The South China Sea (22 page)

These discussions were ignored in Southeast Asia. China was far away and lacked the means and expertise to develop anything more than a few miles from its shores. When Li Peng proposed joint development in the Spratlys, it was interpreted as empty posturing. Opinions would change. There was more to Deng's policy than simply postponing disagreements. Its full formulation had three elements: ‘sovereignty is ours, set aside disputes, pursue joint development’, of which the first was most significant. It meant, in effect, that any other country wanting to develop maritime resources within the ‘U-shaped line’ would either have to recognise Beijing's territorial claims or directly challenge Beijing's physical presence. Since none would recognise Chinese sovereignty, Li Peng's Singapore declaration has become the basis for the current disputes.

Until that moment, Beijing's interest appeared to be confined to the islands and reefs it had occupied in 1974 and 1987–8. After 1990 it became clear that many interest groups in Beijing wanted to enforce the ‘sovereignty is ours’ doctrine throughout the entire area within the U-shaped line. Chief among them was the China National Offshore Oil Company, CNOOC. But the person who pushed CNOOC to make its first move was an American.

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In 1992, a man from Colorado changed the game in the South China Sea by perfecting the art of modern alchemy: turning nothing into gold. He rewrote the rules of Southeast Asian oil prospecting, brought two countries to the edge of conflict and walked away with several million dollars. In the process, China made plain for the first time that its ‘U-shaped line’ claim wasn't just a historical relic but a statement of future intent and its neighbours came to learn that China's quest for energy security would threaten their own. But the story of Southeast Asia's resource wars has an unlikely beginning. It starts in 1969 with a young man walking several miles to the Denver Country Club to be interviewed for a golf caddy scholarship.

Randall C. Thompson's parents had divorced and neither could afford a car so Thompson made his own way to the interview. He flunked it, but one of the panel, impressed by the young man's grit, persuaded his colleagues to send him to the University of Colorado anyway, to study political science. The benefactor was Sonny Brinkerhoff, from the family that owned the Brinkerhoff Drilling Company. The following summer Brinkerhoff offered the 50 scholarship winners work on his oil wells in Wyoming; Thompson was the only one who applied. He liked the work and laboured for Brinkerhoff the next summer too. The summer after that, he graduated and went to see Brinkerhoff again. By the end of the day Thompson had a job as a landman with Amoco Corporation – searching out likely-looking oil prospects and negotiating the exploration rights.

Thompson learned the trade for six years and then moved on, got fired, quit another job, got fired again and quit a fifth job. He wasn't enjoying working for other people so, in 1980, he went back to see Sonny Brinkerhoff. He walked out of Brinkerhoff's office at the age of 31 with the rights to $1 million worth of oil-producing properties: Crestone Energy was born. It wasn't easy. With oil prices per barrel in the low teens, Crestone was just breaking even. But in 1989, Thompson took a call that would change his life. Edward Durkee was another Colorado oilman and one of the original 30 investors in Crestone. By 1989 he was working for the Swedish company Lundin Oil, which was looking to offload its interests in the Philippines. Durkee told Thompson it was a sure thing: ‘Come here now or I'll never talk to you again.’ The following day Thompson and his lawyer were on a plane to Manila.

Durkee lined everything up. Nine days later, on 4 September 1989, Crestone bought Lundin's exploration licence and immediately sold a 40 per cent stake in it to a consortium of seven Philippine companies. Thompson left Manila with a briefcase full of cash. Crestone now owned a majority stake in an exploration block, GSEC 54, off the island of Palawan. It covered about one and a half million hectares: from the existing Philippine fields all the way to the border with Malaysia. Crestone and its partners went over the old seismic data, searching for evidence of recoverable oil. It looked good. Just seven months later, in April 1990, they sold a 70 per cent stake in the block to British Petroleum (BP) for a few million dollars. Crestone had another briefcase full of cash. A year later, in April 1991, BP did find oil, but not in commercial quantities and a year after that it abandoned the Philippines altogether, returning the rights to Crestone's consortium. In oil industry terms there was nothing there, but Thompson had successfully turned it into gold anyway.

