"Although the East China Sea may have abundant oil and natural gas resources, unresolved territorial disputes continue to hinder exploration and development in the area," the U.S. Energy Department's Energy Information Administration said in a report this week.
The uninhabited islands, currently under Japanese control, are called Senkaku in Japan and Diaoyu in China. Tensions have escalated sharply between the two countries as both lay claims to the islands, which are also claimed by Taiwan. Tokyo nationalized the islands earlier this month.
The 482,000-square mile East China Sea is bordered by the Yellow Sea to the north, the South China Sea and Taiwan to the South, Japan's Ryukyu and Kyushu islands to the East and the Chinese mainland to the West, the EIA report said.
"Evidence pointing to potentially abundant oil and natural gas deposits has made the sea a source of contention between Japan and China, the two largest energy consumers in Asia," it said.
The disputed islands lie northeast of Taiwan, with the largest of them 2 miles long and less than a mile wide, the report said.
Japan assumed control of the islands after the Sino-Japanese War in 1895. The United States administered the islands between 1945 and 1972 as part of the post-war occupation of Okinawa.
"Though barren, the islands are important for strategic and political reasons, as ownership can be used to bolster claims to the surrounding sea and its resources under the United Nations Convention on the Law of the Sea," the report said, adding the potentially natural gas-rich East China Sea basin could help meet Chinese and Japanese growing domestic demand.
Though hydrocarbon reserves in the East China Sea are difficult to determine, the EIA estimates the region has between 60 million and 100 million barrels of oil in proven and probable reserves. Its report said Chinese sources estimate undiscovered resources can run as high as 70 billion to 160 billion barrels of oil for the entire East China Sea.
EIA also estimates the region has between 1 trillion and 2 trillion cubic feet in proven and probable natural gas reserves, while noting the region "may also have significant upside potential in terms of natural gas." Chinese sources point to as much as 250 tcf in undiscovered gas resources.
"Until these disputes are resolved, it is likely that the East China Sea will remain underexplored and its energy resources will not be fully developed," EIA said.
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