On the face of it, smouldering decades of the David-and-Goliath-style spat between the Philippines and China over maritime sovereignty were finally brought to a conclusive end in July with an international court ruling that could scarcely have been clearer. Despite China’s repeated claims to the territories within the so-called ‘nine-dash line’, the tribunal at the Permanent Court of Arbitration (PCA) in the Hague found no legal basis for Chinese ‘historical rights’ over these tracts of waters, hundreds of nautical miles from home, and that, it might seem, was that.
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However, while the ruling brought an undeniable clarity to the issue, it certainly did not draw a line under it, and even as Manila celebrated, Beijing rejected the decision. It is further proof, if indeed any were needed, that China is increasingly reluctant to simply toe the largely Western line on rules-based maritime order – and that is something which may have serious ramifications for the Philippines' oil and gas industry, despite all of the recent victory hype.
Growing demand
Strong economic growth coupled with a steadily rising energy demand has put pressure on the Philippines’ energy sector over recent years, and with oil production from existing fields declining, the country is shifting towards natural gas and a reliance on imported petroleum products to meet its needs. With the country’s energy requirements growing in excess of 4% a year, according to the Oxford Business Group, the prospect of being able to develop offshore O&G deposits to mitigate this situation has obvious appeal, not least given the scale of the potential resources involved.
The Reed Bank, one of the areas covered by July’s ruling, some 80 nautical miles off the coast, is believed to hold some of the richest deposits in the whole of the South China Sea, with estimates putting the resource at between 764 million and 2.2 billion boe and 7.6–22 trillion cubic feet (Tcf) of natural gas.
According to US oilfield services company Weatherford, Reuters report, the SC72 concession alone contains 2.6 to 8.8 Tcf of natural gas – three times the resource of the Malampaya field which currently provides around a third of the power to the Philippine main island of Luzon. If such new sources are not developed to offset Malampaya’s falling natural gas and condensates output, then as BMI Research suggest in its Philippines Oil and Gas Report Q3 2016, “the Philippines’ dependence on crude oil, refined fuels and LNG will deepen over the next ten years.”
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By GlobalDataBeijing’s ‘bigger’ interests
While the rich potential resources beneath the contentiously re-named West Philippine Sea could be the turning point in the future energy security of the Philippines, they are markedly less significant in the context of China’s own massive annual consumption – but Beijing’s interests are much bigger.
Some commentators have made the point that the real bone of contention is not the oil, but the fishing. July’s ruling did, after all, result from a case lodged in 2013 in the wake of the expulsion of Filipino fishermen from their lucrative Scarborough Shoal fishing grounds by Chinese Coast Guard vessels operating some 500 nautical miles from home. Although this is undoubtedly a factor, like oil and gas, it too is only part of a picture which can only fully be seen with Chinese eyes, and through the twin lenses of nationalism and exceptionalism.
In its 2015 report, Chinese Disputes in the South China Sea: Risks and Solutions for the Asia Pacific, the Boston Global Forum pointed out that Beijing’s use of reinvigorated nationalism to promote domestic control forms one of the key drivers on China’s assertive territorial expansionism. “The need for internal stability drives propaganda stories of foreign enemies, which leads propagandists to seek or even invent stories of stolen territory from the minutiae of history, including digging into archives to find and emotionalize the once obscure U- shaped line map, and the Senkaku island claim.”
Since the Scarborough Shoal incident, the Chinese response to such ‘stolen territory’ has seen the unilateral declaration of an air defence identification zone in the East China Sea, and the creation – and militarisation – of artificial islands in the South China Sea. At the core of all of this is the doctrine of Chinese exceptionalism and Beijing’s desire to see the West and its international organisations relinquish Asia to a new Chinese hegemony.
Central to achieving that is the need to transform the current international system. Australia’s latest Defence White Paper was spot on the money when it spoke of a “challenge [to] some of the rules in the global architecture established some 70 years ago” – and the United Nations Convention on the Law of the Sea (UNCLOS) is chief amongst those. Beijing’s refusal to accept the competence of the PCA or its ruling on the dispute with the Philippines is about more than mere posturing – and it might just be the key that unlocks the Reed Bank.
Foreign expertise?
Philippine companies do not have the technology, capital or operational experience to go it alone, and to date, attempts to attract the necessary international interest have largely fallen flat, not least as a result of fears over possible Chinese intervention. It seems unlikely that July’s ruling, which although technically final and binding, lacks any clear practical mechanism of enforcement, will of itself change things, but it could open the way for a very Chinese solution.
China has long held that maritime disputes should be settled by bilateral agreement reached through negotiation between claimant states, not by reference to third party UNCLOS-based adjudication. Bejing could in effect offer Manila the choice between standing by as China single-handedly explores the offshore reserves, or developing them in partnership, albeit on largely Chinese terms. As President Xi put it, during his visit to the White House in 2015, “people should move ahead with the times, and give up on the old concepts of ‘you lose, I win’ or ‘zero-sum game,’ and establish a new concept of peaceful development and willing cooperation.”
That kind of revenue sharing arrangement may, of course, be easier to suggest when you have one of the world’s largest navies at your back, but there is a certain logic to it. While China arguably could unilaterally develop the Reed Bank without heed to international law or opinion, it would be practically pointless without access to the convenient ready market offered by the Philippines. Likewise, although Manila could launch a new licensing round and look to international O&G majors to explore the resource, history suggests they are unlikely to do so against Chinese opposition. Collaborative development may simply be the most pragmatic solution.
Waiting game
There is another aspect to this, too. If Beijing can pull it off, it would be a major geo-political coup, forging a long-term, Sino-Filipino critical energy partnership while simultaneously weakening regional ties with the US.
Bill Hayton, associate fellow of the Asia Programme at Chatham House, thinks that for the moment, we are in the waiting phase and says that while informal talks between official representatives of China and the Philippines are ongoing, it is unlikely that any concrete steps will be taken.
“Any Philippine decision to drill on the Reed Bank would either require consent from China or an agreement with the United States about political and military support to deter Chinese opposition. There is no sign of either being agreed for the time being,” he says.
It does, however, seems that time is on China’s side. The Malampaya gas field has only around ten years of operational life remaining, so the clock is definitely running the future of the Philippines’ energy supply and that gives ample opportunity for Beijing to bring pressure to bear, diplomatically and perhaps more directly, too. Delaying and disrupting offshore development would need to be carefully done, of course, to avoid provoking international opinion or sending Manila deeper into the arms of Washington – but then China has always been master of the long game.
