West philippine sea dispute jeopardizes petroleum exploration and development
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West Philippine Sea Dispute Jeopardizes Petroleum Exploration and Development The West Philippine Sea refers to that part of the South China Sea that President Benigno Simeon C. Aquino III declared as the maritime area on the western side of the Philippine archipelago when he issued on 05 September 2012 Administrative Order No. 29. The area is currently subject to a maritime dispute considered by geopolitical analysts as a key political risk to watch as the Philippines seeks a further credit rating update to attract more foreign direct investments. While the dispute involves six parties (People’s Republic of China, Taiwan, Vietnam, the Philippines, Malaysia and Brunei Darussalam) claiming all or part of the South China Sea, the greatest concern is that the ongoing dispute might break out into armed conflict. Any instability in the region is likely to disrupt economic activities and derail development especially with the involvement of the U.S. if it decides to support its allies against China. Some of the countries involved in the dispute contest each other’s rights to the 200-‐nautical mile Exclusive Economic Zone (“EEZ”) and an Extended Continental Shelf (“ECS”), citing the United Nations Convention on the Law of the Sea (“UNCLOS”), which took effect in 1994. UNCLOS governs maritime disputes on overlapping maritime zones like overlapping territorial seas, EEZs and ECSs. The Philippines will not surrender claims to its EEZ but it is not capable of confronting China militarily. China demands one-‐on-‐one negotiations, but other claimants prefer a multilateral approach, which opens the way for an indirect role for the United States, which obviously China doesn’t want. Prior to President Barack Obama’s arrival in Manila on 28 April 2014 for a state visit, the Philippines and the U.S. signed the Enhanced Defense Cooperation Agreement described by both governments as an executive agreement, not a formal treaty and therefore does not require the consent of the Senate in either country. The agreement referred to by President Obama as Washington’s “pivot” to Asia and an “ironclad” commitment to defend the Philippines would provide for U.S. forces to rotate in and out of existing Philippine military bases for missions ranging from narrowly defensive to humanitarian to training of the Philippines’ small, weak military establishment. Both Obama and Aquino, however, were careful not to attribute the agreement directly to China’s claim to the entire South China Sea. 9-‐Dashed Lines and China’s Historical Rights China officially notified the world of its 9-‐dashed line claim in 2009 when it submitted the 9-‐dashed line map to the United Nations Secretary General. Under the so-‐called 9-‐dash line map, China claims almost 90% of the South China Sea, which overlaps 80% of the Philippines’ EEZ and all its ECS in the West Philippine Sea. If China’s claim is upheld, the Philippines will lose the Reed (Recto) Bank and even the strategic Malampaya natural gas field.
Manila filed a case to pursue its claims and submitted a 4,000-‐page memorial seeking a ruling on China’s 9-‐dashed line from the Permanent Court of Arbitration in The Hague. The case would be the first time international legal experts formally consider the validity of China’s territorial claims in the South China Sea. The Philippines’ arbitration case against China is solely a maritime dispute and does not involve any territorial dispute. Chinese Foreign Ministry spokesman Hong Lei issued a statement on the Philippine request for arbitration and repeated China’s opposition to international arbitration over these issues given China’s preference for “direct negotiations with countries concerned.” Hong argued that, by submitting the case for arbitration, the Philippines was in violation of previous agreements to solve issues bilaterally, including the 2002 ASEAN Declaration on the Conduct of Parties in the South China Sea. China is not expected to submit a counter-‐claim and participate in the arbitration process making a Philippine victory by default highly probable. However, such a ruling would be nothing but a public relations victory for the Philippines, allowing Manila to claim that its position is internationally sanctioned. Philippine Secretary of Foreign Affairs Albert del Rosario said he does not expect a ruling on the case before the end of 2015. In an article in the 14 April 2014 issue of Forbes, Singapore senior statesman and former Prime Minister, Lee Kuan Yew doesn’t believe the China will submit its claims, which are based primarily on China’s historical presence in the disputed waters. Lee also believed that China would not allow the dispute to be decided by rules that were defined at a time when China was weak and that it has judged that the U.S. won’t risk its present good relations with China over a dispute between the Philippines and China. Lee added that if historical claims can define jurisdiction over waters and oceans, the Chinese can point to the fact that 600 years ago they sailed these waters unchallenged.
