The South China Sea (24 page)

By January 2007 a few promising prospects had been identified, so a second phase of more detailed surveying was mooted. The Foreign Ministry was opposed and it wasn't until June that the President granted permission for Phase 2. Around the same time GMA was engulfed by a wave of corruption allegations involving her, her husband, the head of the Electoral Commission and projects funded by Chinese aid. Nonetheless, Phase 2 went ahead, gathering more detailed information about specific areas of the seabed. Plans were made for Phase 3: lining up locations for exploratory drilling. But then, in January 2008, the veteran journalist Barry Wain wrote an article for the
Far Eastern Economic Review
accusing GMA's government of making ‘breathtaking concessions’ in the JMSU and criticising its secret terms and conditions.
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The article was seized upon by the growing army of GMA's critics and the JMSU became tarred by its association with China and corruption-tainted infrastructure projects.

As the allegations widened and the infighting worsened, the architects of the JMSU were pushed out. Manalac had continued his efforts to clean up the Philippine oil sector by cutting the cosy ties between local energy companies and the Ministry of Energy. He defied GMA by awarding an unrelated oil contract to the Malaysian company Mitra, rather than to one linked to her husband. Fed up with the ongoing corruption, he resigned from the Philippine National Oil Company in November
2006. De Venecia was deposed as speaker in February 2008 after his son accused GMA's husband of corruption over a Chinese-funded broadband infrastructure project. The JMSU agreement was dead in the water, the possibility of any renewal hopelessly lost amid the soap opera that passes for politics in the Philippines. It expired on 1 July 2008 with no-one in power prepared to argue for its renewal.

Manalac still regards the Joint Marine Seismic Undertaking as a success: it had allowed the Philippine National Oil Company to share costs on a survey it wanted to run anyway and without the risk of confrontation on the high seas. From China's perspective the success was partial. For the first time two ASEAN governments had ‘put aside the question of sovereignty’ and demonstrated a model of joint development. Once again, however, Southeast Asian opposition had thwarted the chances of CNOOC actually delivering any oil. It's not clear that permission for Phase 3 of the JMSU would ever have been granted.

Instead, other governments continued to ignore Li Peng's offer and lease out blocks to international companies inside the ‘U-shaped line’ on their own terms. But over the period of the JMSU, China's rocketing economic growth had begun to give it greater influence. If the JMSU was a Chinese carrot to promote joint development in the South China Sea, Beijing now had a stick to wield against companies that refused to comply.

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The centre of Vietnam's hydrocarbon industry is the city of Vung Tau on the country's southeastern coast. Once a French colonial resort, its grandeur has surrendered to industrial grit. One side of the long peninsula is a playground for Russian engineers with stout bellies and tiny swimming trunks. The other, facing the estuary, is dominated by storage tanks and welding yards. Between them lies a strip of unremarkable tower blocks and the optimistically named Grand Hotel where, on 4 June 2007, BP Vietnam formally welcomed its new director-general: Gretchen H. Watkins. Watkins had started out as an engineer with Amoco and, after the company was taken over by BP, moved through posts in London, the Netherlands and Canada. Young and ambitious, she now had a chance to prove herself on a
wild frontier. What she didn't know was that her ultimate boss, BP's Chief Executive Tony Hayward, had already killed her chances. She would spend a year learning the hard way about the perils of trying to operate in the waters she could see from the Grand Hotel's windows.

BP had been in Vietnam since 1989 but had taken a decade to become one of the few international companies making good money there. In 2002 its
Lan Tay
platform in Block 6.1, which was 362 kilometres offshore, started pumping gas down the world's longest underwater pipeline to a power station up the estuary from the Grand Hotel. In 2006 BP's gas was generating over a third of Vietnam's electricity and there was more to come because the company had rights over two other exploration blocks. BP had sat on the blocks for years, waiting to be convinced that Vietnam's economy could generate sufficient demand to make it worth expanding the production of electricity, and therefore gas. In early 2007, with the country freshly enrolled as a member of the World Trade Organisation and big-name investors flooding in, BP was ready to commit. On 6 March it announced plans to develop two new gas fields in Block 5.2 and either link them to its existing pipeline or build another. A second power station would be built onshore to turn the gas into more electricity for the country and more cash for BP. The timescale was left vague but BP's partner PetroVietnam suggested the gas might come on-stream in 2011.

