Philippines to Offer Offshore Oil Blocks in China-Claimed Areas

Posted on July 31, 2012

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Hillary Clinton, US Secretary of State. Photographer: Brendan Smialowski/AFP/GettyImages

The Philippines will accept bids from oil and gas companies today to explore offshore areas claimed by China, risking renewed clashes as nations spurn joint development of energy resources in disputed waters.

The Philippines, which along with Vietnam rejects China’s so-called nine-dash map of the South China Sea as a basis for joint development, insists that the three blocks on offer fall under its jurisdiction. About 40 companies are prequalified to bid, including units of Total SA (FP), Exxon Mobil Corp. (XOM) (XOM) and Royal Dutch Shell Plc, according to Energy Undersecretary Jose Layug.

“Enhanced energy security is what’s important for us,” Ricky Carandang, a spokesman for Philippine President Benigno Aquino, said yesterday. “It’s important for the economy that we develop more indigenous sources of fuel and power.”

The Philippines, a U.S. ally, this month denounced “intimidation” from China and warned of possible “physical hostilities” at a regional security meeting that included Secretary of State Hillary Clinton. China last year chased away a survey ship doing work for the Philippines and has said companies need its permission to explore in areas up for bid.

“None of the claimants to the South China Sea can really let each other’s claims go uncontested,” said Michael Wesley, executive director of the Lowy Institute for International Policy in Sydney. “If significant exploration and exploitation occur in contested waters, it’s highly likely that China will do something about it.”
Energy Needs

A tripartite agreement with China and Vietnam to jointly explore parts of the sea unraveled in 2008, prompting each nation to separately pursue the search for offshore oil and gas. China surpassed the U.S. as the world’s largest energy user in 2010, while the Philippines wants to reduce its near-total reliance on imports.

Philex Petroleum Corp. (PXP) Chairman and Chief Executive Officer Manuel Pangilinan said yesterday his company plans to join bidding along with Philodrill Corp. and London-based Pitkin Petroleum Plc. The group sees “better prospects” in Area 4 and Area 5, which are closer to the Philippines, he said.

Pangilinan declined to comment on talks with China National Offshore Oil Corp. over Reed Bank, an area where Chinese ships last year chased away a vessel working for Philex affiliate U.K.-based Forum Energy Plc. (FEP) In April, he said the territorial dispute may delay development of the area, which may contain the country’s largest natural gas field.
China Pressure

China probably won’t accept a deal that includes Forum Energy because it wants to only deal with companies from direct claimants, policy research group International Crisis Group said in a report this month. Reed Bank sits to the west of the blocks up for bid today.

“Reed Bank is likely to remain a flashpoint as the Philippines’ Philex Petroleum plans to start drilling in the area by August 2013,” the report said. “So far this has been held up by a lack of capital and potential partners, as major oil companies fear jeopardizing their relationship with China.”

The Philippines is “optimistic” it will receive bids for at least two of the three areas on offer today, Layug said by e- mail. Art Morado, managing director and chief executive officer of Pitkin Petroleum, said he wanted to avoid political risk as much as possible.

“My gut feeling is that as you go farther away from the Philippines going into the deeper waters, I think China will be more active there complaining about any activities,” he said by phone yesterday from Manila. “That will be riskier than blocks that are nearer to the Philippines.”
Deep-Water Rig

China has recently moved to secure more hydrocarbons in the South China Sea. China National Offshore, the government-owned parent of Cnooc Ltd. (883), last month invited foreign companies to explore offshore blocks that Vietnam had already awarded to companies including Exxon Mobil Corp. and OAO Gazprom. In May, Cnooc deployed China’s first deep-water drilling rig near disputed islands.

When asked earlier this year about Philippine plans to offer exploration blocks, foreign ministry spokesman Hong Lei reiterated China’s “indisputable sovereignty” over the area.

“It is illegal for any country or company to engage in oil and gas exploration activities in waters under China’s jurisdiction without the permission of the Chinese Government,” he said on Feb. 28, according to a transcript of the briefing.

The Philippines has sought U.S. help in improving its defense capabilities, acquiring a second Coast Guard cutter and planning to obtain marine patrol vessels and radar. The Philippines spent $2.2 billion on defense last year, compared with China’s $129 billion, according to data compiled by the Stockholm International Peace Research Institute.

“The bids are important because the exercise of sovereignty is best shown by the ability to exercise jurisdiction over the area,” Prospero de Vera, a political science professor at the University of the Philippines, said by phone. “The challenge there is, once you exercise sovereignty in the area, you must back up your words by protecting your interests in the area. That’s the catch.”

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