Under the general principles and rules of international law, a claim of “historical rights” to internal waters or territorial sea must satisfy four conditions. One, the state must formally announce to the international community such claim to internal waters or territorial sea, clearly specifying the extent and scope of such claim. Two, the state must exercise effective authority, that is, sovereignty, over the waters it claims as its own internal waters or territorial sea. Three, such exercise of effective authority must be continuous over a substantial period of time. Four, other states must recognize, tolerate or acquiesce to the exercise of such authority. China’s defence of its 9-‐dashed line will entirely depend on how it can convince the international community that it has satisfied these four conditions. Presently, not a single country in the world recognizes or acquiesces to China’s 9-‐dashed line claim.
Petroleum Resources in the Disputed Areas The ongoing dispute involving among others, the right to explore for and exploit petroleum, minerals and other marine resources in these zones raises tension in
the area, definitely downplaying energy exploration and development interests on the areas currently claimed by the Philippines. The West Philippine Sea is the location of three (3) potential areas where hydrocarbon deposits could be found: Northwest Palawan, Southwest Palawan and Reed (Recto) Bank. Of particular interest is the area of Northwest Palawan, including Reed (Recto) Bank where most of the country’s petroleum production, including the Malampaya natural gas, is sourced from and where the discovery of additional petroleum resources is most likely. According to the Department of Energy (“DOE”) report “Philippine Petroleum Resource Assessment” (2002) the estimated mean volume of the total risked recoverable resources for Northwest Palawan basin is 494 Million bbl (79 Million Sm3) of oil and 9,271 Billion cf (263 Billion Sm3) of gas. Of these total resources, 143 Million bbl (23 Million Sm3) of oil and 3,806 Million cf (108 Billion Sm3) of gas are actually discovered. For the Southwest Palawan basin, the estimated mean volume of the total risked recoverable resources is around 549 Million bbl (87 Million Sm3) of oil, 46% of which comes from mapped structures, and 4,529 Billion cf (128 Billion Sm3) of gas, 24% of which is from mapped structures. For the Reed (Recto) Bank basin, the estimated mean volume of the total risked recoverable resources is around 35 Million bbl (6 Million Sm3) of oil and 2,229 Billion cf (63 Billion Sm3) of gas. The U.S. Geological Survey (“USGS”) came out in 2010 with an assessment of the petroleum potential of the South China Sea including the West Palawan Shelf.
