This week, the Philippines announced it will take China to an international arbitration tribunal because of Beijing's claim of nearly the entire South China Sea. The years-old squabble has long deterred most oil and gas prospectors from the region - but not all of them. A Philippine company is hoping to work with a Chinese state-owned entity to drill for natural gas in the disputed waters.
Forum Energy is stuck in a holding pattern. The British-based company, which is majority-owned by a Philippine entity, had hoped to start drilling for natural gas off Reed Bank in the South China Sea, but it has not gotten government approval.
Forum began preliminary work to assess the area's potential reserves, but in early 2011 workers said they were chased away by Chinese vessels. More than five years ago this area showed a potential 3.4 trillion cubic feet of gas and possibly 10 trillion more.
Manuel Pangilinan, chairman of Philex Petroleum, which has a 65 percent stake in Forum Energy, is eyeing a partnership with the state-owned China National Offshore Oil Corporation (CNOOC) to drill in Reed Bank.
“There are no oil rigs in this country that are owned by Filipinos. So your options are only two: one, damn the torpedoes and send the [foreign] vessel in and see what happens,” Pangilinan said.
Or, the second, Pangilinan says, is to have a commercial arrangement with a Chinese company.
Such a joint venture is an option that China has consistently supported. Earlier this month, China’s ambassador in Manila told a local newspaper it would be better for Forum and CNOOC to get to work, instead of letting the reserves sit untouched while the two countries sort out their differences.
Authorities in the Philippine government are trying to figure out how to proceed. Energy Undersecretary Ramon Oca says they want to “make sure we are not violating” international law.
The Philippines takes the position that China does not follow the United Nations Convention on the Law of the Sea, which delineates a country’s exclusive economic zone as 370 kilometers from its coastline. The Philippines says China’s claim of just about the entire South China Sea is illegal.
Foreign Affairs Secretary Albert del Rosario announced this week that the country is ready to bring it to international arbitration, which would be legally binding.
“On numerous occasions, dating back to 1995, the Philippines had been exchanging views with China to peacefully settle these disputes," noted del Rosario. "To this day, a solution is still elusive. We hope that the arbitral proceedings shall bring this dispute to a durable solution.”
Beijing responded by reiterating China’s claim that it has "indisputable sovereignty" over the South China Sea islands.
The Philippines has said it would support a Philippine-Chinese partnership in the region, provided it conformed to Philippine law, meaning parties would have to follow the 60 percent locally owned-to-40-percent foreign owned rule, among other requirements. President Benigno Aquino said recently he supports a joint partnership as long as royalties would go to the Philippines.
It is this question of royalties that poses the biggest challenge to a joint drilling partnership.
Li Mingjiang, coordinator of China Studies at the Rajaratnam School of International Studies at Singapore’s Nanyang Technological University, says the royalties issue is in many ways at their heart of their dispute.
“The implications are that if you follow Filipino laws and regulations, to some extent, China is conceding the sort of sovereign right to the Philippines in their waters with regards to the energy resources,” Li said.
Australia Defense Force Academy Professor Carl Thayer does not see a joint development partnership happening anytime soon.
“Does China want to accept that? And, if it did and worked in an area where the central government had a claim, it would seem to undermine the central government," Thayer noted. "And then now, DFA is having second thoughts. So I don’t think the prospects are very good.”
Thayer says that until the international arbitration filing, observers thought Forum’s proposal to partner with China was a potential step forward in the development and sharing of the contested resources. Now, with arbitration expecting to take at least a few years, that already slim chance of collaboration has become even less likely.