, Yinson, to provide a Floating Production Storage and Offloading (FPSO) vessel at the site for 10 years at an estimated cost of more than $1bn, as well as a production platform for the site.

Overall, according to the BBC source, Repsol and its partners in the project (Mubadala Petroleum and PetroVietnam) are likely to be around $200m out of pocket.

This is the second time that Repsol has been ordered to suspend drilling. This area is adjacent to Block 136/03 where Repsol was ordered by the Vietnamese government to halt its development drilling in July last year.

That decision was reportedly taken after China threatened to attack Vietnamese outposts in a nearby piece of shallow sea known as the Vanguard Bank.

Reports from July 2017 suggested that it was the head of the Communist Party of Vietnam, General Secretary Nguyen Phu Trong, and the Minister of Defence, Gen Ngo Xuan Lich, who insisted that the drilling in Block 136/03 be stopped in order to avoid confrontation with China. The BBC says it is likely that the same dynamics were at work in the current decision.

Other countries in the region are also keen to develop their offshore oil and gas reserves.
Malaysia, Brunei and the Philippines are all coming under pressure from China to concede "joint development" in areas where the UN Convention on the Law of the Sea (UNCLOS) gives them sole rights. So far all the South East Asian states have resisted the pressure.

Vietnam has chosen to try to develop its fields alone and the result has been military threats from China and, now, a second climb-down, raising questions over Vietnam's offshore potential.

Speculation may well now turn to the fate of Exxon Mobil's Blue Whale gas project off central Vietnam. However, that is closer to land and so may not incur China's ire.

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