MVP warned on China energy deal in Spratlys

Posted at 07/05/12 11:15 PM

China taking part in joint development of natural gas fields around the Philippines-controlled Reed Bank in the Spratlys could cause problems, analysts believe. Stimson Center photo

MANILA, Philippines - Businessman Manny Pangilinan needs to "tread carefully" in sealing a deal with a Chinese oil exploration company to develop natural gas fields around Reed Bank in the Spratlys, a US think-tank has warned.

Pangilinan, chairman of Philex Petroleum Corp., should ensure that any production-sharing agreement with the China National Offshore Oil Corp. (CNOOC) will not stoke further tension between Manila and Beijing, the Washington, DC-based Stimson Center said in an analysis published this week.

"The stakeholders of any potential agreement in both countries would have to tread carefully lest this potential opportunity for progress harms, rather than helps, the possibility for cooperative development and the avoidance of conflict," said Zach Dubel, Stimson Center research assistant.

Philex Petroleum Corp. controls UK-based oil and gas firm Forum Energy, which is conducting exploration in Recto Bank under Service Contract 72 in the Spratlys.
Pangilinan has been eyeing CNOOC as one of several partners for the Reed Bank project.

According to Dubel, the business magnate went to China recently to talk to CNOOC executives about a possible partnership agreement, despite the recent row between Manila and Beijing over Scarborough Shoal.

'CNOOC has foot in the door'

"Though Pangilinan said that CNOOC was only a potential partner and that Philex had not ruled out partnering with other foreign companies, CNOOC at least has a foot in the door for this type of project, and the added technological expertise of deep-water drilling can help their prospects while potentially setting a precedent for joint-development projects in other areas of the South China Sea," Dubel said.

The state-owned CNOOC recently spent more than $1 billion to develop and build a new ultra-deepwater rig that is designed for the West Philippine Sea, according to analysts.

The Stimson Center analyst said any production-sharing agreement between Forum Energy and CNOOC should be "sufficiently balanced to avoid enflaming Filipino national sentiments and eliciting accusations of betrayal in the way that an earlier joint exploration agreement with China did several years ago."

He is referring to the shelved 2005 Joint Marine Seismic Undertaking (JMSU) agreement between China, Vietnam, and the Philippines that coordinated "pre-exploration" of possible hydrocarbon reserves in the Spratlys.

The JMSU was not extended when it expired because of the corruption scandals involving Chinese projects in the country, according to a confidential US embassy cable published by anti-secrecy group WikiLeaks.

China also needs others' help

The Stimson Center paper expressed doubts that China can unilaterally exploit oil and natural gas reserves in the West Philippine Sea.

Although the CNOOC has launched its Haiyang Shiyou 981 drilling rig, as well as its first deep-water pipe-laying ship, the Haiyang Shiyou 201, China does not have the ability to secure them, the think-tank said.

"In the short-to-medium term, neither the PLA Navy nor any of China's several paramilitary patrol and surveillance entities have sufficient capability to completely ensure the safety of any significant oil installations and transport vessels in areas of the South China Sea beyond its EEZ (exclusive economic zone)," it added.

"Subsequently, the risk of such an action to regional stability and China's security would likely be too high to accept given the high cost of expanding its oil and gas operations to the unexplored fields of the disputed areas with the unavoidable nationalistic backlash in other claimant states, with which China has important and growing trade and investment ties," the think-tank said.

"In fact, much of CNOOC's expansion strategy of late has revolved around boosting its overseas production outside the region, such as its involvement in the development of Canadian oil sands projects and in the Missan Oil Fields of Iraq."

Thus, CNOOC will have to rely on production-sharing agreements in order to cash in on the West Philippine Sea, Dubel said.

Under Philippine rules

CNOOC earlier announced that it is offering 9 offshore blocks covering an area of  more than 160,124 square kilometers for joint exploration and development with foreign companies in the West Philippine Sea. The said areas eyed for exploration are closer to the shores of Vietnam than the Philippines.

CNOOC said foreign companies interested in the project will be allowed to access and buy the company's current data on the blocks.

The auction has triggered protests from Vietnam, which called the project "illegal."

In comparison, the Recto Bank joint project must operate under Philippine authority and follow the terms and conditions stipulated in the service contract, according to President Benigno Aquino.
“‘Yung license itself, the service contract, nakalagay na doon lahat ng guidelines, lahat ng mga conditions. He (Pangilinan) has been apprised of the same. He knows the conditions emanating thereto. This is a major project. There will be a lot of finances that are needed and it is incumbent upon him to source these financing also. So long as it complies with the terms and conditions as stipulated in the service contract, we have no issue with this venture,” Aquino said last week.

He said Pangilinan "will be undertaking the venture based on the authorization coming from the Philippine government."

Stratfor: CNOOC to press China's claims

Another think-tank, Strategic Forecasting, Inc. (Stratfor), has an even more cautious view of joint projects in the West Philippine Sea between China and other countries.

The global intelligence company, in its latest analysis of China's moves in the disputed waters of the region, said Beijing will use CNOOC as its lead in pressing its territorial claims.

"CNOOC's growing technological capabilities put it in an advantageous position with respect to Vietnam and the Philippines," Stratfor said, explaining that the 2 other countrues still rely on joint ventures with more advanced companies to develop offshore oil and natural gas resources.

"CNOOC's enhanced deep-sea exploration capability has also bolstered Beijing's strategy to move forward its joint exploration proposal in the disputed area, forcing claimant countries to reconsider their plans to exclude China from joint development projects," the think-tank said.

"On the surface, joint exploration appears to be an offer of conciliation. But that offer comes with a price: With Chinese state-owned companies leading the way by providing the bulk of funding and technology and laying most of the physical infrastructure, the move will significantly strengthen China's claims at the expense of those of its neighbors," it added.

"Other countries will be invited to help and in turn reap some benefit, but in the end China will provide the rigs, money and manpower," it said.

De facto acquiescence

Stratfor said joint energy deals with China "would imply recognition of Chinese authority over these waters, de facto acquiescing to China's territorial assertions."

"This puts other countries in a dilemma, since in the face of Chinese military superiority, they are forced to either relinquish sovereignty if they accept the deal, or relinquish oil and natural gas if they do not," it said.

"Beijing will continue to use CNOOC to both enforce territorial claims and enhance China's grip on energy resources in the South China Sea, which will in turn exacerbate competition between China and other regional players," it added.

View Spratly Islands in a larger map