Philippines to Test South China Sea Agreement With Oil Exploration Push

The Philippines will go ahead with oil exploration in the South China Sea, challenging last week’s regional agreement with China aimed at lowering tensions over the disputed waters, Foreign Minister Albert F. del Rosario said.

Hydrocarbon resources “well within” Philippine sovereignty are essential to the country’s energy strategy, Rosario said in an interview. U.S. Secretary of State Hillary Clinton yesterday warned that increased confrontations in the area are a threat to sea lanes that are “absolutely essential” to world trade.

“If there are assets there, and we believe that there are, we should develop them,” del Rosario said on July 23 at the end of five days of Asian security meetings in Bali, Indonesia. “The need for us to develop them is greater than China’s. China can afford to wait forever. They have the patience of Job. We don’t have that luxury. We’ve got to move ahead.”

The Philippines’ drive to secure energy resources against the wishes of Asia’s biggest economy and military spender risks clashes that may ensnare the U.S., a treaty ally. Del Rosario’s comments, coming days after China and the 10-member Association of Southeast Asian Nations agreed on non-binding guidelines for operating in the sea, echo Clinton’s call to draw up a more comprehensive and binding code of conduct.

“The declaration is a first step, nobody claims it is more than that,” she said yesterday. “It needs to be quickly followed up on by the code of conduct,” based on international law.

Chinese vessels in May sliced cables of a survey ship doing work for Vietnam, the second such incident in a month. In March, Chinese ships chased away a ship working for U.K.-based Forum Energy Plc off the Philippines.

Troop Deployments

Most claimants have troops on the Spratlys, a group of islands and reefs with a total land area equivalent to 1 1/2 times the size of New York’s Central Park spread over an area roughly the size of Iraq. The Philippines spent about 1 percent of China’s budget for its military last year, according to the Brussels-based Stockholm International Peace Research Institute.

The agreement “will go a long way to maintaining peace and stability and good neighborliness,” Chinese Foreign Minister Yang Jiechi told reporters on July 22. Asean members Philippines, Vietnam, Malaysia and Brunei have competing claims in the sea.

The Philippines “went along with the family” in signing the agreement though expressed misgivings because it is non- binding and fails to define a specific area, del Rosario said. That benefits China because it maintains the status quo, he said.

“If China is not challenged on this nine-dash map, which effectively gives them sovereignty over the South China Sea, at some point in time there may be potential threats to freedom of navigation for” other countries, he said. “I don’t know how those guidelines will actually work. The risk of clashes remains.”

China’s Map

China’s map includes oil and gas fields more than three times further from its coast than they are from Vietnam. That includes two of 15 exploration blocks the Philippines put out for tender last month.

More than 100 energy companies including Chevron Corp. and Total SA attended a June 11 road show in Singapore to meet Philippine energy officials and get more information on the blocks, according to the Department of Energy. Three weeks later, Energy Secretary Rene Almendras said the government may offer more exploration contracts in Chinese-claimed waters because it is “staking claims to these areas.”

The Philippines, with an economy about 1/30th the size of China’s, plans to boost hydrocarbon reserves by 40 percent in the next two decades to reduce its almost total reliance on imports, according to a department of energy plan. Vietnam’s domestic gas demand is set to triple by 2025, according to World Bank estimates.

Possible Reserves

Chinese studies suggest the waters sit atop more than 14 times estimates of its oil reserves and 10 times those for gas.

Moves by private oil and gas companies are necessary to spur action on the blocks “because no politician wants to make tough decisions,” said Randall C. Thompson, whose former company Crestone Energy Corp. was awarded rights by state-owned Cnooc Ltd., China’s largest offshore energy producer, to explore an area also claimed by Vietnam. Any discoveries will hasten joint development agreements, he said.

Crestone is now owned by Houston-based Harvest Natural Resources Inc., which holds Chinese rights to the same block Vietnam has awarded to Calgary-based Talisman Energy Inc.

“By taking no risk, you get no rewards,” said Thompson, who now owns Denver, Colorado-based Global Resource Holdings. “Somebody needs to just go in and drill, and then they’ll sit down and figure it out.”

To contact the reporter on this story: Daniel Ten Kate in Bali at dtenkate@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net