At around the same time, the Chinese ambassador to Australia, Madame Fu Ying, was making her own plans, preparing to move to a new post in London. Madame Fu had a bit of history with BP. In 2000, when BP announced its plans to develop Block 6.1, she had been director-general of the Department of Asian Affairs at the Chinese Foreign Ministry. According to a senior BP insider, she had made very strong representations to BP's management in Beijing and Southeast Asia demanding the company stop the project because it was infringing upon China's territorial claim. At the time, BP's CEO was John Browne, a veteran of many frontier battles. He simply shrugged off Madame Fu's objections and the project continued. But on 1 May 2007, Browne resigned from BP after a personal scandal and his place was taken by Tony Hayward.

Madame Fu arrived in London on 10 April, the same day that Beijing opened hostilities in a new battle with BP. In response to a planted question from a Chinese state TV journalist about the new gas project, the
Chinese Foreign Ministry spokesman Qin Gang declared, ‘Vietnam's new actions [are] illegal and invalid … not beneficial to the stability of the South China Sea area’. Strangely, the block that Beijing was now taking exception to – Block 5.2 – was actually closer to the Vietnamese coast than BP's existing operation in Block 6.1. No matter: it was an opportunity for Madame Fu to have her revenge. One of the first things she did after unpacking in London was to request a meeting with the freshly installed Tony Hayward. The company had a good idea what was coming and called its top managers in Vietnam to London to prepare for the discussions. They outlined a robust case for BP to continue the project and then left matters to Hayward and his team.

By 2007, BP was one of the biggest foreign investors in China. Its $4.2 billion portfolio included stakes in petrochemical plants, offshore gas production, 800 petrol stations, a 30 per cent stake in the country's first liquefied natural gas terminal and several other businesses. Madame Fu knew this very well and on 18 May 2007 she made use of it in her meetings at BP's headquarters. She outlined her objections to BP's operations in the disputed waters and then, according to an insider, gave two specific warnings: firstly, that if the company went ahead in Block 5.2 the Chinese authorities would reconsider all the contracts they had awarded to BP, and, secondly, that China could not guarantee the safety of any BP staff working in the disputed area. It appeared to be a blunt threat to both the company's commercial life and to the lives of its employees involved in exploration and production. Lacking his predecessor's experience with roughhouse regimes, Hayward was taken aback. He made a deal with Fu – BP would continue to operate Block 6.1 but would suspend operations in Block 5.2. Fu had her revenge.

This was the mess that Gretchen Watkins inherited when she arrived in Vung Tau two weeks later. BP had signed contracts with PetroVietnam (acting for the Vietnamese government) and the American company ConocoPhillips committing it to survey and exploration work in Block 5.2. It appears from US diplomatic cables released by Wikileaks that BP didn't tell its partners of Hayward's commitment to Madame Fu until 8 June, when the company cancelled its work plan for 2007. Neither ConocoPhillips nor PetroVietnam was willing to let BP off the hook though. Watkins found herself out of her depth in the middle of a legal and geopolitical storm. On
13 June, news leaked that BP had suspended its planned seismic survey and over the following two days the American ambassador in Hanoi, Michael Marine, was visited by both his British counterpart and ConocoPhillips. In his account of the meetings (published by Wikileaks), ConocoPhillips complained that PetroVietnam was demanding that it fulfil their work contract despite BP's suspension. The British ambassador, Robert Gordon, told him that the UK was despatching a senior Foreign Office official for talks with the Vietnamese government.
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With BP having caved in to Chinese pressure, ConocoPhillips had little choice but to follow. It had smaller but still significant business interests in China, including the Xijiang field south of Hong Kong and the Peng Lai development in Bohai Bay. Scenting victory, Beijing widened the campaign. The same month, the Ministry of Foreign Affairs complained to the Japanese government about the activities of a consortium including Idemitsu, Nippon Oil and Teikoku Oil which was planning seismic survey work in Blocks 5.1b and 5.1c (next to BP's blocks). According to an account by the US ambassador in Tokyo released by Wikileaks, the Japanese government chose not to push the issue with Beijing and in July the Japanese consortium suspended its plans.
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In early August 2007, executives from Chevron were summoned to the Chinese embassy in Washington DC and told to stop their company's exploration work in Vietnam's Block 122. The message was repeated more forcefully at another meeting in Beijing the following week. The demand was, on the face of it, outrageous. Block 122 lies immediately off the Vietnamese coast and firmly on its continental shelf. However, Chevron had just signed a very large agreement with PetroChina for a gas concession in Sichuan Province and had a lot to lose. It had suspended operations in Block 122 before the end of the month.
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On 8 September, the Chinese consulate in Houston sent another oil company, Pogo, a letter telling them to stop work in Block 124, 50 kilometres south of Block 122.

