US Sanctions on China’s CNOOC Over the Top

Dec 10, 2020

The U.S. has sanctioned China’s third-largest oil company apparently because it has explored or drilled in an area disputed by third parties.  This precedent could have serious repercussions.

The U.S. government has sanctioned China’s third largest oil company and largest offshore petroleum producer China National Offshore Oil Corporation (CNOOC).   The Executive Order prohibits US individuals and companies from transacting publicly traded securities of “ Communist China Military Companies”—companies that are in some way affiliated with the People’s Liberation Army.  The apparent reason for sanctioning CNOOC is its exploration and drilling in disputed areas of the South China Sea. If this is the reason, the U.S. is using a rather loose and flimsy definition of companies that are “affiliated” with China’s military. Indeed, the U.S. would essentially be sanctioning an international oil company because it has explored or drilled in an area disputed by third parties. The European Council has just sanctioned Turkey –the country– for allowing its drillship to drill in a disputed area claimed by the Republic of Cyprus. But the US sanctions are focused on a particular international oil company. This is an unfortunate precedent and could have repercussions beyond this particular act.

Indeed, many would question the reasoning behind this extraordinary US action.  Understandably, CNOOC said that it was “shocked and regretful”, and that the action was based on “false and inaccurate” information.

 CNOOC Group is a major oil company focused on the exploitation, exploration and development of oil and gas offshore China.  The company is owned by the Chinese government.  Its exploration subsidiary, CNOOC Limited, is listed on the Hong Kong, New York and Toronto Stock Exchanges. Foreign investors own about 16%.  CNOOC’s foreign operations account for about one-third of its total production and include projects in the Gulf of Mexico and Guyana where it has a joint venture with ExxonMobil.

This attack on a major international company for drilling in a disputed area is unprecedented in the US-China relationship. Many international companies have heretofore done this with relative impunity and now there may be blowback. ExxonMobil has undertaken drilling in areas claimed by both Vietnam and China specifically in Vietnam blocks 118 and 119.

China has previously threatened retaliation against ExxonMobil for doing what the U.S. now alleges CNOOC is doing. In 2008, China warned it against proceeding there, suggesting that its business in China could be at risk.

 ExxonMobil is America’s third-largest company and is heavily invested in China. Its holdings range from gas marketing to petrochemicals.  Indeed, it is now building a $10 billion petrochemical complex in China.

Again in 2011, soon after ExxonMobil announced a discovery in Vietnam’s Block 118, China warned “foreign energy companies” against exploring in disputed areas.   In May 2014 CNOOC Ltd. moved the CNOOC Group-owned drilling rig –the Haiyang Shiyou 981 into the area and drilled just east of Vietnam’s Block 119. Vietnam claimed the rig was operating in its Exclusive Economic Zone (EEZ) while China maintained that it was operating in its waters.

This area is legitimately disputed. China claims the Paracels and has occupied them since 1974. It argues rather convincingly that among other reasons in favor of its sovereignty over them, Vietnam recognized its claim in a 1958 letter from Vietnam’s then Premier Pham Van Dong to China’s then Premier Zhou En Lai. If China owns the Paracels and they are entitled to a 200 nautical mile EEZ and an extended continental shelf, China has a legitimate claim to part of Vietnam’s claimed EEZ and continental shelf.  Further weakening Vietnam’s claim, according to the US State Department it uses a baseline for its EEZ and continental shelf claims in the disputed area that does not conform to UNCLOS stipulations.  Until a ruling or a boundary is forthcoming, this area is disputed and according to the Guyana-Suriname precedent, neither country should unilaterally proceed with exploitation.

That means that ExxonMobil’s drilling in these blocks let by Vietnam would be just as legally questionable as that of CNOOC’s drilling there. But the U.S. seems to be implicitly taking Vietnam’s side in its various relevant disputes with China including this one.

In October 2020 China announced it would sanction US companies Lockheed Martin, Boeing Defence, and Raytheon for US government approved arm sales to Taiwan. If China does retaliate against ExxonMobil, it may prohibit any business dealings with it similar to the sanctions it slapped on these companies.

 Worse, it could stimulate a rethink in China regarding its economic interdependence with the U.S.  China may conclude that the U.S. has lured it into the global capitalist system only to punish and manipulate it. Indeed, China may come to regret the day it adopted “capitalism with Chinese characteristics” and act accordingly.  If so these escalating sanctions would be a pyrrhic victory for the U.S.

This US move sets new precedents for US economic warfare and will make it more difficult for President- elect Joe Biden to revive relations.  But Biden could reverse this particular executive order before too much damage is done.  Indeed, whether he does so or not may be a good litmus test of his administration’s approach to China. Will it be an improvement or more of the same?

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