Chinese oil rig finishes exploration in disputed waters off Vietnam

SHANGHAI/HANOI (REUTERS) - A Chinese oil rig has finished drilling near the disputed Paracel islands in the South China Sea after finding signs of oil and gas, a top Chinese energy firm said on Wednesday, more than two months after its deployment hurt ties with Hanoi.

Vietnam's coastguard said the US$1 billion (S$1.24 billion) deepwater rig was being moved towards China's southernmost island province of Hainan. China's official Xinhua news agency said it would be relocated to an area off Hainan but gave no details or a date.

The rig's relocation could reduce tensions between the two neighbours. It will also likely be welcomed by Washington, which had criticised China's decision to put the rig in waters disputed with Vietnam, calling it a "provocative" move.

Hanoi has said the rig was in its 200-nautical-mile exclusive economic zone and on its continental shelf. Beijing has said it was operating completely within its waters around the Paracel islands, which China occupy.

China National Petroleum Corporation (CNPC), the dominant oil and gas producer in China, said in a statement that the rig "smoothly completed" its drilling on Tuesday and found signs of oil and gas. The next step would be to analyse the geological data and evaluate the layers of oil and gas, it said.

CNPC's preliminary analysis showed "the area has the basic conditions and potential for oil exploration, but extraction testing cannot begin before a comprehensive assessment of the data", Xinhua quoted Wang Zhen, deputy director of the CNPC Policy Research Office, as saying.

China had previously said the rig was scheduled to explore the waters around the Paracels until mid-August. It was not clear why it had finished one month ahead of schedule, although Xinhua said July was the beginning of the typhoon season.

China's popular Twitter-like microblogging service Weibo lit up with criticism of the move. Many people said the government had bowed to the United States, underscoring the domestic pressure Beijing faces to be tough in its territorial disputes.

Beijing is likely to dismiss such accusations, given the government insists the area belongs to China and as recently as Tuesday told Washington to stay out of quarrels over the South China Sea.

Wu Shicun, president of the National Institute for South China Sea Studies, a Chinese government think-tank on Hainan, said he believed the rig completed its work ahead of schedule because of good weather before the typhoon season began.

"The place has fairly good oil and gas potential. It looks promising," said Wu, a leading expert on China's energy ambitions in the South China Sea.

Action at Sea

Admiral Ngo Ngoc Thu, chief of staff of the Vietnam coastguard, told Reuters by telephone the rig was about 30 nautical miles from Triton island in the Paracels and had been moving towards Hainan since late on Tuesday night. Thu said Vietnamese boats were still watching the area closely.

Deployment of the rig on May 2 set off deadly anti-Chinese riots in Vietnam, while scores of Vietnamese and Chinese ships have regularly squared off around the platform.

There have been several collisions. A Reuters reporter on a Vietnamese coastguard vessel on Tuesday witnessed a group of Chinese ships chase the Vietnamese boat away from the area in what has been a near daily cat-and-mouse routine.

The rig is owned by state-run China National Offshore Oil Company Group (CNOOC Group), parent of flagship unit CNOOC Ltd . An industry official with knowledge of its operation, speaking on condition of anonymity, said completing the drilling early meant the rig would now be freed up to be contracted out for other jobs.

The rig is China's newest and most advanced, and can drill in waters up to 3,000 metres deep, about double that of the other two rigs China uses for deep sea work, according to industry sources.

China claims 90 per cent of the South China Sea. Vietnam, the Philippines, Malaysia, Brunei and Taiwan also claim parts of the waters, whose estimated energy potential varies widely.

Discoveries near the coasts of Southeast Asian countries in recent years have been mostly natural gas, reinforcing the belief among geologists and explorers that there is more gas than oil in the South China Sea. Chinese industry experts have said the rig had a good chance of finding enough gas to put the area into production. That would give China its first viable energy field in the disputed South China Sea, as well as make it a source of friction with Hanoi for years to come.

The world's largest energy user imports nearly 60 per cent of its oil needs and more than 30 per cent of its natural gas. In a 2013 report, the US Energy Information Administration, a government agency, said geological evidence suggested the Paracel islands themselves did not have significant potential in terms of conventional hydrocarbons.

However, the chance of making a major gas discovery near the islands was high because there had been several gas finds already in the area, experts have said. Vietnam has two fields to the left of where the rig had been stationed, much closer to its coast, where US giant Exxon Mobil Corp discovered oil and gas in 2011 and 2012.