West   Philippine   Sea   Dispute   Jeopardizes   Petroleum   Exploration   and  Development    The  West  Philippine  Sea  refers  to  that  part  of  the  South  China  Sea  that  President  Benigno  Simeon  C.  Aquino  III  declared  as  the  maritime  area  on  the  western  side  of   the   Philippine   archipelago   when   he   issued   on   05   September   2012  Administrative  Order  No.  29.  The  area  is  currently  subject  to  a  maritime  dispute  considered   by   geopolitical   analysts   as   a   key   political   risk   to   watch   as   the  Philippines   seeks   a   further   credit   rating   update   to   attract  more   foreign   direct  investments.      While   the   dispute   involves   six   parties   (People’s   Republic   of   China,   Taiwan,  Vietnam,  the  Philippines,  Malaysia  and  Brunei  Darussalam)  claiming  all  or  part  of  the  South  China  Sea,  the  greatest  concern  is  that  the  ongoing  dispute  might  break  out  into  armed  conflict.    Any  instability  in  the  region  is  likely  to  disrupt  economic  activities  and  derail  development  especially  with  the  involvement  of  the  U.S.  if  it  decides  to  support  its  allies  against  China.    Some  of  the  countries  involved  in  the  dispute  contest  each  other’s  rights  to  the  200-­‐nautical  mile  Exclusive  Economic  Zone   (“EEZ”)   and   an   Extended   Continental   Shelf   (“ECS”),   citing   the   United  Nations  Convention  on  the  Law  of  the  Sea  (“UNCLOS”),  which  took  effect  in  1994.  UNCLOS   governs   maritime   disputes   on   overlapping   maritime   zones   like  overlapping  territorial  seas,  EEZs  and  ECSs.    The   Philippines   will   not   surrender   claims   to   its   EEZ   but   it   is   not   capable   of  confronting  China  militarily.  China  demands  one-­‐on-­‐one  negotiations,  but  other  claimants   prefer   a  multilateral   approach,  which   opens   the  way   for   an   indirect  role   for   the   United   States,   which   obviously   China   doesn’t   want.     Prior   to  President  Barack  Obama’s  arrival  in  Manila  on  28  April  2014  for  a  state  visit,  the  Philippines   and   the   U.S.   signed   the   Enhanced   Defense   Cooperation   Agreement  described  by  both  governments  as  an  executive  agreement,  not  a   formal   treaty  and  therefore  does  not  require  the  consent  of  the  Senate  in  either  country.  The  agreement  referred  to  by  President  Obama  as  Washington’s  “pivot”  to  Asia  and  an   “ironclad”   commitment   to   defend   the   Philippines   would   provide   for   U.S.  forces   to   rotate   in   and   out   of   existing   Philippine   military   bases   for   missions  ranging  from  narrowly  defensive  to  humanitarian  to  training  of  the  Philippines’  small,   weak   military   establishment.     Both   Obama   and   Aquino,   however,   were  careful   not   to   attribute   the   agreement   directly   to   China’s   claim   to   the   entire  South  China  Sea.      9-­‐Dashed  Lines  and  China’s  Historical  Rights    China   officially   notified   the   world   of   its   9-­‐dashed   line   claim   in   2009   when   it  submitted  the  9-­‐dashed  line  map  to  the  United  Nations  Secretary  General.    Under  the  so-­‐called  9-­‐dash  line  map,  China  claims  almost  90%  of  the  South  China  Sea,  which  overlaps  80%  of  the  Philippines’  EEZ  and  all  its  ECS  in  the  West  Philippine  Sea.     If  China’s  claim   is  upheld,   the  Philippines  will   lose   the  Reed  (Recto)  Bank  and  even  the  strategic  Malampaya  natural  gas  field.    

