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West philippine sea dispute jeopardizes petroleum exploration and development

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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 …

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.

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  • 1. 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.    
  • 2. 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  
  • 3. 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  
  • 4. 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)          
  • 5. 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  
  • 6. 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   (fspenarroyo@punopenalaw.com).   He   specializes   in   Energy,   Resources   and   Environmental  Law,  Business  Development  and  Project  Finance.