This is the second product of the CSIS Expert Working Group on the South China Sea, which seeks to chart a feasible model for claimants to manage the maritime disputes.
Competition for oil and gas resources has repeatedly triggered standoffs between claimants in the South China Sea in recent years, especially between China, the Philippines, and Vietnam. The last serious attempt to cooperate on this front was the trilateral Joint Marine Seismic Undertaking of 2005 to 2008, which was allowed to expire amid political controversy and questions about its constitutionality in the Philippines. Since late 2016, the Philippine and Chinese governments have been discussing joint development of hydrocarbons at Reed Bank, but there has been little apparent progress despite optimistic official pronouncements. Independent experts and prominent jurists in the Philippines have said any such scheme would likely be unconstitutional based on the strict provisions in the country’s charter demanding that the government protect the nation’s rights to offshore resources.
The U.S. Energy Information Agency estimates that the South China Sea holds about 190 trillion cubic feet of natural gas and 11 billion barrels of oil in proved and probable reserves, most of which lie along the margins of the South China Sea rather than under disputed islets and reefs. The U.S. Geological Survey in 2012 estimated that there could be another 160 trillion cubic feet of natural gas and 12 billion barrels of oil undiscovered in the South China Sea. Beijing’s estimates for hydrocarbon resources under the sea are considerably higher but still modest in relation to China’s overall demand—the country’s oil consumption in 2018 is expected to top 12.8 million barrels per day.
For Vietnam and the Philippines, however, access to energy resources in the South China Sea is crucial. Block 06.1, part of the Nam Con Son project near Vanguard Bank, supplies about 10 percent of Vietnam’s total energy needs. The Philippines generates about a third of the electricity for its main island of Luzon from a single source, the Malampaya gas field, which is expected to cease production by 2024. Unless an alternative is found—and Reed Bank is the only good option currently on the table—the Philippines will need to either import significant amounts of natural gas at greater costs, rapidly incorporate other energy sources into its power supply, or face severe shortages.
Cooperation on disputed oil and gas resources is more difficult, both legally and politically, than for fisheries or environmental management. Unlike for fish, there is no provision in the United Nations Convention on the Law of the Sea (UNCLOS) mandating that states cooperate to manage oil and gas resources in a semi-enclosed sea like the South China Sea. UNCLOS articles 74 and 83 do say that in the absence of a final delimitation of maritime boundaries, states should exercise mutual restraint and establish “provisional arrangements of a practical nature” to manage their disputes, which offers a narrow foundation for compromise. But successful bilateral joint development agreements for oil and gas in disputed waters are relatively few, and there are no cases of fully operational “provisional arrangements” involving three or more parties. Nonetheless, finding a way forward is necessary if the claimants hope to defuse tensions and avoid harming their energy security.
Despite the obvious difficulties, it is possible for claimants to cooperate on oil and gas development in the South China Sea in a manner that would be both equitable and consistent with international law as well as the laws of all involved parties. Doing so would require considerable creativity and a greater willingness to compromise, especially by China, than has been evident to date. Such an agreement would need to be framed so that all parties could claim it was consistent with their interpretations of both domestic and international law. Most difficult would be finding a way for Beijing to reason that such cooperation was consistent with its assertions of “historic rights” while at the same time ensuring that Manila could uphold its 2016 award from an arbitral tribunal in The Hague and that all coastal states could maintain jurisdiction over their continental shelves.
Striking that precarious balance would require some politically difficult but legally feasible concessions up front. First, China would need to accept that being guaranteed a share of the profits from oil and gas resources throughout the South China Sea would be enough to satisfy its demand for “historic rights.” This would mean accepting a system in which other claimants exercise jurisdiction by licensing oil and gas exploration so long as Beijing shares in the spoils. This should be possible, given that no Chinese law, official statement, or government document has ever clarified exactly what historic rights Beijing claims.
Second, all claimants must be willing to forego pursuing oil and gas drilling based on entitlements from the disputed islands and reefs of the South China Sea. Fisheries management areas around the reef systems could provide a politically palatable way to cordon these features off from exploration without dealing with their legal statuses or delimitation issues. For China, which sees the islands as fully entitled to exclusive economic zones (EEZs) and continental shelves, this could be internally justified as a magnanimous gesture and act of good faith. Beijing could reason that even if the disputed features were islands under article 121.3 of UNCLOS, any equitable delimitation of boundaries with the much longer coastlines of the Southeast Asian states opposite them would result in their EEZs and continental shelves being reduced to small enclaves around the features. For the other claimants, agreeing to forego drilling around the disputed reefs and islands based on the need for environmental conservation should prove a politically palatable rationale to focus petroleum exploration and development on areas closer to their coasts.
These concessions would need to underpin the agreement without being spelled out in its text. That would allow each party to agree on the mechanisms for cooperation while still using different domestic legal justifications for doing so.
