The Story of HYSY 981 (海洋石油981)

WHAT THE HELL HAPPENED?

On a late June morning in 2014, Vietnamese fisheries inspection vessel KN 951 approached HYSY 981 (海洋石油981),[1] a Chinese mobile oil drilling platform operating within Vietnam’s claimed exclusive economic zone (EEZ).[2] [3] Three Chinese State-owned industrial vessels retaliated by spraying, ramming, and chasing KN 951 for approximately 11.5 nautical miles,[4] ultimately doing substantial damage to the Vietnamese vessel’s hull. During the pursuit, the three tug boats displayed a degree of tactical coordination; there is video footage showing that two boats worked in tandem to T-bone KN 951 while a third tug positioned itself in front of the Vietnamese vessel to prevent it from escaping.


"An Exclusive Economic Zone (EEZ) is a concept adopted at the Third United Nations Conference on the Law of the Sea (1982), whereby a coastal State assumes jurisdiction over the exploration and exploitation of marine resources in its adjacent section of the continental shelf, taken to be a band extending 200 miles from the shore."

—OECD, Glossary of Statistical Terms


On June 23,  a Chinese tug boat rams KN 951 while it is sprayed by a Chinese coast guard vessel. A second tug boat that participated in the incident is seen in the background. Source: Bloomberg News

Similar aggressive maneuvers by China’s State-owned assets were common in the summer of 2014, as industrial vessels, Chinese coast guard (CCG),[5] and forces from the maritime militia[6] (海上民兵; China’s paramilitary fleet of ostensible civilian fishing vessels that defend China’s territorial claims from foreign powers), People’s Liberation Army Airforce (PLAA), and People’s Liberation Navy (PLAN)[7] jointly defended HYSY 981. Deployed between May 2[8] and July 15,[9] 2014, the HYSY 981 drilling platform was considered “mobile national territory”[10] in China’s bold play to enforce its claim on the Paracel Islands in the South China Sea.

In addition to the law enforcement, paramilitary, and military assets mobilized, China also relied on its merchant marine— a country’s fleet of commercial vessels[11]—to defend the rig from Vietnamese retaliation. Over the summer, roughly 30 commercial industrial ships helped to form three concentric security rings[12] around the platform.[13] Uncovering the ownership of these industrial vessels leads to national state-owned enterprises (SOE) and, thereby, the highest levels of the Chinese government.

 Map of the South China Sea. The dotted blue lines represent UNCLOS' exclusive economic zone boundaries, and HYSY's position in indicated by the red point. Note that while only China's claims are shown, Vietnam likewise lays claim to a large portion of the Sea, including all of the Paracel Islands. Source: BBC

Map of the South China Sea. The dotted blue lines represent UNCLOS' exclusive economic zone boundaries, and HYSY's position in indicated by the red point. Note that while only China's claims are shown, Vietnam likewise lays claim to a large portion of the Sea, including all of the Paracel Islands. Source: BBC

The HYSY 981 incident provides evidence for an oft-heard but difficult-to-prove claim: Beijing sees SOEs and their assets as dual-use and will use them aggressively to achieve China’s goals internationally. Deploying the platform may have served several policy objectives, including resource acquisition, territorial reunification, and favorable geopolitical conditions on China’s terms. In this event and elsewhere, SOEs help realize these objectives by providing infrastructure and personnel.

The June 23 incident was not an anomaly. Within just five days of the platform’s entrance into Vietnam’s claimed EEZ, Chinese and Vietnamese vessels clashed nearly 200 times.[14] Photos and videos taken at the time clearly show that Chinese industrial vessels not only served as passive deterrents in the security rings around the rig, but also joined law enforcement and paramilitary forces in conducting aggressive maneuvers, including ramming, a tactic that the Chinese media endearingly termed “kissing” (亲吻).[15]

