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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Can Oil Ease South China Sea Tensions?

A year after the Permanent Court of Arbitration ruled in favor of the Philippines in a case the country brought against neighboring China about its territorial claims in the South China Sea, the two are mulling over joint oil and gas exploration in the basin.

China never accepted the court’s ruling. It still claims rights to most of the South China Sea and threatens anyone daring to encroach on these territories, the most recent example being Vietnam’s Block 136-3, where drilling was suspended a week after it began when Beijing threatened an attack on Vietnamese infrastructure in the Spratly Islands.

Manila, however, seems wary of going it alone and is open to a partnership. Earlier this week, President Rodrigo Duterte said drilling in the Reed Bank area may restart before the year’s end after Manila found a partner for the project. Duterte did not identify the partner, but a later statement from the Chinese Foreign Minister, while he was visiting the Philippines, provided ample ground for speculation:

In waters where there are overlapping maritime rights and interests, if one party goes for unilateral development, and the other party takes the same action, that might complicate the situation at sea. That might lead to tension, and as the end result, nobody would be able to develop resources.

The statement could be taken as a warning against Manila to refrain from finding partners that have not been approved by Beijing. Yet it could also be taken as an indication that the partner Duterte mentioned is Beijing. The former might be a bit more likely, however, since earlier this month the Philippine government said it would tender new oil and gas blocks in December, that is, open its oil and gas resources to outsiders. Related: China Outpaces Competition In Renewable Race

The Philippines Foreign Minister has been pretty gracious about joint exploration. During Yi’s visit, Alan Gayetano said that China has been consistent in its position on joint oil and gas development in the South China Sea. In fact, talks about such joint development date back to the mid-1980s. The Philippines has been the country that’s gone back and forth in its position, but now negotiations look promising, Gayetano said.

According to analysts, joint exploration in disputed offshore areas would be a complicated matter due to legislative and sovereignty issues. For starters, agreeing to joint exploration in disputed areas could look as if each side is legitimizing the other one’s claim to these resources. The Reed Bank, which is one of the areas under discussion, falls within the Philippines’ exclusive economic zone, so any suggestion that Manila accepts China’s claim to it would lead to a backlash at home.

Then there is also the issue of national laws regarding oil and gas exploration. The Philippine constitution envisages that Manila retains 60 percent in any offshore exploration project, and this will hardly sit well with China. The list of potential problems goes on.

At the same time, the Philippines urgently needs more oil and gas. Its economy is growing fast, and local reserves are nearing depletion at a fast pace. Joint exploration may well be a better alternative to no exploration at all.

Related: Daily OPEC Oil Prices Now Public For The First Time Ever

So, what reserves are we talking about? Back in 2013, the EIA estimated oil and gas reserves in the South China Sea at 11 billion barrels of crude and 190 trillion cubic feet of gas in both proved and probable reserves. Most of the oil and gas that is being extracted from the sea lies close to the countries that surround it in areas that China does not dispute.

However, there may be another 12 billion barrels of oil and 160 trillion cubic feet of natural gas in untapped deposits—about a fifth of them in disputed areas. The EIA notes that these were not commercial reserves at the time, but technology has moved on quickly and to date, they may well be commercially viable.

One-fifth of 12 billion barrels can come in handy: the Philippines consumed 399,000 bpd in 2015. China consumes over 11 million bpd. Both economies are growing and both rely on fossil fuels for the time being. Joint exploitation of the reserves in the disputed areas seems like the sensible thing to do. Whether it can actually get it done is a different matter.

By Irina Slav for Oilprice.com

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