The National Interest offers an “end of the world as we know it” scenario for a potential Trump Administration/China clash: “$5 Trillion Meltdown: What If China Shuts Down the South China Sea?” (July 16, 2016) Rex Tillerson’s Senate confirmation remarks, reported in “Rex Tillerson’s South China Sea Remarks Foreshadow Possible Foreign Policy Crisis” (New York Times, January 12, 2017) called for the US to get tough with China’s bases on South China Sea islands.
Mr. Tillerson told members of the Senate Foreign Relations Committee on Wednesday that China’s multibillion-dollar island-building campaign in the oil-and-gas rich sea was illegal and “akin to Russia’s taking of Crimea.”
“We’re going to have to send China a clear signal that, first, the island-building stops,” Mr. Tillerson told the senators. “And second, your access to those islands also is not going to be allowed.”
But concern about oil and gas under the South China Sea is misguided. The key South China Sea issues are shipping and fishing. Future oil and gas should be considered a distant third.
Since 2014, billions of dollars have been lost by around the world in deep sea oil and gas projects (“15 [oil] companies lost $21.7 billion in 2014“). Exploration and drilling projects started before mid-2014 expected $75 to $100 a barrel oil and similarly high natural gas prices. Oil was $114 a barrel in June, 2014, but dropped below $50 and has stayed in the $40-$60 range since.
Surging oil from US shale drilling, increased oil from Saudi Arabia, Iraq, and Russia, as well as in returning Iran, all have production costs well below future undersea oil. Even without political risks, oil from under the South China Sea is less and less likely or relevant. Before the shale boom, the Chinese government believed oil shortages a key national defense issue. But that was ten years ago, when no one expected vast new oil and gas production from horizontal drilling through U.S. shale deposits.
Shale has another advantage over undersea drilling: fast and lower start-up costs. A proposed project to discover and drill oil or natural gas from under the South China Sea would cost billions and take perhaps a decade to bring oil to market. Advocates for such a project need the money now but won’t have revenue for ten years. New shale well proposals can raise funds and start drilling in a few months. Plus hundreds of already drilled wells are capped and just waiting for higher oil prices (see: “Hoping for a Price Surge, Oil Companies Keep Wells in Reserve” (New York Times, December 25, 2015).
Maybe some day oil and natural gas from the new “Saudi Arabia” under the South China Sea will be able to compete in world markets, but that day seems far, far in the future.
Shipping and South China Sea fisheries though, are still very important. China needs the sea lanes to stay open for its imports and exports. The National Interest story (above), suggests China could block the sea lanes, forcing expensive diversion for energy and other shipping headed for Taiwan, South Korea, and Japan:
…two-thirds of South Korea’s energy supplies, nearly 60 percent of Japan’s and Taiwan’s, and 80 percent of China’s crude oil imports flow through the South China Sea.
However, any Chinese action that threatens the South Korean, Taiwanese, or Japanese economy also threatens Chinese workers and companies. See, for example, “A bridge over troubled waters: Taiwan, Japan and South Korea employ huge numbers of mainland Chinese” (The Economist, November 8th 2014):
88,000 firms from Taiwan employ 15.6m Chinese workers. About 11m are employed at 23,000 Japanese firms or their suppliers. Throw in 2m more workers for South Korean enterprises, and companies from around the troubled East China Sea have approaching 30m Chinese on their payrolls.
Tens of millions more in China work for suppliers to firms based in South Korea, Taiwan, and Japan. Plus Chinese firms are investing heavily in South Korea. See, for example: “China shovels investment into South Korea — entertainment, real estate big takers” (Asia Times, April 20, 2016).
Strong economic ties between China, South Korea, Taiwan, Singapore, and Japan serve as a counterbalance to nationalistic urges and a history of conflicts. Chinese action to restrict shipping over the South China Sea would be economically and politically destabilizing, and I think as unlikely as major oil and gas production from under the South China Sea.
But under these shipping lanes are the vast fisheries, which have collapsed due to overfishing. The good news is that South China Seas fisheries can be restored drawing from successful fisheries restoration and management in New Zealand, Australia, and other world fisheries.
“Follow the Fish: Considering Options in the South China Sea,” (Marine Awareness Project, November 7, 2016), explains the role of regional fisheries agreements to complement the Exclusive Economic Zones (EEZs) of international law:
The second, and less-noticed, level is the regional one—that is, formulating and implementing regionally agreed-upon standards outside the established EEZ or territorial sea boundaries of littoral states. After all, fish are the only sovereign resources that stubbornly move between and among jurisdictions. To ensure that migrating species are not fished down to zero in regional high seas (so that there will be some fish left to swim into EEZs), UNCLOS encourages signatories to develop management measures in areas beyond an EEZ’s jurisdiction.
Wall Street Journal overview (July 19, 2016): “5 Things About Fishing in the South China Sea“:
• Fish stocks in the South China Sea have fallen 70% to 95% from 1950s levels,
• Fish caught in the South China Sea account for about 12% of the global annual catch.
• Chinese fishing fleets significantly outnumber those from other claimant countries in the South China Sea
• An average person in Southeast Asia and China consumes about 24.2 kilograms of fish a year… The average annual consumption of seafood in the U.S. was just 6.5 kilograms in 2012
• The ruling from the U.N. Permanent Court of Arbitration effectively demolished China’s claim to the vast majority of the South China Sea.
However, regional fisheries agreements based on top-down planning lack the institutional strength of quota-based systems like catch shares or TURFs.
Catch shares, mentioned above, offer an alternative path to restore and manage endangered fisheries. The Environmental Defense Fund’s Fisheries Solutions Center reports:
As of 2013, nearly 200 rights-based management programs exist worldwide, affecting more than 500 different species in 40 countries.
Debaters of the ocean policy topic should be familiar with EDF and the success of catch shares systems in restoring fisheries.
The Fisheries Solutions Center lists Shiyin Chen as Asia-Pacific Legal Fellow :
Shiyin assesses fisheries laws and policies and their implementations in Asian countries, particularly in China, and analyzes the possibility of using market-based approaches to achieve sustainability. She helps the Oceans Program launch fishing rights programs in China to reverse the decline of fish stocks and restore marine biodiversity.
For more on catch shares, see, “Catch Shares Around the World” (PERC), reporting on EDF report:
The Environmental Defense Fund has published a map of all catch share programs around the world. According to the infographic (click to enlarge), as of 2010 there were 275 catch share programs in effect worldwide, affecting 850 different species.
New Zealand and Australia lead the world in rights-based fisheries, with 117 and 111 species under catch share management respectively. Canada, Chile, and the United States are also among the top five in species protected. Perhaps surprisingly, rights-based fisheries exist in countries ranging from Namibia (8 species) to Papua New Guinea (13 species). See the accompanying searchable database of catch share systems around the world.
This Izzit.org video, Sustainable Oceans & Seas reviews the history and economic principles behind New Zealand’s recovery from collapsed fisheries 30 years ago. How to implement similar reforms to the contested South China Sea is a challenge.
Sustainable Oceans & Seas – Full Video from izzit.org on Vimeo.