[ROCKMAN]

Might be the first time Mr. Black and Mr. Mulcair have agreed about anything. Of course there are some Canadians who dislike the idea of a refinery there as well as products being shipped out of their ports as much as they dislike producing the oil sands in the first place. From April 1013:

http://www.cbc.ca/news/canada/british-c ... -1.1368791

China's largest bank will be helping to finance the proposed Kitimat refinery, which would process oil from the Alberta oil sands in B.C., instead of the raw bitumen being shipped overseas.
B.C. media mogul David Black said he has signed a memorandum of understanding with the Industrial and Commercial Bank of China (ICBC) for the proposed refinery that is estimated to cost $25 billion.
Black, who was in Beijing on Thursday, did not say how much money ICBC will provide, only that the bank has expressed interest in loaning money to the enterprise, functioning as a coordinator to get other banks involved, and providing engineering and construction help to build the refinery.

B.C. media mogul David Black met with ICBC officials in Beijing this week. "They’re very interested. There’s a lot in this for China and there’s a lot in this for Canada and B.C.," Black told CBC News. "This is a non-binding letter of intent. There’s lots of negotiating to do, lots of fleshing out for the agreement. But I am very sure that we’ll get there." Black said more memorandums of understanding are anticipated between Chinese companies and his company, Kitimat Clean. The Kitimat refinery — which should have the capacity to process the entire output of the proposed Northern Gateway pipeline — will create 3,000 full-time jobs, 6,000 temporary jobs and generate large tax revenues for the government, Black said.

[Keith_McClary]

Some charts on the Kitimat Clean website:
http://kitimatclean.ca/review-of-the-pr ... project-2/
Figure 1: Key Processes in a ‘Conversion’ Refinery .................. 4
Figure 2: Regional Refining Net Margins and Average Utilisation ................... 9
Figure 3: Global Refinery Capacity and Configuration ............................ 10
Figure 4: Generic Process Flow Diagram of Hydrocracking / Coking Refinery ... 12
Figure 5: China – Fuel Product Output and Consumption ..................... 18
Figure 6: Fuel China – Product Imports and Exports ............. 18
Figure 7: India – Fuel Product Output and Consumption ............ 19
Figure 8: India – Fuel Product Imports and Exports ............. 21
Figure 9: South Korea – Fuel Product Output and Consumption ....... 22
Figure 10: South Korea – Fuel Product Imports and Exports ........... 23
Figure 11: Japan – Fuel Product Output and Consumption .............. 24
Figure 12: Japan – Fuel Product Imports and Exports ................ 25
Figure 13: Asia / Oceania – Fuel Product Output and Consumption ...... 26
Figure 14: Asia / Oceania – Fuel Product Imports and Exports ........ 26
Figure 15: Comparison of Refining Complexity, Industry Size and Market Structure . 27

[ROCKMAN]

Granted this is just about a short term situation but it does highlight our developing "just in time" system. And also where our j-I-t heroes abide. And it isn't in this country:

Reuters - "Refiners in Asia, Europe and Russia are shipping around half a million tonnes of heating oil and diesel to the United States, this month after bitterly cold weather sharply reduced oil stocks there. At least a dozen tankers have been booked so far in January to ship gasoil and diesel to the U.S. East Coast. The majority of the tankers, or around 300,000 tonnes of oil product, originated from the Baltic Sea and Black Sea. One tanker, the 100,000-tonne Torm Valborg, was chartered by Reliance , which operates the world's biggest refining complex in western India. Around three medium-range tankers were booked from Europe on the west-bound transatlantic route. Also, around five cargoes of jet fuel heading from the Middle East and Asia to Europe were diverted to the United States in recent days, with several likely to discharge in Florida. "U.S. East Coast heating oil stocks are low at the commercial level and are being reduced at the consumer level. That market should remain tight and can't get much incremental supply from the U.S. Gulf due to the Jones Act restricting transport between the two regions by vessel," said Jakob, analyst Petromatrix. "Russia will have to come to the rescue of the U.S. East Coast heating oil consumers since the Jones Act does not allow the U.S. Gulf to do it," he added. The Jones Act generally requires that the maritime transport of cargo between points in the United States be carried by U.S.-flagged vessels that are at least 75 percent owned and crewed by U.S. citizens, with U.S. officers and built in U.S. shipyards. Only one tanker, at 40,000 tonnes, delivered gasoil to the U.S. East Coast in December, traders said. A sharp decline in U.S. distillate stocks to below their five-year average last week and icy weather that swept across the U.S. East Coast have sent U.S. ultra-low-sulphur diesel futures higher this week."

