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The South China Sea: Oil and Gas and an Increasingly Assertive China

Monday, 17 February 2025 | 01:00

The South China Sea is not only vital for global trade but also holds major oil and gas reserves that are critical for the energy security of claimant states. Countries like Vietnam and Malaysia are investing in offshore drilling to meet domestic needs amidst declining onshore reserves.

The militarization of artificial islands and increased Chinese aggression have aggravated tensions in the South China Sea, in turn jeopardizing the economic and energy interests of Southeast Asian nations.

It will be essential to closely monitor future changes in the presence of, and hostility by, China, Southeast Asian nations, the U.S., and other interest parties. Active dialogue and cooperation among claimant states are vital for managing disputes and reducing tensions.

Operational Context: Strategic Importance of the South China Sea

The South China Sea (SCS) is a conduit for one-third of global trade. Disruptions to these shipping lanes could significantly impact global supply chains. Access to these waters is also particularly vital to the economic security of the countries that border it, known as claimant states. These countries all possess overlapping territorial claims in the region, and include China, Vietnam, the Philippines, Malaysia, Brunei, and Taiwan. In addition, the SCS is estimated to hold around 11 billion barrels of oil and 31.2 billion barrels of oil equivalent (BOE) in natural gas in proved and probable reserves. Around one fifth of these resources may be found in contested areas. The SCS therefore plays a key role in ensuring the energy security of claimant states. Recently, on 8 August 2024, the Chinese state-owned oil corporation CNOOC confirmed the discovery of a gas field (Lingshui 36-1) in the SCS, located southeast of Hainan Province and estimated to contain over 100 billion cubic metres of natural gas.

The exploration and development of oil and gas in the SCS has been, and will likely continue to be, the centre of political tensions between claimant states. Since China's passage of the 1992 Law on the Territorial Sea (asserting its sovereignty and claims to the waters), alongside large-scale Chinese land reclamation and artificial island building efforts from 2013, Beijing has been demonstrating its ability to project power and control in the region. This display of assertiveness has taken the form of increased deployment of military assets, militarisation of artificial islands, and the harassment of foreign vessels and offshore rigs. Moreover, China's most recent escalation of these tactics, beginning in 2023 and intensifying in recent months, can be traced to domestic political pressures, advances in Chinese maritime and military capabilities, and increased geopolitical competition with U.S. and allies.

Map illustrating Chinese territorial claims based on their “nine-dash line,” exclusive economic zones of claimant states, and disputed islands in the South China Sea (Source: UNCLOS, CIA)
While China occupies the three largest artificial islands in the South China Sea, Vietnam occupies the next three largest (Source: Asia Maritime Transparency Initiative)

China's Assertive Actions and International Implications

Under international law, a country is granted sovereign rights to extract natural resources from within its own exclusive economic zones (EEZ). China's heightened activity in the SCS is directly linked to an intention of controlling and influencing the exploitation of resources, in turn complicating the energy exploration efforts of Vietnam, Malaysia, and the Philippines. To do so, China claims sovereignty over many parts of the 200 nautical mile EEZ of other claimant states to the SCS, referring to their self-proclaimed “nine-dash line” – this encompasses around 90% of the SCS. The southernmost extent of this claim reaches nearly 2000km south of China's Hainan Island and even encroaches on waters near the Natuna Islands, which are part of Indonesia's EEZ. However, while the line is employed by Beijing to advance its territorial claims, many countries have rejected them on the basis that they are expansive, ambiguous, and illegal under international law. A 2016 ruling of the Permanent Court of Arbitration declared the line to have no legal basis under UNCLOS.

Chinese militarisation in the SCS has taken the form of continuous, low-intensity conflict. Most notably, these have included ramming, boarding, encircling, as well as blaring sirens and firing water cannons and military grade lasers at civilian ships and military vessels. These tactics fall under “grey-zone” operations– strategies that remain below the threshold of military conflict but nevertheless challenge other nations rights through intimidation, coercion, and harassment. China's increasingly aggressive use of these tactics suggests a possible shift from strategic defence to offence within the SCS, aimed at gradually consolidating control over disputed waters. In addition, China has enhanced its military activities in the seven artificial islands in the region. Over the years, China has transformed features like the Fiery Cross Reef, Mischief Reef, and Subi Reef into fully functioning military outposts that enable the establishment of a permanent presence in the SCS. These islands have been strategically fortified with airstrips, hangers, port facilities, and long-range radars.

