How Cnooc, PetroChina Investors Can Benefit From Disputed South China Sea

TAIPEI, Taiwan (TheStreet) -- China's landfill projects in the South China Sea, though unpopular with its neighbors and the U.S., should boost Chinese state oil drillers Cnooc Ltd. (CEO)  and PetroChina (PTR) , both of which trade in the U.S., because an expansion or strengthening of China's claims would smooth exploration for those companies.

China's addition of landfill to otherwise submerged atolls south of its mainland near the existing Spratly islands effectively creates islets that can be used for construction of military airstrips, expansion of an exclusive economic zone and air-defense surveillance.

The construction is occurring in a disputed area. Besides China, Brunei, Malaysia, the Philippines and Vietnam all lay claim to some of the islands, atolls and coral reef that dot the South China Sea.

"Short of military action, there's not anything we can do," says Ramon Casiple, a blogger and political analyst in the Philippines. Manila is asking the United Nations to negate China's claim. "Diplomatic action has been tried before," Casiple says.

The two state oil giants are quiet about their government's creation of land.

New York-listed Cnooc, China's largest producer of offshore oil and gas, declined to say whether China's creation of islands would expand the company's scope of exploration or make existing work safer -- the two most likely advantages of Beijing's landfill islets. Company publicist Michelle Zhang said only that Cnooc was on track to fulfill South China Sea projects that it outlined at the beginning of the year.

PetroChina public-relations representative Mao Zefeng did not answer calls on Thursday. His company is the New York-traded arm of state-owned China National Petroleum Corp., the country's largest oil producer.

Tighter defense of China's exclusive ocean economic zone may also disrupt marine shipping, a possible inconvenience to foreign-owned carriers such as Denmark's Maersk (AMKBF) and Singapore's Neptune Orient Lines (NPTOY) , though some shippers say they have already found South China Sea routes that keep their vessels out of any hot water.

About half the world's shipping crosses the South China Sea, which extends from Singapore to Taiwan. The sea is believed to hold reserves of 11 billion barrels of oil and 190 trillion cubic feet of natural gas. China wants that as well as seafood supplies for its 1.3 billion people.

History indicates that China will finish its new islets with few obvious hitches. The country started Three Gorges Dam, the world's largest hydroelectric project, in 2012 to harness the Yangtze River despite international worries about environmental damage.

Six years earlier. it had opened the world's highest railway line, linking Tibet to lower, more populated parts of the country. Critics called the railway a means to dilute the native culture of rebellious Tibet by letting in more ethnic Chinese.

The Philippines has gotten most upset about the landfill islets, says Bonnie Glaser, senior adviser for Asia at Center for Strategic and International Studies, a think tank in Washington.

If China uses the new islets to expand its exclusive economic zone around South Johnson Reef near an outlying Philippine island, it could "potentially expand" Beijing's claim to within a 230-mile zone claimed by the Manila, Glaser says.

Some call China's push into the sea a challenge to the U.S., Beijing's only would-be military rival and a critic of its unwillingness to cooperate with the other claimant countries. Washington has thrown support behind the Philippines, a former U.S. colony.

But China has blown off the Philippine UN petition and silenced Vietnam by removing a massive Chinese oil rig in July -- with no guarantee another one won't show up. It has declined to sign a South China Sea code of conduct. It's unlikely that Washington diplomats will be invited to the launch of China's latest atoll.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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