China-Philippines Joint Development of South China Sea Hydrocarbon Resources: Challenges and Future Priorities Kang Lin & Luo Chuanyu oint development is an important part of China’s South China Sea policy. Benefiting from the steady development of the South China Sea Jsituation and especially from the recent agreement between China and ASEAN countries on a single draft negotiating text of the Code of Conduct (COC) in the South China Sea, together with the improvement of China- Philippines relations and the establishment of the bilateral consultation mechanism on the South China Sea issue since late 2016, it is currently a favorable opportunity to promote cooperation on oil and gas resources in the South China Sea. A substantial breakthrough, if achieved, will not only help further consolidate the China-Philippines relations and reduce the adverse impact of the South China Sea arbitration case, but also probably prompt other South China Sea countries to follow suit. Therefore, it is of practical significance to study the feasibility and challenges of bilateral joint exploitation of hydrocarbon resources in the South China Sea. Current Status of China-Philippines Oil and Gas Development in the South China Sea The South China Sea is rich in oil and gas resources. According to statistics, the oil reserves in the South China Sea are between 20 and 30 billion tons of oil equivalent, and the natural gas reserves are about 20 trillion cubic meters, making the area one of the largest hydrocarbon sources yet to be exploited. Kang Lin is Associate Dean of the School of Tourism at Hainan University; Luo Chuanyu is Associate Dean of China-ASEAN Research Institute at Guangxi University. China-Philippines Joint Development of South China Sea Hydrocarbon Resources: Challenges and Future Priorities November / December 2018 133 Given the strategic significance of oil and gas resources, their exploitation in the disputed waters of the South China Sea is also an important concern of relevant countries. China and the Philippines have jurisdiction disputes over the exploitation of oil and gas resources in the Liyuetan (Reed Bank) Basin and the Northwest Palawan Basin. The Liyuetan Basin is completely within the nine-dash line of the South China Sea, and recent exploration shows that there are good prospects for hydrocarbon resources development in its southern depression. Located to the southwest of the Philippines, the Northwest Palawan Basin consists of two parts, the West Palawan Basin and the North Palawan Basin, with a total area of about 30,000 square kilometers.1 Part of the Northwest Palawan Basin is within the nine-dash line. In 1979, the Philippines discovered the Nido oil field in the area and subsequently discovered several small- and medium-sized oil and gas fields. Currently, the accumulated detected oil reserves are 141 million tons of oil equivalent, and the natural gas geological reserves reach 129.9 million cubic meters.2 The Philippines relies heavily on imported oil. In 2016, its crude oil imports reached 78.772 million barrels, while its domestic crude oil production was only 135,000 barrels.3 In order to alleviate the pressure from energy imports and be less dependent on the international energy market, the Philippine government has continuously increased the exploration of hydrocarbon resources in the South China Sea and actively sought cooperation with Western oil companies to jointly develop the resources.4 The Philippines has always regarded the Northwest Palawan Basin as a 1 Yao Bochu, Wan Ling and Liu Zhenhu, “Tectonic Dynamics of Cenozoic Sedimentary Basins and Hydrocarbon Resources in the South China Sea,” Journal of China University of Geosciences, No.5, 2004, pp.546-547. 2 Li Jinrong, Fang Yinxia and Zhu Ying, “Hydrocarbon Resources within the U-shaped Line in the Southern South China Sea: Distribution Characteristics and Development Status,” China Oceans Law Review, No.1, 2013, p.37. 3 “Philippine Oil Imports Fell by 13.5% in 2016,” Chinese Ministry of Commerce, March 25, 2017, http:// www.mofcom.gov.cn/article/i/jyjl/j/201703/20170302538525.shtml. 4 Mark J. Valencia, South-East Asian Seas: Oil under Troubled Waters, Oxford: Oxford University Press, 1985, pp.35-36. 