Tempest in the South China Sea

On March 16 of 2009, the governments of Brunei and Malaysia exchanged letters that essentially meant Brunei had abandoned its claim to a nondescript 7,800 square kilometer patch of mud flats and mangrove swamps called Limbang, which had been claimed by both for two decades.

Over the last three months, however, the agreement appears to have blown up in Malaysia's face with accusations that two exploration blocks in the South China Sea which were ceded to Brunei in the letters may contain anywhere from 1 billion to 4 billion barrels of crude. Thus, at the current price of US$74.20 per barrel, critics argue, Malaysia may have ceded anywhere from US$74.2 billion to US$296.8 billion in revenues to the tiny sultanate – or more. Crude hit a record US$147.27 per barrel on July 11, 2008, before falling back as the world financial crisis hit.

This has set off a political squabble in Malaysia, with the 84-year-old former Prime Minister Mahathir Mohamad using it as a cudgel to once again beat up on Abdullah Ahmad Badawi, the successor he came to revile as premiere, for signing the letters of exchange. The governments of the East Malaysian states of Sabah and Sarawak, which would claim the oil, say their state assemblies were never consulted, a violation of parliamentary procedure and constitutionality.

In addition, Opposition Leader Anwar Ibrahim of the Pakatan Rakyat coalition and his ally Lim Kit Siang, head of the opposition Democratic Action Party, are blasting away at Prime Minister Najib Tun Razak, who was deputy prime minister and essentially running the cabinet in the waning days of Badawi's reign, which ended only a month after the agreements were signed. Tengku Razaleigh Hamzah, a rebel elder statesman inside the United Malays National Organisation, has criticized the agreement. Hassan Marican, the former chief executive officer of Petronas, called it a treasonous activity.

Limbang nearly cuts Brunei in half on Borneo's north coast but it effectively belongs to the Malaysian state of Sarawak. The signing appeared to close one of Southeast Asia's longest-running minor border disputes and was claimed as a diplomatic triumph, settling a sea boundary delineation dispute which had held up oil and gas exploration off the two countries' mutual coasts as well as enabling the two to form a united front against China's claims over the entire South China Sea. Even today, the Chinese Foreign Ministry lays claims to Malaysia's Layang-Laying, an atoll roughly 300 km from the coast of Sabah and 1,800 km from Hainan, China's most southerly inhabited island.

The disposition of the two blocks is important to both countries. Malaysia is estimated to become a net oil importer by 2011 if it does not find more reserves, and Brunei's fields, which have for decades made it the richest nation on a per capita basis in Southeast Asia, are fast depleting. A 2006 study by Rabobank, the Dutch financial services provider, said Brunei's wells will run dry in 2015—just a bit over five years from now. A 2003 study by the World Markets Research Centre puts the end of the gravy train a year earlier, 2014.

The controversy surfaced when Murphy Oil, the Arkansas-based exploration company working with Petronas Carigali, Petronas's exploration and production unit, issued a press release on April 21 saying that it had been informed by Petronas that "following the execution of the Exchange of Letters between Malaysia and the Sultanate of Brunei on March 16, 2009, the offshore exploration areas designated as Block L and Block M are no longer a part of Malaysia" and that Murphy was terminating its production sharing contracts.

"We have absolutely no comment beyond what was in our news release," said Mindy West, Murphy's vice president for public relations, in an email.

The Murphy Oil announcement set off Mahathir, who charged on April 29 in his popular blog Che Det, which is read widely in Malaysia, that "Abdullah has caused Malaysia to lose at least US$100 billion dollars (about RM320 billion) of Malaysia's oil in this agreement. Can Wisma Putra please explain why it did not stop Abdullah?"

Mahathir is still smarting from a book written by former Asian Wall Street Journal editor Barry Wain, which accused the former premier of wasting as much as US$40 billion at exchange rates at the time on grandiose projects and corruption. Today, every chance he gets, he brings up the amount of money Badawi allegedly wasted or lost to corruption.

"Having given up on Block L and M so easily, especially to a small country like Brunei, we will have no chance with Indonesia, in the contest over the Ambalat Oilfields," said an aide to Anwar. Last May, warships from Indonesia and Malaysia challenged each other repeatedly in disputed oil-rich Ambalat territories of the Celebes Sea east of Borneo, with Indonesian navy officials saying they were minutes away from firing on the Malaysians, which they charged were 12 nautical miles inside Indonesian territory. Both countries have awarded oil concessions to Shell, Unocal, and ENI respectively in the disputed region.

But it appears that the storm in Kuala Lumpur is political rather than international, and probably confined to the local political arena. The government insists that under the agreement signed by Badawi a year ago, Petronas, the national oil company, will engage in joint exploration and exploitation of the two blocks with Brunei.

In fact it appears unclear if the two blocks were ever Malaysia's to give away. The agreement appears to settle a deadlock over the two blocks that has existed since at least 2003, when Malaysia awarded the two blocks to Petronas Carigali and Murphy Oil in an effort to assert its claim over the area. That was immediately met with a Bruneian gunboat which drove Murphy's craft out of the area. A month later, the Malaysian Navy blocked the arrival of a ship owned by Total, one of six companies to which Brunei had awarded a competing concession. The dispute in fact kept all of the companies from drilling for anything.

The two competing oil exploration companies seem to believe cooperation will go forward. Nobody seems to have read the last sentence in the Murphy Oil statement to the New York Stock Exchange, which said that "Murphy's potential participation in replacement production sharing contracts covering these areas is under discussion."

In addition, in a statement on its own website, Total, the French oil operator in league with the Brunei government to operate in Blocks L and M, said that the company "also remains optimistic pending the result of oil sharing negotiations between Brunei and Malaysia to resolve a dispute over the ownership of two large oil exploration blocks in the deepwater exploration areas in South China Sea. This optimistic message was presented in a telephone conversation by Yves Grosjean, the newly assigned general manager for the two Total affiliates in Brunei Darussalam."

Both countries might want to make sure their respective environmental agencies are capable of monitoring the undersea drilling to make sure there isn't a blowout like the one in the Gulf of Mexico, in which a deep sea well controlled by BP is spewing thousands of barrels of oil per day into the waters in what could end up one of the biggest manmade environmental disasters of all time.