So we are exporting significant amount of products and shipping 50,000+ bbls of Eagle Ford to eastern Canada every day. Oh yeah...the system is working just fine. LOL.

[sparky]

.
@ Tanada , the Transiberian and its sister line the BAM are way too expensive for that
there is a growing network of pipe older or being laid from Russia and the "Stans"
Russia and China are often at loggerhead over the routes
China want direct access to its hinterland , so far Russia prefer to go for the Pacific coast
it give then more customer choice
By the way prez Putin presented a thesis in Leningrad when he was a student there
the thesis title is "“The Strategic Planning of Regional Resources Under the Formation of Market Relations,”

[beancounter123]

FYI

http://www.zerohedge.com/news/2014-01-2 ... -petroyuan

don't know if this ties to your individual posts - Rockman and contributors

[ROCKMAN]

bc123 - Great link...thanks. Ties a lot of various thoughts together. Not long so folks should read. here's a teaser from it:

"So what does this shift in oil imports mean? More than anything else, it is a sign that China will increasingly depend on global markets to satisfy its ever-growing oil demand. This necessitates further engagement with the international system to protect its interests, encouraging a fuller integration with the current liberal order. This will have effects on both China’s approach to its currency and its diplomatic demeanour.

This shift might usher in a world where oil is priced in RMB (Chinese currency) as opposed to solely in USD. This transition could only occur, however, if the RMB was made fully convertible and Beijing steps back from its current policy of exchange rate manipulation. Earlier this year, HSBC predicted that the RMB would be fully convertible by 2017, a reality that is surely hastened by its position as the single largest purchaser of foreign oil. A fully convertible RMB would be a “key step in pushing it as a reserve currency and enhancing its use in global trade, said Tihanyi, a strategist at Scotia Capital."

[ROCKMAN]

The old Golden Rule: He that owns the gold makes the rules.
Maybe the new Golden Rule: He that has the capex to mine the gold makes the rules

DAVOS, Switzerland, Jan 25 (Reuters) - Oil executives normally travel the world to win big contracts - but rarely do government officials travel the other way. This week in Davos, however, some of the most powerful oil CEOs gathered on the sidelines of the World Economic Forum and were presented with an embarrassment of riches. While the appearance of Iran's new president and oil minister in front of the heads of BP, ENI, Total and Lukoil made most headlines, the executives also heard presentations by officials from Canada, Mozambique and Mexico.

The head of BP Bob Dudley drew a simple conclusion: "It just shows how big the shifts are in the industry. Oil prices peaked at $147 a barrel in 2008 amid growing fears that the world was running out of oil. Five years on, oil is considered plentiful thanks to the U.S. shale oil revolution and the discovery of massive oil and gas fields elsewhere. Some executives are beginning to talk about an easing of resource nationalism, one of the hottest topics in the industry over the past decade as countries such as Russia and Kazakhstan became increasingly assertive about developing their reserves themselves.

"Today a number of countries which have huge reserves of oil and gas begin to say that they need investments to develop them," said the head of Lukoil Vagit Alekperov. "It is not only Iran. It is Mexico, East Africa. We have seen a period of national protectionism when unfortunately we could not access some countries because it was all run by national companies. Today the situation changes," he said.

Capital Diet

Privately-held Lukoil, which is limited in accessing giant fields in its home base Russia, this week signed a memorandum to study projects in Mexico with state energy company Pemex as the country opens up its energy sector to boost production. Mexican President Enrique Pena Nieto last month signed a bill into law that ended the country's 75-year-old oil and gas monopoly.

