The Buried Treasure of the South China Sea

Map: South China Sea overlaid with CCP 9-Dash Line Claim (Source: U.S. EIA, public domain)

Imagine for a moment that you’re a Vietnamese fisheries surveillance sailor working for the government, monitoring the fishing waters of your country. The year is 2014, and while most of the world is obsessed with the ALS ice bucket challenge, you've suddenly gotten the call to head straight to the Paracel Islands in the South China Sea to meet a Chinese incursion into Vietnam’s exclusive economic maritime zone. You arrive at the island chain, unsure what to expect, and you are met with the sight of a behemoth offshore oil drilling rig, accompanied by a veritable fleet of Chinese navy, coast guard, and civilian fishing vessels.

This rig, called the HYSY 981, is the pride of the Chinese energy sector. Commissioned in 2012, it was lauded by some Chinese Communist Party (CCP) officials as a “movable national territory” of the Chinese state, and cost at least USD 1 billion to complete. At that moment in May of 2014, though, this “movable national territory” is floating above your actual* national territory, only 120 miles off of Vietnam’s coast. Your mission is to scuttle the waters around HYSY 981 to ensure the rig cannot properly position itself above the oil field and begin drilling. The Chinese ships assembled in front of you have other plans though.

What follows this initial standoff is over two months of naval near-misses with Chinese and Vietnamese ships engaging in repeated rammings and dousing each other with water cannons. The Chinese vessels create a floating fortress of three concentric rings surrounding the oil rig, protecting it from Vietnamese incursions against its own incursion. Still, you and your compatriots are able to make aggressive maneuvers around the rig, making the operating environment very uncomfortable, to say the least. There are no casualties in the maritime standoff, but one of your fellow Vietnamese fishing vessels is sunk amid the chaos.

Back home in Vietnam, massive protests erupt outside of Chinese consulate buildings and Chinese-owned businesses opposing the expansionist actions of Beijing, as well as the Vietnamese government’s lack of concrete action against China. After a few weeks of the standoff at sea, these initially peaceful protests devolve into violent riots, leading to Chinese factories being burned to the ground across Vietnam. The situation on land and at sea is quickly getting out of hand.

Finally, on July 15th, 2014, China’s government announces that HYSY 981 has “completed its work” at the Paracels and will be withdrawing back to internationally recognized Chinese waters, one whole month earlier than the drilling operations were initially planned to be complete. So perhaps you and your fellow Vietnamese sailors can take some comfort in the fact that you were able to ward off this incursion into your maritime territory. However, simultaneously, you know that the event you just participated in was one of the most significant sea-changes (pun intended) for Southeast Asian geopolitics in decades.

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The 2014 HYSY 981 crisis was emblematic of the political and military posturing that has come to define the South China Sea (SCS) in the last decade. China has long laid claim to large swathes of the strategically important body of water, most infamously via the “9-Dash Line”, an obscure maritime boundary with equally obscure historical justifications. This claim overlaps with the internationally recognized maritime borders of Vietnam, the Philippines, Malaysia, and Brunei.  The CCP claims "indisputable" sovereignty over the islands, reefs, and "adjacent waters" within the nine-dash line, as well as "sovereign rights and jurisdiction" over the relevant waters, seabed, and subsoil. However, the 2014 crisis was the first significant military standoff over the matter since 1988, when a skirmish at the Spratly Islands resulted in the death of 65 Vietnamese servicemen.

Following China’s ascension to the World Trade Organization and its increasing presence in international forums in the early 2000s, it seemed that it might start acting like a more amicable global neighbor. With the rise of Xi Jinping’s China, though, this optimism has been replaced by a feeling of dread among its regional neighbors, and nowhere is this truer than in the SCS. But what is driving this trend? Is it just the renewal of hardline nationalist ideology under Xi’s rule? Or maybe a military strategy to achieve naval dominance in the region? Both of these inquiries carry some water, and are certainly relevant to the CCP’s actions, but they represent means rather than ends. To what end is nationalist ideology being steered toward the SCS issue? To what end is it worth kicking all other naval forces out of the region? Perhaps it is no mere coincidence that the first major standoff in decades surrounded the issue of offshore oil and gas production. Perhaps what is so valuable about the SCS to the modern Chinese state is not the sea itself, but the black gold beneath its seabed.

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Map: Proven oil and gas basins in the South China Sea (Source: U.S. EIA, public domain)

The disputed waters of the South China Sea hold approximately 11 billion barrels of oil and 5.4 trillion cubic meters of natural gas in proven reserves. Estimates from the US Geological Survey (USGS) indicate there could be another 4.5 trillion cubic meters of natural gas and 12 billion barrels of oil undiscovered.

The Chinese government’s estimates, meanwhile, fall between 293 and 344 billion barrels of oil and 30 to 72 trillion* cubic meters of natural gas. For context, Saudi Arabia’s proven reserves are estimated at 267 billion barrels of oil and 9.4 trillion cubic meters of natural gas as of 2025.