A few notable cases provide clear insight into this issue. Satellite imagery has shown refuelling and taxi-ing of an early warning and control aircraft on the Fiery Cross Reef; on the Subi Reef: truck-like objects have been constructed with the intention to prevent foreign aircraft from landing on the island; and two catamaran missile boats capable of carrying up to eight subsonic anti-ship missiles have been observed docked by the Mischief Reef. These three Chinese artificial islands are the largest in the SCS, forming a so-called “triangular defence position” against current US bases in the Philippines.

Satellite imagery of Fiery Cross Reef (which China first took possession of in 1988) from 2006 and 2022, showing the extent of militarisation of the feature. (Source: Asia Maritime Transparency Initiative)

Escalating Tensions and Confrontations in the South China Sea
Since 2018, Beijing's Spratly Island outposts have received increasing military capabilities, including anti-ship cruise missiles, long range surface to air missile systems, military radar and signals intelligence capabilities, and laser and jamming equipment. The primary function of these islands is therefore associated with the expansion of Chinese offensive capabilities beyond their continental shores. China has around 20 outposts in the Paracel islands and seven in the Spratly Islands. Beijing also asserts its control over the Scarborough Shoal, located around 220km west of the Philippine Island of Luzon. China has maintained a constant guard presence there since 2013. The Shoal has been the subject of a long-running territorial dispute between the Philippines and China, and in recent months there have been several run-ins between Filipino vessels and Chinese Coast Guard (CCG) vessels in the surrounding waters. Satellite images from February 2024 also reveal a floating barrier believed to be erected by China at the entrance of the atoll.

China's recent willingness to utilise force to dominate the SCS can be illustrated through confrontations between China's Navy, Maritime Militia, and CCG, and Filipino vessels. One incident in June 2024 involved CCG members wielding axes and a Philippine sailor losing his finger, an event seen as a sharp escalation and a clear sign of growing Chinese assertiveness in the region. In mid-September 2024, there were four confrontations between the two countries, involving collisions and dangerous manoeuvres, within the timespan of just two weeks. This surge in tensions was concentrated in the Second Thomas Shoal and the Sabina Shoal, a resource-rich atoll near the Philippine mainland.

In April 2024, the Philippines Coast Guard sent the BRP TERESA MAGBANUA, one of their largest and most advanced response vessels, to Sabina Shoal. This was not done in efforts to monitor what the Philippines fear is a Chinese plan to reclaim land there, but to demonstrate Filipino intentions of exploring the area for oil and gas. In addition, the Shoal serves as the main staging ground for resupply missions to the BRP SIERRA MADRE, a World War II-era warship deliberately grounded by the Philippines in 1999 to reinforce its territorial claims at the Second Thomas Shoal. China has since denounced what it saw as the “illegal grounding” of BRP TERESA MAGBANUA, deploying several vessels to surround it. On 16 September 2024, the Philippine's announced that it would “continuously deploy” coast guard vessels to the contested waters off the Sabina Shoal.

Areas where China has previously confronted the Philippines since 2013 (Source: the New York Times)
Aerial image showing Philippine coast guard vessel BRP Teresa Magbuana being surrounded near the Sabina Shoal by Chinese vessels on 1 September 2024 (Source: Philippine Coast Guard)

Energy Security in the South China Sea: Oil and Gas Deposits
The SCS is characterised by unclear boundaries and underexplored resources, a situation compounded by the significant costs associated with resource exploration and ongoing territorial disputes. These factors heighten the risks involved in developing and exploiting the basins in the region. Consequently, the SCS is currently underexplored, and most existing oil and gas fields are located in uncontested areas near the shorelines of claimant states. However, the possibility of discovering natural resources in these waters remains, creating incentives to secure larger parts of the SCS to meet domestic energy demands of littoral states. In particular, the Spratly Islands are believed to hold significant oil and gas reserves. According to reports, Vietnam has explored the Vanguard Bank area, and the Philippines has attempted to develop the Reed Bank. In the Paracel Islands though, partly due to a firmer Chinese presence and control, exploration activities have been less substantial.

In Southeast Asia, electricity demand is set to grow rapidly in the coming decades as countries face the task of maintaining economic growth and meeting the needs of growing populations. Currently, many governments rely on liquefied natural gas (LNG) as a cost-effective bridge between their current reliance on coal and an eventual transition to renewables. Coal-fired power plants reportedly account for over 40% of the region's power generation. In China, while growth in solar, wind, and nuclear energy has satisfied some energy demands, the growth rate of fossil fuel consumption continues to increase. Vietnam's onshore oil and gas reserves in the Cuu Long Basin, especially the Back Ho deposit, are declining significantly. This has prompted investments in offshore drilling in the SCS. In Malaysia, several deepwater exploration projects are underway in the Sabah and Sarawak Basins of the SCS following maturity of onshore resources, whereby the most easily accessible resources have been largely extracted and are now nearing depletion or producing at reduced rates.