Madame Fu was clearly very happy with BP because, on 31 August 2007, she made a special trip to the company's Wytch Farm onshore oil production site in southern England where she suggested that ‘both sides could make more exchanges and cooperation’. Unusually for a visit to Dorset, her host was BP's Head of Asia Pacific, John Hughes. He made special mention of BP's hopes ‘to carry out strategic cooperation with major
Chinese petroleum companies’.
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But Beijing hadn't finished with BP. The next step was to try to use the company to manoeuvre the Vietnamese government into conceding sovereignty. According to a senior BP insider, the Chinese government ‘suggested’ the company facilitate discussions between the China National Offshore Oil Company (CNOOC) and PetroVietnam about joint development of Block 5.2 and its neighbour, Block 5.3. CNOOC's motives combined profit and politics: its president, Fu Chengyu, was known to have higher ambitions. CNOOC's head office in Beijing directly faces Fu Ying's employer, the Foreign Ministry, across the Chaoyangmen Road intersection. In 2007 and 2008, the Fu–Fu axis appeared to be two faces of the same policy.

This was actually the second time that CNOOC had compelled BP to play Cupid: there had been a previous attempt in 2003. Then, BP had introduced CNOOC to PetroVietnam and backed away. PetroVietnam had politely entertained some general discussions for a few months until it finally made plain that CNOOC was welcome to become a commercial partner but there was no way it was going to become the joint administrator of Vietnam's oil blocks. When CNOOC returned to the fray in 2007, Mr Fu had something more specific in mind: a stake in blocks 5.2 and 5.3. Just like the deal that Randall Thompson had proposed on behalf of Crestone 15 years before, it would have been a working arrangement that – under the cover of ‘joint development’ – would have implicitly recognised Chinese sovereign rights to the resources within the disputed territory. And this time BP wasn't going to be allowed to wash its hands of the discussions. It was going to be used, in effect, as an arm of Chinese foreign policy.

BP's senior management in London under Tony Hayward appears to have been blind to the history and geopolitics of the situation it now found itself in. The company continued to act on the basis that this could be just another joint venture, that CNOOC could be bought off with a commercial deal and that the sovereignty dispute could be left for the governments to handle. It didn't seem to realise that it
was
the sovereignty dispute. For more than a year Gretchen Watkins and other executives shuttled between Hanoi and Beijing passing messages between the two state oil companies. BP offered to develop projects in new areas, projects with reciprocal benefits for both sides, and convinced itself that a deal was on the cards. BP
even changed Watkins’ job title to Director-General for BP Vietnam and China Exploration and Production. Unsurprisingly there was no progress. Vietnam wouldn't budge on sovereignty and CNOOC wasn't interested in a commercial deal. But it took several months before Hayward and his team finally understood. They were much more interested in the huge prospects opening up in the Gulf of Mexico. For them, Southeast Asia was a sideshow.

Watkins and BP's regional management tried to find a way out. They knew they could not meet their contractual obligation to complete seismic surveys by the end of 2008. Instead, early in that year, BP and ConocoPhillips quietly turned over the operatorship of Blocks 5.2 and 5.3 to PetroVietnam. They continued to own the rights to the blocks but this arrangement meant they could avoid sending their own ships into the disputed waters. On 13 May 2008, Watkins briefed the newly appointed US ambassador to Hanoi, Michael Michalak, about the arrangements, telling him that BP and ConocoPhillips had no plans to tell the Chinese government about the change of operator.
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Two weeks later the most powerful politician in Vietnam, Communist Party General Secretary Nong Duc Manh, visited Beijing for three days of talks. Accompanying him was the Chairman of PetroVietnam who held private discussions with Chairman Fu of CNOOC. Fu later visited Hanoi for talks with PetroVietnam but there was still no breakthrough. News of PetroVietnam's survey did leak out in July but the Chinese seemed too preoccupied by the impending Beijing Olympics to take any action.
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