Economic Importance of South China Sea, A 5 Trillion Dollar Question

The South China Sea has been a source of tensions between several East Asian countries for decades. The fears are growing that the area will become a flashpoint, with potentially serious global consequences since the rivalry between China and the United States, which apparently backs its ‘ally’ the Philippines, is on the rise. The ruling from the International Tribunal for the Law of the Sea, based in The Hague, led  to the escalation of tensions with both countries conducting military training exercises in the region, yet China is not ready to back down from claiming the territory as its own.

The South China Sea channels a third of the world’s shipping and is rich with islands, fisheries, oil and gas deposits. Although it is disputed between China and other Southeast Asian states — Taiwan, Vietnam, the Philippines, Indonesia, Malaysia and Brunei — yet the core of all these rising tensions is economy. This article is an attempt to highlight the economic importance of the South China Sea.

1. Trade Route

Stretching from Singapore and the Strait of Malacca in the southwest to the Strait of Taiwan in the northeast, the South China Sea is one of the most important trade routes in the world. The strategic geopolitical centrality of the South China Sea is well known: A naval crossroads of trillions in annual trade; transit sea lanes to roughly half of global daily merchant shipping, a third of global oil trade and two-thirds of all liquid natural gas (LNG) trade.

In his famous book “Asia’s Cauldron: The South China Sea And The End Of A Stable Pacific,” Robert D. Kaplan, a former member of the Pentagon’s Defence Policy Board, writes: “The South China Sea functions as the throat of the Western Pacific and Indian oceans — the mass of connective economic tissue where global sea routes coalesce. Here is the heart of Eurasia’s navigable rimland, punctuated by the Malacca, Sunda, Lombok, and Makassar straits. More than half of the world’s annual merchant fleet tonnage passes through these choke-points and a third of all maritime traffic worldwide.”

This excerpt is sufficient to explain that the South China Sea is an important shipping lane. It is estimated that around US$5 trillion worth of trade passes through its waters every year. It accounts for about 12 percent of the annual global fisheries catch and is rich in oil and natural gas. Its significance as an important sea lane can be gauged from the fact that the oil transported through the Malacca Strait from the Indian Ocean, en route to East Asia through the South China Sea, is triple the amount that passes through the Suez Canal and fifteen times the amount that transits the Panama Canal.

2. Gas Reserves

The South China Sea is a huge source of hydrocarbons, particularly natural gas which is said to be the most abundant and sought-after hydrocarbon resource here. The US Geological Survey (hereinafter USGS) estimates that besides huge oil reserves, about 60% to 70% of the area’s hydrocarbon resources are gas and has placed the sum total of discovered reserves and undiscovered resources in the offshore basins of the South China Sea at 266 trillion cubic feet. Indeed, most of the hydrocarbon fields explored in the exclusive economic zones of Brunei, Indonesia, Malaysia, Thailand, Vietnam, and the Philippines contain natural gas, not oil.

One Chinese estimate for the entire SCS puts natural gas reserves to be 2 quadrillion cubic feet, with the hope that Beijing can produce 15 billion cubic metres of LNG a year.  Yet another Chinese report estimates 225 billion barrels of oil equivalent in the Spratly Islands alone. It is hypothetically possible therefore that total gas resources in the South China Sea would be almost 900 trillion cubic feet (Tcf). This would be equivalent to the amount of natural gas in Qatar, which sits on the world’s third largest reserves.

3. Oil Reserves

Although many analysts believe that the majority of these hydrocarbon resources are natural gas instead of oil, geologists suggest that the Sea could also, potentially, hold hundreds of millions of barrels of oil, even more. One older Chinese estimate places potential oil resources in the South China Sea as high as 213 billion barrels of oil, though many Western analysts have repeatedly claimed that this estimate seems extremely high. A conservative 1993/1994 USGS report estimated the sum total of discovered reserves and undiscovered resources in the offshore basins of the South China Sea at 28 billion barrels.

State-owned oil major China National Offshore Oil Company (CNOOC), responsible for most of China’s offshore hydrocarbon development, estimates that the area holds around 125 billion barrels of oil and 500 trillion cubic feet of gas in undiscovered areas.

If Chinese calculations are considered correct, then the Sea contains more oil than any area of the globe except Saudi Arabia. Some Chinese observers have called the South China Sea “the second Persian Gulf.”

The Ghawar oil field in Saudi Arabia, has an estimated 70 billion barrels of remaining reserves. Ghawar is why Saudi Arabia became OPEC’s de facto leader and has dominated global oil markets for decades.

The Burgan field in Kuwait holds an estimated 66 to 72 billion barrels of reserves. Other giant fields include the Safaniya field, in Saudi Arabian waters in the Persian Gulf. It’s the world’s largest offshore oil field and is estimated to hold more than 50 billion barrels of oil.

4. Fisheries

The South China Sea is a vital source of protein and export revenue and fishing is a big business here. The industry not only earns billions of dollars — in 2012, their value on the open market was just less than $22 billion — but also employs millions across the region. The Sea has some of the world’s richest reef systems and over 3,000 indigenous and migratory fish species, comprising some 12 percent of global fish catch.
Chinese dominating presence in this sector becomes highlighted when we see that there were about 4.7 million fishing vessels in the world in 2012, according to data from the Food and Agricultural Organization. Of these, 68% were in Asia and nearly 700,000 were Chinese, a tally that was much larger than those of any other nation.

5. Rare Earth Metals

As defined by the International Union of Pure and Applied Chemistry, rare earth metals are a set of seventeen chemical elements in the periodic table, specifically the fifteen lanthanides plus scandium and yttrium. The metals are important because they provide critical components in next generation technology; everything from hybrid cars to flat screen TVs to top-of-the-line smart phones have rare earth metal elements. Though the availability of REM’s in the South China Sea is still being determined, large deposits have recently been found just off Japan’s east coast, and China has previously used its virtual monopoly on the minerals to punish Japan in the Senkaku/Diaoyu island conflict.

Importance for China

In 2010, China surpassed the United States to become the world’s biggest energy consumer, as per the data from the International Energy Agency. So, it needs more and more energy to run its industry. It is due to this factor that along with a growth in onshore gas production, China continues to advance into deepwater areas in the Pearl River Mouth and Qiongdongnan basins in the South China Sea. The country’s three largest national oil companies, China National Offshore Oil Corporation (CNOOC), China Petroleum & Chemical Corporation (Sinopec), and China National Petroleum Corporation (CNPC), are responsible for developing South China Sea’s resources.

The region is also the key hub of China’s global supply chain. It protects China’s access to the India Ocean, which happens to be Beijing’s crucial energy lifeline. Woody Island in the Paracels, southeast of Hainan Island, also happens to be a key bridgehead in One Belt, One Road (OBOR) – the New Silk Roads. The South China Sea is strictly linked to the Maritime Silk Road.

US Interests

The US has no claims to the South China Sea, but has economic and political interests in the region. About $1.2 trillion of US-traded goods travel through the South China Sea each year. However, since all the states in the Asia Pacific, including China, have a strong interest in preventing interference with commerce in the South China Sea, it is hard to see dangers to this common interest on the horizon.

Conclusion

China has claimed the majority of the South China Sea for centuries and will not relinquish its claim anytime soon. Chinese officials insist the country’s primary goal is to preserve stability. Hence, in order to avoid any global conflict, the best strategy is to start joint-development projects to cultivate valuable resources found in the sea.
It is encouraging that the US and China have signed risk-reduction measures to prevent encounters at sea from spiralling out of control, yet there is still a lot to be done.