Wed, May 29 2024 29 May, 2024

Talks over gas in Philippines, China an uphill struggle

Discussions over joint exploration of gas in Philippine- and Chinese-claimed waters face a mounting struggle amid increasing concerns over fossil fuel development.

Offshore oil rig or production platform in the South China Sea, Malaysia (Photo credit: Adobe Stock/corlaffra)

The Philippines and China are back at it, trying to piece together failed joint oil and gas exploration talks over the volatile South China Sea (SCS) off the Philippine coast, but several hurdles remain.

Philippine President Ferdinand Marcos Jr. told Chinese President Xi Jinping during a visit to Beijing two weeks ago that he hoped the two sides could resume dialogue over the issue.  He added that there are “vast opportunities” that the Philippines and China can seize as the economies of the world change, which would benefit the two countries.

Previous exploration talks were terminated last June during the term of Philippine President Rodrigo Duterte due to China’s claim on the disputed territorial waters.

The two countries have disagreed for decades over maritime sovereignty in the area that Manila refers to as the West Philippine Sea, part of its UN-mandated 200-nautical mile exclusive economic zone (EEZ). Beijing has previously agreed to and ratified the UN’s EEZ stipulations.

Much of the negotiations that remain for joint development include which side would control exploration activities since according to Philippine law a domestic company has to hold a majority stake, while many analysts believe that China wouldn’t acquiesce to a junior partnership position, particularly in areas that it claims as its own sea territory.

The SCS, a key global shipping route, is subject to overlapping territorial claims involving China (which claims around 90% of the SCS), Brunei, Malaysia, Indonesia, the Philippines, Taiwan and Vietnam. Each year trillions of dollars of trade flow through the sea, which is also rich in fish and offshore gas.

Court of Arbitration’s ruling ignored

A panel of five judges at the Permanent Court of Arbitration in The Hague in 2016 ruled against China’s territorial claims and in favour of the Philippines. China, however, has never acknowledged the ruling.

The SCS could hold 11 billion barrels of oil proved and 190 trillion cubic feet (tcf) of natural gas, according to the US Energy Information Administration (EIA). An updated survey in 2012 estimated that there could be another 160 tcf of natural gas and 12 billion barrels of oil undiscovered in the SCS.

Chinese estimates are much higher, which is one reason it is active in its land reclamation activities in the area.

Philippine Supreme Court wrinkle

Just a week after Marcos’ visit to Beijing, the Philippine Supreme Court added another wrinkle over any hope of resuming exploration talks.

The Court declared the Philippines’ 2005 energy exploration agreement with Chinese and Vietnamese firms as illegal, ruling that the country’s constitution does not allow foreign entities to exploit gas in Philippines’ territory and other natural resources.

The Court added that it was illegal because the constitution stipulates that majority-owned Philippine companies must control and supervise activities and companies involved in gas exploration and production activities.

Both the Marcos Administration and Beijing were quick to respond, pledging to work together in spite of the Court’s decision. Manila said it would take the decision into consideration, while Beijing reiterated its support for resuming talks.

However, the answer might not be as easy as just reaffirming the desire for continued talks.

“If we look at Marcos Jr. and his geopolitical stance in general, it’s fairly different from Duterte. Of course he wants to remain in Beijing’s orbit as a partner, and I do think there are some members of his administration who are not that opposed to potential deals with China,” Georgi Engelbrecht, Crisis Group Senior Analyst Philippines, told Gas Outlook.

“But even his visit to Beijing was not crowned by a lot of success, and we see a lot of efforts by the U.S. and other likeminded countries to secure the gains of the bilateral relationship.”

“As a result, and in particular after the Supreme Court decision, it appears unlikely that lots of energy will be redirected towards efforts to get a deal. Domestic opposition will always be there, and so will be critical perspectives from the security establishment,” he said.

Englebrecht added that former Philippine Foreign Secretary Teodoro Locsin said that discussions had been terminated because of “constitutional limits and sovereignty issues.”

“This will not go away,” Engelbrecht added. “So, unless Marcos Jr. will have good technocrats who are provided with a green light to move ahead (and the current Energy Secretary is a capable official) and crack the dilemma, it [joint exploration] will be challenging.

LNG increasingly called into question

While both the Philippines and China grapple with implications over the Court’s ruling and a host of other issues needed to be resolved before exploration activities could begin, there’s already discussion that LNG may not be the best option for the Philippine energy sector as it seeks to replace its own dwindling offshore gas reserves and also wean itself off of coal needed for thermal power production.

Since the start of last year when Russia invaded Ukraine and an ensuing gas supply shortage for Europe unfurled along with an ongoing global LNG supply crunch, prices for the super-cooled fuel have reach cost-prohibitive levels.

LNG spot prices in Asia, in large part due to arbitrage opportunities in Europe, breached the $60/MMBtu price point in March. They then pared gains but have hovered around the still expensive mid-$30s/MMBtu price point since.

Meanwhile, developing both solar and wind power has reached cost parity with LNG development and in some cases is now cheaper than its LNG and gas-to-power counterparts. LNG prices are also forecasted to remain high for at least the near future.

LNG sourcing issues

According to the Institute for Energy Economics and Financial Analysis (IEEFA), LNG sourcing is also unstable and unpredictable. This has led to difficulties in securing imported LNG and can serve as a warning for Philippine energy companies.

Moreover, renewables projects can be built and become operational quicker than gas and LNG projects. Wind power projects can usually be constructed in as little as two to six months.  

Solar projects can be built and become operational in around six to 18 months, depending on size and scale. LNG import terminals can take three to five years to build in developed countries and longer in those with little or no LNG development experience like the Philippines.

Methane leakage

The argument, prevalent just a few years ago, that LNG was the ideal transition fuel away from coal to renewables is also falling to the wayside. The rational promulgates gas since it emits around 50% less Co2 than does coal when used for power generation. However, gas is still a major carbon emitter while methane, one of the most dangerous gases for climate change, prevalent along much of the gas/LNG value chain, is an even bigger problem.

According to the World Economic Forum, methane is 80 times worse for the planet than CO2 for accelerating climate change.

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