To that end, claimants and littoral states should agree to:
- Establish a joint venture, in the form of a new commercial entity, in each South China Sea littoral state involving that claimant’s national petroleum company and as many of its counterparts from the other claimants as are interested in investing. Each joint venture’s sole business will be exploration and production of South China Sea hydrocarbon resources off that country’s coast. There are already successful models of joint ventures among state-owned petroleum companies operating in the South China Sea, but a multiparty corporation established by parties to a dispute would be groundbreaking. These joint ventures will operate as follows:
- The corporations will seek to acquire petroleum licenses for new offshore blocks in the South China Sea offered by the countries in which they are headquartered, either via production sharing agreements or service contracts, depending on the domestic law of the tendering state. This will ensure that all parties have the opportunity to benefit from oil and gas production throughout the South China Sea.The joint ventures will seek to purchase stakes that their individual member-companies already hold in petroleum licenses in the portions of the South China Sea with which they are concerned. Existing contracts that coastal states have with other parties will not be affected, but the corporations may seek to acquire those licenses when they are relinquished by the current operators. The corporations may also seek to purchase minority stakes in commercially producing blocks in which the current operator is unlikely to relinquish the license any time soon. For a survey of oil and gas blocks that have been licensed by the Southeast Asian claimants or that are currently open for bids, see the map below.
- Decisions by the joint ventures to invest in specific blocks in the South China Sea will have no impact on territorial claims or the eventual delimitation of maritime boundaries and cannot be construed as recognition of the claims of any party by the other members of the joint venture. To this end, an explicit non-prejudice clause will be incorporated into the agreements creating the joint ventures and in all contracts into which they enter.
- Each claimant will be guaranteed the right to invest, through their national oil companies, in each of the joint ventures but will be under no obligation to do so. This means that one claimant, such as China, might have a company invested in each of the joint ventures while another might invest in only one or two. Any claimant that does not have its national oil company invest in a given joint venture at the time of its establishment will be welcome to do so in the future. Conversely, each company will be free to divest its stake in any given joint venture at any time (though only to the other national oil companies).
- Equal ownership stakes by each company involved in the joint venture might be preferable in some cases, while in others some might wish to invest more or less depending on their capabilities and interests. These details should be left up to negotiation and adjustment as needed. Similarly, the details of how each corporation makes investment decisions and which stakeholder(s) acts as the operator in any given project should be left to negotiation among the national oil companies. Profits from the joint ventures’ operations should be shared based on each partner company’s stake in the corporation.
- Agree that all South China Sea littoral states may license petroleum exploration and production within 200 nautical miles of their coastlines pending the eventual delimitation of maritime claims. In areas of overlap, unless a previous bilateral agreement has been reached, a median line will be used to determine which state has the provisional right to license exploration and production. This arrangement is detailed in the map below. Licensing will function as follows:
- The establishment of offshore blocks will have no impact on territorial claims or the eventual delimitation of maritime boundaries and cannot be construed as recognition of the claims of others. Any licenses issued by the coastal states will also incorporate a non-prejudice clause specifying that this provisional arrangement will have no effect on the final delimitation of boundaries.
- The licensing process will operate according to the domestic laws of the coastal states. In some cases, governments could simply grant licenses to the joint venture engaged in hydrocarbon exploration and production off its coast, while in others competitive bidding might be necessary. Even in those cases requiring bidding, the joint ventures will have considerable advantages—political and otherwise—over competitors.
- The coastal state that tenders a license acquired by one of the joint venture corporations will enjoy the same share of profits (the majority in most cases) and the same right to taxation as it would in tendering the license to any other company. This will guarantee that the littoral states benefit most from the resources off their coasts while still allowing all members of the joint venture a share in the profits.
- Any existing joint development frameworks, such as those between Malaysia and Brunei off the latter’s coast or between Malaysia and Vietnam near the entrance to the Gulf of Thailand (see map), will remain unchanged. The newly-established joint ventures in the countries concerned will seek to acquire licenses in these areas as any oil company might, while the coastal states will tender licenses and split profits according to their preexisting agreement.
- Agree to forego oil and gas exploration in protected fisheries zones covering the vital reef systems of the South China Sea, including the Spratly and Paracel Islands, Scarborough Shoal, and Luconia Shoals, as determined by a multilateral body of independent experts and regional officials (see Blueprint for Fisheries Management and Environmental Cooperation).
- Undertake a joint oil and gas survey, performed by one or more of the corporations, of the area of seabed in the center of the South China Sea beyond 200 nautical miles from the coastlines as a provisional measure. This will serve as an acknowledgment that some areas beyond 200 nautical miles are subject to overlapping extended continental shelf claims by the coastal states while other areas might be entirely beyond any continental shelves and therefore constitute part of the common heritage of mankind.
- Agree that in the case of a dispute over the interpretation or implementation of this agreement, either party may request the establishment of a commission of mediation, inquiry, or conciliation according to the following procedures:
- Each party to this agreement will name up to four experts in maritime affairs to be registered on a list to serve as potential members of a commission of mediation, inquiry, or conciliation. If a party has fewer than four experts registered to the list at any time, it may name additional experts to fill its quota.
- A party to a dispute may request the establishment of a commission once it is satisfied that direct negotiations cannot resolve the issue. Participation in the process of mediation, inquiry, or conciliation will then be compulsory for all parties to the dispute.
- Each party to the dispute will appoint two experts from the standing list of potential members to serve on the commission. A party may not appoint one of the experts that it named to the list.
- Once all parties to the dispute have made their selections, those appointed commissioners will elect another expert from the list to serve as the chairperson of the commission. That chairperson may not be selected from among those experts named to the list by one of the disputing parties.
- The commission will determine its own procedure for investigating and mediating the dispute, unless the parties to the dispute have already agreed to a procedure.
- The commission will issue a decision outlining its conclusions on all questions of fact or law relevant to the dispute and make its recommendations for a settlement between the parties.
This blueprint represents a consensus among the members of the South China Sea Expert Working Group at CSIS acting in their personal capacities, and not as representatives of their home institutions.