A Blueprint for Cooperative Oil and Gas Production in the South China Sea
Photo Credit: Xinhua
By Mark J. Valencia

A Blueprint for Cooperative Oil and Gas Production in the South China Sea

Sep. 20, 2018  |     |  0 comments

The Asia Maritime Transparency Initiative (AMTI) at Washington’s venerable Center for Security and International Studies recently released a report of its South China Sea Expert Working Group entitled “A Blueprint for Oil and Gas Production in the South China Sea. ”

Having wrestled with these issues some 20 years ago to little avail, I would welcome a politically feasible solution or a pathway thereto. The “Blueprint” is an important contribution to thinking about interim solutions to these seemingly intractable disputes. However, I am afraid it will fall afoul of reality and be ignored by the principals just as so many well-meaning proposals before it.

Our proposals were made long before the arbitration decision delegitimizing China’s historic claim to maritime space and the idea that any of the Spratly features were entitled to 200 nautical mile Exclusive Economic Zones and continental shelves. They also did not consider claims to extended continental shelves or Malaysia and Brunei’s subsequent “joint development” agreement. Further, they reduced China’s claimed area somewhat. Moreover, they focused on the Spratlys and did not include the whole South China Sea and in particular the Paracels — although they did suggest that the Paracels could indeed generate EEEZs.

Most important, in what now seems prescient, we did propose ignoring the Spratlys as bases for claims to EEZs or continental shelves and using the original overlap of claims to formulate a sharing solution. Of course, the areas of overlap would now have to be adjusted based on claims from legitimate baselines and the areas allotted to each joint development company adjusted accordingly. But the proposed principles would remain the same.

One of our proposals is remarkably similar to that of AMTI’s Blueprint in that it suggests that 12 joint development companies be established by the national oil companies of each country based on the overlap of the original claims (See Figure 1). But it differs in that if a country did not claim a particular area, its national oil company would not be a member of the joint development company for that particular area. Moreover, it proposes the overall coordination of these joint development companies by a Spratly Co-ordinating Agency (SCA). Shares, benefits, costs and voice or vote in the operation of each joint development company would be shared equally after allocating 5 percent of the profits to the SCA. Although a joint development company would exist in theory for each of the 12 areas, it would become operations only when and if a simple majority of the claimants to that area agreed to operationalize it.

Figure 1. Hypothetical sharing of the resources in the South China Sea via 12 joint development companies

In general, past research and revelations of the AMTI have seemed one-sided and focused on “outing” China. They largely neglected the “sins” of other claimants like Vietnam, the Philippines, Malaysia and Taiwan.  More balanced analysis would pay equivalent attention to other claimants’ activities and as well as those of the US Navy and its “militarization” of the Sea. I have previously elaborated on these apparent biases.

However, the AMTI “Blueprint” is different in tone and tenor — perhaps in part because it includes input from a wide range of perspectives from the region and not just AMTI’s staff. Its major contribution is the concept of the establishment of a cooperative network of private sector multilateral joint ventures with negotiated allocation of shares focused on harvesting the petroleum resources “throughout the South China Sea … Each claimant would be guaranteed the right to invest … in each of the joint ventures.” The claimants would also “agree that all South China Sea littoral states may license petroleum exploration and production within 200 nautical miles of their coastline … In areas of overlap … a median line should be used to determine which state has the right to license exploration and production.”

This is a noble idealistic effort like many of those before it. However, like previous “blueprints,” this one too is likely to founder on the legal and political rocks of reality. As the Group says, “cooperation on oil and gas development … in a manner that would be both equitable and consistent with international law as well as the laws of all involved parties … would require considerable creativity and a greater willingness to compromise … than has been evident to date.” As the Group also observes: “Most difficult would be finding a way for Beijing to reason that such cooperation was consistent with its assertions of ‘historic rights’ while at the same time ensuring that Manila could uphold its 2016 award.” Indeed, that’s the rub and it is a likely deal breaker.

I will point out a few major and minor problems with the proposal.

One is of course getting China’s leadership to accept — and to try to sell to its populace that the “deal” satisfies its claim to “historic rights.” China’s leadership has gone so far in stimulating nationalism in support of this claim that anything less than its public recognition would likely not satisfy its nationalists. This is not about “sharing in the spoils” as much as it is about the domestic and international legitimacy of its leadership. The present leadership would be in danger of being hoisted on its own petard.

However, an even bigger obstacle in accepting the “deal” would be the reticence to participate of the Philippines, Malaysia, and especially Vietnam which has been the most vocal critic of China’s claims. They would have to tacitly acknowledge that China’s nine-dash line claim has some validity. Otherwise why would the claimants with validated claims to EEZs — and thus sovereignty over the resources within them — consent to preferentially share them with China? The same would apply to China’s indisputable EEZ as well.

The idea to try to finesse these fundamental concessions by not spelling them out in the text of a “deal” is domestically disingenuous and therefore dangerous for the leadership of all the claimants.

Another potentially fatal problem is that the proposal — at least its accompanying map of the areas to be allotted licensing rights for each claimant — ignores the Paracels, as if none of them can generate an EEZ. Of course, it would be somewhat easier to reach an agreement that way — but there is a significant problem with this tacit proposal. The arbitration decision does not apply to the Paracels — except possibly by precedent — and it would take another arbitration, with all its political ramifications, to decide legally whether any can generate a claim to an EEZ, a continental shelf, and an extended continental shelf. As far as I can tell, there are — and were — no indigenous inhabitants in the Paracels. Thus, according to the Spratlys precedent, none are likely to be able to legally generate an EEZ. But this would have to be proven by a long and politically fraught process, and then enforced — and China is likely to oppose the process and the enforcement effort every step of the way.

There are also some problems with the specifics. Why should non-claimants to a particular area have a preferential opportunity to share its resources? Why would Malaysia and Vietnam which have what they believe to be a legitimate joint claim to an extended continental shelf share the resources of that area with other claimants — especially China? And what if a party to an existing joint development arrangement refuses to share with others?

I commend the Group for offering a new version of the ideal. But I am afraid that its complexity and the reality of nationalism will condemn this idea to the same dust-bin as many others before it.

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