Iranian President Hasan Rouhani called on oil companies in Davos to return to Iran as part of Tehran's move for a rapprochement with the West. Meanwhile, Canada and Mozambique are tapping some of the world's biggest oil and gas fields. For oil majors, that means one thing: Their bargaining power is as great as ever as a huge number of large projects compete for their money. "I made it clear some time ago I'm not going back to Iran under old contract terms even if all sanctions are lifted," said the chief executive of ENI Paolo Scaroni.

The stiff competition between projects comes as oil majors slash their budgets in response to shareholders' calls on them to stop overspending and increase dividend payouts. "We are all on a capital diet right now, and that means that some of these projects won't be developed unless terms are attractive," the CEO of one oil major said. That presents an opportunity for players who in the old days would always lose out to majors.

"Majors will no longer be developing the lion's share of big projects in the world. But it doesn't necessarily mean they will remain undeveloped. I expect national oil companies like China's CNPC and even mid-sized independents to step in and fill the space," another oil executive said.

[h2]

"We are all on a capital diet right now, and that means that some of these projects won't be developed unless terms are attractive"

When you put that together with the thread on US military 2015 decline in global overall production us-army-world-is-sleepwalking-to-a-global-energy-cr-t69155.html it forms an interesting set of circumstances.

Specifically about the near magical ability of capital markets to absorb any cost of production, no matter how much the return diminishes.

Our culture has formed an odd sort of magical thinking when it comes to money and capital, as if it creates itself and has nothing to do with the real world, real matter, real commodities etc.

If I read the above quote correctly, it says that the idea that oil will continue to be developed no matter how much it costs per barrel to put new fields online is already being proven categorically false, even as some insist that markets will bring oil online, by themselves, and their magical hands that nobody but the most obliviously blind to reality can see, aka neo-liberal conservatives etc.

Assuming rough correctness in the US military study where global oil production goes into decline around 2015, probably a bit later, and the current warnings alluded to in the thread linked to above, one can see a point where new production shows so little promise of capital return that it becomes a better option to just go on as is, buying up other companies/resources, etc, sort of cannibalizing the corpse, which still doesn't know it's dying.

There will be some major reliefs to that day, one being that, despite them adding non crude liquids to the total barrels per day counts, the plateau will start to bump its way down, with the inevitable issues caused when each downward move is followed by a blip up, each of which will be highlighted with greater and greater desperation to prove that 'peak oil is not happening' or whatever the mantra the media wants to project at that stage.

Other advantages of things like tight oil development is that so many holes have to be drilled all over that the inane 'drill baby drill' nonsense will not get much traction as people look out over vast fields of rigs dribbling out their few barrels of oil as they traverse the downward sides of their production curves.

On a more macro level, it brings to mind the various EROEI type 'debates' , debates which largely vaporize if you consider capital / money as a symbol for access to commodities, including raw materials, at which point, when you read a seemingly random statement that capital is finding it 'unattractive' to use itself on further risky and expensive oil discovery/drilling, that actually basically demonstrates that the symbol for resources no longer can justify the amount of those symbols required to produce more of that resource, and that's the macro sense I believe that escapes some literalists who have trouble with the concept, ie, nobody is ever going to say it is not energy positive to drill for or develop resource x or y, they will say it's not worth it, it costs too much, the risk is not worth the reward, and that is what I believe in the real world EROEI will look like, all the while allowing people to continue to maintain that there is no connection between decisions to no longer drill for declining resource reserves of increasing complexity and the returns those investments yield to the society as a large, via the tool of 'money' as a cipher for that entire process.

It will however remain vastly amusing to watch when the numbers actually start to go down, as they must do with 6.2% estimated global field decline rates, which means of course that every year, year in and year out of our current plateau, they are having to bring online about 4.5 million barrels a day, a number so staggering that only complete blindness can make anyone think we can keep doing that for many more years. It's already impressive that we are able to do that now, and things are still working pretty well all in all.

