Oil Deals May Be Key To Peace In South China Sea

Chinese President Xi Jinping and Philippine President Rodrigo Duterte are escorted pass a line of soldiers during a welcoming ceremony at Malacanang Palace in Manila on November 20, 2018. Xi is on a two-day state visit to the Philippines, the first in 13 years by a Chinese leader. (AP Photo/Bullit Marquez)

Remember when the Philippines and China were enemies? Or at the very least, at odds over China’s claim to islands in the South China Sea? Philippine president Rodrigo Duterte used to be wary of Xi Jinping, China’s Communist Party boss, and president. That was so long ago, like pre-2016. Two years later, Manila is ready to be a China province, as Duterte joked earlier this year. Kidding aside, a new oil deal between the two is sure to set the table for better relations going forward.


Oil may be to blame for wars around the Middle East. But oil deals between two nations is one of the best ways to secure peace.

Both sides got that deal on Tuesday.

The joint oil and gas exploration agreement was one of 29 deals inked Tuesday during Xi’s two-day state visit to Manila. It came at a time of tensions ratcheted up further by Vice President Mike Pence during the APEC Summit this weekend which saw the Veep basically boxing Trump into a corner on China. Anyone hoping for a rapprochement with Xi at next week’s G20 meeting in Argentina is in for a rude awakening, if Pence’s hard line at APEC is any guide.

U.S. Vice President Mike Pence talks tougher on China than President Trump. To Pence, the South China Sea is as big a deal as the trade war. Maybe even bigger. (AP Photo/Mark Schiefelbein)

Assuming oil is one way to Washington’s heart, a deepwater-drilling relationship with a U.S. oil company may be just what the doctor ordered. The U.S. and China’s tight-knit relationship is in the intensive care unit, with no release date in sight.

According to a Chinese draft of the deal obtained by CNN in Manila, the state-owned China National Offshore Oil Corporation (CNOOC) and a yet to be named Philippine counterparty will explore and develop hydrocarbons in the South China Sea. Anti-China senator Antonio Trillanes released the draft Tuesday night to local reporters there. He is critical of Duterte’s detente with Beijing

CNOOC is China’s biggest oil exploration and production company. It’s publicly traded on the NYSE. They inked the deal with an unknown Philippine energy firm this week. Photographer: Lucas Schifres/Bloomberg NewsBLOOMBERG NEWS


The Duterte Administration once took a strong line on China’s claims to islands in the sea. They even took the issue to the International Court in the Hague, which ruled in favor of Manila in 2016.

For Beijing, Duterte has seen the light. He has done a complete about-face on China. He sees China investment and growth as a key component of his own economy.

Meanwhile, the South China Sea has become the new flashpoint for Washington in its ongoing fight with China to maintain its hegemony in Asia. The U.S. uses China’s claims to small, sandy islands as evidence that Beijing wishes to control the free flow of trade passing through the waterways.

Oil rigs and commercial fishing vessels in the South China Sea. Could oil deals with the U.S. put an end to Washington’s fears that China will dominate these trade routes? Photographer: Qilai Shen/Bloomberg

The issue has become front and center under the Republican-led government but was already being discussed during the Obama administration. The South China Sea issue completely tore up ex-president Obama’s plan for an Asian pivot. If the Asian pivot meant expanding U.S. commerce with Asian nations, with China the most important market of the bunch, defense and security matters have cast that aside. Under the Trump administration, both trade and defense have driven a hard wedge between the world’s No. 1 and No. 2 economies.


Maybe the oil and gas industry can save China and the U.S. from themselves.

If Exxon and PetroChina executives shook hands over a deepsea oil bloc, things could settle down between Beijing and Washington. Even so, there are no guarantees. Exxon had a deepwater-drilling joint venture in the Kara Sea, in Russia’s Arctic, with state-owned oil firm Rosneft. But Obama’s early sanctions against Russia in 2014 put that deal on ice. And now Exxon is out of the Kara Sea. Rosneft has lost the chance to obtain key technologies for deepwater drilling.

Still, it is not difficult to imagine an oil deal in the South China Sea as a potential white flag waved from Beijing.

One older Chinese estimate places potential oil resources in the South China Sea at 213 billion barrels. A conservative 1993/1994 U.S. Geological Survey estimated the sum total of discovered reserves and undiscovered reserves at just 28 billion barrels.

Protesters display placards during a rally at the Chinese Consulate to protest the state visit of Chinese President Xi Jinping Tuesday, November 20, 2018 in suburban Makati City, east of Manila. (AP Photo/Maria S. Tan)

CNOOC currently estimates that the area holds around 175 billion barrels of oil and gas equivalent. CNOOC shares are traded on the NYSE.

One thing is certain: There is oil down there, and it is not being fully explored. The U.S. and China could work together on this. China is largely on its own.


In 2010, China’s CNOOC sunk a billion dollars into its Hai Yang Shi You 981 deep-sea drilling platform. When it was launched four years later, Chinese authorities claimed that the rig was Chinese “sovereign territory.” It floated all the way to waters not far from the coast of Vietnam.

The Vietnamese hated this and ultimately responded to what they viewed as a Chinese incursion on their country by burning down Chinese factories there. The rig was removed.

China isn’t backing down from pushing the envelope in the region.

In March, China’s foreign minister Wang Yi said, “Beijing’s resolve to protect the peace and the stability of the South China Sea cannot be shaken.” He blamed “foreign forces” who “have sent fully armed warships and fighters to the South China Sea to flaunt their military might.” This is the U.S. Navy. To China, the South China Sea has their name on it, literally and figuratively. The closest American property is Guam, a four-hour flight away.

The so-called nine-dash line is what China claims as its navigable water boundaries.Forbes graphic.


Nevertheless, Australia and the U.K. joined the U.S. this year in challening Beijing’s claims to parts of the South China Sea.

China has overlapping territorial claims in the sea with the Philippines, Vietnam, Taiwan, Malaysia and Brunei. Beijing claims ownership to almost 90% of the sea. Their map is commonly referred to as China’s nine-dash line. That imaginary line goes far beyond China’s coast and extends close to Vietnam and the Philippines. If those two countries applied the same map of the South China Sea to their borders, it would take their version of a nine-dash line to Hainan.

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