Territorial tribulations: Disputes have delayed deep-sea discoveries

Strong demand for oil and gas, particularly in rapidly growing Asian economies, means that finding and securing new sources of hydrocarbons is more important than ever. And with prices remaining strong, the stakes for countries competing for new energy supplies have never been higher. The Philippines’ efforts to boost domestic oil and gas production have so far met with limited success, as many of the blocks offered up for contracting have resulted in marginal production or have not yet been fully explored. To date, the vast majority of natural gas supply has come from just one source in the Malampaya gas field.

With production levels of existing reserves dwindling and the potential of recently tendered blocks difficult to predict, the country may need to look further afield to secure its primary energy needs. Unfortunately, it is not the only one seeking to meet its power needs by looking beneath the waves.

MALAMPAYA: First discovered in 1992, the Malampaya gas field, located just off Palawan Island’s west coast, is the most productive field in the country to date. Producing at a depth of approximately 840 metres, the Malampaya deep-water gas-to-power project is run by a joint venture of operator Shell Philippines Exploration (45%), Chevron Malampaya (45%) and the state-owned Philippine National Oil Company (PNOC, 10%). In 2010 the project produced approximately 124.82bn standard cu ft (bcf), down from 133.92 bcf registered in 2009, according to PNOC data. The project also produced 4.9m barrels of gas condensate in 2010, down from 5.47m in 2009. The company cited a scheduled maintenance shutdown from February 10 to March 13 as the reason for the slowdown.

Maintenance downtime or not, the fact is that after 10 years of consistent production, the Malampaya field and its estimated 4.3trn cu ft (tcf) of gas reserves are now entering a second, more mature phase of development. As volume and pressure within the deposit decrease, the reserve requires the use of additional compressors to maintain production levels.

FIELD LONGEVITY: Although original estimates about the 2.7-tcf deposit predicted that the field would be depleted by 2021, leaving the related 2700-MW power plant’s fuel supply as a big question mark after just 20 years of operation, new discoveries and extraction technology have since revised the reserve estimates upwards to 4.3 tcf, which could extend the lifetime of the field by another 20 years.

The field is connected to the shore terminal and gas facility located at the city of Tabangao on Luzon Island. From here, a portion of the gas is destined for three power plants: the 1200-MW Ilijan power plant; the 1000-MW Santa Rita power plant; and the 500-MW San Lorenzo power plant. These plants then provide electricity for the populous Luzon island. Additional natural gas is diverted to the Pilipinas Shell Petroleum’s refinery in Tabangao, as well as conversion into compressed natural gas (CNG) to be used as fuel for a government-sponsored mass transport pilot project.

While the Malampaya field has been instrumental in reducing the country’s dependence on energy imports, its decreasing reserves and the reliance on its gas for a vast part of electricity generation pose questions for continuing supply in the medium term, as production from the field declines.

DEEP SEA FISHING: To secure new sources of energy, the government has offered dozens of new blocks up for auction in recent years and is also now looking further afield at some considerably larger − but more complicated − attractions.

There are two major offshore areas that potentially hold gas reserves that could meet not only the Philippines’ domestic power needs but also provide enough excess off-take for export. The first is the massive 13m-ha area located off Luzon Island’s eastern seaboard known as the Benham Rise, and the second, more complicated area is the disputed Spratly Island chain, situated in the West Philippine Sea. Looking purely in terms of political feasibility and production expediency, the Benham Rise area is preferable because no other countries have laid claim to the site. From a production view, the site’s extinct volcanic ridges are expected to contain large quantities of solid methane and oil, based on initial studies by the Philippines Department of Environment and Natural Resources.

The government has been moving on this claim for some time, having submitted an application for territorial sovereignty for the area to the UN in 2008 and hoping for a positive response by mid-2012. The site lies well within the 200-mile exclusive economic zone recognised by the UN under the Convention on the Law of the Seas (UNCLOS).

WILD, WILD WEST: On the other side of the country lies a collection of rocky islands which are at the centre of a six-nation row that far exceeds their diminutive stature. Located in the West Philippine Sea, known to the Chinese as the South China Sea, the area is widely believed to contain massive oil and gas reserves and has consequently drawn strong interest from the bordering states of Brunei, China, Vietnam, the Philippines, Taiwan and Malaysia. Estimates based on initial exploratory work of the region vary widely, although all share ambitious projections, leading the area to be labelled a “second Gulf”. The US Geological Survey estimates the area’s total oil reserves could reach 28bn barrels and as much as 266 tcf of natural gas.

Given its growing appetite for energy, China has long claimed the South China Sea as its territorial waters. In a bid to counter China’s economic and political clout, a number of other countries in the region are banding together and asking for outside international intermediation, including the UN through the 1982 UNCLOS, to resolve the dispute. According to the UN agreement, territorial seas were defined as all waters located within 12 nautical miles (22 km) from a country’s coastline, including islands. In addition, each nation’s exclusive economic zone (EEZ) extends 200 miles (370 km) from its respective coast – a stipulation complicating the Spratly dispute in that many of the countries’ EEZs overlap, although not China’s.

CHOPPY WATERS: China has rejected this approach of including non-claimant countries and has expressed a desire to resolve the situation through bilateral deals. Citing a series of somewhat unclear historical claims dating back to the Han and Ming dynasties, in 2009 China submitted to the UN its “Nine-Dash Line Map”, which covered almost the entire 1.7m sq km of the South China Sea. This plan was subsequently contested by the Philippines at the UN.

This continued disagreement has led to numerous clashes between the claimant nations over the years, including multiple incursions of Chinese air and sea forces into the territory of the Philippines and Vietnam. Some of these confrontations have involved shots fired by Chinese patrol vessels and accusations by Vietnam that Chinese forces have twice severed exploration vessel undersea cables in a disputed area which lies only 120 km off the coast of Vietnam and around 600 km from China’s Hainan province.

A non-binding 2002 pact between ASEAN and China called for the peaceful resolution of the dispute, although little progress has been made at the time of press. Further complicating the matter are the mutual defence agreements that both the Philippines and Taiwan have with the US, whom China has repeatedly warned not to enter the dispute.

MINE, ALL MINE: Not only does China’s claim encompass the Spratly Islands, but also other areas to the north, just off the Philippines’ Luzon and Palawan Islands, and even the Malampaya gas field. These include the Reed Bank (also known as the Recto Bank) service contract (SC) 72 block, approximately 274 km off the coast of Palawan, and blocks three and four, which were offered up for tender in June 2011.

In addition, the Scarborough Reef, which is located off the west coast of Luzon Island, has also been a focal point of disputes over the years. Subsequent exploration activities by Forum Energy of the UK, the firm operating SC72, were met with hostility by Chinese interests, with two patrol boats allegedly harassing and threatening to ram the seismic survey vessel Veritas Voyager in February 2011. “China is making a lot of noise during the seismic surveys and has been shadowing our vessels,” said Ismael Ocampo, the director of the Energy Resource Development Bureau of the Department of Energy. “While the Philippines expects ASEAN to make a united stand against China on the issue of territorial sovereignty, China prefers more splintered bilateral negotiations.”

PURSUING ITS INTERESTS: Brushing aside China’s claim, the Philippines’ current administration has been more proactive in pursuing its territorial and energy interests and has moved forward with plans to open new concession areas for exploration and production – some of which lie across China’s Nine-Dash Line but are also well within the Philippines’ EEZ.

“We maintain that what is ours is ours and are prepared to validate our position in accordance with international law, specifically the UN Convention on the Law of the Sea,” said Albert Del Rosario, the Philippines’ foreign affairs secretary, in a statement in August 2011.