Philippines Could Lose Oil and Gas Block to China

Manila ‘clings to fantasy’ it can exploit site inside China’s nine-dash line

Philip Bowring

Oct 30, 2020

What is really going on between the Philippines and China? Or is Manila, not for the first time, out of the loop and clinging to fantasies that it can exploit its oil and gas in the West Philippine Sea especially on the Reed Bank, well within its EEZ but also within China 9-dash South China Sea claim line?

Earlier this month, the Duterte government announced that a moratorium on oil and gas exploration on the Reed (Rector) Bank west of Palawan had been ended. The moratorium had been imposed as a precautionary measure at the time the Philippine’s case against China regarding encroachment into its Exclusive Economic Zone in the South China sea and related Law of the Sea issues was being considered by the Permanent Court of Arbitration.

China’s refusal to accept the decision, which largely went in favor of the Philippines, was accompanied by an aggressive posture in that area which in effect precluded exploration. But then in 2018, the Duterte government signed a Memorandum of Understanding with China for exploration with China’s national Overseas Oil Company (CNOOC) to be the operator and get 40 percent of the output, the same percentage as received by Royal Dutch Shell Plc which found and developed the Malampaya gas field which lies closer to Palawan than Reed Bank and on the edge of China’s claim.

The latest announcement produced a flurry of interest in oil stocks with stakes in that region’s exploration blocks. Suddenly too there was a flurry of interest in Malampaya. That field is declining, and production will wane sharply from 2024. But if exploitable gas is found on Reed Bank – and previous drilling has been positive – the pipeline which runs from Malampaya to Batangas could provide a link to get any new field ashore in Luzon. Duterte’s favorite businessman, Davao-based Dennis Uy’s Udenna group last year bought Chevron’s stake in Malampaya and Shell now wants to sell its stake.

Uy and the Philippine National Oil Company, which has 10 percent, have shown interest in bidding for it. But now so too have two local business giants, Ramon Ang of San Miguel and Manuel V. Pangilinan of First Pacific Co. Ltd.

This all implies that China is agreeable and that, as Energy Secretary Alfonso Cusi asserted, is an exercise of Philippine sovereign rights. That would indeed be a remarkable breakthrough given that China has never shown any sign of backing down from its nine-dash line claim, even if it only intermittently uses force and threats backed by its vessels.

However, there is no lack of optimism with even Associate Justice Carpio, who was behind bringing the Philippine case to the Court of Arbitration, and who suggested in a column for the Inquirer that it might just be a deal which could lead to similar ones involving others, notably Vietnam and Malaysia, with EEZs claimed by China.

For sure, the Philippines is especially desperate to reduce its dependence on hydrocarbon imports, especially with Malampaya in decline – which is forcing the gas users (power stations) to start negotiating for LNG contracts and terminals. The need for new sources from non-coal sources was underlined by a government announcement putting a halt to new coal-fired projects, of which San Miguel had several planned. Some Philippine politicians and businessmen are also viewed as keen for any China deals from which they can benefit. The country is often regarded by its neighbors as the weakest link in the chain of opposition to China’s sea claims.

Nonetheless, any deal with China is all about the small print. Agreeing on cost and production sharing is relatively simple. But no legal framework can stand for long if the issue of sovereignty is set aside, along with jurisdictional and taxation rights. An earlier agreement with China negotiated in Arroyo’s time and pushed by businessman-politician Jose de Venecia failed for that reason. There are circumstances where states can jointly develop areas where claims conflict. But they are over small, marginal areas, not a whole sea which also has fish and other resources.

China may feel that it has gone too far with its assertive actions in the SCS and its Wolf Warrior diplomacy, which has increased alarm in Southeast Asia, stimulating the development of the anti-China “quad” – the US, Japan, India, and Australia. Only this week India announced its intention to send its navy into the South China Sea and acknowledge the critical role of the Melaka strait.

In Singapore, retired top diplomat Bilahari Kausikan criticized Cambodia and Laos for being puppets of China standing in the way of concerted Association of Southeast Asian Nations policy towards China. So it may be an appropriate time for Beijing to show maximum flexibility in the wording of an agreement with the Philippines which would be acceptable not only to the Philippine legislature but also to a politicized Supreme Court.

However, the odds remain very much against it, particularly at a time when the Philippine military, and navy in particular, has shown its concerns on several issues concerning the ambitions of China’s state companies – including the Sangley Point International Airport project, which is being built by China Communications Construction Company, one of the country’s biggest construction concerns. Fudging its economic rights to 2.2 million square kilometers of sea would a monumental and irreparable defeat.

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