Assessing the China-Philippines MOU on Cooperation on Oil and Gas Development
Photo Credit: AP
By Jianwei Li and Ramses Amer

Assessing the China-Philippines MOU on Cooperation on Oil and Gas Development

Dec. 27, 2018  |     |  0 comments


On November 20, 2018 during Chinese President Xi Jinping’s state visit to the Philippines, 29 cooperation documents were signed between relevant authorities from both countries in the presence of President Xi and President Duterte. The 2nd among the long list of cooperation projects is the Memorandum of Understanding on Cooperation on Oil and Gas Development between the Government of the Republic of the Philippines and the Government of the People’s Republic of China (hereafter the MOU). The MOU is a carefully-drafted political document and its signing is an important step for bilateral efforts towards the direction of expanding their cooperation to marine resources development. Its evolvement will also impact bilateral dispute management and peace and security in the South China Sea (SCS) region and beyond.


Nature of the MOU


As Article II of the MOU states, the MOU is in relation to oil and gas exploration and exploitation in relevant maritime areas. Based on the context of Article I by referring to the 2002 Declaration on the Conduct of Parties in the South China Sea (DOC) and that both governments “have made substantial progress and meaningful gains in exploring opportunities and means to cooperate with each other in maritime activities”, the MOU is about bilateral cooperation in the SCS.


The topic of bilateral marine resources development in particular oil and gas cooperation has attracted attention from the political opposition in the Philippines headed by the group of politicians and judges who are either in opposition to Duterte or were involved in the 2016 Arbitration Case invoked by the former Aquino III Administration against China. They have been accusing the Duterte administration of “selling sovereignty and sovereign rights to China” defined by the award from the Arbitral Tribunal. It is important to note that from the very beginning of the Case, China considered it as not in line with the basic principles of international law and refused to participate and accept the award. After the signing of the MOU, two Philippine officials, Secretary of Foreign Affairs Locsin and Secretary of Energy Cusi, clarified that the MOU was an “agreement to agree”, that is, both parties agreed, through the MOU, to arrive at an agreement within a certain time. Presidential Spokesperson Salvador Panelo refers to the MOU as a “framework” that is “not legally binding.”


Following concerns that the MOU could compromise the country’s sovereignty or lead to a debt trap, the Philippines’ Senate President called for a legislative review of the MOU. After examination of the MOU, Justice Secretary Guevarra said that he did not find any violation of the laws. He further elaborated that the MOU did not concern sovereignty issues and it merely expresses “a mutual desire to agree on specific cooperation arrangements within 12 months”.


Although details of cooperation will be discussed afterwards, the MOU clarified the positions of both countries, that is, “the MOU, and all discussions, negotiations and activities of the two governments or their authorized enterprises under or pursuant to this MOU, will be without prejudice to respective legal positions of both governments” (Article IV). This MOU does not create rights or obligations under international or domestic law. This is a pragmatic attitude towards their SCS disputes. Both recognized the existence of differences relating to their claims of sovereignty and sovereign rights in the SCS, but they agreed to shelve the differences and begin discussing cooperation, leaving the disputes to be resolved by later generations.


Implications of the MOU


The MOU conveys several messages. A Chinese Foreign Ministry spokesperson described the process at a press conference. It was, as he said, through in-depth exchanges of views for several times and after communication and negotiations that the two sides reached agreement on signing the inter-governmental MOU. During the whole process, the two sides demonstrated pragmatic attitudes and positive will to develop China-Philippines friendship and deepen bilateral cooperation. Therefore, the signing of the MOU is a testament to the mutual respect, equal-footed negotiation and mutual trust between China and the Philippines. Furthermore, based on the above working environment, marine resources development can work between the two countries.


Second, the signing of the MOU reflects strong political willingness from the top leaders of both countries to co-operate on oil and gas development in the SCS. The cooperation on oil and gas development is an important consensus reached by top leaders of both countries since Duterte took office in 2016. Back in October 2016 when President Duterte paid his first state visit to China, both countries signed a joint statement in which it was indicated that both sides agreed to explore (other) areas of co-operation in the SCS (Point 42 of 2016 Joint Statement).


In the 2017 joint statement signed during Chinese Premier Li Keqiang’s official visit to the Philippines, it was clearly emphasized that both sides “may explore means to cooperate with each other in other possible maritime activities including maritime oil and gas exploration and exploitation, in accordance with the respective national laws and regulations of the two countries and international law including the 1982 UNCLOS, and without prejudice to the respective positions of the two countries on sovereignty, sovereign rights, and jurisdiction” (Point 14 of 2017 Joint Statement).