Open source ship tracking data show that Chinese industrial vessels helped patrol the area around HYSY 981. For example, the movements of the Hai Shan (海山) and Zhong You Hai 226 (中油海226) suggest these vessels were on guard duty, as they maintained distinctive positions close to HYSY 981 throughout the summer. The former spent most of its time tracing a circular pattern southwest of HYSY 981 while the latter patrolled the southeast. When HYSY 981 repositioned on May 27, [16] these vessels moved with the platform and maintained their relative deployments. Confirmation of this interpretation is found in the open source: the manager of Hai Shan highlights the vessel’s role in providing security for HYSY 981 on the company’s website.[17]

 The movements of Hai Shan (light pink) and Zhong You Hai 226 (bright pink)  during HYSY’s deployment in the summer of 2014. HYSY 981’s position is show in yellow (May 2 – May 27) and red (May 27 – July 15). Source: Windward Maritime

The movements of Hai Shan (light pink) and Zhong You Hai 226 (bright pink)  during HYSY’s deployment in the summer of 2014. HYSY 981’s position is show in yellow (May 2 – May 27) and red (May 27 – July 15). Source: Windward Maritime

China’s SOEs risked losing hundreds of millions of dollars in commercial assets by acting so provocatively. Moreover, HYSY 981, and the vessels involved in this dispute, sparked an international incident between China and Vietnam that could have led to open war. Indeed, the event unleashed mass protests in Vietnam, killing Chinese nationals.[18] Several questions naturally follow: who are the owners of these brazen vessels and why would they risk valuable assets in such an audacious manner?

 

WHO DID THAT SHIT?

Of the 11 identifiable industrial vessels involved in the defense of HYSY 981, open source evidence indicates that ten[19] are owned, respectively, by the SOE subsidiaries CNPC Offshore Engineering Co. Ltd. (CPOE; 中国石油集团海洋工程有限公司), China Oilfield Services Limited (COSL; 中海油天服务股份有限公司), and Yiu Lian Dockyards Limited (香港友联船厂有限公司).

 CNPC Offshore Engineering Co. Ltd. (CPOE). Source: Official Registry Data

CNPC Offshore Engineering Co. Ltd. (CPOE). Source: Official Registry Data

Five of the eleven vessels are owned by CNPC Offshore Engineering Co. Ltd. (CPOE). Official registry documents confirm that, as its name suggests, CPOE is a wholly-owned subsidiary whose sole investor is China National Petroleum Corporation (CNPC; 中国石油天然气集团公司), a national-level SOE that is directly owned by the State Council.

 China Oilfield Services Limited (COSL). Source: Official Registry Data

China Oilfield Services Limited (COSL). Source: Official Registry Data

Two vessels, Binhai 284 (滨海284) and Binhai 285 (滨海285), both of which participated in the June 23, 2014, attack on KN 951, are owned by COSL. The company also manages the HYSY 981 drilling platform on behalf of its parent company, China National Offshore Oil Corporation (CNOOC; 中国海洋石油总公司).

According to available ownership records, COSL has been majority owned by CNOOC since its creation. COSL’s remaining shares (49.47%) are currently held by government-controlled funds in China and Hong Kong.[20] In turn, CNOOC is a SOE wholly-owned by China’s Ministry of Finance.[21]

 Yiu Lian Dockyards Limited. Source: Official Registry Data

Yiu Lian Dockyards Limited. Source: Official Registry Data

You Lian Tuo 9 (友联拖9) was the third tug boat that joined the June 23, 2014, maneuver. Whereas the vessels linked to COSL and CPOE were both owned and managed by those companies, Yiu Lian Tuo 9 and two sister vessels were (in 2014) managed by a small private company named Qingdao Kilter Ship Management Co. Ltd. (青岛凯瑞特船舶管理有限公司), and owned by Yiu Lian Dockyards Limited. Registry records reveal that Yiu Lian Dockyards is a wholly-owned[22] subsidiary of one of China’s oldest and largest SOEs: China Merchants Group (CMG; 中国招商局). [23] An official audit conducted in 1987 suggests that CMG is directly owned by China’s Ministry of Transportation.[24]

 

DID THE GOVERNMENT APPROVE?