South China Sea proved and probable oil reserves. Most conventional reserves are in uncontested areas, yet contested areas are likely underexplored. (Source: US Energy Information Administration)
Current oil and natural gas basins in the South China Sea (Source: U.S. Geological Survey)

Malaysian and Vietnamese Responses to Chinese Maritime Assertiveness

Malaysia maintains strong economic ties with China, and maritime disputes between the two countries are typically managed through diplomatic channels. While the Director General of Malaysia's National Security Council acknowledged that Chinese vessels had been patrolling Malaysian waters, he downplayed concerns of harassment by Chinese forces. Despite this, Petronas, Malaysia's state-owned oil and gas company, recently awarded numerous permits to companies such as Shell and TotalEnergies to explore new deposits located more than 100 nautical miles off the Malaysian coast. CCG vessels have contested these oil and gas development efforts, particularly near the Kasawari gas field off the cost of Sarawak. Reports also indicate that Chinese military aircraft have flown as close as 60 nautical miles to the Sarawak shoreline. In a notable shift, Kuala Lumpur has become more assertive in defending its maritime rights in the face of Beijing's attempts to hinder its resource exploration activities. Malaysia has significantly bolstered its military presence within its EEZ and has begun shadowing Chinese vessels operating in these waters. Reports from September 2024 suggest that Malaysia remains committed to continuing its activities in the SCS, despite Chinese claims that they are “infringing on its territory.”

Vietnam's attempts to develop resources in the region are often met with Chinese opposition. In 2014, the Hai Yang Shi You 981 standoff occurred when Chinese state-owned CNOOC deployed its oil platform near the Paracel islands, prompting Vietnam to intervene to prevent its establishment. Similarly, in 2017, Repsol, a Spanish multinational energy company, cancelled its planned project on the Vanguard Bank under pressure from China. This trend continued in 2018 when China opposed Vietnam's attempts of attracting foreign investment for oil and gas exploration in the SCS. In response to these challenges, Vietnam has adopted a “tit for tat” approach, maintaining a steadfastly assertive stance against Chinese aggression. This includes active land reclamation efforts in the SCS, where Vietnam has reclaimed approximately 280 hectares of land across ten features between November 2023 and June 2024. Despite growing economic ties, concerns persist over a potential escalation in Chinese-Vietnamese relations. In March 2024, China expanded its maritime claims by establishing a new baseline that includes a portion of the Gulf of Tonkin, a shallow body of water located between northern Vietnam and southern China, as part of its internal waters. Additionally, there are fears that if Vietnam resumes its activities near the Vanguard Bank, Chinese vessels may encroach on Vietnamese territorial waters, threatening the country's national energy strategy, “Power Development Plan 8.”

Regional and International Security Frameworks

The SCS is a complex nexus of geopolitical rivalries and third-party involvement. The Philippines exemplifies how domestic and foreign policy influences state behaviour in the contested waters. Since President Ferdinand Marcos Jr. took office in 2022, the Philippines has adopted a more confrontational stance against China, strengthening partnerships with the U.S. Reports from March 2024 indicate that the Philippines is also “counting on” the U.S. and its allies to support its energy exploration plans in the SCS, including inviting U.S. companies to invest in exploration and development activities. The 1951 U.S.-Philippines Mutual Defense Treaty has been frequently referenced in recent statements from both nations regarding the current security situation, stipulating mutual support in case of an attack by a third party on either country. In September 2024, both nations, along with other Asia-Pacific countries such as Australia and Japan, conducted joint maritime exercises in the SCS to enhance regional security and interoperability.

Amid fears that the SCS could become a flashpoint for conflict, the U.S. frequently deploys its navy destroyers to the disputed waters through “freedom of navigation operations.” While these patrols are supposedly intended to uphold international law, they can also be seen as a signal challenging Chinese claims in the region. U.S. warships often participate in these operations, and in June 2024, a multinational patrol involving the Philippines, Japan, and Australia was conducted as part of this initiative. Beijing, however, denounces U.S. “freedom of navigation operations” within their nine-dash line, asserting that maritime disputes in the SCS, including those related to developing resources, should be resolved exclusively among the claimant states involved. China regularly conducts military drills to demonstrate its naval capabilities and readiness to counter the increasing Western military presence in the region. Most recently, on 14 October 2024, Beijing deployed warships and fighter jets to the Taiwan Strait, a narrow body of water adjacent to the SCS.

