South China Sea: why the Philippines needs a Chinese energy deal

There seems little room for compromise amid tensions in the South China Sea between China and the Philippines. All the while, the space to prevent an escalation, or worse, appears to be narrowing.

Pointing to historical rights dating back centuries, Beijing claims the fishing, navigation and resource development rights over much of the disputed waters. Manila in turn asserts that the disputed area is clearly within its UN-mandated 200 nautical mile exclusive economic zone.

While China mostly relies on its massive coastguard (the world’s largest by far) to do its bidding, the Philippines has been building a coalition of nations to support its much smaller naval and coastguard presence.

This includes strengthening its defence cooperation with the US under the decades-long Mutual Defence Treaty, and forming military alliances with Japan and Australia. Other countries, including Britain, Canada, Germany, France, South Korea and India, have pledged varying degrees of support for the Philippines.

However, past Sino-Philippine relations could offer a solution that might just breathe new life into the strained relationship, namely, joint oil and gas exploration and production. Far-fetched as it might sound, the two countries have previously agreed on oil and gas cooperation.

As recently as in 2016, preliminary talks centred on a deal to explore energy sources in the disputed South China Sea. Talks resurfaced two years later but failed to gain traction. However, in 2005, China, Vietnam and the Philippines signed a deal to survey the ocean floor for oil and gas.

Teams from the three countries worked side by side on a Chinese vessel for 75 days gathering seismic data covering nearly 18,000km, the entire joint exploration area. This deal also lost traction, not due to geopolitical differences but a lack of support from legislators in Manila.

Last year, hope rose again as the two sides presented a joint statement highlighting the resumption of South China Sea oil and gas cooperation. This included the establishment of a diplomatic communication mechanism to resolve maritime issues. The statement was issued at the end of Philippine President Ferdinand Marcos Jnr’s meeting with Chinese President Xi Jinping in Beijing in January.

However, less than a week after the visit, in a setback for Sino-Philippine relations, the Philippine Supreme Court ruled that the 2005 joint exploration deal (which had expired in 2008) was unconstitutional. Since then, tensions between China and the Philippines have escalated.

One way for the Marcos administration to show goodwill towards Beijing would be to push for a new exploration deal since the court ruling pertains only to the 2005 agreement.

Marcos Jnr could even label such a deal as essential to national security since, in the absence of alternatives, the Philippines can expect to suffer natural gas shortages once reserves from its Malampaya offshore gas field are depleted within a few years.

In anticipation of a drop-off in domestic natural gas supplies, the Philippines has built several liquefied natural gas (LNG) import terminals, mostly in Batangas province, some 100km south of Manila. At least seven LNG import terminals have been approved by the Philippine Department of Energy. More could be in the works. But an over-reliance on imported LNG is problematic.

Given the tight LNG supply globally, and with the Philippines a new market entrant, its import terminals will need to buy from the volatile spot market to supplement any term supply contracts it can get. Price swings for spot LNG can be massive. After Russia invaded Ukraine in February 2022, spot LNG prices in Asia spiked, rising past a prohibitive US$40 per million British thermal units (MMBtu) to set a record high.

Prices have since pared back to around US$10/MMBtu, but only after creating havoc across global gas markets, and financial hardship for several countries in the region that relied too heavily on imported LNG, including Sri Lanka, Bangladesh and Pakistan. Higher gas prices are eventually passed on to end users, including many already cash-strapped consumers.

Simply put, relying on spot LNG supplies puts Philippine energy security at risk. A way to help balance the country’s gas supply could be joint production with one of China’s three major oil and gas companies. China National Offshore Oil Corp (CNOOC), which took part in the 2005 Sino-Philippine-Vietnam survey, has the expertise and experience to make joint exploration and production successful.

Just how much oil and gas lies underneath the South China Sea, however, has been the subject of debate for decades. Much of the reserves remain unexploited due to territorial disputes. The US Energy Information Agency estimates that the area holds around 190 trillion cubic feet of natural gas and 11 billion barrels of oil in proved and probable reserves.

Most of these reserves are along the margins of the South China Sea rather than in contested areas. The US Geological Survey estimates that there could be another 160 trillion cubic feet of natural gas and 12 billion barrels of oil undiscovered.

To put those numbers in perspective, the Malampaya gas field, the largest in the Philippines, holds 2.7 trillion cubic feet of natural gas. The field had met as much as 40 per cent of Luzon’s power needs since 2001. Luzon is the Philippines’ most populous island with some 65 million people.

As such, given the overwhelming amount of gas resources in the South China Sea, any joint exploration and production deal between China and the Philippines would not only improve bilateral relations and contribute to peace in the region, but also help the Philippines overcome an impending energy crunch. However, it will also take a new level of political determination and courage for the Philippines to make the first move.

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