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Southeast Asia's flashpoint

Vietnam's need for more energy is reviving the disputes with Beijing over the South China Sea

Oil and gas-hungry Vietnam is tweaking the lion's tail in a long-disputed part of the South China Sea that could bring to a head a simmering row with China.

Hardly a month after China oversaw the development—or rather revival—of a "negotiating framework" with Vietnam and other claimant nations intended to establish a code of conduct for arguments in these waters, Vietnam began exploration in the Spratly Islands over which China has unilaterally asserted its rights.

Almost immediately, China cancelled a defence meeting with Vietnam. In the process put in jeopardy the code of conduct that Chinese foreign minister Wang Yi had hailed as a solid foundation that would ensure a generally stable situation in the South China Sea subject to "the premise that there is not major interference from outside parties".

It's not certain exactly what "major interference" means, but Vietnam may be about to learn. As well as launching exploration in the Spratlys, the country has granted India an extended oil concession in these contested waters. (Vietnam claims the Paracel and Spratly archipelagos.) As London-based Peter Hayes, a specialist in trade and regulation in the Asia-Pacific region, noted in a paper released by research organisation Nautilus Institute: "This represents a shift in policy for both nations who had put new (exploration) ventures on hold since 2014 to avoid escalating conflicts with China."

The Philippines could also be testing the definition of what constitutes major interference. Contradicting a recent strategy of cosying up to its much bigger neighbour, President Rodrigo Duterte's government announced in mid-July that it would probably also resume exploration in waters where China has established man-made military bases under its claim to most of the South China Sea. This is a claim which was comprehensively rejected last year by the tribunal at the Permanent Court of Arbitration in The Hague.

The latest initiatives by Vietnam and the Philippines may take things back to square one in this strategic waterway, through which between $3 trillion and $5 trillion of goods pass every year. The other states claiming their share of the South China Sea—Malaysia, India, Taiwan and Brunei—have long sought a legally binding and enforceable code based on a 2002 agreement that lapsed in the wake of China's uncompromising stand.

However, there was considerable scepticism about China's sincerity towards the revived code. According to a report in India's Economic Times in early August, China is merely using the talks to buy time: "Some critics and diplomats believe China's sudden interest in the code after 15 years of delays is to drag out the negotiating process…to complete its strategic objectives in the South China Sea."

Clearly, Vietnam decided it cannot wait any longer. The country has pledged to build up oil stocks equivalent to 90 days of imports by 2020 as it faces daunting demands for all forms of energy in the next few years while reducing dependence on coal. According to a consensus of experts, the government can only meet its goals by ending the dominance of large and inefficient state-owned companies that are crowding out nimbler and more capital-savvy private operators.

As Giles Cooper, partner in law firm Duane Morris, pointed out in a briefing in early August, Electricity Vietnam (EVM) overshadows the entire power sector with harmful effect. "Not only does EVM routinely miss its main objective of securing stable electricity supply, but it also suffers significant annual financial losses in the hundreds of millions of dollars," he explains.

Although Vietnam is aiming in the long term for a future based on renewables, it is also under pressure to tap its natural gas reserves, for which it requires outside capital and expertise. But this is unlikely to happen unless fundamental reforms are put in place. "The government must therefore draw up a political and regulatory framework to better assure foreign and local investment, the sharing of technologies and experience and to successfully develop markets," adds Duane Morris in a separate briefing.

In the meantime, Vietnam can only wait and see how China reacts to its activity in the Spratlys. But it's unlikely the government will back down because of its long-held historical claim to the South China Sea. Known as the East Sea in Vietnam, it has been a territorial right since the 16th century according to evidence accumulated by scholars. By contrast, China only began asserting its claim from the early 20th century.

Vietnam now seems to have run out of patience. Its foreign ministry insists that China is violating the former's sovereignty over the Paracel and Spratly archipelagos where it continues to develop the so-called "Sansha City" with a current population of about 1,000.

There appears to be no room for compromise.

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