Energy Secretary Alfonso Cusi’s surprise announcement last week of the resumption to oil-and-gas exploration in the disputed West Philippine Sea was a bold move and a big show of confidence that Manila could now stand against Beijing’s harassment.
For nearly a decade, China has been intimidating the Philippines, opposing any unilateral oil-and-gas exploration in the disputed waters in the West Philippine Sea.
China wanted a piece of the action, not only in areas under Philippines control, but in other areas where Brunei, Malaysia and Vietnam have been drilling for energy resources.
Cusi’s lifting of the moratorium imposed in 2012 by the previous administration could signal that the country was prepared to duel with China by sending a credible naval force to protect survey vessels conducting exploration activities in the Reed Bank.
The Service Contract Area 72 in the Reed Bank covers about 8,000 square kilometers and initial tests showed that its southwest gas fields, known as Sampaguita, contained up to 2.6 trillion cubic feet (TCF) of gas. In the northern area, there was an estimate of 3.1 TCF.
The Reed Bank, locally known as Recto Bank, is well within the country’s 200 nautical mile exclusive economic zone (EEZ) but China had taken interest, claiming it as part of its territory based on historical accounts under the nine-dash-line theory.
But the previous government under President Benigno Aquino III rejected China’s claims and it went to The Hague to seek arbitration in 2013, imposing a ban on all exploration activities in the area until the issue was resolved.
Three years later, the Permanent Court of Arbitration ruled in favor of the Philippines, nullifying China’s nine-dash-line claims as without legal basis. Beijing did not recognize the award and continues to insist on its illegal claims by using intimidation and threats of using force to enforce its claims.
China’s sudden interest in the Reed Bank began only after former President Gloria Macapagal Arroyo entered into a trilateral deal with China and Vietnam to conduct seismic study in the West Philippine Sea.
In 2011, Chinese armed vessels harassed a survey ship hired by Forum Energy, which was awarded the contract to explore oil and gas in the Reed Bank covering Service Contract Area 72.
At that time, the Philippines had very limited capability to provide security and protection to the civilian contractor, an Anglo-Filipino consortium led by PXP Energy Corp. under the control of businessman Manuel Pangilinan.
Pangilinan’s PXP Energy Corp. formed the London Stock Exchange-listed Forum Energy after it acquired the exploration concession from Sterling Energy in 2005. It began drilling in 2010 three wells and planned to drill two more wells upon the lifting of the moratorium.
In 2011, the Philippines had only three former US Coast Guard Hamilton-class weather high endurance cutters, three former British Royal Navy Peacock-class corvettes, and 10 brand-new, smaller, and Japanese-made Coast Guard search-and-rescue ships.
But these vessels were not armed with missiles and could not operate at sea for a two-week period without resupplying and refueling. The ships were no match to China’s fleet in terms of size, numbers and firepower.
The situation has changed. The Philippine Navy acquired an extra Pohang-class corvette from South Korea last year and its first semi-stealth and missile-capable frigate was delivered in June. A sister-ship will be on its way early next year.
The three additional warships have longer endurance and better firepower as well as more capability to provide protection to survey ships in the Reed Bank area.
Vice Admiral Giovanni Carlo Bacordo has said the navy would guarantee the safety and protection of foreign and local investors conducting economic activities within the country’s EEZ.
Manila has also secured an insurance policy after it entered into a memorandum of understanding with Beijing for a joint development of oil-and-gas fields in the disputed waters in the West Philippine Sea.
President Rodrigo Duterte moreover set aside the legal victory at The Hague, allowing Forum Energy to enter into negotiations with China’s state-owned oil corporation for a commercial deal in the Reed Bank.
The two governments signed a joint cooperation agreement in oil-and-gas exploration although it was not clear if Beijing would respect Philippine laws on the 60-40 sharing of revenues in the projects.
However, the coronavirus pandemic has impacted on China’s plan to vigorously pursue oil-and-gas exploration in the South China Sea, particularly on the side of the Philippines because it is too expensive and too far from its territory.
There were rumors swirling in Beijing that China would rather concentrate on rebuilding its economy ruined by the pandemic and to strengthen its home front, which also saw an exodus of Japanese and Western companies relocating to Vietnam, Indonesia and other Southeast Asian countries.
But the commercial negotiations continue. China does not want to be left out of any deals in the South China Sea. There was no indication it had softened its stand in opposing any unilateral exploration in the area.
Cusi, for his part, insisted the lifting of the moratorium was “an exercise of our sovereign rights.”
He also pointed out that the memorandum of understanding (MOU) to explore a joint development program or cooperation with China does not indicate that the Philippines is giving away its sovereign rights.
“In no way does it weaken the arbitral decision,” he said, invoking the 2016 arbitral ruling, which China does not like to hear.
Cusi also said anybody was welcome to apply for service contracts in the West Philippine Sea even if these concessions had been awarded to local investors.
There was one country, apart from China, which had shown interest in the Reed Bank — Russia. In fact, executives of Rosneft met with Duterte during his visit to Moscow last year. A top-level delegation from Russia’s giant oil-and-gas corporation also visited Manila last year for follow up talks with the energy department.
Rosneft operates oil-and-gas facilities in Vietnam and its presence in the Philippines would boost the industry in terms of capital and technology. It would be more neutral amid the increasing rivalry between China and the United States.
China would oppose any Western oil-and-gas players dipping their hands into the disputed waters and the United States, the long-time ally of the Philippines, would also frown on Beijing getting a slice of the pie in the area.
The Philippines is desperate to explore and extract energy resources in the West Philippine Sea as the existing gas wells in Malampaya are fast depleting and it would take time to develop new wells.
The Philippines has nearly 30 oil-and-gas service contract areas nationwide and only five areas were affected by the moratorium in the Reed Bank and western Palawan areas — Service Contract areas 54, 58, 59, 72 and 75.
But only Service Contract 72, which is Reed Bank, is problematic because of China’s interest. The other four service contract areas are closer to Palawan and were awarded to local companies that have joint ventures with the state owned-Philippine National Oil Corporation.
Oil- and-gas exploration began in the Philippines toward the end of the Spanish colonial period when an American company struck oil in Cebu, but the reserves were not large enough for commercial operations.
There were also explorations in Mindanao and Quezon province but these were unsuccessful in producing resources for commercial operations until the 1950s, when energy exploration was revived after the Petroleum Act of 1949 was passed by Congress.
The country remained very much underexplored, with activities centered in offshore Palawan and onshore Cebu.
The first oil-and-gas field was discovered in El Nido, northwest Palawan in 1977 but it was closed down after 40 years. It produced a total of 18 MMbo.
Larger gas fields were also discovered in 1990 in Linapacan and Malampaya, also in Palawan. In 2020, only three gas wells are operating — Malampaya and Galoc in Palawan and Alegria in Cebu.
Two others had closed – El Nido and Matinloc, both in Palawan.
Thus, there was an urgent need to explore and extract as the country depends heavily on fossil fuel to run its economic growth engines, particularly the power sector.
The recovery of the Philippine economy ruined by pandemic depends largely on how soon business and services are reopened. The resumption of oil-and-gas exploration could stimulate the economy and employ more labor, but large foreign capital is needed to restart the industry.
The lifting of the moratorium is what the industry and the country needs at the moment.