Is China drilling for oil in Vietnamese waters?

Is China drilling for oil in Vietnamese waters?

China’s Haiyang Shiyou 981 oil rig is reportedly once again operating in waters contested by Vietnam.  The rig’s return creates a number of risks for investors operating in Vietnam and the region more broadly.

On January 19th, the government of Vietnam announced that a Chinese oilrig – the Haiyang Shiyou 981 – had moved into contested waters in the South China Sea. Vietnamese officials filed an official protest against the action and demanded that China refrain from drilling in the area.

The HS981 was previously the focal point of a Sino-Vietnamese crisis in 2014 when the rig was moved into disputed territory off the coast of Vietnam. The spat led to massive anti-Chinese protests and violence within Vietnam, which in turn led to significant losses for several businesses operating within the area.

As such, the HS981’s return to contested waters has generated significant regional concern, particularly given its inauspicious timing, coming days after the anniversary of the Sino-Vietnamese Battle of the Paracel Islands and days before Vietnam’s 12th Party Congress.

There are three key risks for investors raised by the recent HS981 incident:

Risk 1: Unrest – 2014 Redux?

The HS981 has been the focus of controversy in the past. In 2014, the Chinese moved the HS981 into what Vietnam considers to be its territorial waters and brought with it a large escort. The resulting dispute led to Vietnamese and Chinese ships harassing and ramming one another repeatedly.

In Vietnam, widespread anti-Chinese demonstrations became violent, targeting Chinese-speaking individuals and businesses displaying Hanzi (and, in some cases, Hangul and Kanji). This led to the death of several foreign workers, the destruction of numerous businesses, and the eventual evacuation of Chinese workers from Vietnam.

Investors should be aware that the current HS981 incident will likely result in anti-Chinese demonstrations, and violence or damage to Chinese businesses is a distinct possibility. Nevertheless, Vietnam is unlikely to see a repeat of the massive protests of 2014.

Vietnamese nationalists regularly take advantage of these types of incidents to demonstrate, and recently held minor protests during the anniversary of a 1974 maritime battle between Vietnam and China.  Protests could take place in any of the cities outlined in Figure 1 (above), and are particularly likely to occur near businesses displaying Northeast Asian characters (Hanzi, Hangul, or Kanji).

Still, the Vietnamese government will be prioritizing security and stability during the ongoing party congress (particularly in the capital), and security forces will likely be on high alert to prevent a repeat of the 2014 violence.  The current dispute has not escalated as the 2014 incident did, and the rig is operating in a location much further away both from the Vietnamese coast and the mutually-contested Paracel Islands than in 2014. The recent dispute is therefore less likely to galvanize the same massive nationalist sentiment as in 2014.

Risk 2: Dispute escalation

While the 2014 HS981 incident led to Vietnamese and Chinese ships ramming and firing water cannons at one another, the ongoing intergovernmental dispute over HS981 is unlikely to escalate to the same extent. So far, Vietnam has limited its response to a diplomatic protest.

The ongoing Party Congress will make it difficult for Vietnam to respond more forcefully; the leadership is wholly preoccupied with determining succession and is unlikely to adopt a highly confrontational approach that might trigger a crisis.

China similarly seems uninterested in a public confrontation, having removed its online notice of the rig’s position.  Additionally, as mentioned above, the current location of the HS981 is far less provocative than in 2014.

Still, investors should monitor further developments closely. In the unlikely event that the current intergovernmental dispute escalates further, it could lead to various formal (or informal) trade sanctions between the two states and broader and more violent nationalist protests – both in Vietnam and China.

Risk 3: Strategic mistrust in Sino-Vietnamese relations

Although the immediate escalation of the HS981 dispute is unlikely, there is a significant risk that the dispute will contribute to growing rivalry and distrust between the two governments.  Over the past decade, China has grown more assertive with regard to its territorial disputes in the South China Sea and has bolstered its naval capabilities, alarming rival claimants in the region including Vietnam.

China’s more assertive behavior is convincing political elites in Vietnam (and throughout the region more broadly) that China is bent on dominating the South China Sea, coercively if necessary, and will not prove to be a passive or trustworthy neighbor. The HS981’s redeployment will seem to be simply the latest manifestation of Chinese assertiveness, particularly given the fact that it follows closely on the heels of Vietnam’s denunciation of Chinese aerial activity in the South China Sea.

While these incidents are unlikely to decisively influence the ongoing Vietnamese Party Congress (which will be dominated by factional politics), they are likely to affect subsequent foreign policy decision-making by Vietnamese leaders.  As such, investors can expect Sino-Vietnamese relations to continue to slowly deteriorate in the coming years.

Rising geopolitical tensions between China and Vietnam are likely to create an unstable, risk-prone environment for investors in the region.  An atmosphere of mistrust will only increase the chances that future disputes could lead to nationalist unrest, boycotts, sanctions, and even intergovernmental conflict.

Overall, while the current dispute is unlikely to produce massive nationalist unrest on the scale of the 2014 demonstrations, it will contribute to the narrative of a dangerous, revisionist China among Vietnam’s leadership and raise the prospects of long-term geopolitical instability between the two states.

About Author

Erik French

Erik French is a PhD Candidate at the Maxwell School of Citizenship and Public Affairs, a supervisor at Wikistrat Inc., and a former Sasakawa Peace Foundation fellow with Pacific Forum CSIS. His research focuses on security, politics, and economics in East Asia.