Summary: The Geopolitical Landscape of the South China Sea

The South China Sea (SCS) serves as a crucial throughway for global trade and merchant shipping, while also possessing significant oil and natural gas reserves. These resources are vital for claimant states, including China and many Southeast Asian countries, in meeting their growing energy needs amid depleting onshore reserves and the challenges of transitioning to renewable energy. China's willingness to disregard international norms and project its military power in the SCS reflects a broader strategy aimed at securing as many oil and gas reserves as possible. This is evidenced by its harassment of vessels and the construction and militarisation of artificial islands. The natural resource deposits are often located near the coastlines of these nations, within their EEZ, prompting countries like Malaysia, Vietnam and the Philippines to pursue oil and gas despite increasing pressure and aggression from Beijing.

China's ongoing militarisation and assertiveness have spurred claimant states to bolster their diplomatic partnerships and engage in joint military exercises in the contested waters. This includes defence agreements, such as the one between Washington and Manila, as well as enhanced cooperation among ASEAN member states to effectively address Chinese aggression in the SCS, particularly toward Vietnam and the Philippines. However, ASEAN remains remain divided on the best approach to handle the situation, weaking the alliance's ability to present a united front against Chinese expansionism. This division further exposes the SCS to regulatory uncertainty and heightened military tensions. Meanwhile, although U.S. presence in the region provides a counterbalance to China and is essential for maintaining freedom of navigation, its focus on Chinese expansionism is not guaranteed. American policies often shift with changing administrations and election outcomes, and it is likely that other geopolitical theatres such as the Middle East and the war in Ukraine will dominate U.S. attention in the short to medium term. Additionally, the capacity and willingness of the U.S. to counter China's growing naval presence in the SCS are limited by insufficient manpower and resources. This inconsistent and unreliable U.S. involvement, coupled with policy gaps and current naval limitations relative to China's, emboldens Beijing to assert greater control in the SCS region.

Strategies for Regional Stability and Future Considerations

China's military superiority over its neighbours and its incremental expansionism in the SCS through intimidation and force will present significant risks if left unchecked. Despite the potential for China to steadily increase its dominance in the absence of substantial resistance from ASEAN or external powers like the U.S., experts caution against a confrontational approach, advising stakeholders to “tread lightly.” Efforts to address China's expansionist behaviour should avoid establishing “red lines” that might provoke retaliation from Beijing. While it remains unlikely that Beijing will initiate military confrontation in the SCS, its current assertiveness is expected to continue, if not intensify. Indicators of a more aggressive Chinese strategy include deployment of anti-air and anti-ship capabilities, movement of military aircraft to the Subi, Fiery Cross, and Mischief Reefs under the guise of “military exercises” or “temporary rotations,” and increases in the frequency or intensity of coercive actions by CCG vessels.

As tensions mount and the prospect of escalation of Chinese military assertiveness in the SCS heightens, it is important to explore potential responses and strategies available to affected countries and interest parties. If China escalates its actions, a combination of military, diplomatic, and economic responses is likely. These might include increased naval presence, sanctions and trade measures. Alternatively, if China maintains its current approach of gradual territorial consolidation, tensions may normalise, allowing Beijing to entrench control over contested waters. This scenario would complicate the security landscape in the region and hinder the energy exploration and development efforts of affected parties. In response, Southeast Asian nations must engage in diplomatic efforts, strengthen their defence capabilities, and pursue international legal action to safeguard their interests. Establishing a robust regional security framework within ASEAN is imperative; this framework should promote regional cohesion and active dialogue with China while also engaging with extra-regional powers. Possible actions include enhanced joint patrols, capacity building, defence modernisation, and comprehensive resource management initiatives.

Looking ahead, recent discoveries of rare earth elements (REMs) in the SCS could also transform these waters into a site of geopolitical competition over maritime mineral wealth. Reports indicate that across Southeast Asia, governments are seeking to position themselves as green technology hubs and critical suppliers for the electric vehicle industry. This will likely lead to tense standoffs with Chinese vessels as countries actively seek to acquire these vital resources through deep-sea exploration efforts in the contested SCS. As with other natural resources, any developments in this area should be closely monitored. Any escalation in or shift in Chinese strategy is likely to have implications on not only claimant states but also the wider international shipping community.
Source: Dryad Global, METIS Insights – February 2025, Patteraporn (Christina) Jansson (https://www.dryadglobal.com/)

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