The use of SOE assets in a quasi-military operation raises the question of government involvement. When the HYSY 981 drilling platform was unveiled in 2012, the ceremony saw the gathering of numerous Party, Army, and State representatives, including the State Council, and the Ministries of Finance and Foreign Affairs. A vice chairwoman of the State-owned Assets Supervision and Administration Commission (SASAC)—a regulatory body that manages SOEs—read congratulatory remarks prepared by the future premier of China’s State Council, Li Keqiang (李克强).[25]

CNOOC’s Chairman Wang Yilin (王宜林) asserted that the platform would aid China’s transformation into a strong maritime power, calling HYSY 981 “mobile national territory” (流动的国土)[26] that would help transform China into a great power on the seas.[27] Two years later, in 2014, HYSY 981 deployed to disputed waters, and SOE-owned industrial vessels joined forces with military, paramilitary, and law enforcement to enforce China’s territorial claims by carving out a piece of the South China Sea.

China’s SOEs could not have coordinated the HYSY 981 operation on their own; simply drilling in the disputed South China Sea would have required Beijing’s approval. In the past, when SOEs have applied for drilling concessions in disputed waters, Beijing refused, allegedly to avoid conflict with Vietnam.[28] Yet in 2014, state authorities appear to have given their full consent. Further, SOEs alone would not have had the authority or capacity to coordinate the PLA, coast guard, and maritime militia in defense of HYSY 981.

Explicit government support came on May 8—a week after HYSY 981 moved into position. The Ministry of Foreign Affairs and CNOOC’s subsidiary COSL held a press conference responding to Vietnam, whose ships had hounded the platform from the outset. Yi Xianliang (易先良) of the Department of Boundary and Ocean Affairs and Li Yong (李勇), COSL’s President and CEO at the time, threatened to increase security in the area.[29] Interestingly, ship tracking data shows that Bin Hai 284 and 285—the two COSL vessels that attacked KN 951 in June—began moving south from Beijing toward HYSY 981 within days of this conference.

So why were SOE industrial vessels used to defend HYSY 981 at all, especially when numerous law enforcement and paramilitary vessels were already at the scene? So far, there is no definitive answer. One possibility is that Beijing required SOEs to contribute to the rig’s defense in exchange for approving the project in the first place. Another possibility is that these ships were mobilized to augment the capacity of the maritime militia. The maritime militia is comprised of civilian fishermen who are compensated to participate paramilitary operations.[30] In this case, militia members may have initially resisted participation due to limited incentives.[31] The industrial vessels may have been called on to offset this deficit.

 

WHY DID THE COMPANIES PARTICIPATE?

Commercial assets are generally risk averse, yet the vessels and personnel that participated in the defense of HYSY 981 faced significant risks, conducting dangerous maneuvers like chasing and “kissing.” As mentioned above, the SOEs may have been compelled to do so.  Chinese law gives the National People’s Congress, State Council, and Central Military Commission authority to mobilize civilian assets for national defense when “territorial integrity… is threatened.”[32] Therefore, if Beijing formally mobilized SOE assets for the HYSY 981 offensive, the companies involved were obligated by law to comply.[33] This obligation was explicitly applied to all assets in the transportation sector, maritime and otherwise, in January 2017.[34]

However, government bodies also incentivized participation in HYSY 981’s defense through commendations that recognize service to the nation. Defending HYSY 981 therefore became a point of pride for some. Qingdao Kilter Ship Management Co. Ltd., the private company that managed three of Yiu Lian Dockyards Limited’s vessels, is one such case. Qingdao Kilter’s website states that, “the oil industry has given [the company] high praise. Especially, between April 27 and July 22, Hai Shan, You Lian Tuo 9, and 10 defended HYSY 981 in the Paracel Islands, … for which [the company] received positive evaluations and commendations from high-level leadership in all areas.”[35]

