London. The South China Sea has become the most important testing ground for the changing economic, political and military relationship between China and the United States.

The islands, rocks, reefs and shoals at the heart of the dispute — most of them uninhabited and submerged at high tide — cover just a few square kilometers of a sea area that extends over 3 million square kilometers.

But long-festering disputes over sovereignty among the littoral states (principally China, Vietnam and the Philippines but involving Malaysia, Brunei and Indonesia) have been transformed into a dangerous and unpredictable confrontation between the superpowers (China and the United States).

In theory, the dispute is straightforward and consists of three elements: (1) who owns the outcrops; (2) what rights, if any, does ownership confer to natural resources in the surrounding seas and beneath the seabed; and (3) what does ownership mean for ships and aircraft of other nations journeying through the area, which contains some of the world’s busiest and most important sea lanes.

China and the other littoral states dispute ownership (element 1) as well as the rights to resources and maritime control that flow from it (elements 2 and 3). The United States officially takes no view about ownership and control of resources (elements 1 and 2) but has a strong commitment to “freedom of navigation” and resists attempts to assert control over the surrounding sea (element 3).

Washington wants to freeze development of the outcrops and other activities it considers “provocative” pending a resolution of which country, if any, owns them and insists its ships and aircraft have the right to operate anywhere in the area.

China says it owns the outcrops so is entitled to exercise full sovereignty over them — including construction of structures and land reclamation, as well as proclaiming territorial seas around them and claiming an exclusive economic zone.

Superpower clash

The South China Sea is often made to seem like a technical legal dispute. But it is really a raw contest for power and influence between an incumbent superpower and a rising one.

The South China Sea has become a combustible battle of wills between a status quo power (the United States) and a dynamic one that wants to rewrite the settlement produced at the end of World War Two when it was largely powerless (China).

It pits a legalistic, multilateral model of dispute resolution based on international law (favored by the United States) against a bilateral approach based on diplomacy and military power (favored by China).

It raises questions about whether states can be bound by the decisions of international tribunals against their will (the Philippines has taken its dispute to arbitration but China has insisted it does not consent to the arbitrators’ authority).

In the military realm, it tests whether China’s naval power will be confined by the first island chain (Japan, Taiwan and the Philippines) or out into the heart of the Pacific Ocean. By extension, it raises issues about whether China will remain primarily a land-based power or become a maritime power to rival the United States with operations across all the world’s oceans.

More generally, it raises questions about whether the United States is trying to engage China or construct a network of alliances across Asia and the Pacific to contain the country’s economic, political and military power. South Korea, the Philippines, Japan, Taiwan and Malaysia are in varying degrees allies of the United States, which is also forging closer links with Vietnam, fueling China’s suspicions of encirclement.

And the South China Sea dispute has become entangled in the domestic politics of both countries. For China, it is about adjusting the postwar international framework to accommodate the country’s “peaceful rise” and recognize Beijing’s rights as a “big power” after centuries of humiliation at the hands of Western colonialists and Japan.

For the United States, the dispute is entwined with fraught discussions about the country’s economic, political, diplomatic and military decline, whether the Obama administration should have taken a more robust approach to projecting US power, and whether the next president should take a harder line with China, Russia and Iran.

Controlled escalation

Neither Chinese President Xi Jinping nor US President Barack Obama can afford to display any weakness on the issue, which is a matter of national pride on both sides. So far, the two sides have opted for a strategy of controlled escalation.

China has accelerated land reclamation and is sending thousands of tourists each year on cruise ship tours to islands it claims.

The United States has responded by flying a spy aircraft near some disputed outcrops to exercise its claim to freedom of navigation (complete with invited television crew to make the point clear).

China has hinted it could proclaim an air defense identification zone in the area, which would presumably mean its ships and aircraft would be more aggressive in challenging overflights by military and civilian aircraft.

There is a substantial element of theater in this conflict, which is being played out in front of the media and conferences: both sides want to appear strong in front of a domestic audience and their foreign allies while minimizing the risk of accidental confrontation.

To avoid accidents, the two sides have reached a military-to-military understanding on how to handle unplanned encounters at sea between their navies and sought to do the same for aviation after a series of hair-raising intercepts of US military aircraft by Chinese fighter pilots operating from the island of Hainan.

Both governments have notified the other in advance of publishing military strategy documents likely to draw media interest and stoke controversy.

Neither wants to jeopardize the wider relationship. On a wide range of issues from climate change, intellectual property protection, trade and cyber-crime to the Middle East and the proliferation of sensitive military technologies, the two sides need each other.

China’s Xi has been invited to make a state visit to Washington later this year, which means both sides have a strong incentive to stress cooperation over confrontation in the overall relationship.

Risk of accidents

The problem is that both sides are still committed to a controlled escalation strategy, which could easily become an uncontrolled one if not carefully managed. The sheer number of actors in the South China Sea dispute increases the risk of miscalculation.

The United States appears to have only limited control over the activities of Vietnam and the Philippines. Manila is a US ally but Hanoi is nominally a communist government, though it enjoys increasingly close relations with the United States at military-to-military level.

Commanders of individual aircraft and ships in the area have to make instant decisions in the case of unplanned encounters or unexpected behavior. In theory, local commanders can be controlled through strict protocols but in practice those may not always work and military-to-military communication is poor.

In 2014, China’s close intercepts of US military aircraft, which drew fierce protests from US officials, were blamed on idiosyncratic military officers on Hainan. Whether this was true or was a matter of central policy remains unclear, but it points to concern about the level of centralized command and control over local military forces.

