Oil and polemics do not mix ( 2)

Earlier, we explained that the regalian doctrine is not a barrier to cooperation with China, Vietnam, or Malaysia on petroleum exploration in the South China Sea, especially as the cooperation area will necessarily include not just the Philippine continental shelf but also the disputed, foreign-occupied rocks and their territorial seabed.

The national patrimony clause is another matter. It recognizes in the Philippine state possessory rights in order to discover and extract petroleum resources, including private lands. It provides that petroleum exploration shall be undertaken directly by the government or indirectly through a Filipino citizen or a corporation at least 60 percent of whose capital is owned by Filipino citizens. However, it may also be undertaken by a wholly foreign-owned corporation having an agreement with the president regarding technical or financial assistance. Recent examples are Petroleum Service Contracts 80 and 81 in the Sulu Sea—which is undoubtedly part of Philippine internal waters—in which wholly foreign-owned corporations hold the majority stakes.

In the continental shelf, the national patrimony clause is also applicable as it is wholly consistent with the United Nations Convention on the Law of the Sea (Unclos). Under Articles 77 and 81 of Unclos, in the continental shelf the Philippines has the sovereign right to explore and exploit; it has the right to drill the seabed, discover and extract the underlying petroleum resources, and acquire ownership thereof when the same is brought to the well-head. The same economic possessory right in the continental shelf is guaranteed by the national patrimony clause.

As early as 1972, the Philippines through Presidential Decree No. 87 operationalized the national patrimony clause by adopting a production sharing and service system in which, following competitive bidding, a contract is awarded to the best qualified petroleum corporations, local or foreign. It does not confine contracting to corporations at least 60 percent of whose capital is owned or controlled by Philippine citizens. (Section 3 [14], Section 4, Section 5, and Section 11)

PD 87 has not been repealed even in the face of the national patrimony clause under the 1973 and 1987 Constitutions. It was amended by PD 1459 (1978) to encourage contracting with “foreign companies with management and financial capabilities and technical expertise,” and PD 1857 (1983), which granted additional incentives to these foreign companies, especially those involved in deep-water/risk contracts (Section 1 to 3). The Filipino participation incentive clause under PD 87 continued to be implemented even under Republic Act No. 11371 (2019) and the Philippine Model Service Contract (2024).

Any cooperation agreement entered into by the Philippines with China, Vietnam, or Malaysia would necessarily involve their respective state-owned petroleum corporations, namely, China National Offshore Oil Corp., Vietnam Oil and Gas Corp., and Petroliam Nasional Berhad or their authorized licensees. It would inevitably extend not just to the Philippine continental shelf but also the territorial seabed of disputed rocks that are occupied by China, Vietnam, or Malaysia.

The national patrimony clause as implemented by PD 87 would pose no obstacle to such cooperation arrangement as, within the cooperation area, the Philippine licensing system shall apply only to operations within the Philippine continental shelf, just as Chinese, Vietnamese, or Malaysian licensing systems would apply to operations within the territorial seabeds of the disputed rocks that are occupied by them.

The thornier issue is the allocation of production costs and proceeds among the participating states and between them and their respective licensees. PD 87 provides that “in no case shall the annual net revenue or share of the Government, including all taxes paid by or on behalf of the Contractor, be less than sixty per cent of the difference between the gross income and the sum of operating expenses and Filipino participation incentive.”

Moreover, the 2016 Arbitral Award gives the Philippines a decisive advantage as its economic entitlement to the continental shelf in the central area of the South China Sea is indisputable, whereas the sovereignty rights of the occupant state to the territorial seabed remains disputed.

The 1974 Korea-Japan agreement for the joint exploration and exploitation of an identified zone in the East China Sea might provide useful lessons. Both states agreed to equal sharing in production cost and proceeds (Article 9). More importantly, they stipulated that the production share “shall be regarded as natural resources extracted in the continental shelf over which that Party has sovereign rights” (Article 16). It goes without saying that their agreement is without prejudice to the parties’ positions on their pending territorial dispute. The same works for the 2008 Japan-China joint exploration agreement.

China, Korea, and Japan did not let their violent territorial animosities hinder oil and gas cooperation.

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Melissa Loja and Romel Bagares are independent Filipino scholars of international law.