Ahead of his March 21 visit to Beijing, Philippine foreign secretary Alan Peter Cayetano gave an optimistic preview of his talks scheduled with his Chinese counterpart, covering joint petroleum exploration and development in the South China Sea. After meeting, however, the two foreign ministers announced only that the two countries would “cautiously proceed with discussions” and actively promote cooperation on oil and gas “in a prudent and steady way.” Neither side could provide details, other than to state that they are working to find a “common” and “suitable” legal framework for the venture. This agreement was reiterated in the meeting between President Rodrigo Duterte and President Xi Jinping at Boao on April 11. In other words: so far, substantive talks have not taken place, and nearly two years later, both parties are still in the (pardon the pun) exploratory stage.
This is not unexpected. Since last year, the foreign secretary has said the Philippines is seeking a deal “better than Malampaya” (its existing Service Contract 38) that is fully compliant with the Philippine constitution. Cayetano also emphasized that the scope of discussions was limited to exploration and not full-blown development, as a fruitless exploration would preclude the need to discuss the obvious, more difficult issues.
Recently, President Duterte proudly declared China’s offer for joint exploration of the Philippine exclusive economic zone and continental shelf in the South China Sea to be “like co-ownership” and a better alternative to war. Palace staff attempted to back-pedal on the comments, downplaying the comparison as mere simile, but then further muddied the issue by announcing that joint exploration was in the works for two existing projects northwest of Palawan. But these involve entirely different issues: Service Contract 57, which would see the China National Offshore Oil Corporation “farmed in” or brought on for exploration and drilling in an area not claimed by China, has been pending final approval since 2006, while Service Contract 72 covers a block claimed by China but determined by the 2016 South China Sea arbitration award to belong to the Philippines. Service Contract 57, contrary to the Palace staff statement, is clearly not a candidate for joint development; China has long sought joint development for Service Contract 72. The energy secretary has prudently refrained from commenting on the matter.
Some observers see such statements as presaging joint development, while highlighting the Philippines’ openness to partnerships with foreign corporations under the 1987 Constitution and standing law and jurisprudence on the service contract system for natural resources. But these conflate the state’s power to enter into commercial transactions with the state’s exercise of sovereign rights and prerogatives over its domain and resources, and misunderstand the fundamental nature of joint development in connection with international maritime disputes.
Joint development in practice usually means two states share the contested resource, the rights and jurisdictions over it, including its exploration and exploitation, pending final settlement of their dispute. It presumes the two states have legitimate contingent rights based on a physical foundation: e.g., a transboundary resource that straddles the prospective boundary between them. However, the states would prefer to derive their respective benefits together, rather than awaiting final determination and division through maritime delimitation.
To make any deal work, the Philippines must overcome two major legal problems: 1) internationally, how to justify its acceptance that China contingently shares the petroleum resources within its continental shelf after an international arbitration award clearly declared that no plausible claim exists; and (2) domestically, how to accommodate any petroleum development not under its sole jurisdiction, control, and supervision but rather on a shared, co-equal basis with another state. Manila hopes the needed solutions will be provided by the “suitable” legal framework.
As is, service contracts are essentially commercial transactions between the state and a private entity. Under Philippine law, no sharing arises merely because the state issues a service contract to a foreign corporation. As a sub-contractor, the corporation acts as an agent of the state for resource exploration and development, and does not gain any rights equal to or greater than its principal’s. Even if the corporation is 100% foreign-owned and making all decisions regarding operations and management, it is ultimately still subject to the state’s full control and supervision, i.e., exclusive Philippine jurisdiction. Clearly, these conditions would not be acceptable to China and its own concept of joint development.
With up to 30 percent of Philippine power needs supplied by a single petroleum platform until around 2030, alternatives to make up for a shortage are few and costly in financial or environmental terms: imported LNG, more coal plants, nuclear power, or petroleum reserves elsewhere. Each has its own set of problems that, as time passes, would increase the pressure for the Philippines to either strike a bargain or find other sources.
However, China seems unimpressed with any sense of urgency after the March and April meetings. Further delays could necessitate revision of longer-term economic projections, to account for adjustments in the energy infrastructure or potential gaps between power supply and demand. Without headway, a power crisis in the near future could hit the Philippine economy particularly hard, and not even China’s promised infrastructure and financial assistance could persist against a major energy shortage. Thus, while Beijing may have convinced Manila that joint development is a win-win solution, in the end, the Philippines may end up winning less than expected.
