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Saturday, April 16, 2005

OPI UPDATE: CHINA AND JAPAN AWAKEN AN OLD CONFLICT OVER GAS AND OIL

Protests in China against Japan have intensified. Now a controversy about oil and gas fields in the East China Sea has been thrown into the mix. While the oil and gas dispute is not new, it may be intensifying –not because anything has actually changed, but because it is in China’s interest to ratchet up anxiety overt he issue.

A TEXTBOOK CASE OF NATIONALISM

This week’s anti-Japanese protests in Beijing have intensified. Thousands turned out in Beijing and Shanghai this morning, marching on the Japanese consulates and smashing the signs and windows of Japanese owned businesses in the area. The conflict first arose earlier this month when China objected to textbooks just published in Japan that the Chinese say whitewash Japan’s wartime atrocities toward China. The unrest started in the southern and central China in the Guangdong and Sichuan provinces, and then spread to Beijing last week and now to Tianjin, Shanghai, and Hangzhou on the east coast.

Last week Beijing appealed for calm while doing little to quell the controversy. Beijing’s reaction was stronger today, fearing the protests were getting out of hand. “Express your patriotic passion in an orderly manner,” the Beijing police said in a statement on Friday as riot police turned out in force to protect the foreign consulates. Japan’s foreign ministry lodged a protest, saying the Chinese government failed to protect Japan’s diplomatic and commercial facilities and urging Beijing to act more effectively to prevent further damage.

JAPAN DRILLS BACK

The two countries have now added oil and gas drilling in the East China Sea to the controversy. While the issue of who owns gas and oil deposits in the East China Sea is not new –China and Japan have been negotiating the issue for more than a decade—Japan announced on Wednesday that Teikoku Oil Co. and Japan Petroleum Exploration Co. have been designated to conduct drilling on behalf of the Japanese government in the disputed waters. China’s Ministry of Foreign Affairs called the move a “serious provocation.”

In mid-January 2005 Japan Petroleum Exploration Co. and Teikoku Oil Co. began talks with the Japanese government on plans to drill for gas in disputed waters. Those talks finally came to a conclusion last week. The proposed drilling still must be approved by Japan’s Ministry of Economy, Trade, and Industry, which will likely take 2-3 months. However, the announcement constitutes a clear statement of ownership over a region and resources that have long been under negotiation. It also adds fuel to an already growing fire.

The conflict, which until recently had frozen exploration and drilling activities in the disputed waters, has stymied production and development of scant and badly needed resources. Japan and China rank second and third respectively in the world in oil consumption and both are among the world’s largest importers of oil

The East China Sea controversy concerns ownership of a set of small islets south of Japan (Senkaku islets in Japanese or Diaoyu in Chinese) and the precise extent of the two countries’ territorial waters there. In 2003 China began natural gas production in a region just inside their own claim, but close enough to the Japanese side that the Japanese argued that even if the Chinese line were the correct one, the field itself likely straddles the boundary, making the oil and gas partly theirs.

Where exactly the line should be drawn, is no easy problem to solve. Japan draws the dividing line an equal distance from the coasts of the two countries, while China claims its EEZ extends to the edge of the continental shelf. The Chunxiao gas field, which China began to develop in 2003, is located four km inside the Chinese side of the boundary claimed by Japan. In July 2004 Japan began its own preliminary explorations in the same area, sparking Chinese protest.

According to the UN Convention on the Law of the Sea, both sides are wrong, at least in how they have gone about the matter. The Convention stipulates that when there is disagreement on the demarcation of sea boundaries between any countries, the parties concerned should avoid anything that could undermine an eventual agreement –i.e. exploration and drilling. Tokyo’s original proposal, which Beijing rejected, was to divide the sea equally between the two countries. China declined and offered instead to jointly develop the fields, a proposal which Japan found unacceptable. The 2003 Chinese development followed shortly thereafter.

In mid-January 2005 Japan Petroleum Exploration Co. and Teikoku Oil Co. began talks with the Japanese government on plans to drill for gas in disputed waters near the Chinese development zone. Those talks finally came to a conclusion last week. The proposed drilling still must be approved by Japan’s Ministry of Economy, Trade, and Industry, which will likely take 2-3 months. However, the announcement constitutes a clear statement of ownership over a region and resources that have long been under negotiation.

Ironically, the whole argument may be much ado about little. It is not clear how abundant the deposits in the East China Sea actually are. Royal Dutuch/Shell and Unocal had originally contracted to develop the disputed Chunxiao gas field with Sinopec and CNOOC. It was the largest project that China had ever initiated with foreign partners. In September of 2004, however, the two Western companies pulled out of the deal, citing ‘commercial’ reasons. The pull-out cast doubt on the economic viability of the undersea fields. However, many speculated that the pull-out had more to do with politics than production. Shell and Unocal deny that claim.

Regardless, Sinopec and CNOOC continued with development and the field is set to come on stream in mid-2005 as scheduled. The Chinese expect it to produce 2.5 billion cubic meters of natural gas in the immediate two years after production begins. They continue to maintain that the field holds as much as 50 billion cubic meters of gas and will become a major producer in the next ten years. They project commercial operations to begin at a production rate of 1.9 bcm per year, rising to 7.8 bcm by 2010. The field may also contain less abundant, but still significant, deposits of oil.

CHINA’S NEED FOR NATIONALISM

The East China Sea dispute, while not new, has fanned nationalist flames on both sides of the current controversy over Japanese textbooks. The issue raises questions not only of the two countries’ war-torn history, but also of future security. Banners and tee shirts at this morning protests bore the slogan “Give back the Diaoyu islands” and similar references to the territorial conflict. Japan’s quest for a seat on the U.N. Security Council has also been brought up in the current dispute. Japanese Foreign Minister Nobutaka Machimura is due to meet his counterpart Li Zhaoxing on Sunday. How this meeting goes will say a lot about how relations between the two economic giants, who themselves have $178 billion in trade annually, will unfold in the coming weeks and months.

But China is likely in no hurry to reduce Chinese nationalist passions, for it clearly needs them in order to face serious issues brewing at home, namely the increasingly fragile state of its economy. Inefficient and unnecessary state-run enterprises have stayed alive for years on bad loans that are now threatening serious harm to the economy if the enterprises are not shut down. However, if China shuts down the dead-weight enterprises, thousands of Chinese laborers will be thrown out of work. Such large unemployed masses are threatening to the stability of any regime, but especially to one whose very reason for existence centers on the laborer.

China is thus likely to use the current nationalist surge to distract the population from the coming joblessness and economic hardship. The timing of the current conflict –as well as increased tensions over Taiwan—couldn’t be better for Beijing, and indeed may be more sly than serendipitous. China can make the desperately needed structural adjustments in its economy as long as Chinese eyes are focused outward.

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