Manila   filed   a   case   to   pursue   its   claims   and   submitted   a   4,000-­‐page  memorial  seeking   a   ruling   on   China’s   9-­‐dashed   line   from   the   Permanent   Court   of  Arbitration   in   The  Hague.   The   case  would   be   the   first   time   international   legal  experts   formally   consider   the   validity   of   China’s   territorial   claims   in   the   South  China   Sea.   The   Philippines’   arbitration   case   against   China   is   solely   a  maritime  dispute  and  does  not  involve  any  territorial  dispute.      Chinese   Foreign   Ministry   spokesman   Hong   Lei   issued   a   statement   on   the  Philippine   request   for   arbitration   and   repeated   China’s   opposition   to  international   arbitration   over   these   issues   given   China’s   preference   for   “direct  negotiations   with   countries   concerned.”   Hong   argued   that,   by   submitting   the  case   for  arbitration,   the  Philippines  was   in  violation  of  previous  agreements   to  solve  issues  bilaterally,  including  the  2002  ASEAN  Declaration  on  the  Conduct  of  Parties  in  the  South  China  Sea.    China  is  not  expected  to  submit  a  counter-­‐claim  and  participate  in  the  arbitration  process  making  a  Philippine  victory  by  default  highly  probable.  However,  such  a  ruling   would   be   nothing   but   a   public   relations   victory   for   the   Philippines,  allowing   Manila   to   claim   that   its   position   is   internationally   sanctioned.    Philippine  Secretary  of  Foreign  Affairs  Albert  del  Rosario  said  he  does  not  expect  a  ruling  on  the  case  before  the  end  of  2015.    In  an  article  in  the  14  April  2014  issue  of  Forbes,  Singapore  senior  statesman  and  former  Prime  Minister,  Lee  Kuan  Yew  doesn’t  believe   the  China  will   submit   its  claims,  which  are  based  primarily  on  China’s  historical  presence  in  the  disputed  waters.    Lee  also  believed  that  China  would  not  allow  the  dispute  to  be  decided  by  rules  that  were  defined  at  a  time  when  China  was  weak  and  that  it  has  judged  that   the   U.S.   won’t   risk   its   present   good   relations   with   China   over   a   dispute  between  the  Philippines  and  China.    Lee  added  that  if  historical  claims  can  define  jurisdiction  over  waters  and  oceans,   the  Chinese  can  point   to   the   fact   that  600  years  ago  they  sailed  these  waters  unchallenged.  

Under  the  general  principles  and  rules  of  international  law,  a  claim  of  “historical  rights”  to  internal  waters  or  territorial  sea  must  satisfy  four  conditions.  One,  the  state   must   formally   announce   to   the   international   community   such   claim   to  internal  waters  or  territorial  sea,  clearly  specifying  the  extent  and  scope  of  such  claim.  Two,  the  state  must  exercise  effective  authority,  that  is,  sovereignty,  over  the   waters   it   claims   as   its   own   internal   waters   or   territorial   sea.   Three,   such  exercise   of   effective   authority  must   be   continuous  over   a   substantial   period  of  time.  Four,  other  states  must  recognize,   tolerate  or  acquiesce  to  the  exercise  of  such  authority.    China’s  defence  of  its  9-­‐dashed  line  will  entirely  depend  on  how  it   can   convince   the   international   community   that   it   has   satisfied   these   four  conditions.    Presently,  not  a  single  country  in  the  world  recognizes  or  acquiesces  to  China’s  9-­‐dashed  line  claim.  

Petroleum  Resources  in  the  Disputed  Areas    The  ongoing  dispute  involving  among  others,  the  right  to  explore  for  and  exploit  petroleum,  minerals  and  other  marine  resources  in  these  zones  raises  tension  in  

the  area,  definitely  downplaying  energy  exploration  and  development   interests  on  the  areas  currently  claimed  by  the  Philippines.      The   West   Philippine   Sea   is   the   location   of   three   (3)   potential   areas   where  hydrocarbon  deposits   could  be   found:  Northwest  Palawan,   Southwest  Palawan  and  Reed  (Recto)  Bank.  Of  particular  interest  is  the  area  of  Northwest  Palawan,  including  Reed  (Recto)  Bank  where  most  of  the  country’s  petroleum  production,  including  the  Malampaya  natural  gas,  is  sourced  from  and  where  the  discovery  of  additional  petroleum  resources  is  most  likely.    According   to   the   Department   of   Energy   (“DOE”)   report   “Philippine   Petroleum  Resource   Assessment”     (2002)   the   estimated   mean   volume   of   the   total   risked  recoverable   resources   for   Northwest   Palawan   basin   is   494   Million   bbl   (79  Million   Sm3)   of   oil   and   9,271  Billion   cf   (263  Billion   Sm3)   of   gas.   Of   these   total  resources,   143   Million   bbl   (23   Million   Sm3)   of   oil   and   3,806   Million   cf   (108  Billion  Sm3)  of  gas  are  actually  discovered.    For  the  Southwest  Palawan  basin,  the  estimated  mean  volume  of  the  total  risked  recoverable  resources  is  around  549  Million  bbl  (87  Million  Sm3)  of  oil,  46%  of  which  comes  from  mapped  structures,  and   4,529   Billion   cf   (128   Billion   Sm3)   of   gas,   24%   of   which   is   from   mapped  structures.  For  the  Reed  (Recto)  Bank  basin,  the  estimated  mean  volume  of  the  total  risked  recoverable  resources  is  around  35  Million  bbl  (6  Million  Sm3)  of  oil  and  2,229  Billion  cf  (63  Billion  Sm3)  of  gas.    The  U.S.  Geological  Survey  (“USGS”)  came  out  in  2010  with  an  assessment  of  the  petroleum  potential  of  the  South  China  Sea  including  the  West  Palawan  Shelf.    

