On October 15, 2020, President Rodrigo Duterte announced the lifting of the six-year moratorium on oil and natural gas exploration at Reed Bank (Recto Bank). The previous administration of President Benigno Aquino imposed the ban on energy exploration in the face of China’s coercive actions in this part of the South China Sea. In March 2011, two Chinese patrol boats harassed a Philippine Department of Energy (DOE)-commissioned survey ship that was exploring the area for possible drilling sites. Three year later, the Philippine government announced a ban on energy exploration activities at Reed Bank and eventually in other parts of the Philippines’ exclusive economic zone (EEZ) in the South China Sea. This prevented several energy companies from engaging in exploration operations to protect their assets from aggressive Chinese activities in the disputed waters.

In 2016, President Rodrigo Duterte was elected president. He immediately unraveled his predecessor’s confrontational approach vis-à-vis Chinese maritime expansion in the South China Sea.  The Philippines and China formed a bilateral commission to manage their dispute. And in 2018, the two sides conducted negotiations for joint exploration and development of energy resources in the disputed waters.

In a press briefing on October 15, 2020, DOE Secretary Alfonso G. Cusi said that local companies involved in three drilling projects off the western-most Philippine island of Palawan could now resume their exploration operations. He also added that President Duterte’s green light for energy companies to resume oil and gas exploration in disputed waters would pave the way for more interested parties to participate in the development projects.

Mr. Cusi claimed that the president’s decision to resume gas and oil exploration at Reed Bank was a “unilateral decision” as counterparts in China were not informed ahead of the announcement.  He declared, “Manila will stand by its position but will not engage in a conflict.” He underscored that if China protests the order, “the Philippines will stand up for its rights.” Consequently, Cusi’s statement created the impression that the Duterte administration, by lifting the moratorium, is asserting its rights vis-à-vis Beijing at Reed Bank.

Under the Shadow of China

Two days after President Duterte lifted the ban on energy exploration in the South China Sea, it seemed his decision may have had China’s blessing. Chinese Foreign Ministry spokesperson Zhao Lijan said, “China hoped it could work together with the Philippines in jointly developing energy projects in the South China Sea.” He revealed that “China and the Philippines have reached consensus on the joint development of oil and gas resources in the disputed waters and have established a cooperation mechanism or relevant consultation.”

On the same day, it was disclosed that the Philippines’ PXP Energy Corp was negotiating with China National Offshore Oil Corp (CNOOC) for joint oil and gas development. PXP said that talks were being handled by its subsidiary Forum and the two sides had not yet reached any disclosable agreement.

Retired Supreme Court Associate Justice Antonio Carpio claimed that the lifting of the moratorium is part of the implementation of a November 2018 Philippines-China memorandum of understanding (MOU) that obliged both countries to cooperate in the exploration of oil and gas deposits in the South China Sea.  Under the MOU, CNOOC could become Forum Energy’s service provider at Reed Bank under a commercial agreement. The Chinese oil company would serve either as subcontractor, equity partner, or both.  Under a hypothetical service contract, CNOOC could get 40 percent of the net proceeds for its services in extracting the oil and natural gas deposits and technology. Sixty percent of the proceeds would go to the Philippine government as the sole owner of the oil and gas.

Beijing could only explore for, and extract, resources from disputed waters if it partners with a company that holds a license issued by Manila under this proposed arrangement. If CNOOC and Forum Energy signed a commercial agreement, a win-win formula for the South China Sea dispute would be on table.  This arrangement would ensure that the Philippines retained its sovereign rights in its EEZ in the South China Sea as a service contract with CNOOC would be governed by Philippine law. China could offer similar commercial deals to Vietnam, Malaysia, and Brunei. If these countries accepted this arrangement, China would have solved the dispute over hydrocarbon resources in the South China Sea.  It would also earn the goodwill of all the littoral Southeast Asian states.

If China were to ultimately accept such a deal, it would be extending a major concession to the Philippines because it would mean recognizing the latter’s economic rights over its EEZ in the South China Sea—something Beijing has long refused to acknowledge. This 180-degree turn would likely owe to U.S. pressure on China, including its conduct of regular freedom of navigation patrols and Secretary of State Mike Pompeo’s July 2020 statement that the United States’ position on the South China Sea disputes would be based on the 2016 arbitral award in the Philippines’ favor. The Philippines has also recently added pressure on China, with Duterte publicly acknowledging the 2016 award and the significance of the security alliance with the United States.

China’s Diplomatic Gambit?

By recognizing the Philippines’ economic rights in its EEZ, China would be showing the world that the claimant states in the South China Sea dispute could solve the maritime row without external involvement. China would by playing up its gambit of projecting itself as an “intra-regional country” on the same side as the Southeast Asian claimants, while the United States and Japan would be depicted as extra-regional interfering forces causing trouble. China might leverage this to convince the 10 member-states of the Association of Southeast Asian Nations to sign a code of conduct in the South China Sea by its hoped-for date of 2022.

About Renato Cruz de Castro

Renato Cruz De Castro is a distinguished university professor in the International Studies Department, De La Salle University, Manila, and holds the Dr. Aurelio Calderon Chair in Philippines-American Relation. As a member of the Board of Trustees of the Albert Del Rosario Institute of Strategic and International Studies (ADRI), he writes monthly opinion columns for the Philippine Star and Business World.