Stemming the tide: Diplomatic disagreements have overshadowed the opportunities opened up by the exploration of new territory

While hydrocarbons production in the Philippines has declined in recent decades, the exploration of new territory holds the potential to stave off dependence on foreign imports, if not reverse the trend altogether. Unfortunately, a host of obstacles will need to be overcome in order to achieve any significant improvement even in the short-to-medium term. Among the most relevant of these challenges are the profitability of marginal fields in the current energy market, adherence to strict requirements for potential exploration and development companies, and territorial disputes with other countries over certain areas.

NEW OFFERINGS: The Department of Energy (DoE) opened up its 5th Philippine Energy Contract Round (PECR) in May 2014, offering up 11 oil and gas blocks that will remain open for bidding until the first quarter of 2015, at which time contracts will be awarded to qualified applicants. The 11 areas encompass a total area of approximately 47,840 sq km and are mainly located in frontier regions. They have an average size of 4350 sq km per block, with the largest covering 5760 sq km. The PECR 5 round is the first round of blocks offered up by the DoE since PECR 4 was launched in 2011. Only four of the 15 blocks from PECR 4 resulted in service contracts due in part to the DoE’s strict application guidelines used in reviewing potential bids.

While these requirements are unlikely to change in the near future, the approval process is undergoing improvements intended to streamline and increase the transparency of the entire process. This includes a pilot project which posts the status of the application online, such as which department is reviewing documents and how long they take to carry out these procedures, with the ultimate goal of including contracts from all energy projects – oil, gas, coal and electricity – in this online service. Other setbacks in exploration and production have been the result of litigation by indigenous groups as well as between rival companies. Initial interest for PECR 5 has been shown in blocks 8-11, running contiguously south to north in the West Philippine Sea off the west coast of Luzon Island within the West Luzon Trough basin. A number of other offshore blocks – numbered 4, 5 and 6, and located within the East Palawan basin in the Sulu Sea – have attracted attention. Blocks 1, 2 and 3 are spread out to the east around the Visayas area in the South-east Luzon basin (Block 1) and the West Masbate Iloilo basin (Blocks 2 and 3).

DIPLOMATIC TIES: Among the areas on offer is the 468,000-ha Block 7, located some 80 nautical miles (148 km) west of Palawan Island in the West Philippine Sea’s Reed Bank. Nestled amongst the previously awarded blocks 72, 55 and 63, this latest offering is located atop a geological formation thought to hold large amounts of oil and gas. Estimates based on initial exploratory work of the Reed Bank (also known as the Recto Bank) and disputed Spratly Islands to the south-west vary widely. However, the US Geological Survey estimates that the area’s total crude oil reserves could reach 28bn barrels and as much as 266trn cu feet of natural gas.

Given these stakes, diplomatic ties have become strained as different states vie for the right to commercialise these potentially lucrative prospects. Six states bordering the South China Sea (known locally as the West Philippine Sea) have registered claims over portions of this territory including Vietnam, Malaysia, Brunei and Indonesia, as well as the Philippines and China. Oil exploration vessels plying the waters of SC 72, operated by the UK-based exploration and production outfit Forum Energy, and bordering Block 7 on its northern border, have been repeatedly harried by Chinese-flagged vessels in recent years. These aggressive Chinese manoeuvres are the result of its “Nine Dash” policy, through which it lays claim to much of the area.

Conversely, the Philippines supports the territorial guidelines laid out in 1982 by the UN Convention on the Law of the Sea, which defines sovereign territorial seas as all waters located within 12 nautical miles (22 km) from a country’s coastline, including islands. Each nation’s exclusive economic zone thus extends 200 nautical miles (370 km) from its respective coast.

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The Report: The Philippines 2015

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