TABLE 1. Estimates of oil and gas based on US Geological Survey
Total Petroleum Systems (TPS) and Assessment Units (AU)
Field Type Largest expected field size
Total undiscovered resources (Mean)
Oil (MMBO)
Gas (BCFG)
NGL (MMBNGL)
South China Sea Platform (Miocene TPS) Dangerous Grounds-‐Reed Bank AU
Oil Gas
703 4,217
2,522 N/A
10,370 15,149
197 881
Palawan Shelf Province (Eocene-‐Miocene Composite TPS) Eocene-‐Miocene Reservoirs AU
Oil Gas
101 514
270 N/A
179 1,229
6 38
BCFG = billion cubic feet of gas MMBNGL=million barrels of natural gas liquids MMBO = million barrels of oil NGL=natural gas liquids Largest expected filed size for oil is measured in MMBO and for gas in BCFG
Source: “Assessment of Undiscovered Oil and Gas Resources of Southeast Asia, 2010,” US Geological Survey, cited in THE WEST PHILIPPINE SEA: The Territorial and Maritime Jurisdiction Disputes from a Filipino Perspective, A Primer”
According to the “Report on the South China Sea” released by the US Energy Information Agency (“EIA”) on 07 February 2013, the region around the Spratly (Kalayaan) Islands have virtually no proved or probable oil reserves. Industry sources suggest less than 100 billion cubic feet (Bcf) in currently economically viable natural gas reserves exist in surrounding fields. However, the area may
contain significant deposits of undiscovered hydrocarbons. USGS assessments estimate anywhere between 0.8 and 5.4 (mean 2.5) billion barrels of oil and between 7.6 and 55.1 (mean 25.5) Tcf of natural gas in undiscovered resources. Most of these undiscovered resources are likely located in the contested Reed (Recto) Bank, which is also claimed by China, Taiwan, and Vietnam. The Philippines began exploring the area in 1970 and discovered natural gas in 1976. The Philippine government awarded a petroleum service contract to U.S-‐based Sterling Energy in 2002, which was then acquired by U.K-‐based Forum Energy in 2005. However, Chinese objections culminating with an incident in the Reed (Recto) Bank on 02 March 2011 when Chinese vessels approached Forum Energy’s ship demanding that it stop all exploration activities and leave the area, prevented the operator from pursuing further activities. Theresa Martelino-‐Reyes of the VERA Files reported that the state-‐owned Chinese oil firm, China National Offshore Oil Corp. (“CNOOC”) has rejected the “Farm-‐in Agreement” proposal of Forum Energy in the disputed Reed (Recto) Bank service contract because of “sovereignty issues” between China and the Philippines. Nevertheless, CNOOC welcomed “innovative” proposals on how it can participate in the service contract. Forum Energy reportedly declared force majeure, which will end on August 2014. Meanwhile, the company released in 2012 its estimate of petroleum resources for the Reed (Recto) Bank. TABLE 2: Estimates of hydrocarbon resources in Reed (Recto) Bank based on Weatherford Petroleum
Resource
Type Estimate Type
Low High Best estimate Gross prospective resources
Gas 4.666 TCF 16.612 TCF 8.799 TCF
Oil 117 MMBO 416 MMBO 220 MBO and liquids in places Gross contingent resources
Gas Oil
1.474 TCF 37 MMBO
2.603 TCF 115 MMBO
4.598 TCF 65 MBO and liquids in place
NOTES
• “Prospective resources refer to quantities of oil and gas estimated at a given date to be potentially recoverable from undiscovered accumulations, which are technically and economically viable to recover…”
• “Contingent resources refer to quantities of oil and gas estimated on a given date to be potentially recoverable from known accumulations but are not currently economically viable to recover. Such resources include accumulations for which there is no viable market…”
• Pre-‐drill estimates of resources are based on certain assumptions and information and interpretations currently available, with no assurances of accuracy.
(Source: “Recto Bank sitting on 16T cubic feet of gas,” Business Mirror, April 26, 2012, pg. A1-‐A2, cited in THE WEST PHILIPPINE SEA: The Territorial and Maritime Jurisdiction Disputes from a Filipino Perspective, A Primer)
Joint development: An Innovative Proposal? The Arroyo government agreed to a Joint Marine Seismic Undertaking (“JMSU”), which was a tripartite agreement signed on 14 March 2005 between the state-‐owned oil companies of the Philippines (PNOC), China (CNOOC) and Vietnam (Petrovietnam). Under the JMSU, the parties agreed to conduct a joint seismic survey for three years in an area of the West Philippine Sea including the Spratly (Kalayaan) Islands and Reed (Recto) Bank. However, JMSU did not involve joint development activities. According to then PNOC President Eduardo Mañalac, JMSU involved “a) a sincere effort on the part of three governments to find common ground for cooperation involving the South China Sea area; b) a desire to materialize this effort in terms of a concrete scientific study, the results of which could be of great value in determining over-‐all consequences for the region; and, c) a common