Taking into consideration of the existing bilateral disputes in the SCS, any choice of cooperation area in the overlapping-claimed area which is located within the Philippines’ EEZ of 200 nm from the coast will be sensitive, even though there is “without prejudice to respective legal positions”.



The recent 2018 joint statement relating to President Xi’s visit, both sides welcomed the signing of the MOU, and agreed to discuss maritime cooperation including maritime oil and gas exploration, sustainable use of mineral, energy and other marine resources, among other consensus on implementing relevant international maritime instruments to ensure the safety of life at sea, marine environmental protection, and human resources development (Point 27 of 2018 Joint Statement). Without the strong support from the top leaders, it would be difficult to start co-operation in the unchartered water.


Third, the MOU also reflects the commitment from both government agencies to push ahead with cooperation on oil and gas development in relevant maritime areas. It was declared in the MOU that relevant agreements would be reached on oil and gas exploration and exploitation within 12 months. Such development is important for the Philippines. Currently the Philippines relies overwhelmingly on imports to fuel its fast-growing economy and needs to develop indigenous energy resources. In 2016 it imported 10,670kt of crude oil and domestic production was only 760kt. In the same year natural gas supply met the domestic demand, both 153,275tj. However, its main source of natural gas, the Malampaya field located closer to disputed waters, will be depleted within a decade. To reach agreement for oil and gas development will be good news for the Philippines economic development.


Fourth, China-Philippine oil and gas cooperation in the SCS is not an easy task. Both governments have taken a cautious and careful move. As discussed above, the MOU was reached after two years of negotiations and consultations. In the meantime, some key issues still need to be tackled in the near future.


Guidelines


Two Articles in the MOU, Article II and III, give guidance for both governments to work together to reach arrangements to facilitate oil and gas exploration and exploration in an accelerated manner. Article II specifies the principles to be followed. They include “mutual respect, fairness, and mutual benefit, flexibility and pragmatism and consensus”, “equal and friendly consultation” and “being consistent with applicable rules of international law”.


Article III, entitled “Working Mechanism”, specifies the mechanism under the MOU and their relevant responsibilities. Two kinds of organizations will be formed, an Inter-Governmental Joint Steering Committee and one or more Inter-Entrepreneurial Working Group(s). The Committee will be co-chaired by the Foreign Ministries and co-vice chaired by the Energy Ministries with equal number of members of relevant agencies from the two governments. The Committee will be responsible for negotiating and agreeing the cooperation arrangements and cooperation maritime areas.


It is also the responsibility of the committee to decide on the number of Working Group(s). Each Working Group will consist of representatives from enterprises authorized by the two governments. The Working Group(s) is(are) responsible for negotiating and agreeing on inter-entrepreneurial technical and commercial arrangements. China authorizes China National Offshore Oil Corporation as the enterprise for each Working Group. The Philippines will authorize, depending on the applicable working area, the enterprises(s) where a service contract exists, or otherwise the Philippine National Oil Company — Exploration Corporation.


Furthermore, with Article VI “Other Matters”, the Committee or a Working Group can be consulted for any other matters rather than those in the MOU.


Future Challenges


The MOU has sent a positive signal to the SCS region and beyond that cooperation in the SCS can be expanded to marine resources development, oil and gas in particular. However, from the MOU to any concrete bilateral cooperation agreement in the SCS, two key issues need to be agreed upon, co-operation area (where) and business arrangements (how). Taking into consideration of the existing bilateral disputes in the SCS, any choice of cooperation area in the overlapping-claimed area which is located within the Philippines’ EEZ of 200 nm from the coast will be sensitive, even though there is “without prejudice to respective legal positions”. The options of working areas will be under close scrutiny of the political opposition in the Philippines. The previous pretext used to bring the 2005 China-Philippines-Vietnam Tripartite Agreement on Joint Marine Seismic Undertaking on a halt might be invoked again — being inconsistent with the Philippine constitution and selling the Philippine sovereignty.


How China and the Philippines could really shelve their maritime disputes and how the MOU will evolve into a cooperation agreement will have significant impact not only on the Philippine domestic politics but also on China-Philippine relations over the SCS. Political wisdom is very important. The China-Philippine experience might set a precedent for co-operation on oil and gas development in the SCS region.



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