How resource cooperation in disputed waters can be a win-win for China and the Philippines

Lucio Blanco Pitlo III says sharing energy exploration rights in disputed areas can benefit both Manila and Beijing: the latter can hold onto its traditional claims and show it can be a good neighbour, while the former can maintain its energy security

Lucio Blanco Pitlo III

Published: 4:00am, 14 Aug 2018

Why you can trust SCMP

Two years after a landmark ruling in their dispute over maritime territory in the South China Sea, the Philippines and China appear to be making subtle progress in implementing parts of the judgment, particularly in relation to resource access. Dispute management, confidence building and goodwill have provided convenient face-saving covers for the moves.

This is especially so for Beijing, which vehemently professed it would not adhere to the ruling by an international arbitration tribunal. Getting China to refrain from interfering in the exercise of Philippine sovereign rights in its exclusive economic zone (EEZ) in the West Philippine Sea was one of the ruling’s crucial points for Manila.

Can China follow US by using shale to become an energy exporter?

Significant headway is being made on this front. Resumption of Filipino fishing in Bajo de Masinloc (Scarborough Shoal) and negotiations for joint exploration suggest both sides are moving forward, though not without difficulties.

Resource competition is a major driver in the decades-old six-party territorial and maritime row. Petroleum finds in the 1970s sparked a scramble to stake a presence in the sea and brought the flash point to the world’s attention. In 2012, a fishing incident in Bajo de Masinloc became one of the immediate triggers behind Manila’s decision to initiate arbitration proceedings against Beijing. In 2014, a Chinese oil rig dispatched in Vietnam’s EEZ raised bilateral tensions.

However, compared to the more sensitive sovereignty and national security issues, resource access occupies a lower rung and even offers low-hanging fruit for fostering cooperation and improving relations among claimants.

With pragmatic leadership and subdued nationalist outbursts, resource cooperation can enable disputants to benefit from the contested sea without ceding their claims and positions. This appears to be Philippines President Rodrigo Duterte’s approach. However, changes on the ground since 2014, and the 2016 ruling, present dilemmas.

Compromise needed in Philippines over its South China Sea policy

If China’s interests in the disputed sea are more motivated by security concerns, especially given increasing US naval and aerial operations, then the argument that Beijing will be more accommodating of other claimants’ resource claims may hold.

Although China began petroleum extraction in the South China Sea as early as the 1980s, most of its upstream activities remain confined to waters closer to its shores, notably in the Pearl River Basin. Furthermore, with indigenous production, progress in renewable energy, long-term supply contracts and diversified energy transport corridors, China’s energy security seems more robust.

Watch: A rare view of the South China Sea

In contrast, Philippine energy security is becoming more precarious, with burgeoning demand. Its biggest natural gas field, Malampaya, located offshore in the West Philippine Sea, supplies 40 per cent of the energy requirements of Luzon, the archipelago’s biggest island, but is ageing rapidly and expected to be exhausted by 2024. Technical intervention may prolong its life to 2030.

This looming energy crisis and the pressing need for Filipinos to resume fishing unimpeded in the West Philippine Sea are integral to Duterte’s openness towards resource cooperation with China.

Despite such noble intentions, critics point out that any joint exploration or development with China risks acknowledging Beijing rights that would go against the 2016 tribunal ruling.

Don’t expect Beijing’s latest ‘breakthrough’ to weaken US-Asean ties

However, China’s opposition to unilateral drilling in the South China Sea remains unchanged. In fact, with its recently built artificial island outposts, any attempt would not go unchallenged.

Thus, any resource cooperation with China would be a compromise. It is a concession Duterte understands and prefers over a drawn-out contest with immediate detrimental consequences and no certain end in sight.

A Chinese coast guard ship (left) is blocked by three Vietnamese coast guard vessels near China's oil drilling rig in disputed waters in the South China Sea in May 2014. China’s dispatch of an oil rig to the exclusive economic zone claimed by Vietnam stoked an especially widespread round of anti-Chinese sentiment. Photo: AFP

If claims are true that China agreed to a Philippine proposal for a 60/40 revenue-sharing formula skewed in the latter’s favour, then it appears Manila was able to leverage the ruling. Such an arrangement would allow the Philippines to meet its constitutional requirements and could even be packaged as a commercial transaction in which a Chinese enterprise agrees to be a Philippine service contractor.

Joint hydrocarbon exploration with China is not unprecedented. An agreement was reached in 2004, which paved the way for tripartite resource exploration in the contested sea. But that undertaking was discontinued in 2008 due to domestic pressure.

What happened to the billions China pledged the Philippines?

However, since then, Philippines has been unable to explore or develop a new field, especially in Recto Bank (also known as Reed Bank), believed to be its next prospective energy frontier. Political risks have discouraged big multinational energy players from taking part.

A moratorium on exploration was announced in 2014, dashing hopes of finding a replacement for Malampaya sooner. Hence, joint exploration talks brought a sense of optimism for an industry eager to restart and expand upstream activities.

A banner declaring the Philippines a “province of China” is seen hanging from a footbridge in Taguig city, south of Manila, on July 12 to mark the second anniversary of The Hague's ruling against Beijing’s South China Sea claims. The banners are a protest against President Rodrigo Duterte, who, domestic critics say, has failed to assert the Philippines’ right to the waters. Photo: EPA-EFE

Based on the Malampaya model, it would take about six years to move from development to production. Hence, if exploration could start soon and return with favourable results, it is possible for construction of the necessary petroleum infrastructure to begin before Duterte steps down in 2022.

If this happens and the succeeding administration follows through, a new field in Recto Bank could come online before Malampaya runs out. This could enable Duterte to leave a favourable legacy for Philippine energy security, vindicating an approach which is proving unpopular with critics today.

Lucio Blanco Pitlo III is a research fellow at the Asia-Pacific Pathways to Progress Foundation, and lecturer at the School of Social Sciences, Ateneo de Manila University

Post