TABLE  1.    Estimates  of  oil  and  gas  based  on  US  Geological  Survey      

 Total  Petroleum  Systems  (TPS)      and  Assessment  Units  (AU)  

Field  Type   Largest    expected    field  size  

Total  undiscovered    resources  (Mean)  

Oil  (MMBO)  

Gas  (BCFG)  

NGL  (MMBNGL)  

South  China  Sea  Platform  (Miocene  TPS)  Dangerous  Grounds-­‐Reed  Bank  AU  

Oil  Gas  

703  4,217  

2,522  N/A  

10,370  15,149  

197  881  

Palawan  Shelf  Province  (Eocene-­‐Miocene  Composite  TPS)  Eocene-­‐Miocene  Reservoirs  AU  

Oil  Gas  

101  514  

270  N/A  

179  1,229  

6  38  

BCFG  =  billion  cubic  feet  of  gas  MMBNGL=million  barrels  of  natural  gas  liquids  MMBO  =  million  barrels  of  oil  NGL=natural  gas  liquids  Largest  expected  filed  size  for  oil  is  measured  in  MMBO  and  for  gas  in  BCFG  

  Source:     “Assessment   of   Undiscovered   Oil   and   Gas   Resources   of   Southeast   Asia,   2010,”   US   Geological  Survey,   cited   in   THE   WEST   PHILIPPINE   SEA:   The   Territorial   and   Maritime   Jurisdiction   Disputes   from   a  Filipino  Perspective,  A  Primer”  

 According   to   the   “Report   on   the   South   China   Sea”   released   by   the   US   Energy  Information  Agency  (“EIA”)  on  07  February  2013,  the  region  around  the  Spratly  (Kalayaan)   Islands   have   virtually   no   proved   or   probable   oil   reserves.   Industry  sources  suggest   less   than  100  billion  cubic   feet   (Bcf)   in   currently  economically  viable   natural   gas   reserves   exist   in   surrounding   fields.  However,   the   area  may  

contain   significant   deposits   of   undiscovered   hydrocarbons.     USGS   assessments  estimate   anywhere   between   0.8   and   5.4   (mean   2.5)   billion   barrels   of   oil   and  between  7.6  and  55.1  (mean  25.5)  Tcf  of  natural  gas  in  undiscovered  resources.    Most   of   these   undiscovered   resources   are   likely   located   in   the   contested  Reed  (Recto)   Bank,   which   is   also   claimed   by   China,   Taiwan,   and   Vietnam.   The  Philippines  began  exploring  the  area  in  1970  and  discovered  natural  gas  in  1976.    The  Philippine  government  awarded  a  petroleum  service  contract   to  U.S-­‐based  Sterling  Energy  in  2002,  which  was  then  acquired  by  U.K-­‐based  Forum  Energy  in  2005.   However,   Chinese   objections   culminating   with   an   incident   in   the   Reed  (Recto)   Bank   on   02   March   2011   when   Chinese   vessels   approached   Forum  Energy’s  ship  demanding  that  it  stop  all  exploration  activities  and  leave  the  area,  prevented  the  operator  from  pursuing  further  activities.    Theresa   Martelino-­‐Reyes   of   the   VERA   Files   reported   that   the   state-­‐owned  Chinese   oil   firm,   China  National  Offshore  Oil   Corp.   (“CNOOC”)   has   rejected   the  “Farm-­‐in   Agreement”   proposal   of   Forum   Energy   in   the   disputed   Reed   (Recto)  Bank   service   contract   because   of   “sovereignty   issues”   between   China   and   the  Philippines.   Nevertheless,   CNOOC   welcomed   “innovative”   proposals   on   how   it  can  participate  in  the  service  contract.    Forum   Energy   reportedly   declared   force   majeure,   which   will   end   on   August  2014.   Meanwhile,   the   company   released   in   2012   its   estimate   of   petroleum  resources  for  the  Reed  (Recto)  Bank.    TABLE  2:    Estimates  of  hydrocarbon  resources  in  Reed  (Recto)  Bank  based  on  Weatherford  Petroleum  

