China moves on Disputed Territory

Some readers may be familiar with the term “expropriation,” a political risk which the Multilateral Insurance Guarantee Agency (MIGA), a World Bank affiliated insurer, defines as “an action whereby a government seizes property of assets of the foreign investor without full compensation to the investor…also referred to as ‘ownership risk’ or nationalization.”  More astute readers may also be familiar with the term “creeping expropriation”, which MIGA defines as “a series of events by a government (or a subsovereign entity) that results in a deprivation of the investor’s rights.”  Both these terms are well-known among members of the global political risk community and by the multinationals and foreign investors who buy insurance policies from the likes of MIGA and the Overseas Private Investment Corporation (OPIC) to protect their overseas investments from state confiscation by a host government.  Should a host government grab the assets of a multinational operating on its territory, either in one action or a series of actions, the insurers will likely pay the multinational or foreign investor a sum to compensate them for their loss.

While the concept of creeping expropriation is typically used in a government-to-investor relationship, could we not also consider a government to have a foreign policy of creeping expropriation when it comes to territories disputed by another government? An example of this government-to-government creeping expropriation, resulting in the deprivation of another government’s rights, may be happening now in the East China Sea.  The unilateral decision by the State-run Chinese oil and gas firm CNOOC Limited to submit for state approval a plan to develop Huangyan phase II and Pingbei, totaling seven new fields, in a territory claimed by both Beijing and Tokyo, may fall under a foreign policy definition of creeping expropriation.

To understand the history of the dispute, we need to refer back to May 2008, when China and Japan jointly agreed to develop hydrocarbons in the East China Sea, following summit talks between then Japanese Prime Minister Yasuo Fukuda and then Chinese President Hu Jintao.  Since then, Tokyo’s priority has been to settle maritime boundaries before developing the gas fields while Beijing slowed exploration in the energy-rich area.  Lately, Beijing’s patience seems to have worn thin, as China continues to develop a thirst for gas, a cheaper and cleaner energy alternative to the coal and oil imports it relies upon to fuel its economy.  In this particular case, the new field developments are expected to fuel the manufacturing hub of Zhejiang province, about 400 km (249 miles) away on the east coast.  CNOOC and partner Sinopec Corp are already working on two fields associated with Huangyan I, about 26 kms (16 miles) west of the disputed median line — for which Japan lodged a protest early this month after detecting well construction works.  Tokyo fears the drilling will tap into gas fields which lie on its side of the demarcated line.  The complaint was quickly rejected by Beijing, which maintained its activities are in the Chinese territories.  The five fields of Pingbei are located in the western side of the Xihu trough, which is an uncontested area.

Clearly, Beijing’s recent moves to develop a new gas field near the Japan-China median line in the East China Sea threaten to undermine the 2008 bilateral agreement to seek joint gas development in the area and have escalated tensions. Tensions over the East China Sea are already at high levels, with both nations scrambling fighter jets and ordering patrol ships to shadow each other.  The immediate issue is what will be Tokyo’s response should Beijing unilaterally approve the new Huangyan gas fields.   A miscalculation on either side could lead to an escalation, with Japan reserving the right to call on the U.S. to fulfill its pledge to defend its ally.

While Beijing’s latest effort at creeping expropriation has riled Tokyo, there is still time for negotiation on joint exploitation of the disputed area.  The approval by China’s National Development Reform Commission has yet to be given for the new gas fields, and could also be overturned by China’s Foreign Ministry, which requests oil companies to seek its approval before every drilling.  As an ally of Japan, the Americans will be closely watching this situation with grave concern and need to weigh in to help mediate the talks.  Any unilateral actions should be discouraged, and the resumption of talks on the new Huangyan gas field development should not rely on concessions on other bilateral issues, such as the concessions Beijing is seeking over the sovereignty of the Japanese-held Senkaku Islands, which lie south of the development site.  Bilateral cooperation, and not unilateral expropriation, is the way forward.