Beijing and Manila Lean Toward Joint Offshore Energy Cooperation in Disputed Philippine Waters

On July 26, during a two-day visit to Manila, Chinese Foreign Minister, Wang Yi, expressed Beijing’s interest in jointly exploring for oil and gas in disputed South China Sea waters with the Philippines.  A day prior to Wang’s remarks, Philippine President Rodrigo Duterte stated that “a partner had been found” for joint exploration and development of oil and gas fields in the Philippines’ Exclusive Economic Zone (EEZ).  Duterte did not specify the identity of this “partner.”

A significant rapprochement has taken place between Beijing and Manila in recent months that has allowed Beijing to defy international norms and further its commercial and military activities in the disputed South China Sea.  The Philippines is relying on the exploration and development of Reed Bank – located within its 200 mile-long EEZ — to contribute to its long-term energy security, as other resources producing diminishing output.  Despite its rightful claim to this region, the Philippines has been unable to operate there free of Chinese harassment.  Previously, in 2011, a Filipino petroleum company reached out to Chinese state-owned CNOOC for joint development, but the offer was declined.  Later, in 2013, the Philippines filed an arbitration case challenging China’s claims and subsequent encroachments into its portion of the South China Sea.

The recent détente and potential renewed partnership in this historically disputed region is the culmination of Manila’s pivot to China.  This Beijing-claimed sphere of influence has been largely fueled by China’s accelerated investment and economic cooperation with the Philippines.  Many of the most recent investments (2014–2017) have been in the energy and infrastructure sectors.  Notable transactions include:

·  $1 billion EPC contract between PowerChina Corporation and Philippine’s Olympia Violago Water & Power Inc. for the 500 MW Wawa Pumpe-Storage Hydropower Project

·  Turbine Supply Agreement with Xinjiang Goldwind Science & Technology Co. and Shanghai Electric Power Design for a windfarm in Pasaquin, Philippines

·  $1 billion EPC contract with Shanghai Electric Power Corporation for a thermal electric power plant

Moreover, reports emerged in April 2016 that China National Offshore Oil Company (CNOOC) was negotiating with Filipino firm, Philex Petroleum, for potential areas of cooperation in Reed Bank.   In July 2016, however, the Permanent Court of Arbitration in the Hague ruled against China’s territorial claims in the South China Sea, causing Philex to suspend negotiations with CNOOC.

Recent remarks made by the Chinese Foreign Minister, and mirrored by President Duterte, could potentially see the revival of Chinese SOE activity in this disputed space.  Although several regulations dictate the operations of foreign entities in the Philippine’s EEZ (the Constitution requires that the Philippine entity retains 60% in any venture), Beijing’s accelerating E&F penetration of the Philippines, combined with its historical disregard for territorial integrity, could prove detrimental to Philippine interests were a deal to be concluded.