    Resource  

Type  Estimate  Type  

Low   High   Best  estimate  Gross  prospective  resources  

Gas   4.666  TCF   16.612  TCF   8.799  TCF  

Oil   117  MMBO   416  MMBO   220  MBO  and  liquids  in  places  Gross  contingent  resources  

Gas  Oil  

1.474  TCF  37  MMBO  

2.603  TCF  115  MMBO  

4.598  TCF  65  MBO  and  liquids  in  place  

   NOTES    

• “Prospective   resources   refer   to   quantities   of   oil   and   gas   estimated   at   a   given   date   to   be  potentially   recoverable   from   undiscovered   accumulations,   which   are   technically   and  economically  viable  to  recover…”  

• “Contingent   resources   refer   to   quantities   of   oil   and   gas   estimated   on   a   given   date   to   be  potentially  recoverable  from  known  accumulations  but  are  not  currently  economically  viable  to  recover.    Such  resources  include  accumulations  for  which  there  is  no  viable  market…”  

• Pre-­‐drill   estimates   of   resources   are   based   on   certain   assumptions   and   information   and  interpretations  currently  available,  with  no  assurances  of  accuracy.  

 (Source:    “Recto  Bank  sitting  on  16T  cubic  feet  of  gas,”  Business  Mirror,  April  26,  2012,  pg.  A1-­‐A2,  cited   in   THE   WEST   PHILIPPINE   SEA:   The   Territorial   and   Maritime   Jurisdiction   Disputes   from   a  Filipino  Perspective,  A  Primer)    

     

Joint  development:  An  Innovative  Proposal?    The  Arroyo  government  agreed  to  a  Joint  Marine  Seismic  Undertaking  (“JMSU”),  which  was  a   tripartite  agreement  signed  on  14  March  2005  between  the  state-­‐owned   oil   companies   of   the   Philippines   (PNOC),   China   (CNOOC)   and   Vietnam  (Petrovietnam).    Under   the   JMSU,   the  parties  agreed   to   conduct  a   joint   seismic  survey  for  three  years  in  an  area  of  the  West  Philippine  Sea  including  the  Spratly  (Kalayaan)  Islands  and  Reed  (Recto)  Bank.  However,  JMSU  did  not  involve  joint  development   activities.     According   to   then   PNOC   President   Eduardo   Mañalac,  JMSU   involved   “a)   a   sincere   effort   on   the   part   of   three   governments   to   find  common  ground  for  cooperation  involving  the  South  China  Sea  area;  b)  a  desire  to  materialize   this   effort   in   terms   of   a   concrete   scientific   study,   the   results   of  which   could   be   of   great   value   in   determining   over-­‐all   consequences   for   the  region;   and,   c)   a   common   determination   to   cement   the   friendships   formed   by  opening  further  discussions  beyond  the  JMSU.”        Despite  the  fact  that  the  JMSU  agreement  provided  a  provision  that  maintained  that  the  “signing  of  this  Agreement  shall  not  undermine  the  basic  position  held  by  the  Government  of  each  Party  on  the  South  China  Sea”,  and  the  DOE  issued  a  “Non-­‐Exclusive  Geophysical  Permit”  on  10  June  2005  to  give  a  legal  cover  for  the  other   JMSU   parties   to   conduct   seismic   activities   thereby   indicating   that   the  Philippine  government   still   continued   to   exercise   jurisdiction  over   the  affected  areas,   the   JMSU  was  regarded  as  a   “sell-­‐out”  by   the  Philippines  because   it  gave  China   an  opportunity   to   claim  access   to   the  Reed   (Recto)  Bank   that  had  never  been  disputed  before.   Intense  public  opposition   to   the  Arroyo  Administration’s  role  in  the  JMSU,  particularly  allegations  that  tied  the  JMSU  to  corruption,  caused  the  agreement  to  lapse  without  extension  in  2008.  (“The  West  Philippine  Sea:  The  Territorial   and   Maritime   Jurisdiction   Disputes   from   a   Filipino   Perspective,   A  Primer”,  The  Asian  Center  and  Institute  for  Maritime  Affairs  and  Law  of  the  Sea,  University  of  the  Philippines,  2013)    According   to   Supreme   Court   Senior   Associate   Justice   Antonio   Carpio   in   his  speech  given  before  the  Philippine  Bar  Association  on  29  August  2013,  China  has  been   dangling   to   the   Philippines   and   other   claimant   states   its   offer   for   joint  development   of   the   disputed   areas   while   shelving   the   sovereignty   issues.    However,  he  mentioned  at  least  three  problems  to  this  offer.    First,   China  wants   to   jointly   develop   the   EEZ   of   the   Philippines   but   refuses   to  jointly   develop   China’s   own   EEZ.   In   effect,   China   is   saying   to   the   Philippines,  what   is   exclusively   China’s   economic   zone   is   China’s   alone,   but   what   is  exclusively   the   Philippines’   economic   zone   belongs   to   both   China   and   the  Philippines.      Second,   China’s   offer   of   joint   development   is   subject   to   the   precondition   that  participating  coastal   states  must   first  expressly  recognize  China’s   “indisputable  sovereignty”  under   its  9-­‐dashed   line  claim.  This  precondition  effectively  means  that  once  a  state  agrees  to  joint  development,  it  must  not  only  vacate  any  island  it   possesses   in   the   Spratlys   and   turn   over   the   same   to   China,   it   must   also  renounce   any  maritime   claim  within   the   9-­‐dashed   line   area.   This   precondition  

