Philippine President Rodrigo Duterte, right, met with Chinese President Xi Jinping in Hainan, China, in April 2018. Photo: ace morandante/Philippines Presidential Photographers Division/EPA/Shutterstock
Philippine President Rodrigo Duterte is negotiating an agreement with China to share oil and natural-gas resources in the disputed waters of the South China Sea, a deal that would be a major policy victory for Beijing.
It would open the door for China to push for similar arrangements with other Southeast Asian nations that have challenged its expansive claims and potentially lock Western oil companies out of the resource-rich region.
Mr. Duterte’s opponents and legal experts say joint development—which Beijing has long advocated—legitimizes China’s assertion that it has historic rights over almost the entire South China Sea, undermining a 2016 international tribunal ruling that invalidated those claims. It would also fortify Beijing’s control over the strategic waters, where tensions between the U.S. and China have surged.
Beijing has blocked the Philippines from operating in an area of seabed known as Reed Bank, 85 nautical miles off the Philippine coast, using patrol vessels and threats of war. Manila is eager to tap those reserves to address a looming energy shortfall.
The 2016 ruling held that the Philippines has exclusive rights over Reed Bank but China has refused to comply with the decision. After a visit to Beijing in late August, Philippine Foreign Secretary Alan Peter Cayetano said both sides would “set aside the issue of our claims” in order to break the logjam.
Philippine officials said the two governments are working on a legal framework with an eye toward an expected visit by Chinese President Xi Jinping in November. China’s foreign ministry said in a faxed statement that the leaders of both sides “have reached an important consensus on properly handling the South China Sea issue, including commitment to pragmatic cooperation and joint development,” adding that such cooperation wouldn’t affect either side’s legal position on the dispute.
Arguments over the proposed pact capture the dilemma smaller countries in the region face as China asserts its military, diplomatic and economic clout, with U.S. policies falling short. Officials in Manila say they see few alternatives to working with China, even if that means entrenching Beijing’s influence.
“We just have to make a good situation out of a bad situation by dealing with China,” Philippine Defense Minister Delfin Lorenzana said in an interview in June. On the tribunal decision, he said: “Should we wave it in the face of Xi Jinping and say, ‘Follow this?’ There is a giant there that will not honor the ruling. What can you do?”
Chinese structures and buildings on the man-made Subi Reef at the Spratlys group of islands are seen from Thitu Island in the South China Sea. Photo: Bullit Marquez/Associated Press
Mr. Lorenzana said China had the power to punish the Philippines by restricting trade and tourism, sealing off fishing grounds used by Filipinos and harassing military resupply vessels. The Philippine military wasn’t equipped to deter Chinese encroachment, he said, adding: “Now it’s too late in the game. They’re already there.”
Under Mr. Xi’s leadership, China constructed fortified artificial islands close to the Philippines. This year, it deployed antiship cruise missiles, surface-to-air missiles and jamming equipment on them.
At the same time, Beijing has offered billions of dollars in infrastructure investment to the Philippines, effectively muting one of the strongest voices against its assertive stance. Mr. Duterte has played down maritime disputes with the country, while pulling away from the U.S. and moving slowly on implementing a 2014 defense pact.
Lawmakers, officials and analysts in Manila said the Philippines can’t rely on Washington, its longtime military ally, when faced with Chinese pressure. They pointed to Washington’s refusal to clarify whether the countries’ Mutual Defense Treaty would apply to an attack on Philippine troops or vessels in the South China Sea.
A protester holds a flag during a rally in February 2018 at the Chinese consulate in Makati city to protest China's increased presence in the disputed Spratly islands in the South China Sea. Photo: Bullit Marquez/Associated Press
U.S. officials have expressed commitment to the alliance, but stopped short of specific guarantees. Mr. Lorenzana said the U.S.’s interest in the South China Sea appeared limited to maintaining freedom of navigation.
The Philippines is running out of time. A third of the electricity supply for its main island of Luzon comes from the Malampaya gas field, which will run out within a decade. Exploration would need to begin now, experts say.
For China, Mr. Duterte’s desire for closer economic ties presents a crucial deal-making window. Mr. Dutete must leave office in 2022 under term limits, and his successor may take a harder line.
Beijing has long recommended joint development. In 2011, a survey ship hired by Forum Energy PLC, a 70%-owned unit of Philippine company PXP Energy Corp., was chased out by Chinese marine-surveillance vessels.
PXP Energy, then called Philex Petroleum Corp., began negotiations with China National Offshore Oil Corp., but talks quickly broke down over a clause giving China the right to tax the venture, a person with knowledge of the matter said.
Western oil giants interested in Reed Bank ended discussions because of the dispute, a person involved said. Today, the risks for major international companies are higher.
The Sierra Madre ship of the Philippine Navy is anchored near Ayungin shoal in the Spratlys, in a photo from 2015. Photo: ritchie b. tongo / pool/European Pressphoto Agency
“How do you get into an area where there are built-up defense installations?” the person said. “China has positioned itself very strongly.”
The Duterte administration is navigating tricky legal and political terrain. Justice Antonio T. Carpio, a senior Supreme Court judge and advocate for a tough China policy, said that for a joint project to comply with the constitution, it would have to be subject to Philippine laws and taxes.
The solution, Mr. Carpio said, was a deal that offered China roughly half the gas or proceeds from the gas, but no sovereign rights. In practical terms, he said, the Philippines would contract a Chinese state-owned company and split the output or profit.
China would then be able to apply this template to “extract concessions” across the South China Sea and block out Western oil companies like Exxon Mobil , he said.
“China is using the nine-dash line to bully us into giving up half of our resources,” Mr. Carpio said. “They’ll get what they want.”
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