Oil Majors Avoid Philippine Bids for China-Claimed Sea Blocks

U.S. Secretary of State Hillary Clinton
Hillary Clinton, US Secretary of State. Photographer: Brendan Smialowski/AFP/GettyImages

The Philippines received bids from local companies to explore offshore areas claimed by China in a tender that the world’s biggest oil and gas firms avoided as the nations feud over territory.

Makati City-based Helios Petroleum and Gas Corp. submitted offers for two of the blocks, while a group including Philex Petroleum Corp. bid on one, according to Energy Undersecretary Jose Layug. Two of the three areas fall within China’s so-called nine-dash map of the South China Sea.

“We normally receive bids from medium-size companies, not from the big boys,” Layug told reporters in Manila today. “We’re very happy with the turnout.”

The Philippines, a U.S. ally, this month denounced “intimidation” from China and warned of possible “physical hostilities” at a regional security meeting that included Secretary of State Hillary Clinton. Units of Total SA, Exxon Mobil Corp. and Royal Dutch Shell Plc, which were among about 40 companies prequalified for the auction, didn’t enter bids.

“No one can afford to upset the Chinese and be marginalized in the Chinese market,” Gordon Kwan, the Hong Kong-based head of regional energy research at Mirae Asset Securities Ltd., said by phone. “The Philippines is simply not a must-have market for major oil companies,” he said, adding that only businesses “with no chance in China” would bid.

China Permission

Chinese vessels last year chased away a survey ship doing work for the Philippines, and China’s government has said companies need its permission to explore in areas that were offered today. A tripartite agreement between the Philippines, China and Vietnam to jointly explore parts of the South China Sea unraveled in 2008, prompting each nation to separately pursue the search for offshore oil and gas.

Helios bid on both Area 3 and Area 4, which fall within China’s claims based on its nine-dash map. Philex, Philippine National Oil Co.-Exploration Corp. and Petro Energy Resources Corp. jointly bid on Area 4. London-based Pitkin Petroleum Plc and Philodrill Corp. jointly bid on Area 5, which is closer to the Philippines than the other blocks offered.

The Philippines may award exploration contracts as early as September, Layug said. Costs for the three blocks up for bid today combined with a further 12 offered earlier would total about $6 billion, he said.

“We don’t think the tension in the West Philippine Sea had a negative impact,” Layug said, using the government’s term for the South China Sea. “These areas are clearly within the sovereign rights of the Philippines.”

Political Risk

Arturo Morado, chief executive officer of Pitkin Petroleum, said yesterday he wanted to avoid political risk.

“My gut feeling is that as you go farther away from the Philippines going into the deeper waters, I think China will be more active there complaining about any activities,” he said by phone from Manila. “That will be riskier than blocks that are nearer to the Philippines.”

China surpassed the U.S. as the world’s largest energy user in 2010, while the Philippines wants to reduce its near-total reliance on imports. The government in Manila plans to boost hydrocarbon reserves by 40 percent in the next two decades, according to a Department of Energy plan.

“Enhanced energy security is what’s important for us,” Ricky Carandang, a spokesman for Philippine President Benigno Aquino, said yesterday. “It’s important for the economy that we develop more indigenous sources of fuel and power.”

Reed Bank

Philex Petroleum Chief Executive Officer Manuel Pangilinan in April said tensions with China may delay development of Reed Bank, which may contain the country’s largest gas field. He declined to comment yesterday on talks with China National Offshore Oil Corp. to settle a dispute involving Forum Energy Plc, a U.K.-based Philex affiliate.

Last year, Chinese ships chased away a vessel working for Forum Energy near Reed Bank, which sits to the west of the blocks up for bid today. China probably won’t accept a deal that includes Forum Energy because it wants to only deal with companies from direct claimants, policy research group International Crisis Group said in a report this month.

“Reed Bank is likely to remain a flashpoint as the Philippines’ Philex Petroleum plans to start drilling in the area by August 2013,” the report said. “So far this has been held up by a lack of capital and potential partners, as major oil companies fear jeopardizing their relationship with China.”

Deep-Water Rig

China has moved to secure more hydrocarbons in the South China Sea. China National Offshore, the government-owned parent of Cnooc Ltd., last month invited foreign companies to explore offshore blocks that Vietnam had already awarded to companies including Exxon and OAO Gazprom. In May, Cnooc deployed China’s first deep-water drilling rig near disputed islands.

When asked earlier this year about Philippine plans to offer exploration blocks, foreign ministry spokesman Hong Lei reiterated China’s “indisputable sovereignty” over the area.

“It is illegal for any country or company to engage in oil and gas exploration activities in waters under China’s jurisdiction without the permission of the Chinese Government,” he said on Feb. 28, according to a transcript of the briefing.

The Philippines has sought U.S. help in improving its defense capabilities, acquiring a second Coast Guard cutter and planning to obtain marine patrol vessels and radar. The Philippines spent $2.2 billion on defense last year, compared with China’s $129 billion, according to data compiled by the Stockholm International Peace Research Institute.

“The bids are important because the exercise of sovereignty is best shown by the ability to exercise jurisdiction over the area,” said Prospero de Vera, a political science professor at the University of the Philippines. “The challenge there is, once you exercise sovereignty in the area you must back up your words by protecting your interests.”

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