One of the commendations bestowed on Qingdao Kilter Ship Management Co. Ltd. was a second class merit award (二等功) that went directly to a tug boat captain named Li for their part in the operation. Interestingly, a second class merit was conferred on all commanders, combatants, and logistics personnel[36] 40 years earlier, when China originally wrested control of the Paracel Islands from Vietnam.[37]

 

AND? THIS WAS THREE YEARS AGO…

So why is this story relevant today? In building its global presence, China has been steadily working to transform itself into a “maritime great power” (海洋强国), largely by leveraging SOE investments. For example, Chinese SOEs—including China Merchants Group, discussed above—now dominate international shipping, primarily through control of or influence in over half of the world’s top 50 container ports.[38] In an effort to become a “maritime great power” and in support of its blue-water navy, China has developed one of the world’s largest merchant marine fleets of commercial ships.[39]

 Source: https://www.cna.org/cna_files/pdf/china-merchant-marine.pdf   *Note: This table represents one method of calculating merchant marine size. Other methods place China in second and third place.

Source: https://www.cna.org/cna_files/pdf/china-merchant-marine.pdf

*Note: This table represents one method of calculating merchant marine size. Other methods place China in second and third place.

Many countries rely on their merchant marine fleets to provide logistical support to the military during war, and China is no exception. However, the HYSY 981 incident suggests that China believes commercial industrial vessels can also be used legitimately as an offensive tool in peacetime. Similar logic is seen frequently in the activities of China’s maritime militia of fishing vessels, which is one of only two militias in the world that has a mandate to defend internationally disputed territorial claims,[40] even in peacetime. Overall, Beijing appears to believe that any commercial asset, particularly state-owned assets, are legitimate instruments of aggressive foreign policies.


China’s Maritime Militia is a reserve force of the People’s Liberation Army organized under the People’s Armed Forces militia system comprised primarily of commercial fishermen.

Andrew Erickson

Merchant marine may be defined as all ships engaged in the carriage of goods; or all commercial vessels (as opposed to all nonmilitary ships), which excludes tugs, fishing vessels, offshore oil rigs, etc.”

CIA World Factbook

*Note that China appears to make no such exception regarding tug boats and oil rigs. 


China’s willingness to leverage SOE assets as a critical policy tool has global security implications. SOEs have deep capital reserves, enabling them to operate broadly across regions and industries. Deep pockets also allow SOEs to take outsized risks and absorb substantial losses that market-driven business may not survive. Further, many SOE subsidiaries are publicly traded on international markets. For example, China National Offshore Oil Corporation’s holding, CNOOC Limited, is traded on the New York Stock Exchange.[41] Listing on publicly traded exchanges creates the impression that these companies are purely motivated by profits. This impression can be accurate, but Beijing sees SOEs and their assets as dual-use.

The dual-use nature of SOEs and the inherent risks of asset mobilization demand heightened scrutiny of Chinese investments abroad. Such risks are not limited to the maritime sector, but extent to other industries, such as aerospace and resource extraction. For example, SOEs investing in satellite technology in South America have allegedly been linked to the People’s Liberation Army.


 

Citations

[1] http://vietnamconsulate-ny.org/news/2014/06/press-release-mfa-viet-nam-june-26th-2014

[2] https://www.csis.org/analysis/china-vietnam-tensions-high-over-drilling-rig-disputed-waters

[3] Abbreviated EEZ, it is the maritime territory accorded by the United Nations Convention on the Law of the seas in which a country has exclusive rights to economic activities, including drilling, resource extraction, and fishing.

