Wednesday, October 10, 2012

East China Sea Energy Report

Although the East China Sea may have abundant oil and natural gas resources, unresolved territorial disputes continue to hinder exploration and development in the area.

The East China Sea is a semi-closed sea bordered by the Yellow Sea to the north, the South China Sea and Taiwan to the South, Japan's Ryukyu and Kyushu islands to the East and the Chinese mainland to the West. Evidence pointing to potentially abundant oil and natural gas deposits has made the sea a source of contention between Japan and China, the two largest energy consumers in Asia.

The sea has a total area of approximately 482,000 square miles, consisting mostly of the continental shelf and the Xihu/Okinawa (Chinese name/Japanese name) trough, a back-arc basin formed about 300 miles southeast of Shanghai between the two countries. The disputed eight Daioyu/Senkaku (Chinese/Japanese name) islands lie to the northeast of Taiwan, with the largest of them two miles long and less than a mile wide. Though barren, the islands are important for strategic and political reasons, as ownership can be used to bolster claims to the surrounding sea and its resources under the United Nations Convention on the Law of the Sea. To date, China and Japan have not resolved their ownership dispute, preventing wide-scale exploration and development of East China Sea hydrocarbons.

East China sea map

Oil & Natural Gas

The East China Sea basin, particularly the Xihu/Okinawa Trough, is a potentially rich source of natural gas that could help meet Chinese and Japanese domestic demand.

China recently became the second largest net oil importer in the world behind the United States and the world's largest global energy consumer. Gas imports have also risen in recent years, and China became a net natural gas importer for the first time in almost two decades in 2007. EIA forecasts that China's oil and natural gas consumption will continue to grow in coming years, putting additional pressure on the Chinese government to seek out new supplies to meet domestic demand (See China country analysis brief). Japan is the third largest net importer of crude oil behind the United States and China, as well as the world's largest importer of liquefied natural gas (LNG), owing to few domestic energy resources. Although EIA projects oil consumption in Japan to decline in coming years, Japan will continue to rely heavily on imports to meet consumption needs (See Japan country analysis brief). Therefore, both China and Japan are interested in extracting hydrocarbon resources from the East China Sea to help meet domestic demand.


Hydrocarbon reserves in the East China Sea are difficult to determine. The area is underexplored and the territorial disputes surrounding ownership of potentially rich oil and natural gas deposits have precluded further development. The EIA estimates that the East China Sea has between 60 and 100 million barrels of oil (mmbbl) in proven and probable reserves. Chinese sources claim that undiscovered resources can run as high as 70 to 160 billion barrels of oil for the entire East China Sea, mostly in the Xihu/Okinawa trough. However, "undiscovered resources" do not take into account economic factors relevant to bring them into production, unlike "proven and probable reserves."

China began exploration activities in the Each China Sea in the 1980's, discovering the Pinghu oil and gas field in 1983. Japan co-financed two oil and gas pipelines running from the Pinghu field to Shanghai and the Ningbo onshore terminal on the Chinese mainland through the Asian Development Bank and its own Japanese Bank of International Cooperation (JBIC).

More recently, both China and Japan have concentrated their oil and gas extraction efforts in the contested Xihu/Okinawa trough. Most fields are operated as a joint venture between the Chinese National Offshore Oil Corporation (CNOOC) and the China Petroleum & Chemical Corporation (Sinopec) with support from foreign firms and other partners, such as the Shanghai government. CNOOC listed its East China Sea proved oil reserves at 18 million barrels in 2011, according to an annual report, while other partners have not publicly released their reserve figures.

Only the Pinghu field, operational since 1998, has produced oil in significant quantities to date. Pinghu's production peaked at around 8,000 to 10,000 barrels per day (bbl/d) of oil and condensate in the late 1990's, and leveled off to around 400 bbl/d in recent years. In the medium-term, the East China Sea is not expected to become a significant supplier of oil.

Natural gas

EIA estimates that the East China Sea has between 1 and 2 trillion cubic feet (Tcf) in proven and probable natural gas reserves. The region may also have significant upside potential in terms of natural gas. Chinese sources point to as much as 250 Tcf in undiscovered gas resources, mostly in the Xihu/Okinawa trough.

