What Does Recent International Disputes Over Territories at Sea Mean For the Oil and Gas Sector?

In recent years, territorial disputes over the sea have been increasing in the Asia-Pacific region. China has been in a long on-going argument with Japan over the Senkaku Islands/Diaoyu Islands while Vietnam is currently at odds with China over a Chinese oil rig that’s deployed in the South China Sea.

At the same time, there are numerous disputes in Southeast Asia between China, Vietnam, the Philippines, Malaysia, Indonesia and Brunei. In 2008, even Singapore was involved in a dispute with Malaysia over a small rocky island (its Malay name is Batu Puteh, literally translated as “White Rock”) that’s situated at the intersection between the Singapore Straits and South China Sea.

Why is everyone so eager to lay claim to territories in the South China Sea and East China Sea in the region?

That old black gold

Turns out, both bodies of water are two of the most resource-rich seas in the world. Countries that end up controlling them not only expand their water territories; they will be able to access these oil & gas resources and expand their economy as well.

Given the sensitive nature of international territorial disputes, what does it mean for the companies that operate in the oil and gas sector in the Asia Pacific region?

Increased risk

Companies like Keppel Corporation (SGX: BN4), Sembcorp Marine (SGX: S51), and Nam Cheong (SGX: N4E) build jack-up rigs and other offshore vessels for companies that drill for oil and gas. If their rigs and vessels are deployed in disputed-territories, will they be affected as well when different parties search for someone to blame?

What about service providers such as Ezra Holdings (SGX: 5DN) and Ezion Holdings (SGX: 5ME)? These companies provide offshore support services by leasing out their vessels for use. If they’re at work in disputed-territories in regional waters, are their vessels at risk of being attacked?

These are not easy questions to answer and we might not even be able to come up with definite ones. However, what we do know is that these disputes do make it riskier for such companies operating in this region.

What can happen to those companies?

When operational risks increases, the cost of conducting business in the region will increase as well. For instance, insurance costs might surge as insurers price in higher risk. Staff costs might increase too as lesser people might be willing to work in troubled regional waters.

If tension between nations intensifies because of territorial disputes at sea, we might well see a decrease in margins for oil- and gas-related companies operating in these regions.

As of now, world powers such as China and the USA are trying to exert their pressure upon the region. It’s anybody’s guess as to what might eventually happen.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.