More importantly for the region, Thompson had discovered the South China Sea. At the party after the BP signing, in the home of the British ambassador to Manila, the beer flowed and tongues loosened. ‘Alcohol was talking when it should have been confidential,’ Thompson recalls, ‘and everybody said Vietnam is going to be hot and the BP guys said, in so many words, it's the deep water in the Nansha islands.
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The next day I went to the library to find out where the Nansha islands were.’ In 1990 Vietnam was off-limits to American oil companies because the wartime US trade embargo was still in place. BP and some other European companies had started sniffing around but the only people actually pumping oil there were the Russians. Memories of a brief oil boom in the dying months of the Vietnam War lingered and that was all the incentive Thompson needed. He spent three weeks after the ambassador's reception scouring geological records and old surveys. He eventually settled on a patch of seabed between the Vietnamese coast and Vietnamese-occupied Spratly Island encompassing the Prince Consort Bank and the Vanguard Bank. But rather than head to Vietnam, Thompson learned all about the ‘U-shaped line’ and set his hopes on China instead.

In April 1991 Thompson travelled to the South China Sea Institute of Oceanography in Guangzhou to examine the seismic surveys that had been loudly trumpeted a few years before. ‘They showed me some
structures, I got excited about it and then I did some more research.’ He pressed flesh and hosted dinners, trying to persuade the Chinese to take Crestone seriously until, in February 1992, after much deliberation at the highest levels in Beijing, he finally got to pitch his proposal to the board of CNOOC. Thompson took two advisors to precisely define the patch of seabed he wanted the rights to: his original mentor Ed Durkee and Daniel J. Dzurek, the former Chief of the Boundary Division of the US Department of State. The shape of the block they drew resembled a pistol with the handgrip pointing south and the barrel pointing east. The strange perimeter managed to include the likely oil prospects while touching, but not going over, the Indonesian, Malaysian and Brunei claim lines in four places. ‘I took Ed Durkee to outline the block from a technical standpoint and Dan Dzurek to outline it from a political standpoint. We took great care to not get into Philippine waters, or Indonesian, Malaysian or Brunei waters,’ Thompson remembers. If his block looked like a weapon, it was aimed only at the Vietnamese.

The same month that Thompson pitched his idea to CNOOC, the Chinese National People's Congress approved a ‘Law concerning Territorial Waters and Adjacent Regions’. The Law formalised China's 1958 ‘Declaration on the Territorial Sea’ (see Chapter 4), thereby claiming the Macclesfield Bank, the Paracels and the Spratlys and creating the legal basis – at least in Beijing's eyes – to lease out exploration blocks far from the mainland. The piece of seabed that interested Thompson was just 250 kilometres off the Vietnamese coast and more than 1,000 kilometres from the beaches of China. The audacity was breath-taking; even CNOOC was out of its depth – technically and politically. Thompson says he had to encourage CNOOC to give him the rights without a general auction, warning its executives that publicity would only cause problems with the Vietnamese.
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At this point Crestone had four employees: Thompson, a secretary, a receptionist and a part-time accountant. In the end he got his deal. CNOOC awarded one of the smallest oil companies in the world the rights to a huge area of sea: 25,155 square kilometres. It cost Crestone just $50,000. The Chinese called the exploration block ‘Wan An Bei-21’ (WAB-21). Under the deal, CNOOC would provide its existing geophysical data and retain the right to buy 51 per cent of the lease at a later date if it should prove
profitable. Crestone would undertake more seismic surveying and cover the development costs. For the Chinese political leadership, Thompson was a dream come true. Here was a man, an American man, willing to physically assert China's territorial claim off the Vietnamese coast. Crestone would take all the flak while CNOOC could sit back and watch.

