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Looking to China: President Rodrigo Duterte announced the executive order in May
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Manila opens the door to Chinese E&P

An executive order has reduced the constraints on Philippines’ state oil company working with third parties on oil and gas deals

An executive order from Philippines President Rodrigo Duterte that relaxed the rules on oil and gas exploration should make it easier for the government to cement its recent outreach to China, as it opens exploration blocks in a bid to reverse a precipitous decline in production.

Executive Order 80, issued in late May, reverses a previous ruling from 2006 that prevented the Philippine National Oil Company Exploration Corporation (PNOC-EC) from directly farming out its acreage. From now on, third parties can participate in service contracts awarded by the government to PNOC-EC, the upstream arm of state-owned Philippine National Oil Company, without the need for public bidding.

PNOC-EC has been on the hunt for partners to help develop offshore reserves. Crucially, the order clears the path for a farm-out that would allow Cnooc to take over operatorship and 51pc of Service Contract No. 57 (SC 57) covering offshore areas of northwest Palawan island, in the West Philippine Sea. Duterte's increasingly warm ties with China means Cnooc is increasingly in the frame for the award.

The Philippines, which has in the past contested Chinese claims in the South China Sea, signed a memorandum of understanding (MoU) with China in November last year to conduct joint exploration for oil and gas.

The Philippines-China MoU on cooperation in oil and gas development MoU identified Cnooc as China's representative in any activities. Analysts have questioned whether this would affect Manila's claims in the West Philippine Sea, which lies within its exclusive economic zone (EEZ).

The Washington-based Asia-Maritime Transparency Initiative warned that the MoU might hinder unilateral exploration and development by the Philippines of other areas of the West Philippines Sea, or be the basis of an exclusionary policy that eventually locks the Philippines into partnerships with only Chinese companies.

China's Holy Grail is securing joint development projects in other countries' EEZs in the South China Sea, says Bill Hayton, an associate fellow at Chatham House's Asia Pacific programme. "These are state-to-state deals where countries agree to share the resources in their EEZ. The Chinese tend to avoid joint venture deals where five countries might be sharing resources. That's not their game," he says. "Whereas the Philippines has been talking about joint development as they know that is what China wants to hear."

Urgent exploration

Such concerns are downplayed by Duterte, who analysts suggest has his own interests in striking deals with Chinese corporates. "If they are Chinese state-controlled or Communist Party-led companies, they might take on acreage for political rather than economic reasons—and that might dovetail nicely with Duterte's desire to have investments that he can direct," says Hayton.

There are wider issues at play for Manila—which is offering 14 petroleum exploration blocks (four onshore and 10 offshore) to potential investors this year—as it steps up the search for new oil and gas supply to counter declining production and reduce growing dependence on imports to meet rising demand.

“The Philippines has been talking about joint development as they know that is what China wants to hear.”

The Philippines remains in dire need of more oil and gas exploration. Its existing reserves are in decline and as its sole producing Malampaya gas-to-power project is approaching the end of its production life, noted Fitch Solutions in a research note issued on 10 May. The Malampaya field is responsible for 97.5pc of domestic oil and gas production, although Fitch noted it is widely expected to near depletion by 2024 as existing reserves run out and output maintenance efforts slow.

That puts addition pressure on the authorities to attract IOCs into its upstream, and may explain why the government has extended a deadline by three months to 21 August for bids under the Philippine Conventional Energy Contracting Programme. There are indications of only limited IOC interest in licenses that mostly lie in unexplored basins.

If international companies choose to steer clear, Duterte's gamble is that Chinese heavweights will be more forthcoming.

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