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Heralding Deal with China, Philippines Restarts Offshore Oil-Gas Exploration in Disputed Sea

FILE - Philippine President Rodrigo Duterte attends a meeting with members of the Inter-Agency Task Force on the Emerging Infectious Diseases in Davao province, southern Philippines, Aug. 17, 2020.
FILE - Philippine President Rodrigo Duterte attends a meeting with members of the Inter-Agency Task Force on the Emerging Infectious Diseases in Davao province, southern Philippines, Aug. 17, 2020.

The Philippine government’s lifting of a ban on offshore oil and gas exploration reopens the door to joint energy development with China, the erstwhile biggest player in a regional maritime sovereignty dispute, analysts believe.

Philippine President Rodrigo Duterte has approved a Department of Energy proposal to resume exploration in the South China Sea, the department said October 15 in a statement online. Exploration was called off six years ago as a Sino-Philippine maritime dispute peaked.

Resumption of oil and gas exploration will “infuse the economy with fresh foreign direct investments,” Energy Secretary Alfonso Cusi said in the statement.

China stands to become the key foreign investor despite irritating the Philippines and five other governments with its maritime expansion since 2010, analysts say. They chafed particularly after officials in Beijing authorized the landfilling of tiny islets, in some cases for military use. China claims about 90% of the sea, including tracts that the Philippines say come under its exclusive economic zone.

Two years ago this month, China and the Philippines signed a memorandum of understanding to look together for undersea oil and gas, a way of defusing their corner of the broader regional dispute. The Sino-Philippine dispute culminated in 2016 with a Philippine world arbitration court victory. China snubbed the ruling, but that same year Duterte moved to make friends with counterparts in Beijing and tap it for economic aid.

“Early on, the [Duterte] administration entered into memoranda of understanding with China, and that included joint development, or at least the promise of joint development, as far as the West Philippine Sea is actually concerned. So this might simply be moving forward on those MOUs, especially since the Duterte administration is winding down,” said Herman Kraft, political science professor at University of the Philippines Diliman.

The West Philippine Sea is Manila’s term for the South China Sea.

Manila lifted the moratorium “in good faith and with full regard of the ongoing negotiations between the Philippines and China,” Energy Secretary Cusi added in the statement.

From the start at least, Philippine officials will let China jointly develop just in undisputed waters under their control and subject to domestic laws on foreign investors, said Aaron Rabena, research fellow at the Asia-Pacific Pathways to Progress Foundation in Metro Manila.

The 2018 memorandum does not specify where the two sides would explore or who would take how much of any gas and oil discovered.

“I think what the government plans to do is they want to start joint ventures within Philippine territorial waters,” Rabena said. “I think they’re going to set the momentum first so that everything is legal, because it’s much easier to start with that.”

The energy secretary issued return-to-work notices for three specific projects. The Philippine National Oil Company-Exploration Corp. and PXP Energy Corp. of the Philippines operates one apiece. The third, run by Forum Energy of the United Kingdom, lies in a zone claimed by China.

“I think Duterte’s position has been, he wants to maintain good relations with China,” said Rajiv Biswas, senior regional economist with IHS Markit, a London-based market analysis firm. “If the Philippines starts unilaterally taking measures to drill, it could make it more difficult to maintain good relations with China.”

Brunei, Malaysia, Taiwan and Vietnam also claim all or parts of the South China Sea. Claimants prize the sea for its fisheries and marine shipping lanes as well as energy reserves. Malaysia gets nervous when Chinese ships pass through waters it claims, and Vietnamese boats rammed Chinese vessels in 2014 when China allowed an oil rig to be parked in a contested tract.

The resumption of exploration will give the Philippine government more money to “prime the pump” during an economic downturn caused by COVID-19, said Song Seng Wun, an economist in the private banking unit of Malaysian bank CIMB. Traditional sources of income such as tourism and remittances from overseas workers have slowed this year, Song said. The economy is forecast to contract in 2020.

“I suppose essentially [officials are] just going down the list of what they could possibly sell or earn money from,” Song said. “So, I suppose it is not a surprise they would go down the list and say ‘OK, what about oil, what about energy or gas?’”

Exploration will help “boost economic recovery following the outbreak of the COVID-19 pandemic,” Secretary Cusi said in the statement, citing job creation as one way.

Between 0.8 and 5.4 billion barrels of oil and from 7.6 trillion to 55.1 trillion cubic feet of natural gas are yet to be tapped around the Spratly Islands, which includes the Sino-Philippine dispute zone, the U.S. Energy Information Administration estimates.

A new start to exploration will boost “energy security” too, the secretary said. He cited “impending depletion” of an existing natural gas reserve.