More on oil and gas in the South China Sea
/A while ago I read Daniel Yergin’s book, The Prize, which is all about oil and the oil business (to be honest, I didn’t read the whole thing: it’s long!). Two things stuck with me: 1) Germany and Japan basically lost World War II because they didn’t have enough oil/fuel. And 2) Russia lost the Cold War because oil prices fell and wrecked its economy.
I starting thinking about that today because I am seeing stories about China, South China Sea and its efforts to stop Vietnamese oil and gas production. Or I guess, China needs oil, and the South China Sea is the closest oil field readily available.
The biggest near-term threat to Vietnam’s efforts in the sea is to its Ca Vau Xanh project, or Blue Whale, a project that Exxon is working on with PetroVietnam. There is speculation that China is putting pressure on ExxonMobil and/or Hanoi to stop the project. The speculation comes from social media, news outlets and and experts writing in these outlets. An alternative theory is that Vietnam is haggling over gas prices, and that is stalling the project. These negotiations may be happening but they are very unlikely to stop the project - Vietnam needs it too much. .
We talked yesterday about Vietnam being a small new fuel importer, but that small is going to turn into big if projects like Blue Whale don’t go through. Plus, while it is somewhat easy (albeit expensive) to import fuel, you have to build power plants that can convert that fuel into electricity to power your booming manufacturing base. That is already a problem in Veitnam’s south, and is expected to result in country-wide shortages in 2021. According to the this article:
Vietnam Electricity, PetroVietnam and Singapore’s Sembcorp are currently holding talks to build and operate two power plants to convert the gas [from Blue Whale] to 2 Gigawatt of electric power. This would amount to ten percent of Vietnam's current total power demand.
Vietnam needs this project. And China really doesn’t seem to want Vietnam to have it. Needing to have physical access to the oil wells seems a bit weird to me these days. Oil and gas are globally traded. And, while occasionally expensive, have generally been available. I guess in the case of war that’s not true (remember Yergin), but it seems like war is a ways off.
So what would happen if Exxon pulled out:
Gas prices would like rise, because Vietnam would have to import more fuel.
Manufacturing businesses would suffer, because they would face higher costs for electricity, and, if shortages come through, potential lack of stable electricity supplies.
There would also be pressure on the current account side, because the country would have to import more fuel.
And pressure on the fiscal budget. According to the last article, the Vietnamese government is expected to make $20 billion from this project. That’s a lot of ducats that need to be replaced.
Vietnam’s use of coal would jump, because there is no domestic replacement for this gas. But there is domestic coal, a fair amount of it, in fact.
There would be more investment in renewables. This would be very positive in the long term, but will be costly for Vietnam in the short term. And doesn’t replace the lost revenue.
There would likely be more riots against Chinese companies, because regular Vietnamese would think (rightly or wrongly) that China pressured the company to pull out.
Vietnam is not able to pull out of this deal, so I expect that from the government’s side, it will do whatever it can to make sure it still happens. The US government also wants it to happen. ExxonMobil’s calculation is more difficult, because China is such a large importer of fuel. It will be interesting to watch.