[h2]

And with that said, a Eureka moment hit me:

When the decline starts, the story may be this: we are unable to get capital to develop the resources we need, re oil, gold, platinum, and whatever else we are finishing up easy supplies of.

That puts the blame on something other than the fact we used up the easy to get stuff, and now are left with the crud and expensive to get leftovers, and lets us continue with our fantasy world where growth will be just around the corner, as soon as we get oil production ramped up again, etc..

I can easily see the talking heads say this, ie, continuing to deny reality by pretending the market, being unwilling to engage in non profitable speculation, is the cause of the first decline in global barrels per day, whenever that happens. Again, that's a big plus of the big fields of rigs going after tight oil, you can point those out to those less able to grasp reality and prone to repeat slogans like 'drill baby drill' and say, we did, that is slowing down now too. Anything to shut them up, though they will just think of something new and someone else to blame for nature's annoying habit of being finite in terms of non sustainable consumption and extraction practices, because, as we all know, those practices form our inalienable rights as members of industrial man, and those rights are non-negotiable, LOL. Whoever decided to call talking apes 'homo sapiens' really was going a bit over the top in terms of self indulgence and self aggrandizement.

[sparky]

.
I read the Davos line of though as a permanent shift in the oil Business
before oil companies "owned "the fields , now they increasingly become project managers
they have the ability to manage large developments , the extraction and processing and are paid in some of the oil
.. it make plenty of sense ,the governments want the money flow ,often the finances come from someone else ,
and those guys want to be sure things will happen
for the big oil companies ,having your own fields is nice ,but that is no longer possible in plenty of countries
they have become tenant farmer , paid in his own production

[ROCKMAN]

sparky - Exactly. Which is one reason why China has a huge advantage over US companies. US oil pubcos are not designed to be contract operators. They are oil field owners or partners with other owners. The Halliburtons and Schlumbergers are designed to be project managers...for a profit. And Chinese production managers aren't as concerned about their profit margin as much as they are focused on China having access to that oil. And that's an advantage they have over Halliburton et al.

[ROCKMAN]

One more of those unintended consequences: the US shale oil boom has hurt future import opportunities. Notice this situation represent long term oil purchases…perhaps well beyond the period when the oil shales may not be providing as much of our requirements. As you’ll see China isn’t the only country locking up “our” oil:

Reuters - India's state-run refiners are snapping up Latin American oil after upgrading their plants, reaping the benefit of cheap prices for crudes that have lost their market in the United States to shale oil. Decades-old crude trading routes are being redrawn as the United States cuts its dependence on imports through a boom in shale oil, forcing Latin American exporters to tap buyers as far away as China and India - markets growing enough to soak up their surplus supplies.

These Latin American crudes are often heavy grades, which, without elaborate refining, tend to produce higher quantities of low-value products such as fuel oil, used to run ships' engines. For Indian buyers, these crudes offer the chance to earn a return on the billions of dollars spent in improving their plants, enabling profits to be boosted in a regime which makes them sell products at state-capped prices.

India is the world's fourth-biggest buyer of crude and 80 percent of its needs are met by imports, making cheap supplies crucial as its economy gropes with power shortages and it spends billions subsidizing fuel for millions of its poor. In the last few years, India has already had to find replacement crude for barrels lost when sanctions on nuclear operations hit Iran, once its second-largest supplier. Up to now, much of the switching by state refiners has been to other Middle East sources, such as Saudi Arabia and Iraq, which are now the top two suppliers as Iran slips to number six.

Clear signs of a change, though, emerged earlier this month when Mangalore Refinery and Petrochemicals (MRPL) became the first Indian refiner to buy Argentina's medium-sweet Escalante grade. "In 2007, we first thought of buying Latin American oil but we were not prepared," said MRPL Managing Director P.P. Upadhya. "I visited Venezuela. A team of officials visited some Latin American countries in 2011. They did not have spare oil," he added. "Now, the market dynamics have changed and I got my first high acid oil cargo from the region in a tender."

