Business tycoon Manuel Pangilinan offered China’s state-owned oil firm access to the Spratly group of islands in the South China Sea over which the Philippines has a territorial claim, although he had no legal capacity to do so.
Pangilinan, chairman and chief executive officer of Philex Petroleum Corp, offered to include in his discussions with officials of the state-owned China National Offshore Oil Corp. (CNOOC) the Spratlys Islands, even if his company’s contract with the Philippine government is limited to Reed Bank, which is part of Palawan.
In an aide memoire addressed to President Benigno Aquino dated May 7, 2012, Pangilinan reported on his meeting with CNOOC officials led by its president Yang Hua and listed his 11 point proposal which, he said, the Chinese “received positively.”
The 11-point proposal includes a Framework Agreement between Philex and CNOOC “relating to an area of mutual interest which will be defined as the area covered by SC 72.”
“Other disputed areas (such as the Spratlys) could be included by agreement,” wrote Pangilinan.
SC 72 refers to Service Contract 72, signed in 2010, in which the Philippine government awarded Forum Energy Plc. (FEP) exploration rights to a basin within Reed Bank. Philex owns 64.45 percent of FEP, a London-based listed oil and gas exploration firm focused on the Philippines. FEP in turn owns 70 percent of SC 72.
Reed Bank is not in the Spratlys, although China is claiming it as part of its territory under its 9-dash line map. Aside from the Philippines and China, Vietnam and Taiwan also claim Reed Bank.
Pangilinan said, “The period of the Framework Agreement will be from execution up to the date on which the parties reach a determination as to whether hydrocarbon resources in the area of mutual interest are capable of commercial development.”
“The Framework Agreement will cover exclusively commercial and technical arrangements and neither party will take a position on the sovereignty issue which is agreed to be a Government to Government matter,” wrote Pangilinan, who is also managing director of First Pacific Co. Ltd., whose chairman is the Indonesian tycoon Anthoni Salim.
Philex president and FEP executive director Carlo Pablo said neither the Philippines nor China has approved the proposed framework agreement at this time. There is also “nothing agreed yet” on CNOOC’s specific participation in SC 72, he added, nor is there any agreement on the offer to include the other disputed areas, including Spratly Islands.
“The framework agreement will set out an exploration work program to be implemented in stages designed to determine by year 2016 the commerciality of hydrocarbon resources in the area of mutual interest,” the Pangilinan memoire said.
Pangilinan said, “Philex will give CNOOC an opportunity to make an equity investment in Forum Energy Plc under terms to be agreed.”
Legal experts warn that Pangilinan’s offer to CNOOC would violate the Philippine Constitution which states that “the exploration, development, and utilization of natural resources shall be under the full control and supervision of the State.”
The Constitution further provides that “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 sixty per centum of whose capital is owned by such citizens.”
A Joint Marine Seismic Undertaking by the Philippines, China and Vietnam in disputed areas, including Reed Bank, that was entered into by President Gloria Arroyo in 2004 has been questioned in the Supreme Court on the basis of these charter provisions.
Pangilinan’s proposal to CNOOC also states that a separate agreement would be negotiated by the parties if oil and gas of commercial quantity is discovered in the area, including the terms for profit-sharing.
“Any subsequent agreement (including any agreement as to the sharing of any profits after deduction of appropriate capital and operational expenses) between CNOOC and Philex to develop hydrocarbon resource within the area of mutual interest would be conditional on a resolution by the Philippine and Chinese Governments of the dispute relating to the sovereignty of such area,” Pangilinan said in his aide memoire.
Pangilinan clarified that the two parties would agree on their respective roles, “including the terms on which CNOOC might participate in the exploration work program as a technical consultant, and/or advisor, and/or investor.”
The two firms opted to form a working group that would negotiate and implement the framework agreement subject to approval of their governments. Each party would have two members in the group.
As an additional point, Pangilinan said he would later propose that the framework agreement be subject to “a neutral but internationally-recognized jurisdiction,” preferably British law, as long as this does not go against Philippine laws and the terms of Philex’s contract with the government under SC 72.
The decision to grant permits concerning the exploration and drilling activities in Reed Bank should come from Foreign Secretary Albert del Rosario, who is himself a former director of Philex and a close associate of Pangilinan. The Department of Energy deferred to Del Rosario’s office this authority last year because of its foreign relations implications.