Light at the end of the tunnel?

Last Oct. 15, 2020, President Duterte announced the lifting of the moratorium on oil and gas exploration in the West Philippine Sea (WPS). The Aquino administration imposed the moratorium in 2014 due to the harassment by Chinese coast guard vessels of Philippine commissioned ships undertaking seismic surveys in the Reed Bank. Forum Energy, which was awarded by the Philippine government Service Contract 72 over Reed Bank, can now resume its exploration activities.

China’s reaction to President Duterte’s announcement showed that China had expected the lifting of the moratorium. The spokesperson of China’s foreign ministry stated on Oct. 18, 2020, that China and the Philippines “have reached consensus on joint exploration of oil and gas resources in the South China Sea and set up relevant consultation and cooperation mechanisms.” Apparently, the lifting of the moratorium is a step in the implementation of the memorandum of understanding (MOU) that China and the Philippines signed on Nov. 27, 2018, to cooperate in the exploitation of oil and gas in the WPS.

The reaction in the Philippine stock market to the lifting of the moratorium was ecstatic. The stock price of two listed companies that hold equity in Forum Energy shot up by almost 50 percent, while the stock price of a third listed company that also holds equity in Forum Energy increased by 39 percent. Those in the know must be seeing something in the planned acquisition by Dennis Uy of the 45-percent shareholding of Shell in the Malampaya consortium, after the Davao-based businessman had earlier bought the 45-percent shareholding of Chevron in the Malampaya consortium, which owns the underwater gas pipeline that runs from Malampaya to the coast of Batangas.

This is the same pipeline that will pump the gas from Reed Bank to Batangas. Dennis Uy happens to be the partner of China National Offshore Oil Corp. (CNOOC) in a Liquefied Natural Gas terminal project in Batangas.

Under the MOU, Chinese state-owned commercial companies like CNOOC will participate in the exploitation of oil and gas in the WPS in partnership with Philippine Service Contractors like Forum Energy. After the terms of reference (TOR) to implement the MOU was signed in August 2019, Chinese and Philippine officiWest als were supposed to have met last March in Manila to vet the CNOOC and Forum Energy commercial agreement, with CNOOC acting either as subcontractor, equity partner, or both of Forum Energy. The coronavirus pandemic, however, intervened and aborted the meeting. A new meeting is still to be rescheduled.

Once the commercial agreement between CNOOC and Forum Energy is signed, the formula for a South China Sea-wide solution to the maritime dispute in the South China Sea will have been found. China has informed Vietnam that it will offer the same MOU-TOR arrangement to Vietnam to amicably settle their own maritime dispute. China is expected to offer the same arrangement to Malaysia and possibly to Brunei and Indonesia as well.

The Philippines must remain firm that Chinese companies can participate in the exploitation of oil and gas in the WPS only under the Service Contract system of the Philippine government. This preserves the sovereign rights of the Philippines in its exclusive economic zone (EEZ) in the WPS as the Service Contract is governed by Philippine law. There is also an express acknowledgment in the Service Contract that the oil and gas belong to the Philippines. This is the only way that the Philippines, as well as Vietnam, Malaysia, Brunei, and Indonesia, can justify to their people that their governments are not ceding their sovereign rights to China.

Under the Service Contract system, the Service Contractor is paid 40 percent of the net proceeds for its services in extracting the oil and gas and for providing the capital and technology. The Philippine government receives 60 percent of the net proceeds as owner of the oil and gas. This is the same income-sharing arrangement between the Philippine government and the Malampaya consortium. If CNOOC becomes the Service Contractor in extracting the oil and gas in large areas of the EEZs of the Philippines, Vietnam, Malaysia, Brunei, and Indonesia, that will be a huge win for China. And China will win something even far more valuable—the friendship of all the peoples of these Asean coastal states.

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