134 China International Studies China-Philippines Joint Development of South China Sea Hydrocarbon Resources: Challenges and Future Priorities key area for offshore exploration and development and has invested large amounts of resources, but the actual results achieved so far are far from ideal with few successful cases. The Malampaya gas field, located in the Service Contract 38 license area and 80 kilometers northwest of the Palawan Island, was jointly developed by Shell Philippines Exploration, Chevron Malampaya and the Philippine National Oil Company. With a potential natural gas reserve of 76.5 billion cubic meters (about 55 million tons of oil equivalent), it was officially put into operation in October 2001 with a mining period of 25 years. It is the largest gas field project for commercial development in the Philippines’ history. As the Malampaya gas field is scheduled to close down in 2025, the Philippines is eager to find new oil and gas fields. The Philippine Foreign Secretary Alan Peter Cayetano has publicly stated the country’s commitment to joint oil and gas exploration with China in relevant waters, given that the Malampaya field will be exhausted in less than 10 years.5 The Liyuetan Basin is recognized as being rich in hydrocarbon resources. The Philippine government plotted out a block named PCR-1 in the South China Sea in 2002, which included the basin, and later subdivided the block several times into multiple smaller blocks for open tendering, one of them called GSEC-101. During then Philippine President Gloria Macapagal Arroyo’s visit to China in 2004, China National Offshore Oil Corporation (CNOOC) and the Philippine National Oil Company signed the Agreement for Joint Marine Seismic Undertaking in Certain Areas in the South China Sea, agreeing to conduct cooperation in early-stage exploration of hydrocarbon resources near the Liyuetan Basin. Vietnam subsequently joined in, and oil companies from the three countries signed a tripartite agreement in Manila in March 2005 and began to carry out a series of pragmatic maritime cooperation.6 The selected area for the 5 “Philippine Media: Duterte Gives Green Light to Joint Exploration in South China Sea with China,” Huanqiu, August 17, 2017, http://world.huanqiu.com/exclusive/2017-08/11138695.html. 6 Wu Shicun, Solving Disputes for Regional Cooperation and Development in the South China Sea: A Chinese perspective, Oxford: Chandos Publishing, 2013, p.164. China-Philippines Joint Development of South China Sea Hydrocarbon Resources: Challenges and Future Priorities November / December 2018 135 trilateral cooperation is rightly located at Block GSEC-101. However, when the first phase of the agreement expired at the end of 2008 and the three parties needed to work out an action plan for the second three years, the Philippine parliament voted down the plan on the grounds that the Liyuetan Basin is located in the Philippines’ exclusive economic zone (EEZ) and thus the development of marine resources within the region involves the country’s sovereignty rights. Subsequently, the Philippine parliament passed the Territorial Sea Baselines Law in 2009, claiming sovereignty over some islands and reefs of the Nansha Islands (Spratly Islands) in its western waters, and clearly delineated the extent of its alleged EEZ. Based on this law, the Philippine authorities changed Block GSEC-101 into Block SC72 for separate open tendering. In 2010, the Forum Energy Technologies UK acquired the exploration permit for the block, and found a world-class gas field Sampaguita in the area, with a potential gas reserve of up to 56.6 billion cubic meters.7 In the next year, the company announced the beginning of exploration activities in Block SC72, which were not actually implemented due to Chinese opposition. The Philippine government has twice extended the execution period for its Liyuetan gas exploration project, in 2015 and 2016 respectively. During the administration of Benigno Aquino III, the Philippine government basically excluded China from joint development in the South China Sea and encouraged domestic oil companies to unilaterally go to the Liyuetan Basin for on-the-spot exploration. In the fourth round of contract projects launched by the Philippine Department of Energy in June 2011, the third and fourth blocks of the 15 blocks open to exploration by foreign investment were located within the nine-dash line.8 Due to strong opposition from China, the Philippines’ invitation for bids failed to obtain positive response from large Western oil and gas companies. Given this, the Philippines’ Philex Petroleum Corporation 7 Kang Lin, Great Chapter: Time to Sail in the South China Sea, Southern Publishing House, 2014, p.136. 8 Li Guoqiang, “Policy Adjustment in Resources Development in the South China Sea,” International Studies, No.6, 2014, p.107. 136 China International Studies China-Philippines Joint Development of South China Sea Hydrocarbon Resources: Challenges and Future Priorities began contact with CNOOC in 2012 to discuss joint development of Block SC72. The preliminary consultations between the two sides progressed smoothly. However, at the last moment when the two sides were about to sign a cooperation agreement, the Philippine government suddenly requested the inclusion of the so-called “reclamation