[4] http://bbs.tiexue.net/post_8761423_1.html

[5] http://www.guancha.cn/local/2014_05_14_229365.shtml

[6] http://cimsec.org/hainans-maritime-militia-hands-deck-sovereignty-pt-3/32085; and http://cimsec.org/chinas-daring-vanguard-introducing-sanya-citys-maritime-militia/19753

[7] https://www.defense.gov/Portals/1/Documents/pubs/2015_China_Military_Power_Report.pdf

[8] http://www.msa.gov.cn/html/xinxichaxungongkai/gkml/HXJG/Hainan/20140503/7291b46d-ab69-4949-8a88-6c55dad815e8.html

[9] Chinese authorities claimed that HYSY 981 finished its work a full month ahead of schedule and withdrew the oil rig on July 15, 2014, despite initial plans for the rig to remain in place until August 15. Source: http://thediplomat.com/2014/08/vietnam-china-and-the-oil-rig-crisis-who-blinked/

[10] https://d2071andvip0wj.cloudfront.net/275-stirring-up-the-south-china-sea-iv-oil-in-troubled-waters.pdf; and http://www.cnooc.com.cn/art/2014/2/19/art_1641_1661.html

[11] https://www.cia.gov/library/publications/the-world-factbook/fields/2108.html

[12] https://www.defense.gov/Portals/1/Documents/pubs/2015_China_Military_Power_Report.pdf

[13] http://www.guancha.cn/local/2014_05_14_229365.shtml; and http://m.sohu.com/n/401273520/?pvid=000115_3w

[14] http://news.sohu.com/20140509/n399324370.shtml

[15] http://bbs.tiexue.net/post_7916727_1.html

[16] http://www.msa.gov.cn/html/xinxichaxungongkai/gkml/HXJG/Hainan/20140527/1739f8cb-e8db-46fe-8759-bc8c125c0d7b.html

[17] http://www.qdkilter.com/about.aspx?e=4

[18] https://www.theguardian.com/world/2014/may/15/vietnam-anti-china-protests-oil-rig-dead-injured

[19] The owners of the eleventh vessel, the Hai Li (海力), are currently unconfirmed.

[20] Tianyancha

[21] China National Enterprise Credit Publicity System

[22] The ownership is “indirect” because CMG controls Yiu Lian’s shares through other wholly-owned subsidiaries, including China Merchants Industry Holding’s Co., Ltd. and China Merchants Development Co., Ltd. (Source: Hong Kong Company Registry)

[23] Hong Kong Companies Registry

[24] Hong Kong Companies Registry

[25] http://www.cnooc.com.cn/art/2012/5/11/art_341_468921.html

[26] https://d2071andvip0wj.cloudfront.net/275-stirring-up-the-south-china-sea-iv-oil-in-troubled-waters.pdf; and http://www.cnooc.com.cn/art/2014/2/19/art_1641_1661.html

[27] http://www.cnooc.com.cn/art/2014/2/19/art_1641_1661.html

[28] http://nationalinterest.org/feature/beijing-needs-the-south-china-sea-stay-top-17223; and http://www.eeo.com.cn/2011/0604/202804.shtml

[29] http://www.bjrbw.com/news/3182.html

[30] http://www.andrewerickson.com/2017/04/conclusion-to-our-9-article-cimsec-series-hainans-maritime-militia-all-hands-on-deck-for-sovereignty-pt-3/

[31] http://cimsec.org/frontier-frontline-tanmen-maritime-militias-leading-role-pt-2/25260

[32] http://eng.mod.gov.cn/publications/2017-03/03/content_4774223.htm; and http://www.gov.cn/flfg/2010-02/26/content_1544415.htm

[33] http://www.gov.cn/flfg/2010-02/26/content_1544415.htm

[34] http://npc.people.com.cn/n1/2016/0505/c14576-28326937.html

[35] http://www.qdkilter.com/about.aspx?e=4

[36] http://history.people.com.cn/n/2014/0605/c372328-25109662-4.html

[37] https://thediplomat.com/2014/01/lessons-from-the-battle-of-the-paracel-islands/

[38] https://ig.ft.com/sites/china-ports/?mhq5j=e5

[39] Michael McDevitt. 7th Annual China Defense and Security Conference. Jamestown Foundation. October 11, 2017.

[40] https://medium.com/fairbank-center/understanding-chinas-third-sea-force-the-maritime-militia-228a2bfbbedd

[41] https://www.nyse.com/quote/XNYS:CEO

[42] http://thediplomat.com/2016/05/china-builds-space-monitoring-base-in-the-americas/