And more complex facilities are coming up in the country that will further the trend. Indian Oil Corp's (IOC) 300,000 bopd Paradip refinery will start operations in June. By 2016, Chennai Petroleum's coker unit will be commissioned and a 120,000 bpd expansion of Bharat Petroleum Corp's (BPCL) Kochi refinery is set to be completed.

CHANGING CRUDE BASKET

The United States has reined in buying from Latin America as its own shale oil output takes off. North America added 1 million bpd to global supply in 2013 alone, the Energy Information Agency says, and crossed the threshold to be a net exporter late last year, putting more supplies on the market. In 2005/06, Latin American oil accounted for a scant 2.3 percent, or 46,200 bpd, of India's crude imports but by 2012/13 that had jumped to about a fifth, or 672,400 bpd. Just under half of that - 300,000 bpd - was under a long-term deal between Venezuela and privately-owned Reliance Industries, which has a huge, world-class refinery on India's west coast.

Over the same seven-year period, Middle East imports slipped to some 62 percent of India's basket from 73.5 percent while West African grades dipped to 16 percent from 20 percent. That shift will continue, as state-run refiners join private players Reliance and Essar Oil in the race to improve refining margins.

[ROCKMAN]

It would appear the big battle between Baghdad and the Kurds over oil exports may be ramping up significantly very soon. Given the nature of the region it’s easy to anticipate armed conflict at some level.

Reuters – Norway's DNO said it would build a second pipeline to export oil out of its Tawke field in Iraqi Kurdistan. The ability to export out of the Kurdistan region is vital to DNO's fortunes, because Tawke is its prize oilfield, estimated to contain a billion barrels of recoverable oil. On Thursday DNO said it would build a second pipeline, with twice the capacity of the existing pipeline, to export oil from Tawke to the Fish Khabur terminal, from where oil can be exported via other pipelines.

See more at: http://www.rigzone.com/news/oil_gas/a/1 ... MC4Aj.dpuf

[Keith_McClary]

From another thread:
saudi-oil-exports-surge-to-12-yr-high-t69278-20.html#p1182470
$this->bbcode_second_pass_quote('ROCKMAN', '�')��You seem to be assuming that there is an agreement that the JV refinery will get SA oil below market prices and sell product to China below market prices.” Actually just the opposite. I expect the oil and the refined products to be priced based on some global benchmark. I assume China is making the investment for the sake of control and not to get the oil/products at a discount and may actually be paying a premium based on their capex investment.

And yes: producing more product internally will reduce demand elsewhere in the market place. But some folks keep ignoring the key issue I keep repeating: it’s a matter of controlling the oil/products. The 4+ billion bbls of oil run through that refinery for the next 30 years or so won’t be available to any other buyer. That may seem so important today. But in 15 or so years when perhaps the KSA is exporting much less than today? Same issue with the oil China owns in the ground in Angola.

[ROCKMAN]

"I don't think it's the same as owning oil in the ground." No...it isn't. Better IMHO: they have a lock on billions of bbls of oil without having the risk of exploration drilling. The fact that the KSA owns half the plant gives them great motivation to see it's supplied over plants owned by anyone else.

Again, this development of Iraq refining capacity might free up some refined products on the open market that Iraq would have imported. But ultimately the Iraq plan will remove 750,000 bopd from the oil acquisition market. So assuming a minimum 30 life for those new Iraq refineries that’s another 8 billion bbls of oil that oil that importing countries won’t have available in the market place. And Iraq will have the sole power to decide where their products end up.

“Iraq has held a ceremony marking the start of construction of a large oil refinery aimed at meeting increasing demand for refined products. Oil Ministry spokesman Assem Jihad said Saturday that a Korean consortium led by Hyundai Engineering & Construction will build the 140,000 barrels-per-day refinery in the central province of Karbala over a 54-month period. Four other Korean companies have teamed up with Hyundai. Jihad added that the engineering, procurement, and construction deal is valued at $6.04 billion. He said the refinery will produce gasoline, gas oil, fuel gas, liquefied gas, jet fuel, and asphalt. The refinery is one of four new sites Iraq plans to build to boost refining capacity by 750,000 barrels per day.”