demanded   by   China   is   obviously   inconsistent   with   its   offer   to   shelve   the  sovereignty  issue.    Third,  if  the  Philippines  agrees  to  China’s  joint  development  offer,  the  Philippines  will   in  effect  give  up  its  exclusive  “sovereign  rights”  to  exploit  all  the  living  and  non-­‐living   resources   in   its   own   EEZ.   The   Philippines   will   also   give   up   its  exclusive  right  to  exploit  the  mineral  resources  in  its  own  ECS.  The  bottom  line  is  that  China’s  joint  development  offer  will  negate  the  maritime  entitlements  of  the  Philippines   under   UNCLOS.   This   is   constitutionally   impermissible   because   our  1987  Constitution  mandates  the  State  to  “protect  the  nation’s  marine  wealth  in  its  xxx  exclusive  economic  zone,  and  reserve  its  use  and  enjoyment  exclusively  to  Filipino   citizens.”   Any   joint   development   with   China   constitutes   a   “culpable  violation  of  the  Constitution.”    For   whatever   reason   the   Arroyo   government   entered   into   the   tripartite   JMSU  agreement,   the   author   believes   that   it   was   a   major   political   and   diplomatic  blunder  on  the  part  of  the  government.  I  agree  with  Justice  Carpio’s  assessment  that  “the  only  joint  development  that  is  feasible  in  the  Spratlys  is  for  all  claimant  states   to   respect   each   other’s   EEZs   as   guaranteed   by   UNCLOS   and   to   jointly  develop  the  disputed  areas  beyond  these  EEZs.”    Conclusion    The  Western  Palawan  shelf  and  the  Reed  (Recto)  Bank  are  undisputedly  part  of  the   Philippine   EEZ.   In   the   past,   the   Philippine   government   has   exercised  exclusive   “sovereign   rights”   over   the   area   by   awarding   petroleum   service  contracts.     In   addition   to   pursuing   the   arbitration   case   against   China,   the  government   through   the  DOE  should   continue  offering   service   contracts   in   the  disputed  areas  despite  opposition  from  the  Chinese  government.  If  the  DOE  gets  intimidated  by  China  and  wavers,  it  is  a  tacit  recognition  of  China’s  9-­‐dashed  line  historical   claim.   If  needed,   the  Philippine  military   should  provide  protection   to  contractors  while   they  engage   in  exploration  and  development  activities   in   the  disputed   areas.  On   the   other  hand,   the   energy   community  must   do   it   share  by  applying  or  bidding  for  service  contracts  in  the  West  Philippine  Sea.    While  there  may  be  other   “commercial”   considerations   for  multinational   energy   companies  when   they  bid   for  acreage   they  should  also  bear   in  mind   that  nothing  protects  their   investment  more   other   than   their   total   support   and   commitment   for   the  general  rules  and  principles  of  international  law.    Fernando  “Ronnie”  Penarroyo  is  the  Managing  Partner  of  Puno  and  Penarroyo  Law  (fspenarroyo@punopenalaw.com).   He   specializes   in   Energy,   Resources   and  Environmental  Law,  Business  Development  and  Project  Finance.