CNOOC listed its East China Sea proved gas reserves at 300 billion cubic feet (Bcf) in 2011, according to an annual report. In 2012, an independent evaluation estimated probable reserves of 119 Bcf of natural gas in LS 36-1, a promising gas field north of Taiwan currently being developed as a joint venture between CNOOC and U.K. firm Primeline Petroleum Corp.

The uncontested Pinghu field began producing in 1998, reaching a peak of approximately 40 to 60 million cubic feet per day (Mmcf/d) in the mid-2000's and declining in recent years. Chinese companies discovered a large oil and gas field group in 1995 in the Xihu/Okinawa trough. Chunxiao/Shirabaka is the largest gas field in this group and is used on occasion to reference all fields in the area. China began producing at the contested Tianwaitian/Kashi field in 2006, claiming it as part of its Exclusive Economic Zone. According to industry sources, Tianwaitian/Kashi produced between 10 and 18 Mmcf/d in the past several years. China has not released production data from the Chunxiao/Shirabaka field, citing concerns about the regional dispute.

The Chinese government prioritizes boosting the share of natural gas as part of total energy consumption to alleviate high pollution from the country's heavy coal use. To that end, Chinese authorities intend to ramp up production and increase East China Sea gas to flow into the Yangtze River delta region, which includes Shanghai and Hangzhou, two large cities with growing gas demand. According to an industry source, gas from the East China Sea supplied approximately 12 percent of Zhejiang Province natural gas needs in the first half of 2012, though natural gas remains a small part of the region's total energy mix.

natural gas undiscovered recoverable resources 2012

Foreign ventures

Foreign energy companies have had mixed success in the East China Sea. In the 1990's, several foreign companies drilled a series of dry holes in uncontested waters. In 2003, Unocal and Royal Dutch Shell announced a joint venture (JV) with CNOOC and Sinopec to explore gas reserves in the Xihu/Okinawa trough. However, Unocal and Shell withdrew from exploration projects in late 2004, citing doubts over the commercial viability of developing energy resources in the disputed area.

Husky Oil China, a subsidiary of Canadian Husky Energy, holds an exploration block in East China Sea but has had more success in the South China Sea. Primeline Petroleum Corp. and CNOOC started joint development in the promising LS 36-1 gas field near Taiwan, with Primeline's subsidiaries assuming all exploration costs. The companies plan to build pipelines and a 42 Mmcf/d onshore processing terminal at Wenzhou to accept the future gas supplies from the LS 36-1 field.

In August 2012, CNOOC opened up three new offshore blocks for joint-development with foreign companies in the East China Sea but has not awarded any contracts to date.

East China Sea discoveries structures

Territorial issues

China and Japan have two separate, but interlinked disputes: where to demarcate the sea boundary between each country and how to assign sovereignty over the Daioyu/Senkaku Islands.
Despite multiple rounds of high-level negotiations between China and Japan, the two countries have thus far been unable to resolve territorial issues related to the East China Sea. Taiwan's claim parallels China's with regard to the islands, although Taiwan has not actively pursued resources in the region. Until these disputes are resolved, it is likely that the East China Sea will remain underexplored and its energy resources will not be fully developed.

Daioyu/Senkaku Islands

The Daioyu/Senkaku Islands consist of five uninhabited islets and three barren rocks. Approximately 120 nautical miles southwest of Okinawa, the islands are situated on a continental shelf with the Xihu/Okinawa trough to the south separating them from the nearby Ryukyu Islands.

Japan assumed control of Taiwan and the Daioyu/Senkaku islands after the Sino-Japanese War in 1895. Upon Japan's defeat in World War II, Japan returned Taiwan to China, but made no specific mention of the disputed islands in any subsequent document.

For several decades after 1945, the United States administered the islands as part of the post-war occupation of Okinawa. The islands generated little attention during this time, though U.S. oil companies conducted minimal exploration in the area. In 1969, a report by the UN Committee for Coordination of Joint Prospecting for Mineral Resources in Asian Offshore Areas (CCOP) indicated possible large hydrocarbon deposits in the waters around the Daioyu/Senkaku islands, reigniting interest in the area. Although China had not previously disputed Japanese claims, the PRC claimed the islands in May 1970 after Japan and Taiwan held talks on joint exploration of energy resources in the East China Sea. When the United States and Japan signed the Okinawa Reversion Treaty returning the disputed islands to Japanese control as part of the Okinawa islands, both the PRC and Taiwan challenged the treaty.

