Thayer Consultancy Background Brief

ABN # 65 648 097 123

Philippines Mulling Joint
Exploration Service Contracts
with China
March 4, 2018

Recently it was reported that the Philippines identified two areas in the South China
Sea where joint exploration for oil and gas could be undertaken with China, including
one in disputed water in the Spratlys. We request your assessment of the following:
Q1. How would joint exploration agreements between Filipino and Chinese oil
companies affect tensions in the South China Sea? How would this impact on the
United States, Japan, India and Australia?
ANSWER: There are two ways of answering this question. The first response is that
any agreement on joint exploration undertaken by commercial oil companies from the
Philippines and China is a matter between these two parties. It is up to the Philippines
to decide to award commercial service contract 57 in waters that are not in dispute.
The second response is that if the Philippines goes ahead and awards service contract
72 in disputed waters in Reed Bank to a Chinese company, this could undermine the
legal award by the Arbitral Tribunal in 2016 that found in favour of the Philippines.
If the Philippines does award one or both service contracts, this will result in warmer
ties between Beijing and Manila and lower tensions in the Spratlys. China will be
emboldened to press Vietnam to follow suit.
China’s approach undercuts the separate policy pronouncements of the U.S., India,
Japan and Australia calling for the enforcement of the Award issued by the Arbitral
Tribunal that heard the case brought by the Philippines against China.
Q2. Who would benefit from the agreement and who would suffer from its harmful
impact?
ANSEWER: No agreement has been reached yet and the matter is still under
consideration. With respect to service contract 57 it would be a commercial
agreement between two oil companies. Theoretically both should benefit. The matter
of service contract 72 is more complicated because the area is in dispute. Until the
contract is drawn up and signed it is impossible to know what commercial
arrangements have been agreed and if the Philippines has undermined its own
sovereignty. In both cases China is the winner because it has long pushed for bilateral
joint exploration. This would validate China’s legal position and put pressure on
Vietnam, Malaysia and even Indonesia to follow suit. Brunei has already awarded a
service contract to a Chinese oil company to operate in its Exclusive Economic Zone.
 2

Q3. Do you think that the new agreement create a dangerous precedent of allowing
China to venture into other disputed areas in the South China Sea?
ANSWER: Most definitely. In the case of the Philippines, President Duterte is following
the path of expediency to win economic rewards from China. Duterte is not acting in
solidarity with the littoral states who are also members of ASEAN. In the past China’s
calls for joint exploration were dismissed as follows: joint exploration only means
operations in disputed areas of the littoral state but not in China’s waters. China would
gain enormous political leverage over Vietnam, Malaysia and Indonesia to follow suit.
Q4. How should relevant claimants of the related disputed water respond to the
proposed recent move by Philippines and China?
ANSWER: The other claimants can only act through diplomatic channels to inform the
Philippines how its actions will affect their interests. But such diplomacy risks being
viewed as interference in the internal affairs of the Philippines.
ASEAN diplomats in Manila should act now to keep themselves informed of
discussions between the Philippines and China. At the same time, staff in each
country’s foreign ministry should prepare a position paper advising their government
of the pros and cons of joint exploration and the possible risks.
Vietnam and China have undertaken joint exploration in the Gulf of Tonkin for a
number of years. There are working level discussions on joint exploration that have
been dragging on, with China showing impatience at the pace of discussions.
If the Philippines does go ahead, this will be one more avenue for China to assert its
dominance over the South China Sea, militarily, politically, diplomatically and
commercially.

Suggested citation: Carlyle A. Thayer, “Philippines Mulling Joint Exploration Service

Contracts with China,” Thayer Consultancy Background Brief, March 4, 2018. All
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Thayer Consultancy provides political analysis of current regional security issues and
other research support to selected clients. Thayer Consultancy was officially
registered as a small business in Australia in 2002.