Submerged optimism

On the morning it was announced that the President had lifted the moratorium on oil exploration in the West Philippine Sea, the shares of PXP Energy went up nearly 50 percent. Forum Energy, a PXP subsidiary, has a pending project in Recto Bank. The suspension of oil exploration was imposed in 2014 and formalized in March 2015, because, as Forum Energy stated at the time, “the Philippine Department of Energy has granted a force majeure on Service Contract 72 (SC 72) because this contract area falls within the territorial disputed area of the West Philippine Sea which is the subject of a United Nations arbitration process between the Republic of the Philippines and People’s Republic of China.”

The Philippines obtained a favorable ruling, but it has taken time for the Philippines, as a government, to come to terms with it. The Philippines may have won a historic ruling, but China refused to recognize it; lifting the moratorium, then, might have served as a provocation to China or an embarrassment to the Philippines, should China not only refuse to recognize the service contract but also actively move to block its implementation.

Which may be why, in some circles, the news of the lifting of the moratorium was also met with moderate enthusiasm of an altogether more meaningful kind than mere stock speculation. The thinking goes something like this: 1) The news could suggest that CNOOC and Forum Energy have reached an agreement in principle to cooperate in implementing something called Service Contract 72, which covers Reed/Recto Bank; 2) There is an assumption that the President (or his advisers) would not give the go-ahead by lifting the existing moratorium, if our government expected China to stop Forum Energy’s exploration; 3) If 1 and 2 are true, then the exciting part comes in.

This would be “the big breakthrough,” in the form of China, through state-owned CNOOC, cooperating with Forum Energy to extract gas in the Reed/Recto Bank, by means of a service contract awarded by the Philippines. This, according to these circles, was the structure hammered out under the memorandum of understanding (MOU) and terms of reference (TOR) that were signed by the Philippines and China. These—the MOU and TOR — were meant to provide China with a “graceful exit” from what critics consider an indefensible stance on the Arbitral Award.

The implications of all these? If — and this is the crucial word, “if” — there is, indeed, an agreement in principle between CNOOC and Forum Energy, it would lead to the actual implementation of the Arbitral Award and a peaceful settlement of the maritime dispute in the entire South China Sea. Another “if”: If this were to happen, it would provide a model for the region; China could then offer similar arrangements to, say, Vietnam or Malaysia, with a high probability those countries would agree.

These same circles point out there are actually two disputes in the South China Sea: a territorial one involving less than 3 percent of the South China Sea, and the maritime one, which is where gas and oil are situated. The maritime dispute, from this perspective, is the most immediate and impactful of the disputes, because territorial disputes are going to be rendered obsolete by global warming, which will sooner, rather than later, submerge all the high-tide features, including artificial islands, being argued about at present. On the other hand, the same circles are quick to point out, the Philippines, even without the high-tide features, will still be able to claim the areas as forming part of our exclusive economic zone.

These are a lot of ifs, which may be why, pending scrutiny of the contracts and other documents, the experts are commenting in private but not in public. While this would be a development every bit as historic as the country’s having chosen to pursue, and then having won, an arbitration battle, a face-saving, win-win outcome depends on China recognizing the validity of the Philippine contracts, and operating in cooperation with the commercial entities that obtained permission from our government. It would represent a remarkable shift on the part of Beijing, moving forward without actually renouncing its previous stance, thus saving face while abandoning the collision course with international law its belligerent refusal to accept the arbitral ruling risked.

With increasing tensions over Taiwan, it’s conceivable Beijing could be quietly removing a major obstacle to increasing its influence in the region to wean away American allies.

Email: [email protected]; Twitter: @mlq3