6th International Petroleum & Petrochemical Technology and Equipment Exhibition

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Territorial conflict is an old story in the South China Sea, where several nations make conflicting claims on the region—and its oil and gas potential. But the escalating conflict between Vietnam and China is something new altogether.

Anti-China protesters march while shouting slogans in Ho Chi Minh City, May 11, 2014.

Le Quang Nhat | AFP | Getty Images
Anti-China protesters march while shouting slogans in Ho Chi Minh City, May 11, 2014.

As many as 21 people were killed—some of them described as ethnic Chinese—during violent riots in Vietnam overnight when angry Vietnamese burned a foreign-owned steel project. Thousands of protesters took to the streets Wednesday as well, setting fire to factories they thought—sometimes incorrectly—were connected to China.

Starting May 1, naval and coast guard vessels of Vietnam and China have engaged in a high-stakes game of chicken, battling with water cannons and reportedly ramming each other in an area of the South China Sea less than 150 miles from Vietnam’s shores where China has inserted a huge, mobile oil-drilling rig.

But the area near the Paracel Islands where China National Offshore Oil Corporation (CNOOC) has placed a rig, known as HD-981, is conspicuous not for the oil and gas resources that lie there, but for the oil and gas thatdon’t.

Rather than targeting an energy-rich zone, Beijing is simply interested in pushing its neighbors as much as possible to maximize the swath of sea it ultimately will control, experts told CNBC. In effect, China is inserting a physical presence that gives it the upper hand over wide ranges of territory and forces Vietnam to react defensively rather than focus on its own expansions.

“[The placement of HD-981 is] less about practically developing that specific block, and more about the Chinese sending a calculated and pretty aggressive warning to the Vietnamese that they aren’t OK with the Vietnamese developing there,” said Ernest Bower, a Southeast Asia expert with the Center for Strategic and International Studies.

But after years of planning to exploit the oil and gas reserves in the South China Sea, CNOOC could hardly have placed the rig in a less promising location. The area has less than 1 million barrels of oil equivalent in proved and probable reserves, economist Alexander Metelitsa of the U.S. Energy Information Administration said in an email to CNBC.

The U.S. Geological Survey study “did not assess this part of the South China Sea to have any significant oil or gas containing basins,” Metelitsa said.

State-owned CNOOC has aggressively moved forward with plans to get into the deepwater drilling business, said Kang Wu, vice chairman for Asia at international energy consultancy Facts Global Energy. That means stretching out into new territory.

“China has been [drilling] offshore for many years, and they’ve been producing OK … but that kind of oil is running out,” said Wu. “If you want to expand your production base, you have to go out.”

CNOOC did not respond to CNBC’s request for comment.

Read the rest of this article on CNBC’s website.

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