This analysis serves as an update to the author’s earlier analysis of the purported draft framework released by Senator Trillanes, mentioned below.
The contents of the Philippines-China Memorandum of Understanding on Cooperation in Oil and Gas Development (MOU) were officially revealed in a rather unusual manner in the wake of Xi Jinping’s visit late last month. Spokespersons of the Palace, Department of Foreign Affairs and Department of Energy initially denied possession of a copy of the controversial document and pointed fingers as to who actually held it. On November 22, recently-appointed Secretary of Foreign Affairs Teodoro Locsin Jr. appeared in a televised interview on CNN Philippines and teased the public with a reading of parts of the document and a glimpse of its pages. He insisted he wrote the MOU himself and declared “fake” the purported Chinese draft that Senator Antonio Trillanes circulated on the eve of President Xi’s visit. However, he did not at that time publicly release the document without China’s approval, later explaining this to be a matter of courtesy; then he announced that copies would be transmitted to the Philippine House and Senate the following week. Amid mounting demands for transparency and full release of the government’s reported 29 deals signed with China, particularly the MOU, the complete document was officially released on November 26.
The MOU is similar to the purported Chinese proposal, albeit one paragraph shorter. But instead of opening with a reference to the three political declarations of the two parties in previous bilateral meetings, the MOU invokes the UN Charter, the United Nations Convention on the Law of the Sea (UNCLOS), and the 2002 Declaration of Conduct of Parties in the South China Sea as its “context” in addition to the renewal of friendly and positive relations between the two parties, indicating a shift from a pure “political basis.” The reference to UNCLOS is important but equivocal: it may be argued that the parties’ cooperation is premised on their respective legal maritime zones and jurisdictions under UNCLOS, but this may or may not include the interpretation and application in the Philippines v. China award.
It reflects the same “basic principle” as described in the purported draft released by Trillanes, but instead of stating that the parties agreed outright to conduct oil and gas exploration and development “in relevant sea areas” in the South China Sea, there is a marked change. Instead, the parties “decided to negotiate on an accelerated basis arrangements to facilitate oil and gas exploration and exploitation in relevant maritime areas consistent with applicable rules of international law.” This makes the document an agreement to negotiate other agreements for separate exploration or development areas, instead of a general and straightforward agreement applicable to the entire West Philippine Sea (the Philippine name for the portions of the South China Sea adjacent to the Philippines). Custom technical and commercial arrangements can be made for different areas. This may allow, for example, different arrangements between disputed and undisputed areas, keeping in mind that China’s claim does not completely cover all of the West Philippine Sea.
The MOU retains the two-tiered structure of the purported proposal, comprised of an Inter-Governmental Joint Working Committee and an Inter-Entrepreneurial Working Group, with the additional specification of the Energy Ministers as vice-chairs of the former and more detailed description of their respective functions.
The Committee will identify prospective exploration and development areas and negotiate cooperation arrangements for each, as well as establishing their corresponding Working Groups. The MOU identified the China National Offshore Oil Corporation (CNOOC) as China’s representative for the Working Group, but the Philippines may nominate any one of its petroleum service contractors for each specific area, or the Philippine National Oil Company-Exploration Corporation if there are none. Secretary Locsin explains that this is due to the Philippine practice of using privately-owned service contractors instead of a national oil company for petroleum development.
This indicates continuing participation of private sector/external companies on the Philippine side and could provide some protection to existing service contractors such as PXP Energy Corporation, which presently holds the service contract for Reed Bank. The Philippines could simply nominate PXP as a Working Group representative and then leave to it the task of cooperating with China. However, the MOU could not prevent China from potentially buying a controlling interest in a service contract or taking over the service contractor itself, given the former’s massive financial, technical, and technological resources. It may also be argued that the cooperation arrangement does not necessarily require China to farm-in to and operate under a service contract; the text may be interpreted to mean simply that CNOOC and a service contractor will cooperatively work on an exploration and development area but under a separate and special “cooperative arrangement” separate from the latter’s own service contract. Parcelling out different areas to different private service contractors could also be administratively challenging for the Philippines; it has to coordinate management of different areas by different entities, and contend with the inherent autonomy of decision-making by the private sector. In contrast, China exercises absolute control over CNOOC and is assured that it will act consistently with China’s interest across all prospective cooperation areas.
The parties have a soft deadline of 12 months within which to agree on areas and arrangements. This could encourage serious and speedy implementation or lay the groundwork for either calling off the deal or allowing the Philippines to proceed independently with its own exploration and development efforts regardless. This is particularly important considering that further delays work against the Philippine interest and endangers in energy security in the medium term, while there is no similar cause for urgency on the part of China.
The MOU has a stronger non-prejudice clause, which states that neither the MOU nor the Committee’s nor Working Groups’ prospective arrangements affect the parties’ respective legal positions, and emphasizes that the MOU “does not create rights or obligations under international or domestic law.” This guards against its future use as evidence of acquiescence, acceptance, or recognition by either party of their respective claims and positions in the South China Sea. While the MOU technically cannot be used to make the Philippines v. China award irrelevant, neither can it be used to support recognition of China’s excessive claims in the South China Sea. However, this does not discount the political impact of the MOU itself. The accommodation of joint exploration and development in the West Philippine Sea—under the premise that its status is still “disputed” rather than “settled”—is a step backward from the tribunal award’s vindication of the Philippines’ exclusive economic zone and continental shelf.
The confidentiality clause for all information shared by the parties or their Working Groups remains essentially the same, requiring agreement of both parties for the release of any information from any of the prospective cooperation arrangements. This could run afoul of current policy, which makes data and information available to third parties after five or seven years, and could also hinder others from future exploration and development of areas previously covered by the MOU.
Finally, the MOU dispenses with the dispute settlement provision and subsumes all other potential issues under “other matters” to be settled by consultation and agreement by either the Committee or Working Group, presumably depending on the nature of the question or issue to be addressed.
As with the purported Chinese draft, the MOU essentially postpones the substantial negotiations for specific joint petroleum exploration and development projects to a later date, and still does not address the specific challenges and restrictions posed by the Philippine Constitution and legislation. It is not clear whether this MOU will hinder unilateral exploration and development by the Philippines of other areas of the WPS or be the basis of an exclusionary policy that eventually locks the Philippines into partnerships with only Chinese companies. It also does not address the constitutional and legal requirement of “sole control and supervision by the State” of natural resource exploration and exploitation. Unfavorable answers to these questions may lead to the conclusion that Philippine sovereignty and sovereign rights will indeed be compromised. These can be finally determined only when the parties agree on the actual cooperation arrangements for specific areas.