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Joint resource development in South China Sea

by John Kemp

Reuters

Shared development of oil, gas and possibly other natural resources is the most promising option for reducing tensions in the South China Sea and should be the focus of efforts to improve diplomatic relations between China and its coastal neighbors.

Joint development agreements (JDAs) are already common across Asia. Most of the countries with a disputed claim in the South China Sea have signed at least one joint agreement to explore for oil and gas, either in the South China Sea or in neighboring areas like the Gulf of Thailand and the East China Sea, so there are many precedents to draw on.

The basic principle is that countries agree on a legal framework for exploration and production, including sharing fiscal revenues, while shelving their disputes over who actually owns the islands, rocks, shoals and reefs in the area and the seabed mineral rights that come with sovereign ownership.

Joint development agreements would be “without prejudice” to sovereign claims and could allow for the peaceful exploration and development of the area while allowing all the countries involved to maintain their political claims and save face.

The 1982 United Nations Convention on the Law of the Sea (UNCLOS), which all the coastal states have ratified, actively encourages countries to manage disputes by entering into “provisional arrangements of a practical nature” in a “spirit of cooperation and understanding” which are “without prejudice to the final delimitation” of maritime boundaries (Articles 74 and 83).

The aim is to allow economic development to proceed and avoid disputed areas falling into indefinite limbo while improving relations among states.

There are already joint agreements covering some disputed areas in Asia-Pacific between Malaysia and Thailand (1979); Cambodia and Vietnam (1982); Malaysia and Vietnam (1992); Cambodia and Thailand (2001); Malaysia and Brunei (2009); China and Vietnam (2000); Japan and South Korea (1974); Japan and China (2008); Australia and Indonesia (1989); and Australia and East Timor (2002).

Joint development could bring much-needed revenues as well as hydrocarbons to the rapidly developing economies bordering the South China Sea. Without an agreement, it is unlikely most oil companies other than national champions will risk committing substantial capital to seismic surveys and drilling in disputed areas.

Joint development agreements also have the potential to promote better relations and reduce the potential for conflict by giving all the countries concerned a stake in peaceful development. But most JDAs have been concluded when relations between the disputants were already improving.

The question of how to improve relations within the South China Sea enough to make one or more JDAs a realistic possibility was explored in detail at a conference hosted by the National University of Singapore’s Center for International Law in 2011.

Delegates from a range of governments, international organizations, nongovernmental organizations and oil and gas companies acknowledged: “Sovereignty disputes are unlikely to be resolved in the immediate or near-term future (either by negotiation or reference to an international court or tribunal) given the national sensitivities associated with the dispute and the potential access to resources which might come with sovereignty.”

Setting aside sovereignty disputes and focusing on joint development of natural resources was “the most realistic interim solution”. Joint development could reduce the risk of a worsening diplomatic or even military confrontation among the coastal states.

“While all the (claimant countries) have publicly expressed their desire to resolve the dispute peacefully and it is unlikely (though not impossible) that military conflict will occur because of these disputes, there is no doubt that (they) are a major irritant in relations which spills over into other aspects of bilateral and multilateral relations.”

China, Malaysia, Vietnam and Brunei have already been able “to put aside contentious and seemingly intractable maritime disputes in other areas in Asia” and it should be possible to apply “the same reasoning and spirit of cooperation to resolve their claims in the South China Sea.”

Joint development has the potential to be both the most important benefit and the most important contributor to better international relations. The issue is how to get to a deal.

The conference outlined nine practical steps that need to be taken to move the idea of joint development closer to reality. Among the most important was to encourage the various parties to the disputes (China, Vietnam, Malaysia, Brunei, Philippines and Taiwan) to clarify the exact extent of their claims.

At the moment, it is not clear exactly what some countries, especially China, are claiming in the area, which makes the dispute harder to manage. Crystallizing the claims is an essential step so that areas in dispute can be identified and become the subject of negotiations and allowing development in undisputed areas to proceed unhindered.

The conference also urged more surveying of the actual physical features of the disputed islands, rocks and shoals, perhaps by independent parties, with the consent of all the states concerned, and without prejudice to eventual claims. At the moment, the number of outcrops, and how many are above the waterline at high and low tide, which affects their legal status, has still not been defined properly.

The conferees also advocated joint seismic surveying for potential hydrocarbons. Knowledge about oil and gas wealth below the seabed is obviously a “double-edged sword.” But past experience suggests that the potential to exploit oil and gas deposits has been an important factor in spurring previous joint development agreements rather than making them harder.

Several previous agreements were spurred by knowledge that hydrocarbons had been found in affected areas.

Even if the oil and gas resources near the Spratly, Paracel and other island groups in the South China Sea prove to be modest, joint seismic work could help define potential areas for joint development agreements. There is a precedent for agreeing to joint work, including the 2005 Joint Seismic Marine Undertaking between China, Vietnam and the Philippines, even if that agreement was subsequently derailed by Philippine politics and cannot be revived in precisely its current form.

Crucially the coastal states must become much better at managing their domestic politics and controlling nationalist rhetoric by avoiding stoking tensions and staking out public positions from which it is difficult to back down. Governments have a vital role in helping to educate public opinion about the benefits of joint development while explaining that it does not involve surrendering on the issue of sovereignty.

Oil and gas companies can play a vital role. Since they will ultimately be carrying out any exploration and production work, they can influence and educate governments on the legal, political and fiscal requirements for a successful joint development agreement, and how it could benefit all the countries to the dispute. Oil companies can also open crucial channels for communication.

But the biggest challenge is how to improve political and diplomatic relations enough for negotiations or even pre-negotiations on a JDA to begin.

Confidence-building measures are essential. Implementing the 2002 ASEAN-China Declaration on the Conduct of Parties in the South China Sea would be a good start. The aim is to use the declaration as a stepping stone toward a JDA, not an end in itself. Other confidence building measures might include cooperation on search and rescue, marine navigation as well as combating piracy and controlling marine pollution.

Countries outside the region, including the United States, also have a vital role to play in encouraging states around the South China Sea to focus on seeking cooperative solutions rather than relying on legal arbitration or the threat of military force.

Establishing one or more joint development agreements in the South China Sea will not be easy, given decades of mistrust and occasional military conflict in the area, but it is the best way to manage one of the most volatile flash points in the world.

John Kemp is a Reuters financial columnist specializing in commodities and energy.