There is an urgent need to break the escalation cycle and find a better way to manage the disputes. International law, appeals for a freeze on the dispute, and other “norms” of international relations are not terribly helpful since the dispute is fundamentally about military power.

Rather than ratchet up the confrontation, hoping the other side will back down, both sides need to find some creative diplomacy to help transform the nature of the dispute and change the narrative before it becomes even more poisonous.

John Kemp is a Reuters analyst. The views expressed are his own)

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London. “This is the really crappy part of the job, and this is what I hate about this industry frankly,” the chief executive of oilfield services company Baker Hughes complained as he announced it would lay off 7,000 employees.

Baker Hughes is cutting jobs in response to slumping prices and a downturn in drilling activity.

But the company’s obviously frustrated chief acknowledged that “this is the industry, and it’s throwing us another one of these downturns, and we’re going to be good stewards of our business and do the right thing.”

So the company will cuts costs, he told investors in a conference call on January 20 to discuss the firm’s fourth-quarter earnings and outlook for 2015.

More than 100,000 layoffs have been announced across the industry worldwide since prices began to slide last summer, according to a tally kept by Bloomberg.

In recent weeks other major service companies have announced job reductions. Halliburton announced it will cut 6,400 jobs (8 percent of its global workforce) while Schlumberger will eliminate 9,000 positions (around 7 percent of its workforce).

Precision Drilling, one of the largest rig contractors in North America, has idled more than 50 of the 250 rigs it had working this time last year, leaving more than 1,000 skilled operators out of work, the company said on Thursday.

“Industry downturns are difficult for all, but they affect our rig crews more than anybody else,” the company’s chief executive said in a statement.

“Precision recruited, trained and developed many excellent crews to support the demands of our customers over the past several years, and unfortunately we now don’t have work for many of these dedicated workers.”

Human capital

Tens of thousands more jobs have been cut, through layoffs or retirements, across every part of the industry, ranging from self-employed drilling contractors and well-completion crews to full-service companies, seismic surveyors and of course the oil and gas producers themselves.

Oil and gas production is an exceptionally capital-intensive industry. But the sector’s most important and scarce resource is its workforce.

The oil industry’s popular image may be a roughneck in soiled overalls drinking in a strip joint, but it has an enormous demand for highly skilled and, during a boom, very well compensated workers.

Modern oil and gas production is technically complicated and dangerous work. The days of drilling wildcat wells more or less at random and allowing the well to blow out in a massive gusher are long over.

The industry still provides employment for unskilled casual labor. In boom times some of the jobs for truck drivers and other support staff can be exceptionally well paid.

But at its core are tens of thousands of petroleum engineers and petroleum geoscientists, as well as tool pushers, drillers, derrickmen and roughnecks on the rigs themselves, who perform specialized functions which demand years of formal education and, most importantly, experience in the field.

The challenge is recruiting, training and retaining these workers and maintaining an appropriate long-term labor force profile in an industry stuck with a profound boom-bust cycle and beset by periodic mass layoffs.

The great crew change

Until recently, the oil industry was preoccupied by a looming shortage of skilled workers — especially mid-career professionals ready to step into supervisory and senior leadership roles.

Schlumberger’s consulting arm, which offers human resources planning advice to third parties, has warned repeatedly about “the looming talent shortage” as a result of what it termed “the great crew change”.

Oil and gas companies have lots of experienced workers in their late 40s and 50s, and have recently succeeded in attracting more young graduates. But there is an acute shortage of mid-career professionals aged 35-45, with 10-20 years training and experience.

The large number of professionals in their 50s poses a major problem as they reach the age for retirement, while recent graduates are still 10-15 years away from being ready to assume supervisory positions.

The industry’s uneven age profile is the legacy of the last downturn during the late 1980s and through the 1990s, when low oil prices and the squeeze on profits resulted in enormous job losses and a virtual freeze on hiring.

As a result, the cohort of workers recruited in the mid and late 1990s, who should be moving into supervisory and eventually leadership positions, is unusually small.

Back in 2013, Schlumberger predicted the oil and gas industry would have a shortage of around 15,000 experienced petroleum engineers and geoscientists by 2016.

The predicted shortfall of experienced petro-technical professionals (PTPs) would approach 20 percent of the total required number.

The looming shortage was seen by many as the biggest single threat to increasing oil and gas supplies in the second half of the current decade and into the 2020s.

Graduate recruits

Schlumberger forecast the industry would need to hire 10,000 new petro-technical professionals every year through 2020 to offset retirements and meet the need for expansion.

The oil industry spent years working to encourage more college students to specialize in petroleum engineering and related disciplines.

Petroleum engineering departments hired extra instructors and increased enrollments. According to the US Department of Education, the number of students enrolled in petroleum engineering programs at US universities increased from a recent low of just 561 in 1997 to 1,301 in 2011.

Now, of course, the downturn has thrown thousands of oil and gas professionals out of work, and led to pay freezes and cuts in contracting rates.

Amid all the headlines about layoffs, falling salaries and a potentially prolonged downturn in oil prices, the industry somehow has to avoid losing current graduates to other sectors and continue encouraging high school students that oil and gas engineering and science is an attractive long-term career.

Because if the oil industry cannot maintain an adequate skill base, with the right age structure, skill shortages will re-emerge and set the stage for the next brutal boom-bust cycle.

In practice, the industry has never succeeded in balancing long-term personnel planning with the short-term financial imperative to control the wage bill.

It may not be any more successful this time around, if the slump in oil prices and drilling continues long enough.

And that’s why the chief executive of Baker Hughes could say truthfully mass lay-offs are what he and everyone else “hates” most about the oil and gas industry.

Reuters

John Kemp is a Reuters market analyst. The views expressed are his own.

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