So again it isn't about production rates or who ends up with the refined products. It's all about who determines where exportable oil goes. And the increase in internal refining capacity of the oil exporters removes oil from the open market. The open market where every oil importing country competes with ever other oil importer. And will also have to compete with the refineries in the oil exporting countries. The same demand for oil imports with a decreasing volume available is not an optimistic view of the future. In the end would product consumers be better off buying from a refinery in their own country or a refinery in foreign country? Time will tell. At the very least the refineries in those importing countries could be facing extinction. Not a bad development from the view point of an oil exporter with abundant refining capacity: in general decreasing capacity for producing a commodity doesn't tend to lower prices.

[Keith_McClary]

$this->bbcode_second_pass_quote('ROCKMAN', '&')quot;I don't think it's the same as owning oil in the ground." No...it isn't. Better IMHO: they have a lock on billions of bbls of oil without having the risk of exploration drilling. The fact that the KSA owns half the plant gives them great motivation to see it's supplied over plants owned by anyone else.

[ROCKMAN]

We've all heard of Mexico's plan to allow foreign companies to begin participating in developing their fossil fuel resources. But the proposed changes still weren't going to be very advantageous for US public oils that have to adhere to SEC reporting protocols. But Chinese companies march to a different drummer. México has already began a small pilot project exporting oil to China.

Reuters - China's largest energy company will compete for future oil and gas development rights in México which could happen as soon as the end of this year. Mexico's energy overhaul, approved in December, ended state-run oil company Pemex's 75-year monopoly. It aims to lure billions of dollars in foreign or private investment via new contracts that the government says will be auctioned off in public tenders. Gong Bencai, vice president of China National Petroleum Corporation's CNPC America division, pointed to Mexico when asked on the sidelines of an energy conference in Peru if his company plans to take part in any future bid rounds in Latin America. "Yes, we are ready to participate in the Mexico venture," Gong said, without going into further detail. "This is a very big market in the international business" CNPC, parent of PetroChina, is Asia's largest oil and gas producer. Gustavo Hernandez, Pemex's top exploration and production executive, said at the same conference that the first opportunity for companies like CNPC may be right around the corner. "I think (the first international public tender) is going to happen by the end of this year," he said. Top government officials have previously said they do not expect the first tenders until mid-2015. Mexico's energy ministry is in the early stages of implementing energy reforms, currently evaluating which fields Pemex will keep via a so-called "Round Zero" allocation. Pemex submitted its wish list last week, and now the ministry has until mid-September to decide. Once Round Zero is complete, ministry officials say they will launch an annual international bid round through 2019, each one covering about 20,000 square kilometres. CNPC has expanded its presence in Latin America in recent years and is now active in Venezuela, Ecuador, Peru, Colombia, Brazil, Cuba and Costa Rica. In November, CNPC announced it was buying all of the Peruvian assets of Brazil's state-run oil company Petrobras for $2.6 billion.

So first Peru and México next. In the meantime Venezuela is working a deal with Columbia to build a pipeline to the Pacific coast where the oil (our oil) can be shipped to China. China does play the long game so well IMHO.

[ROCKMAN]

And here's a story about 400,000 bopd that had been exported to someone's refinery that won't be getting that that 146 million bbls of oil in 2015. But I'm sure the KSA will be glad to export the products. That is whatever is left after they substitute for their product imports.

Reuters - The joint venture 400,000-barrels-per-day Jubail refinery in Saudi Arabia will reach full production capacity by around mid-2014. Saudi Aramco Total Refining and Petrochemical Company's (SATORP) refinery in Jubail, a joint venture by France's Total and Saudi Aramco, began a gradual startup of operations last year. "All the refining and petrochemicals units should be operational by the end of first quarter 2014. Production is expected to reach full capacity around mid-2014."

Again the key word is "control".

