This week China withdrew its controversial oil rig from disputed South China Sea waters. For oil firms such as ExxonMobil, future drilling plans are anything but clear. The WSJ's Ramy Inocencio talks to Beijing reporter Brian Spegele on the players.
Executives at Talisman Energy Inc. TLM.T -2.14% are excited about promising oil-and-gas prospects off the coast of Vietnam and the Canadian company is gearing up to drill two exploratory wells there this year.
"I would describe these as world-class exploration blocks," says Paul Ferneyhough, the Calgary, Alberta, company's vice president for Asia-Pacific operations. The U.S. calculates that the South China Sea likely holds nearly 11 billion barrels of oil and 190 trillion cubic feet of natural gas.
There is a problem: Proceeding with drilling could bring Talisman into conflict with China, which claims some of the blocks as its own. Talisman declined to comment on China's position. Mr. Ferneyhough accepts Vietnam's assurances that Talisman has the right to explore there.
In May, tensions flared anew when state-owned China National Offshore Oil Corp. sailed a billion-dollar oil rig into waters claimed by Vietnam, prompting a standoff between Chinese and Vietnamese government vessels.
On Tuesday, China said it had completed drilling for now and was withdrawing the rig from the waters, in a potential easing of the standoff. But China's Foreign Ministry left the door open to future exploration there.
Neither Talisman nor U.S.-based Harvest Natural Resources Inc., HNR -0.22% which hold rights assigned by China to an area separately assigned by Vietnam, has started drilling in the flash point areas. Harvest Chief Executive James Edmiston told an industry conference in June that the company was in the process of exiting its China interests.
Some companies have been undeterred. Exxon in 2009 acquired the rights to explore more than 13 million acres off the coast of Vietnam, all within an area Vietnam considers its exclusive economic zone under a United Nations maritime convention. Some of that acreage, however, is contested by China.
A Chinese coast guard vessel patrols near a Cnooc oil rig and in disputed waters in the South China Sea in May. AFP/Getty Images
Still, Exxon and its state-owned partner, PetroVietnam, drilled two successful wells in 2011 and 2012 in the South China Sea. Exxon said in March it expected to drill an additional well this year as it evaluates a multibillion-dollar natural-gas project in Vietnam. A company spokeswoman said disputes of sovereignty are for governments to resolve, and declined to comment on the status of its drilling plans there.
The standoff over which companies can drill and where represents a test of the Obama administration's ability to convince China to dial back recent confrontations with Vietnam and the Philippines without damaging wider U.S.-China ties. The U.S. also fears Chinese control over contested waters could one day impede the ability of its forces to operate there, say observers. Secretary of State John Kerry pressed Chinese officials on the issue during a visit to Beijing last week.
The U.S. has taken moderate steps to heighten pressure on Beijing in recent months over its sea disputes. Daniel Russel, assistant secretary of State for East Asian and Pacific Affairs, said in congressional testimony in February that China's claims over nearly the entire South China Sea had no apparent basis in international law.
China flatly rejects what it sees as U.S. meddling in its territorial disputes.
Senior U.S. diplomats have rarely made public reference to the challenges faced by U.S. companies in the South China Sea. A State Department official declined to offer details on how the U.S. and China have dealt with the matter, adding the U.S. supported expanding economic ties between the U.S. and Vietnam.
China and Vietnam both claim parts of the South China Sea, which the U.S. says holds nearly 11 billion barrels of oil. Shown, a Chinese vessel sprayed a Vietnamese boat in May. AP
The size of China's energy market and the growing global clout of its oil companies give it some unique strength in dealings with international oil firms. For Vietnam, meanwhile, teaming up with international companies is crucial to tapping new reserves of harder-to-reach oil and gas.
"We want to tell the international community: Don't expect China to stop drilling after Vietnam's shouting," said Wu Shicun, president of China's National Institute for South China Sea Studies, referring to a recent flare-up over Cnooc's drilling rig in waters claimed by Vietnam. The company says it has every right to operate in the disputed waters.
PetroVietnam officials protested Cnooc's move. Nguyen Quoc Thap, deputy director at PetroVietnam, said last month that international oil companies have pledged to continue offshore work there.
Exxon and PetroVietnam executives last year met in Washington, D.C., and pledged to advance cooperation. Exxon's business exposure in China is more limited than some competitors. The company's interest includes a minority stake in a south China refinery and a gas exploration agreement with PetroChina Co. 601857.SH +0.13% in northern China's Ordos Basin.
Murphy Oil Corp. MUR +0.24% , which has no operations in China, similarly agreed to move ahead on exploration off Vietnam. A spokesman for the Arkansas-based company said it is seeking additional opportunities in Vietnam.
But other companies have been less willing to test Beijing's resolve. In, 2006, Chevron signed with Malaysia's state oil company Petroliam Nasional Bhd., or Petronas, to explore a block east of Vietnam. China warned Chevron executives its operations there violated Chinese sovereignty.
The Vietnamese offered its navy for protection, according to one diplomatic cable released by WikiLeaks, but Chevron suspended planned seismic work in the block in 2007, citing the China-Vietnam dispute as the reason in a U.S. regulatory filing. It no longer is pursuing work in that area.
Chevron now is pursuing drilling in Vietnam, but not in a disputed area. In June, Italian oil company EniENI.MI -1.96% SpA signed a production-sharing contract with PetroVietnam to explore the area Chevron originally was pursuing.
Royal Dutch ShellRDSB.LN -0.61% PLC and PetroChina have agreements on exploring shale in Sichuan and on cooperation overseas. Shell also works with Cnooc. During a visit to the U.K. by Premier Li Keqiang in June, Shell and Cnooc signed what they called a "global strategic alliance" agreement.
—Daniel Gilbert in Houston and Vu Trong Khanh in Hanoi contributed to this article.