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(Example graph for SCS oil reserves estimates)

If the actual volume of oil and natural gas in the SCS is even half the Chinese government's estimates, then "sovereign rights and jurisdiction" over these reserves would catapult China near the top of the global petro-powers. Paired with its growing refining industry and the construction of sprawling pipeline networks through the Belt and Road Initiative (BRI), China is positioning itself to become a massive energy consumer and an energy broker in the oil and gas space. This proposition is incredibly attractive for the CCP as they attempt to consolidate and expand their global influence vis-à-vis the US in the 21st century.

Think about why the US, even after the end of its “Unipolar Moment”, remains the world’s preeminent superpower. Conventional cocktail-party wisdom will often revolve around the geographic isolation argument, essentially claiming that the US was always destined to be a superpower because of its wall of oceans on either side and (relatively) friendly nations to the north and south. This argument should not be discounted since America’s geography is a huge military advantage, but it doesn’t fully explain the particular sway that the US has over the global economy today. In the modern world of AI and datacenters, the single most important resource a country can have is energy, and the US has lots *of it. In 2025, the US is the #1 producer and refiner of both oil and natural gas by a wide margin. Add this to the strong alliances between America and the Gulf Monarchies, and the world’s most powerful navy to protect supply lines, and America is more energy secure than it has been in generations.

China, on the other hand, is lagging behind on this front. Until the 1990s, relatively low levels of industrialization allowed China to be energy independent, but the incredible pace of growth in the last 30+ years has been too much for China’s domestic oil and gas reserves to keep up with. Today, China imports almost ¾ of its oil from abroad and nearly half of its natural gas, and coal is still the #1 electricity generator. While renewables comprise an increasing proportion of the Chinese energy mix, these traditional hydrocarbon fuels are still necessary for grid backup and powering a conventional army and navy. It’s estimated that if China were cut off from its foreign oil and gas supplies, its economy could only sustainably function for about 80-90 days with its strategic reserves.

The South China Sea is actually the route that most of these hydrocarbon imports to China currently come through, via the Strait of Malacca. War-gamers have theorized that any major confrontation between the US and China over a potential Taiwan crisis would involve a blockade of this shipping route. So, even if China could gain effective control over the SCS itself in such a confrontation (Its navy is certainly large enough to do so), the greater crisis to Chinese national security would be the cutting of its supply lines. New pipelines from Russia certainly help, but reliance on Vladimir Putin is a shaky prospect, no matter how “No limits” your friendship is. So then, if you’re the CCP, what is to be done? If we look back to those Chinese government estimates for SCS hydrocarbon reserves, the answer might just be at your front door. The problem is, you’re not the only interested party, so how do you go about getting it?

Industry or statecraft?

Since Xi Jinping’s rise as the leader of the CCP, China has increasingly adopted a strategy called “Civil-Military Fusion”, which aims to blend the civilian and military sectors to create a unified, efficient, and advanced industrial base that supports economic growth and military modernization. This strategy is meant to apply broad geostrategic thinking to every sector of the economy, and energy has a significant role to play. In the SCS, this effort is spearheaded by the Chinese National Offshore Oil Corporation (CNOOC), the same company that built the HYSY 981 oil rig that sparked the 2014 offshore crisis.

The formula from the 2014 incident is effective and easily replicable. CNOOC will send a rig or exploration vessel into a disputed region of the SCS, prompting a heightened diplomatic or military response from the competing claimant. China’s government will release the diplomatic memo equivalent of a fake-surprised gasp, lamenting that there is nothing controversial at all about CNOOC’s actions. This would be followed by a large deployment of Chinese Coast Guard vessels to protect the CNOOC asset. These ships will then engage in evasive maneuvers and ramming and shoot water cannons at the allegedly offending parties. More likely than not, this game of chicken will result in a stalemate that sees both parties eventually go home, but so long as their rivals know that China will make life difficult for them in that area, that’s good enough for the CCP right now.

Of course, there’s nothing new about oil and gas corporations being major players in geopolitics, but the way Chinese companies are involved is different from the behavior we associate with Western firms. It’s not hard online to find intense criticism of American and British oil corporations for their roles in America’s wars in the Middle East over the last several decades, and frankly, a lot of it is justified. However, the important thing to consider is that these are private companies with undue influence over the civilian government, meaning that the key claim behind these critiques is an excess of corporate power over the state. In the case of a Chinese state-owned company like CNOOC, the inverse is true. Rather than the interests of corporations influencing the behavior of the state, the interests of the state are dominant over the interests of the corporations. President Xi has made it clear throughout his presidency that the state oil companies like CNOOC are not independent interest groups from the Chinese state, and rounds of “corruption” purges have become frequent against high-level officials in the oil sector.

So what does this mean for the South China Sea? The CCP would like to create a regional status quo where might makes right, which would be bad news for the other claimants in the SCS. The most important tool for China’s implementation of this vision is the strategy of Civil-Military Fusion through careful coordination between the government, navy, coast guard, and state industries like CNOOC. This creates a legal gray zone regarding the SCS and its valuable hydrocarbon resources, and this is probably what the CCP would prefer in the meantime. However, the rest of the neighborhood is not as keen on this proposition and will not give up on international law so quickly.