China claims the disputed land based on historic use of the islands as navigational aids. In addition, the government links the territory to the 1895 Shimonoseki Peace Treaty that removed Japanese claims to Taiwan and Chinese lands after World War II.

Japan claims that it incorporated the islands as vacant territory (terra nullius) in 1895 and points to continuous administration of the islands since that time as part of the Nansei Shoto island group. According to the Japanese, this makes ownership of the islands a separate issue from Taiwan and the Shimonoseki treaty. Japan cites the lack of Chinese demands on the area prior to 1970 as further validation for its claim.

Daioyu Senkaku Islands dispute map

Disputed maritime boundary in East China Sea

China and Japan apply two different approaches to demarcating the sea boundary in the East China Sea, both based on the UN Convention on the Law of the Sea (UNCLOS). Japan defines its boundary as the UNCLOS Exclusive Economic Zone (EEZ) extending westward from its southern Kyushyu island and Ryukyu islands. China defines its boundary using the UNCLOS principle of the natural extension of its continental shelf. The overlapping claims amount to nearly 81,000 square miles, an area slightly less than the state of Kansas. Japan has proposed a median line (a line drawn equidistant between both countries uncontested EEZs) as a means to resolve the issue, but China rejected that proposal.

Under UNCLOS, Article 121 (3), "Rocks which cannot sustain human habitation or economic life of their own shall have no exclusive economic zone or continental shelf". The Japanese have claimed that the disputed islands generate an EEZ and continental shelf. China has not taken an official position on the status of the Daioyu/Senkakus as rocks or islands.
Mediation efforts

China and Japan began holding bilateral talks over the East China Sea issues in October 2004, although Taiwan did not participate. Japan has repeatedly requested seismic data from China on Xihu/Okinawa trough fields and asked China to desist production until both sides reached an agreement. China has consistently rejected this claim, insisting that the trough and its associated fields are within its territorial sovereignty.

The two sides have considered joint development of the resources as a means of moving forward with energy exploration but have not yet agreed on what territory such a contract would cover. China has offered joint development of the gas fields north of the disputed islands, sidestepping the sovereignty issue. Japan offered joint development of the Chunxiao/Shirakaba gas field, sidestepping the sea boundary dispute. To date, neither side has accepted the other's offer.

In 2008, China and Japan agreed to explore jointly four gas fields in the East China Sea and halt development in other contested parts of the regions. Both sides agreed to conduct joint surveys, with equal investment in an area north of the Chunxiao/Shirakaba gas field and south of the Longjing/Asunaro gas field. However, China began to develop the Tianwaitian/Kashi gas field unilaterally, launching a protest from Japan in January 2009. In early 2010, Japan threatened to take China to the International Tribunal for the Law of the Sea if China began producing from the Chunxiao/Shirakaba gas field.

The Japanese government began to lease the islands from their private Japanese owners in 2002, sparking protest from China. In April 2012, Tokyo's governor proposed a plan to buy three of the five uninhabited islets from the owners, to the chagrin of the Chinese. The Japanese government officially announced a deal to purchase the islands in September 2012, prompting a wave of protests throughout China and further escalating tensions in the sea.
Other regional actors

The PRC and Taiwan have strengthened their energy relationship in the East China Sea through a joint venture (JV) between Taiwan's CPC and China's CNOOC. In September 2009, the JV drilled a second well in what was previously a contested area between China and Taiwan. Both sides have been contributing to exploration and production activities in the Taiwan Strait, although no major fields have been discovered in the Tainan Basin.

South Korea has signed a provisional agreement with Japan outlining the Korean/Japanese border but has not reached a similar agreement with China. South Korea makes no claims on the disputed area of the East China Sea.

In early September 2012, U.S. Secretary of State Hillary Clinton visited China to meet with Chinese leaders on the issues of disputed territory in the East and South China Seas. The United States has not taken an official position on the issue and has urged both sides to reach a peaceful settlement.

Thursday, October 4, 2012

Oil millionaires of North Dakota

Take Robert Western, a farmer who was dressed in rumpled overalls and a baseball cap as he sipped coffee and discussed the oil boom that has transformed this once sleepy town.

"Some of the younger people buy a lot more - machinery, vehicles, things like that," said the 75-year-old Western. "The rest of us, I guess it doesn't alter our lifestyle a great deal. I don't have a lot of needs."

