Japan Gas Row; Co-Development an Option

TOKYO, Jun 6, 2007 (Dow Jones Newswires)

The relatively small size of gas reserves under the East China Sea disputed by China and Japan, and the failure to make progress in the row so far, show just how much both sides feel they need to get their hands on the gas even if the political cost is high.

How much gas and other hydrocarbons lie under the disputed waters, and surrounding areas, is an open question.

Indications are that it's not a lot, but recent major finds of gas offshore China may reinforce the determination on both sides not to give ground. Of course, sovereignty questions are highly emotive in both countries, and this further underpins tensions over the gas.

The only publicly-available information in Japan on the scale of the reserves is in a 1994 government report, which said that natural gas and oil reserves in the sea near Okinawa, which include the disputed reserves in the East China Sea, are estimated at an equivalent of 3.2 billion barrels of crude oil.

This is a pretty modest amount, about 1.6 times Japan's annual oil and natural gas demand.

But with Japan and China as heavily dependent as they are on foreign oil and gas, every drop counts.

In 2006 Canada's Husky Energy Inc. (HSE.T) found world-class recoverable natural gas reserves estimated at up to 170 billion cubic meters deep under the South China Sea. And last month, PetroChina Co.(PTR) confirmed making a huge oil find in shallow waters off northeastern China.

In 2005, Japan produced 5.79 million barrels of crude and 3.1 billion cubic meters of natural gas, supplying just 0.4% and 3.6% of its total demand, respectively, according to Japan's Ministry of Economy, Trade and Industry, METI.

For China, the issue isn't as acute, but dependency on oil and gas imports is growing fast - in April China relied on imports for 48% of its crude oil needs.

"It's true that the reserves are small," a senior METI official at acknowledged. "But do you think it's okay to accept somebody taking Y100 yen from our yard just because it is merely Y100 yen?" said the official, who talked on condition of anonymity.

For his part, Isao Kakefuda, President of government-backed Japan Oil, Gas and Metals National Corp., or Jogmec, argues that even small-scale reserves should be developed.

"We must develop the reserves because they are in our territories. Only when it (developing them) makes losses, we shouldn't do it."

Median Line Vs Continental Shelf

The dispute goes back decades, but it intensified in 2004 when Japan learned China had built facilities in the Chunxiao gas field on the Chinese side of a median line from the coasts of the two countries, which Japan proposes as a territorial dividing line.

This prompted Japan to conduct seismic exploration on the Japanese side of the median line. After several months, it concluded the structures of four gas reserves in the area, including Chunxiao, extend into the Japanese side.

Apart from the seismic exploration, Japan called on China to provide detailed information on the field and on its development work, as well as halting the work.

The gas field, called Shirakaba in Japan, is roughly 150 nautical miles from Shanghai, and some 18O nautical miles away from Okinawa's main island.

Japan says that as the reserves of all four fields extend under the median line, the two sides should co-develop them.

China, on the other hand, contends that it owns the whole continental shelf, which extends much nearer the Okinawa island group.

The dispute intensified in February this year, when Japan protested at news that China had started delivering gas from Chunxiao/Shirakaba to its mainland.

"This is a fight for pride between two sovereign states," said Hirofumi Kawachi, an analyst of Mizuho Investors Securities, noting at the same time that the reserves in the area are considered small.

"It doesn't make sense to bring the gas to (mainland) Japan, when you take production and shipping costs into consideration. I think it is less costly to bring it to mainland China through a pipeline," said Kawachi. But he added that he wasn't sure if even that made economic sense.

Survey Work, Production

There isn't much public information in China about the scale of work at, or output from the disputed area.

Some recent news came with the April release of the 2006 annual report from Cnooc Ltd., the listed arm of China's largest offshore oil producer by output.

It said it produced 4 million cubic feet of natural gas a day in the Tianwaitian field, or Kashi in Japanese. It is one of the four fields Japan says crosses the median line.

In April 2006, Dow Jones Newswires had reported that China had been producing gas at the field at a rate of 250,000-300,000 cubic meters a day since January that year, citing a source familiar with the matter.

In 2005, the Japanese government awarded test drilling rights for the area to Teikoku Oil Co., now a unit of energy explorer Inpex Holdings Inc. However it hasn't started work, saying this is because the governments are still in talks.

Senior officials from the two sides have met eight times since October 2004 on the issue, the last time in late May in Beijing.

However, the potential for more than mere exchanges of hot air exists.

Japanese Coast Guard vessels regularly patrol near the area. Also, Japanese air force planes patrol Japan's exclusive economic zone, which includes the disputed area, said a Defense Ministry spokesman.

In February 2007, a Chinese ship was spotted conducting research near the Senkaku islands, known as Diaoyu in China, in the southwestern part of the disputed area.

But despite this, it doesn't mean there's no chance of agreement on anything, says Takeo Akiba, Japan's Ministry of Foreign Affairs' Director of the China and Mongolia Division and a key member of the Sino-Japan talks.

"Since it is hard to agree on a territorial line, we have been discussing joint development", Akiba noted, citing the United Nations Convention on the Law of the Sea which allows such preliminary arrangements when involved parties cannot immediately agree on territorial line.

Chinese Premier Wen Jiabao visited Japan in April. In his meeting with Japan's Prime Minister Shinzo Abe, the two agreed to set a target of this autumn for officials to draw up actual measures for joint development, with this being done on the basis that such development shouldn't go against either side's interests.

This has created a new basis for discussion, said Akiba, adding that Japan hasn't given up on trying to hammer out something with China before the autumn deadline.

"A successful joint development would have a great positive impact on Japan-China relationships politically and diplomatically," he said.

Japanese and Chinese officials are due to continue their talks later this month.

Copyright (c) 2007 Dow Jones & Company, Inc.