A Fragile Balance

South China Sea claims map - South China Sea Arbitration - Wikipedia (Public Domain)

The international treaty that governs maritime rights, boundaries, and responsibilities is called the United Nations Convention on the Law of the Sea, or “UNCLOS” for short. Ratified in 1994, UNCLOS grants states rights to a 200-nautical-mile Exclusive Economic Zone (EEZ), over which they have sovereign rights for natural resources. This kind of language doesn’t exactly jive well with China’s claim to indisputable sovereignty and economic rights within the nine-dash line. Many of the confrontations over oil and gas resources, such as the 2014 HYSY Crisis, take place well within the recognized EEZ of China’s neighbors under the provisions of UNCLOS.

In 2016, the Philippines finally took China to task regarding its violations of the UNCLOS agreement. An arbitration was held by the Permanent Court of Arbitration (PCA) in The Hague, an intergovernmental organization that predates the UN. In its ruling on the application of UNCLOS, the PCA ruled that China had violated the Philippines' sovereign rights in its EEZ by preventing petroleum exploration, building artificial islands, and obstructing the local fishing industry. The Chinese government outright rejected this ruling, claiming “historic rights” to the SCS that predate UNCLOS, thereby asserting that their claim should be recognized independently of the convention. They even use state-funded archaeological projects to help support this claim against the 2016 ruling, another example of an arm of civil society being used in the strategy of civil-military fusion. Almost a decade later, the CCP still refuses to acknowledge any legitimacy in the PCA’s ruling.

It’s notable that the 2016 case was brought just by the Philippines and not by a unified coalition of regional states, such as the Association of Southeast Asian Nations (ASEAN), a regional multilateral organization. Unified action on the SCS claims by China has yet to manifest seriously, and oil and gas probably play a big part in this.

Some regional economies with overlapping claims with China, such as Brunei and Malaysia, rely heavily on hydrocarbon income to fund their government and power their economies. This has led to a more diplomatic, bilateral approach to dealing with China, which is not only a military threat to their offshore energy infrastructure, but also a primary destination for the oil and gas they produce. Malaysia does defy Beijing by exploring and drilling within the 9-Dash Line, but its progress is incremental and bolstered by intense diplomatic dialogue with the Chinese. Despite this, the Chinese Navy and Coast Guard will often come within a kilometer of Malaysian oil rigs and engage in the same kind of aggressive maneuvers that our Vietnamese fishing crew became familiar with in 2014.

Brunei, a tiny petro-state on the island of Borneo, has decided to take a more diplomatic route with the CCP, publicly entering into joint development agreements with China in recent years. CNOOC has the right to at least 51% of these agreements, so Beijing will tolerate this state of affairs since it clearly indicates Brunei is the subservient party.

China’s closer neighbors, Vietnam and the Philippines, take a less diplomatic approach. Following the 2014 HYSY Crisis, the Vietnamese government realized it had to seriously reconsider its relationship to China, which was already shaky to begin with. In a turn of events that would have shocked anyone who watched the Vietnam War play out in the 60s and 70s, the Communist Vietnamese government has grown closer to its former nemesis, the United States, eventually leading to a “Comprehensive Strategic Partnership” in 2023. Vietnam has also created a shield for itself in the SCS to protect its hydrocarbon interests by partnering with Russian firms like Gazprom on deepwater drilling projects. Harkening back to the earlier observation that Vladimir Putin is quite the fickle friend for the CCP to have.

On the other hand, the Philippines is a mutual defense treaty ally of the US, which might explain its willingness to take a more explicitly uncompromising position on China’s expansionism, leading to occasional melee clashes between sailors from each country. However, these confrontations are not necessarily good for business, and exploration of the disputed Reed Bank, holding an estimated 5.4 billion barrels of oil and 1.56 trillion cubic metres of natural gas, has been suspended indefinitely by both countries.

Where does this all leave us at the end of the day? On one side of the equation, you have a rising superpower, China, looking to become the undisputed global superpower in the 21st century. In an electrified and industrial world, such power comes from the ability to wield and produce energy. China can attempt to supplement its energy mix with renewables and coal. However, at this juncture, oil and natural gas are still the most critical resources for a superpower to maintain its energy security. The South China Sea and its massive hydrocarbon potential might pose a solution to this problem.

However, on the other side of the equation, we have states with an equal or even greater need for those resources to grow their economies and bring prosperity to their people. This is not to mention that their territorial claims over these oil and gas fields broadly align with international treaties, while China’s do not. Add in the factor of the United States, China’s chief rival, being a primary backer of these claims against China, and this equation becomes harder and harder to balance.

Can there be a peaceful solution here? At this point, much like the question of Taiwan, the answer is really up in the air. The CCP is not known for being a compromising organization, and it has little incentive to back off its claims in the South China Sea when the potential energy benefits are so great and the resistance to their efforts so disjointed. At one point or another, the other claimants to the SCS and its oil and gas reserves will have to take a unified position if they hope to reach a positive solution for themselves. If China reaches military parity with the US in the coming years, then regional unity will become more important than ever.

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