[ROCKMAN]

Almost bypassed this story: UAE Energy Minister Hopes Western Partners Keep Oilfields Role

Reuters – The energy minister of the United Arab Emirates said on Friday he hoped Western oil companies historically in charge of Abu Dhabi's biggest oilfields would keep a role, but that no one was assured of keeping their seat when concessions are renewed. “What's important is that it's fair to the newcomers as it is to the previous shareholders” Al Mazrouei told reporters. The OPEC member country has held a 60 percent stake in Abu Dhabi Company for Onshore Oil Operations (ADCO) since acquiring an interest in fields that produce over half the United Arab Emirates' oil.

Four of the world's largest stock market-listed energy companies – ExxonMobil, Royal Dutch Shell, Total and BP – have each held 9.5 percent equity stakes in the ADCO concession since the 1970s and would be keen to prolong their involvement. After their deal expired on Jan. 11, ADOC took 100 percent of the concession in what was seen as a temporary measure while political leaders in the UAE decide whether to let Asian oil buyers in for the long haul.

{And I assume by “Asian oil buyers’ they mean China}

"No one is assured to keep a seat, it's a bidding, we wish everyone good luck, especially our legacy partners, they are the best and understand the fields because they've been there for 70 years, we hope they will be among those who are winning," Al Mazrouei said.

{Big Oil hasn’t had a very good record recently of winning bids against the Chinese. Perhaps this will be just one more Arab tent for that Chinese camel to stick its nose under}

[ROCKMAN]

China is essentially taking the position that they are there and no one has the force/will to make them leave. If production is established it will probable end up in the World Court. Regardless of how that's resolved (and how long it takes) it will still depend on China accepting a ruling against them:

Reuters - Vietnam has condemned as illegal the operation of a Chinese deepwater drilling rig in what Vietnam says is its territorial water in the South China Sea and told China's state-run oil company to remove it. China said the rig was operating completely within its waters. China claims almost the entire oil- and gas-rich South China Sea, rejecting rival claims to parts of it from Vietnam, the Philippines, Taiwan, Malaysia and Brunei. The rival claims have raised fears of conflict. The Maritime Safety Administration of China (MSAC) announced on its website on Saturday that all vessels should keep one mile (1.6 km) away from the rig, called the Haiyang Shiyou 981. The $1 billion rig is owned by China's state-run CNOOC oil company and it had been drilling south of Hong Kong. On Sunday, Vietnam's Foreign Ministry spokesman objected to the Chinese announcement, saying the coordinates of the oil rig put it in Vietnam's exclusive economic zone and on its continental shelf, about 120 nautical miles off its coast.

The spokesman, Le Hai Binh, said in a statement Vietnam "resolutely opposed", the Chinese company's drilling. "All activities of foreign countries in Vietnam's waters without Vietnam's permission are illegal and worthless," Binh said. Vietnam's state energy company PetroVietnam sent a letter to CNOOC on Sunday saying it strongly objected to China's action and "insisted CNOOC stop immediately the illegal activities and pull Haiyang Shiyou 981 out of Vietnam's waters". But despite Vietnam's objections, MSAC on Monday expanded the prohibited area around the rig to a three-mile (4.8 km) radius. Chinese Foreign Ministry spokeswoman Hua Chunying, asked about Vietnam's protest, said the rig was operating "completely within the waters of China's Paracel Islands". She declined to elaborate. The Paracel Islands are a frequent source of tension between China and Vietnam in the South China Sea. Vietnam has accused China of using aggressive means to intimidate its fishermen near the islands. CNOOC, China's top offshore oil producer, in 2012 invited foreign companies to jointly develop nine blocks in the western part of the South China Sea, which Vietnam said was illegal because the blocks overlap its territorial waters. China and the 10 countries of the Association of South East Asian Nations are trying to negotiate a code of conduct to ease tension in the South China Sea. The South China Sea holds about 11 billion barrels of oil and 190 trillion cubic feet of natural gas in proven and probable reserves, according to the U.S. Energy Information Administration.