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China and the Philippines are reportedly on the cusp of reaching an historic agreement that is expected to re-open the hotly disputed and prospective South China Sea region for oil and gas exploration.

The South China Sea, covering approximately 3.5 million sq km, has always been an area of international focus due to its strategic importance. One source, the United Nations Conference on Trade and Development (UNCTAD), has estimated that shipping contributes to roughly 80% of global trade by volume and 70% by value, a significant portion of which (approximately 60% in volume) is estimated to pass through Asia with the South China Sea accounting for one-third of the global total. Besides being the main maritime crossroad for countries like China, India, Brazil, Japan and the UK (ChinaPower, 2017), it has been touted to also contain potentially substantial oil and gas resources beneath its seabed with the U.S. Energy Information Administration (EIA) estimating the region to contain up to 11 Bbo and 190 Tcfg of potential resources (EIA, 2013). The topic of potential resource volumes in the South China Sea is the subject of heated debate and will not be examined in this blog due to space restrictions. An internet search will amply illustrate this point.

In a submission to the United Nations (UN) on 7 May 2009, China declared that it had “indisputable sovereignty over the islands in the South China Sea and the adjacent waters and enjoys sovereign rights and jurisdictions over the relevant waters as well as the seabed and subsoil thereof. The above position is consistently held by the Chinese Government and is widely known by the international community.” This claim by China is represented by the infamous “nine-dash-line” as illustrated in image 1 where it is superimposed with the currently active blocks in the region. The countries affected by China’s claim comprise the Philippines, Malaysia, Brunei, Indonesia and Vietnam.

 

 

The Philippines – Paving the way forward in the South China Sea

China’s nine-dash-line claim in the South China Sea.

China and the Philippines have already been embroiled in a lengthy maritime stand-off. In January 2013, the Philippines formally initiated arbitration proceedings against China’s claim, which it said is unlawful under the United Nations Convention on the Law of the Sea (UNCLOS), following escalating tensions due to mutual accusations of intrusions into the Scarborough Shoal area in early 2012 (BBC, 2016). On 12 July 2016, the Permanent Court of Arbitration in The Hague ruled in favour of the Philippines against China with regard to the latter’s claim to rights over the waters of the South China Sea and associated resources. The ruling, announced by an arbitration tribunal under UNCLOS, declared that there was no evidence that China had previously exercised control over the South China Sea. The tribunal also ruled that China had violated the sovereign rights of the Philippines and had caused “severe harm to the coral reef environment” with the construction of man-made islands. Although the ruling is binding, the Permanent Court of Arbitration does not have any powers of enforcement. The ruling was welcomed by the Philippines but China firmly rejected the outcome of the arbitration saying that its territorial rights over the sea would not be affected by the ruling in any way and that its armed forces will continue to defend its maritime interests and sovereignty in the area. (The South China Sea Arbitration – The Republic of the Philippines v. The People’s Republic of China, 2016)

In more recent times, the Philippines seems to have reconsidered its stance with regard to China’s claim. On 9 April 2018, it was reported that both countries had indicated that a potential deal for joint development in the disputed areas could be reached as early as 3Q-4Q 2018. Both governments initiated negotiations to ensure fair terms with regard to exploring for oil and gas in the area. Previously, on 14 February 2018, it was reported that the Philippines and China had set up a special panel to establish how joint exploration and development of oil and gas in their disputed zone could proceed without having to address the explosive issue of sovereignty. Leaders from both sides gathered for the second time under a bilateral mechanism aimed at resolving sovereignty disputes. As a result of the meeting, it was reported on 2 March 2018 that the Philippines and China have earmarked two areas where joint exploration may be considered. These comprise the 7,115.5 sq km North West Palawan Basin SC 57 and the hotly contested 8,823.5 sq km Recto Bank Basin SC 72 (Recto Bank being the renamed former Reed Bank). SC 57 is operated by CNOOC International with partners PNOC Exploration Corp and Jadestone Energy. On 2 March 2015, the Department of Energy of the Philippines had enforced Force Majeure in SC 72 suspending all exploration activity in the block effective 15 December 2014. Forum (GSEC 101) Ltd had previously cancelled plans to acquire a planned survey of the sea floor to determine possible well locations due to prior encounters with Chinese naval vessels. Forum is the operator of SC 72 with partner Monte Oro Resources & Energy Inc.

The Philippines – Paving the way forward in the South China Sea

SC 57 and SC 72 within the nine-dash-line claim

Although this is a step in the right direction, analysts claim that resolving future disputes, if they arise, may be extremely complex if sovereignty in the region is not first addressed. Nonetheless, this is an exciting and positive new development in the ongoing saga of the South China Sea with the potential for a precedent to be set in dealing with future disputes with China.

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Shankar Krishnan