China Pressures Exxon, Vietnam on South China Sea Project

(Wall Street Journal via Dow Jones Newswires), July 24, 2008

Exercising its growing heft over the oil and gas industry, China is pressuring Exxon Mobil Corp. and Vietnam over a small project in the South China Sea.

A Chinese foreign ministry spokesman said Tuesday that China maintains its "sovereignty and jurisdiction" over the South China Sea. "The Chinese side has stated its position to relevant parties involved in the deal," he added. The statement came in response to questions about whether Beijing had threatened Exxon's interests in China as a result of the project.

Exxon, of Irving, Texas, declined to comment on China's stance. A spokesman said the company is evaluating several possible exploration projects offshore of Vietnam and has been working with state-controlled Vietnam Oil & Gas Corp., also known as PetroVietnam. However, he said Exxon hasn't signed any contracts for exploration in Vietnamese waters.

China joins other nations including Russia and Venezuela that are seeking greater sway over natural resources, often at the expense of Western oil companies, as high prices for oil and other commodities make them increasingly valuable.

"In one of the more curious developments of 2008, the increase in the amount of money involved seems to have made strong-arm tactics more popular," said Peter Beutel, president of U.S. energy-trading advisory firm Cameron Hanover.

Last year, China pressured foreign oil companies, including Britain's BP PLC, to abandon their oil and natural-gas exploration contracts with Vietnam in the South China Sea. Vietnam has said it is in negotiations with China.

Exxon Mobil, the world's largest publicly traded oil company by market capitalization, is no stranger to China. The company has important ties with state-owned China Petroleum and Chemical Corp., better known as Sinopec, including a 25% stake in a three-way joint-venture oil refinery being built in southern Fujian province.

China and its voracious appetite for oil have emerged as a global force in world energy markets. The nation is now the No. 2 consumer of oil after the U.S., and its demand is closely watched by market forecasters. It also represents a vast new market for fuels and other refined products that make up what is known as the downstream side of the oil business.

At the same time, Western oil companies are interested in potential offshore discoveries in the region. China's thirst for energy and the potential for discoveries mean foreign companies need to sail carefully with their investments.

China's push, reported over the weekend in the South China Morning Post, centers on the Spratly Islands, a rocky archipelago with no confirmed oil or gas reserves, claimed by China and Vietnam, as well as by Brunei, Malaysia, the Philippines and Taiwan. Oil companies were encouraged by preliminary seismic work done under a now-expired June 2005 agreement by China National Offshore Oil Corp., PetroVietnam and Philippine National Oil Co. The islands lie in the southern part of the South China Sea, farther away from the Chinese mainland than they are from the other claimants.

Exxon Mobil isn't alone. BP is fighting to maintain its leverage in Russia's third-ranked oil company by output, TNK-BP Ltd., a 50-50 joint venture with Russian partners. But it is losing ground, as seen by its decision Tuesday to withdraw its remaining technical specialists after Russia's decision a week ago not to grant a visa to Robert Dudley, chief executive of the Anglo-Russian venture.

Exxon Mobil itself remains embroiled in a face-off with Venezuela, after it briefly managed to obtain a world-wide, $12 billion freeze order in a U.K. court as part of compensation for a heavy-oil venture nationalized in the Orinoco basin. Last week, Venezuelan President Hugo Chavez threatened to stop oil shipments to the U.S. if Exxon Mobil succeeded again in suspending the overseas financial accounts of state-owned Petroleos de Venezuela SA.

Copyright (c) 2008 Dow Jones & Company, Inc.


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