31 October, 2016
By Leo Byrne
An oil rig owned by China National Petroleum is currently in North Korea’s exclusive economic zone (EEZ) in the Yellow Sea off the country’s western coast, data from ship tracking website Marine Traffic shows.
The rig arrived at its current location just within the North’s EEZ in late May and is only a short distance from a series of exploration wells found to yield oil in the 80s and 90s.
The platform’s presence in the DPRK’s EEZ could indicate that Beijing is showing renewed interest in a memorandum signed in 2005 to develop the North’s oil reserves in the area.
“The rig does appear to be right in the area where oil finds have been reported. Clearly, it’s the same basin as was explored before,” David Von Hippel, a senior researcher at the Nautilus Institute for Security and Sustainability told NK News.
If the Chinese rig is operating in the North’s EEZ, it could imply Beijing is once again warming up to its truculent neighbor. North Korea doesn’t have a domestic oil and gas industry, nor the technical expertise and capital to explore and develop its reserves.
The financial and technical shortfalls, added to the North’s notoriously difficult business climate, have made the DPRK almost totally reliant on its neighbors for large-scale energy needs. But a functioning agreement to develop the country’s reserves could shore up the North’s energy security, providing fuels for its military and ever growing fleet of civilian vehicles.
“CNPC’s rig deployment is surprising news and a major change of China’s stance towards DPRK’s offshore exploration and development,” Dr. Keun Wook Paik, associate fellow at the Energy, Environment and Resources department at Chatham House told NK News.
“In particular, the timing of rig deployment in parallel with the announcement of US-Korea decision to deploy THAAD system is not co-incidental.”
The Zhong You Hai 17 owned by the state-run China National Petroleum Corporation (CNPC) left the nearby Dalian port on May 22 and began broadcasting its position within the North’s EEZ six days later.
Data from Marine Traffic and recent satellite imagery indicate the platform has remained in the same location ever since.
The platform is what’s known in the industry as a jack-up, a movable oil rig often used in shallower waters like those found in the Yellow Sea.
“A jack-up drilling rig is a type of Mobile Offshore Drilling Unit, which is used in relatively shallow waters on the continental shelf in water shallower than 400ft, though some types can operate in water up to a depth of 600ft,” George Wall, Managing Director of Asgard Project Solutions, a project management company for oil and gas construction work, told NK News.
CNPC declined to comment on what the 14000-tonne platform was doing in the area, or whether it had begun drilling for oil.
Typically oil and gas companies will drill numerous test wells in an exploratory phase before committing to a project.
The DPRK’s West Bay Basin has attracted interest from numerous foreign investors since the 1960s. Companies – both private and national – from Singapore, Norway, the former Soviet Union, Australia, the UK and China have all partnered with a succession of North Korean state-run oil companies to conduct geological surveys or exploration work in the West Sea in past decades.
“At least ten exploration wells are thought to have been drilled in the West Sea,” an article published last year by industry magazine GeoExPro reads.
“Most wells had fair to poor oil and gas shows, but two of them, #602 and #606, encountered good oil shows, the latter testing up to 450 bopd (barrels of oil per day).”
Other wells may have also shown decent flow rates, though the evidence is hard to come by.
“There was an unpublished record telling that well no. 609 had shown an oil flow of as much as 3,500 barrels per day during 1995-96, even though it was not verified,” Dr. Paik continued.
NK Pro has learned the coordinates of the previous exploratory attempts, which are mainly clustered in a relatively small area 120km east of the DPRK’s Nampho port. The Zhong You Hai 17 is currently located roughly 2km east of the 606 and 602 test wells.
However, the long lag time since the previous rounds of exploration makes it unlikely the Zhong You Hai 17 has begun any full-scale drilling, though it may be doing additional exploratory work or preparing for a more commercial stage.
“In this instance the unit may be used for exploratory drilling, following on from previous geological investigations, to verify if petroleum products are present or it may be installing wells for production purposes,” Wall told NK News.
According to MarineRegions.org, the Zhong You Hai’s current location places it 3km within the North’s EEZ, and approximately 90km from the DPRK coast.
Beijing is currently involved in numerous maritime disputes across Asia, but a memorandum of understanding signed in 2005 implied China would cooperate with the DPRK on any commercial oil flows.
“From now on, North Korea and China are expected to share this advantage of crude oil buried in North Korean territory through joint development using China’s technology and resources,” a 2005 article published by South Korea’s Yonhap News Agency on the memorandum reads.
If Beijing is still abiding by the terms of the agreement (which was signed with a different state-run oil company than the rig’s owner CNCP), it could signal the Chinese government is looking to help the North’s long-gestating oil and gas sector.
Getting commercial oil flows from offshore reserves is an expensive business, and recent crashes in global oil prices have made many oil companies unwilling to start new large scale projects. CNPC would have to bear the brunt of the financial costs, while also providing the equipment and technical know-how to use it.
“Given the state of the oil price there is a large amount of pressure on contract prices for offshore drilling rigs, so an indicative cost for the wet lease would be in the range of $60K – $100K per day depending on the exact type of rig and when it was contracted,” Wall continued.
If Beijing is providing the necessary support to get the North’s oil reserves flowing, it would be a further indicator that China is unwilling to let North Korea destabilize under the weight of various rounds of autonomous and UN sanctions.
“Considering that Beijing did not take any meaningful action since the 2005 Christmas Eve MOU signing … CNPC’s rig deployment indicates Beijing’s patience has run out and this dangerous card will be their leverage against THAAD affairs,” Dr Paik added.
“If so, this will be very alarming news for the stability of Northeast Asian region.”
China has already faced criticism from Washington on its implementation of sanctions on the North’s coal industry. Chinese coal traders are widely believed to be taking advantage of a loophole in the sanctions legislation, which allows sales to continue if they are for livelihood purposes and not linked to the DPRK’s weapons programs.
Following the DPRK’s fifth nuclear test in September, reports circulated that Washington was also pushing for restrictions on the North’s crude oil imports, and while Beijing has always been resistant to limiting the North’s access to oil, exploiting its reserves would indicate a markedly contrasting policy.
The ongoing coal trade has meant China has continued to provide the North with one of its economic lifelines, and the presence of functioning oil rig could deliver another.
About the Author
Leo Byrne is the Data and Analytic Director at NK News and is based in Seoul, South Korea. Follow him on twitter @LeoPByrne