After he left, his friend Earl Rogstad remarked to a visitor: "It's too bad Robert didn't have his airplane ready... He offered last summer to fly me over and see (the oil wells) from the air."

Western did not mention that he is co-owner of a Piper single engine propeller plane, according to FAA records. He did admit to receiving oil royalties from wells on his farm but locals said he is far from the richest man in town. It is not clear whether Western is a millionaire or merely wealthy.

"You can't tell the average Joe farmer from the average Joe millionaire," said Ward Heidbreder, Stanley city coordinator.

Average income in Mountrail County, the hub of the North Dakota oil production boom, roughly doubled in five years to $52,027 per person in 2010, ranking it in the richest 100 U.S. counties on that basis including New York City, and Marin, California.

The boom could be creating up to 2,000 millionaires a year in North Dakota, said Bruce Gjovig, founder of the Center for Innovation at the University of North Dakota.

Many oil region residents receive $50,000 or $60,000 a month in oil royalties and some more than $100,000, said David Unkenholz, a senior trust officer at First International Bank & Trust in Watford City, the seat of McKenzie County, which is the No. 2 oil producing county in the state behind Mountrail.

The oil is so plentiful that in Stanley, where the population has about doubled to 3,200 in the last five years, a well drilled under the town means that many homeowners could receive a small oil royalty check.

A lot of North Dakota's new wealthy simply stash the cash in savings and checking accounts with "ridiculously large" balances, banker Unkenholz said.

The monster homes, ostentatious diamond rings or luxury sports cars of California and New York are virtually nonexistent in North Dakota. Looking for wealth here is a subtle exercise.

Locals point to pickup trucks. The boom has boosted truck sales decked out with extras at Stanley's Ford dealer, Prairie Motors Inc, co-owner Gary Evans said.

"They are a lot more elaborate, a lot more loaded up than what they used to be, even the accessories," Evans said. "There is a big demand for accessorizing a pickup truck - everything from running boards to grill guards to chrome wheels."

Evans, 66, a part owner of the dealership since 1970 and manager of the services business, said most residents have not changed their buying habits, especially those over 50.

"Some of these people you could look at and you don't even know if they have an oil well or not, and they may have several," said Evans, who grew up on a family farm west of Stanley and also has some mineral acres.


One reason rich locals do not brag about their money is because some residents do not own precious mineral rights to the land and have missed out on the boom. Land and mineral rights can be separated and sold in North Dakota and often are.

Royalties are paid based on oil produced and sold mainly in sections of land of one or two square miles in size. The owner of the mineral rights receives the royalties. It can be a complex exercise to divide rights among multiple land heirs.

In simple terms, a well producing 100 barrels of oil per day sold at $80 a barrel would generate $248,000 in a 31-day month. The state collects taxes on extraction and production of about 11.5 percent. From there, if the rights holders have one-fifth royalties, they would receive $43,896 a month.

In July, North Dakota wells produced an average of 92 barrels per day but some produced more than 10,000 barrels in a month, a windfall for the royalty owners.

Some of that money has gone to area churches in the form of anonymous donations and some to the schools for technology, said Heidbreder, the city coordinator.

It's not just land owners who are benefiting from the boom. Oil has also brought high-paying jobs, and some of that money filters through to local businesses.

So-called man camps have sprung up in North Dakota, where oil workers live in makeshift dormitories.

At a man camp in Williston run by workforce housing provider Target Logistics, the 26 kitchen staff, all from outside the state, work 84 hours a week for six straight weeks, then take two weeks off, executive chef Jason Freeman said.

Target Logistics has several man camps in western North Dakota, including a hotel and cabins at Stanley, mainly for energy employees. Its camp in Williston, the largest area town, looks like a military base with room for about 800 workers, a huge cafeteria, weight room, lounge and other facilities.

"This is a thriving economy. This doesn't exist anywhere else," said Freeman, who lives in central Minnesota.

There are downsides to the oil rush. Crime reports are up in Stanley, even if not as much as the population. Aggravated assault reports rose 55 percent last year in the oil producing counties, according to state figures.

Gayleen Grote, who lives on a family farm north of Tioga in the oil patch, said she has a permit to carry a concealed weapon and sometimes puts a semiautomatic pistol in a bra holster.

"There is a lot of testosterone," said Grote, adding that though she has never had to get aggressive, male drivers have stopped several times while she was walking by herself on area roads. "There is nothing to do but drink," she said.