Stratfor's 2018 Annual Forecast said that the Philippines will continue its conciliatory outreach to China, specifically identifying energy exploration as one such area of cooperation. With Manila focused on contentious constitutional reforms at home and containing militant threats in the south, it has little bandwidth to confront China and many reasons to cooperate.
China and the Philippines are slowly moving forward on a bilateral arrangement regarding the South China Sea, though they continue to face obstacles. On March 2, a presidential spokesman for the Philippines said the country has identified two sites for potential joint oil and natural gas exploration with China. This development comes in the aftermath of the countries' second bilateral maritime consultation in mid-February. At that meeting, both sides expressed their desire to move forward with joint mechanisms in the areas of fisheries, energy and marine scientific research, and they established a technical working group to tackle the energy issue.
The potential exploration sites include one area, SC-57, outside of disputed waters near the Philippines province of Palawan, as well as the SC-72 field, located in Reed Bank, which is claimed by both the Philippines and China. The SC-57 field is within the uncontested Philippines exclusive economic zone, while the SC-72 field was ruled to be a part of the Philippines' exclusive economic zone in a Permanent Court of Arbitration ruling that China does not recognize. The latter field, believed to be rich in natural gas potential, has been the subject of years of possible joint exploration discussions between Philippines' PXP Energy Corporation and China's state-owned China National Offshore Oil Corporation (CNOOC). All these early attempts failed, however, in large part because China insisted that deals over the disputed territories come with acknowledgment of Chinese sovereignty. Negotiations were suspended in 2014 by former Philippine President Benigno Aquino III's administration amid intensified maritime tensions.
But developing potential maritime resources has become increasingly crucial for the Philippines, which produces some natural gas but imports virtually all of its crude oil. With domestic gas production nearing its peak, the country needs new energy sources to satisfy its economy — hence its focus on the commercially viable, proven resources around the Reed Bank. But the Philippines' lack of adequate technology, combined with China's opposition to unilateral development attempts in areas it deems disputed, have proved too much for Manila in the past.
When Philippine President Rodrigo Duterte came to power in 2016, however, he attempted to rebalance his country's strategic agenda and pursue a detente with China. In response, Beijing has extended certain concessions toward Manila. Both have worked to establish a joint fishing and patrolling mechanism in the Scarborough Shoal, a set of reefs and rocks that China seized in 2012 before granting the Philippines access in 2016. They've also laid the groundwork for possible energy cooperation, with the Philippines announcing in 2017 that it will resume drilling in the disputed sea and reportedly re-engaging in talks with CNOOC.
This pragmatic arrangement could allow the Philippines to acquire the resources it needs, helping manage tensions. But as their relationship moves forward, both Manila and Beijing will likely confront the same obstacles that have damaged previous attempts at bilateral cooperation. In the Philippines, Duterte's engagement with China has prompted domestic criticism and nationalist sentiment. Manila has tried to allay concerns by emphasizing that any deals would be made at the company level and not with the Chinese government itself. But it will also need to iron out thorny constitutional issues. The Philippine Constitution dictates that Philippine entities must retain 60 percent capital and ownership when it comes to joint exploration with foreign companies — and Beijing is unlikely to accept that deal. Finally, even if both sides agree to caveats, China's powerful military presence in the South China Sea will put Manila at an increased security disadvantage.