Thompson was bullish about the prospects and nonchalant about the political risk. When Crestone signed the lease on 8 May 1992, he told journalists he believed there was ‘way in excess of 1.5 billion barrels of oil’ in the block and that he would ‘rather look for oil and gas in an area with high potential, low technical risk and bad politics than the other way round’. He was also happy with a pledge by the Chinese authorities of their ‘full naval might’ to defend his claim, if it came to a confrontation with the Vietnamese. The United States government kept clear. An American diplomat had attended the signing ceremony in Beijing but the embassy denied any involvement in Crestone's negotiations. Indeed, Thompson says that in the days after the signing both the US State Department and the CIA called him to try and find out what he was up to. The State Department in particular was concerned – warning Thompson to keep American personnel and equipment out of the block because of the risk of seizure by the Vietnamese.
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Because of the political sensitivity, Thompson could take his time: Crestone was not obliged to drill any wells for seven years. Meanwhile, the Vietnamese vented their anger, lodging official protests with the Chinese government and printing condemnatory newspaper articles. A verbal war continued for a year and a half. All the time Crestone continued its preparatory work. Then, in December 1993, Thompson was invited for talks in Hanoi with Dr Ho Si Thoang, the chairman of Vietnam's state-owned oil company, PetroVietnam. He was offered a deal: a joint venture, but only if he cancelled his existing agreement with CNOOC. Thompson declined, and the Vietnamese became even angrier. They prepared to deploy much bigger allies than Crestone.

For a few years American companies had been busy trying to line up deals in Vietnam. Among them was Mobil – itching to return to a prospect it had first identified just before the collapse of South Vietnam in 1975: an area it called ‘Blue Dragon’ inside what the Vietnamese, more mundanely, called Block 5.1b. Although it didn't overlap WAB-21, it was within the
‘U-shaped line’. At the same time, PetroVietnam was also negotiating with another big American company, Conoco, about Blocks 133, 134 and 135 that definitely did overlap WAB-21. Nearby, Atlantic Richfield and British Gas were about to start drilling in another Vietnamese block claimed by China.
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None, however, appeared concerned about the risk of alienating Beijing. On 3 February 1994 the day these companies had been waiting for arrived: the United States formally lifted its trade embargo on Vietnam and they rushed to sign contracts.

Crestone, however, was determined to be first to physically stake its claim. By April 1994, Thompson's friends in the South China Sea Institute of Oceanography were ready to go. The institute had been given the funding and the green light from Beijing to undertake a new round of seismic survey work in the northern part of the sea. Thompson persuaded them to change location – and head to WAB-21. As Mobil and its Japanese partners prepared to formally sign the Blue Dragon deal with PetroVietnam, Thompson and the institute were hard at work out at sea. On Tuesday 19 April, as the signing went ahead in the Military Guest House in Hanoi, Crestone announced it had begun seismic survey work in WAB-21 and was planning to drill its first exploratory wells, ‘with China's full support’.
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Mobil clearly didn't take Crestone's activities seriously: at least not seriously enough to prevent it (and its Japanese partners) handing over $27 million for the rights to its block. According to Mobil's then communications manager, R. Thomas Collins, however, PetroVietnam specifically asked the company to announce that it was returning to an area it had previously explored under a licence from the previous South Vietnamese government in order to bolster its territorial claim.
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Out at sea, things were about to get rough.

The Chinese ship never finished its survey. According to Thompson, after four days gathering data, three Vietnamese naval vessels appeared and fired across its bow. ‘I was on a Chinese boat where no-one spoke English, being fired at by a Vietnamese boat where no-one spoke English,’ he recalls. After a two-day standoff, Thompson and the ship's captain decided there was no point continuing and headed back to Guangzhou. Despite its earlier promises of full support, the Chinese Navy didn't show up. ‘They didn't want a confrontation,’ says Thompson. But Beijing was just biding its time.

Immediately after the Chinese had retreated, PetroVietnam rushed to assert its claim to the same piece of sea. On 17 May 1994, the
Tam Dao
, a drilling rig belonging to its Russian joint venture, VietSovPetro, moved onto the Vanguard Bank. This area, Block 135 to the Vietnamese, was the one Conoco was intending to lease, although it lay inside the southwestern corner of Crestone's WAB-21.
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Now it was time for the Chinese to move. They deployed two ships but made no attempt to evict the rig. Instead they laid siege: blocking supplies of drilling mud and food. Details of what happened are sketchy but the rig's crew stuck out the siege for several weeks. According to Ian Cross, at the time a consultant with Integrated Exploration and Development Services in Singapore, they drilled down to about 3,000 metres but found no oil. According to Thompson, ‘they didn't know what they were doing, the rig wasn't properly positioned. They just went to demonstrate sovereignty.’ Certainly VietSovPetro never made any public announcement about what it found.