determination to cement the friendships formed by opening further discussions beyond the JMSU.” Despite the fact that the JMSU agreement provided a provision that maintained that the “signing of this Agreement shall not undermine the basic position held by the Government of each Party on the South China Sea”, and the DOE issued a “Non-‐Exclusive Geophysical Permit” on 10 June 2005 to give a legal cover for the other JMSU parties to conduct seismic activities thereby indicating that the Philippine government still continued to exercise jurisdiction over the affected areas, the JMSU was regarded as a “sell-‐out” by the Philippines because it gave China an opportunity to claim access to the Reed (Recto) Bank that had never been disputed before. Intense public opposition to the Arroyo Administration’s role in the JMSU, particularly allegations that tied the JMSU to corruption, caused the agreement to lapse without extension in 2008. (“The West Philippine Sea: The Territorial and Maritime Jurisdiction Disputes from a Filipino Perspective, A Primer”, The Asian Center and Institute for Maritime Affairs and Law of the Sea, University of the Philippines, 2013) According to Supreme Court Senior Associate Justice Antonio Carpio in his speech given before the Philippine Bar Association on 29 August 2013, China has been dangling to the Philippines and other claimant states its offer for joint development of the disputed areas while shelving the sovereignty issues. However, he mentioned at least three problems to this offer. First, China wants to jointly develop the EEZ of the Philippines but refuses to jointly develop China’s own EEZ. In effect, China is saying to the Philippines, what is exclusively China’s economic zone is China’s alone, but what is exclusively the Philippines’ economic zone belongs to both China and the Philippines. Second, China’s offer of joint development is subject to the precondition that participating coastal states must first expressly recognize China’s “indisputable sovereignty” under its 9-‐dashed line claim. This precondition effectively means that once a state agrees to joint development, it must not only vacate any island it possesses in the Spratlys and turn over the same to China, it must also renounce any maritime claim within the 9-‐dashed line area. This precondition
demanded by China is obviously inconsistent with its offer to shelve the sovereignty issue. Third, if the Philippines agrees to China’s joint development offer, the Philippines will in effect give up its exclusive “sovereign rights” to exploit all the living and non-‐living resources in its own EEZ. The Philippines will also give up its exclusive right to exploit the mineral resources in its own ECS. The bottom line is that China’s joint development offer will negate the maritime entitlements of the Philippines under UNCLOS. This is constitutionally impermissible because our 1987 Constitution mandates the State to “protect the nation’s marine wealth in its xxx exclusive economic zone, and reserve its use and enjoyment exclusively to Filipino citizens.” Any joint development with China constitutes a “culpable violation of the Constitution.” For whatever reason the Arroyo government entered into the tripartite JMSU agreement, the author believes that it was a major political and diplomatic blunder on the part of the government. I agree with Justice Carpio’s assessment that “the only joint development that is feasible in the Spratlys is for all claimant states to respect each other’s EEZs as guaranteed by UNCLOS and to jointly develop the disputed areas beyond these EEZs.” Conclusion The Western Palawan shelf and the Reed (Recto) Bank are undisputedly part of the Philippine EEZ. In the past, the Philippine government has exercised exclusive “sovereign rights” over the area by awarding petroleum service contracts. In addition to pursuing the arbitration case against China, the government through the DOE should continue offering service contracts in the disputed areas despite opposition from the Chinese government. If the DOE gets intimidated by China and wavers, it is a tacit recognition of China’s 9-‐dashed line historical claim. If needed, the Philippine military should provide protection to contractors while they engage in exploration and development activities in the disputed areas. On the other hand, the energy community must do it share by applying or bidding for service contracts in the West Philippine Sea. While there may be other “commercial” considerations for multinational energy companies when they bid for acreage they should also bear in mind that nothing protects their investment more other than their total support and commitment for the general rules and principles of international law. Fernando “Ronnie” Penarroyo is the Managing Partner of Puno and Penarroyo Law ([email protected]). He specializes in Energy, Resources and Environmental Law, Business Development and Project Finance.