How China, Philippines can settle their South China Sea resource dispute and avoid conflict

Reaching an agreement will be tricky because of political and legal obstacles, but these can be overcome
A commercial joint venture with no legal implications on sovereignty that includes sharing resources or revenues from extraction could be a way forward

Mark J. ValenciaandWilliam T. Onorato

Published: 9:15am, 5 Dec 2022

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A moment of truth could be approaching for the China-Philippines dispute in the South China Sea. The administration of Philippines President Ferdinand “Bongbong” Marcos Jnr is reportedly considering allowing Forum Energy to proceed with petroleum exploration on the Reed Bank.

The company has asked the government for protection against harassment by China. If provided, it could lead to a military confrontation and that could draw in the Philippines’ military ally, the United States. A way to avoid such a confrontation is through negotiating a provisional cooperative arrangement of a practical nature that satisfies both parties.

China’s “nine-dash line” claim overlaps most of the Philippines’ 200-nautical-mile exclusive economic zone. This includes the Reed Bank, which is known to contain significant gas resources. In 2018, when President Xi Jinping visited Manila, the two states signed a memorandum of understanding “to negotiate arrangements on an accelerated basis to facilitate oil and gas exploration and exploitation in relevant maritime areas”.

But negotiations were terminated at the end of Rodrigo Duterte’s presidency because, according to then-foreign minister Teodoro Locsin, “We got as far as it is constitutionally possible to go.” In other words, China wanted terms that, in the Duterte administration’s view, would violate the Philippines’ Constitution. Obviously, serious political and legal obstacles remain. What are they and how can they be overcome?

In addition to wanting to avoid further conflict, both states have good reason to be open to a cooperative solution. The Philippines must replace its main domestic supply of gas for electricity – the Malampaya gas field – which could soon run out. However, it has been reluctant to proceed unilaterally on the Reed Bank, given China’s strenuous objections.

China is also keen to conclude a cooperative agreement because it would help strengthen its relations with the Philippines. It would also serve as a precedent and template for temporary settlement of its disputes with others in the South China Sea such as Brunei, Malaysia and Vietnam. Marcos will visit China in January, when there will probably be further discussions of principles.

02:16

Philippine fishermen claim continued Chinese harassment on South China Sea

But the devil is in the details. Politically successful cooperative arrangements usually involve situations in which the two states recognise that each has some legitimate basis for their claim. That is not the situation here.

The Philippines insists China’s “nine-dash line” claim is illegal, as a Permanent Court of Arbitration tribunal ruled in 2016. But China’s populace has been imbued with the belief that the area has been a part of the country since “time immemorial”. Thus, China’s leadership cannot explicitly rescind its claim or recognise that of another state.

The Philippines is particularly constrained by Article XII of its 1987 constitution, which mandates that “the exploration, development and utilisation of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least 60 per cent of whose capital is owned by such citizens.”

China does not want to accept this requirement because it would be an implicit recognition of the Philippines’ jurisdiction. Instead, China wants a 50-50 split of costs, equity and profits with no third-party involvement, but the Philippines does not have the capital to finance 50 per cent of the operation.

China has more wiggle room. It has not made clear whether its “nine-dash line” claim is to the whole area within it, only the geographic features present there or just the resources therein. Beijing might consider a 60-40 split in Manila’s favour as a concession in return for ancillary profits and a large soft power upside.

China’s leaders could argue to nationalists that the ratio reflects its generosity in exchange for Philippine tacit recognition that there is a dispute and thus China’s patrimony has been recognised and preserved.

According to the Philippine Constitution, the Philippines must be in charge and national laws must be followed. Marcos said last Thursday that the Philippines could find “other ways” to proceed with joint exploration if government-to-government talks fail. However, a separate legal, contractual and taxation code for the area could allay concerns. It is also possible that the Philippines Department of Justice could create an exemption from constitutional requirements for the project, as it did for renewable energy projects.

With a strong “without prejudice” clause, neither state would legally surrender their claim. Their arrangement could be a commercial joint venture that carries no legal implications regarding sovereignty and includes sharing the resources or revenues associated with their extraction.

The Philippines Department of Energy has interpreted the 60-40 requirement as applying only to the final profit from production minus the costs. The definition of “profits” could thus be negotiated by the states. There is a lot of money to be made by technologically advanced Chinese companies through provision of goods, services, insurance and such.

There are still political risks for the Philippines. It would be sharing resources with China that Manila has maintained it owns outright. However, there are many significant potential advantages of a cooperative agreement for both states.

Most importantly, it could avoid a clash. Both would reap the benefits of exploiting whatever resources exist in the disputed area. Even the serious possibility of such an agreement could reduce tensions.

Experts on such cooperative development projects can help devise wording acceptable to both states. But, to do so, both would have to accept a less than legally pure interim political solution. If there is political will, such experts can help them find a way.

Mark J. Valencia is a maritime policy analyst in Hawaii. William T. Onorato is a former legal adviser, energy, to the World Bank