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Philippines says China agrees on no new expansion in South China Sea

By Manuel Mogato

MANILA (Reuters) - China has assured the Philippines it will not occupy new features or territory in the South China Sea, under a new "status quo" brokered by Manila as both sides try to strengthen their relations, the Philippine defense minister said.

Philippine Foreign Secretary Alan Peter Cayetano also said the Philippines was working on a "commercial deal" with China to explore and exploit oil and gas resources in disputed areas of the South China Sea with an aim to begin drilling within a year.

The defense minister, Delfin Lorenzana, told a congressional hearing the Philippines and China had reached a "modus vivendi", or a way to get along, in the South China Sea that prohibits new occupation of islands.

"The Chinese will not occupy new features in the South China Sea nor they are going to build structures in Scarborough Shoal," Lorenzana told lawmakers late on Monday, referring to a prime fishing ground close to the Philippines that China blockaded from 2012 to 2016.

China claims almost the entire South China Sea, a waterway through which about $3 trillion worth of sea-borne trade passes every year. Brunei, Malaysia, the Philippines, Taiwan and Vietnam also have conflicting claims in the area.

Philippine President Rodrigo Duterte, who took office in June last year, has courted China and avoided rows over maritime sovereignty that dogged his predecessors, while berating traditional ally the United States over several issues.

China has built seven islands upon reefs in disputed areas, three of which, experts say, are capable of accommodating fighter jets. They have runways, radars and surface-to-air missiles which China says are for defense.

Lorenzana did not comment when lawmakers, citing reports from the military, told him five Chinese ships had showed up almost 5 km off the Philippine-held Thitu Island in the Spratly archipelago on Saturday.

The military's public affairs chief, Colonel Edgard Arevalo, declined to comment until the armed forces had the "whole picture on the current situation".

China's foreign ministry did not immediately respond to a request for comment.

'CONTRARY TO CONSTITUTION'

Cayetano assured lawmakers on Tuesday any energy deal with China would not violate the constitution and would conform to a 60-40 percent revenue sharing, weighted towards the Philippines.

"We can come up with a commercial deal that is better than Malampaya in the disputed areas," Cayetano said, referring to an existing natural gas project off Palawan island between the government and Chevron, a resource which is due to be depleted by 2024.

"How can any Filipino argue with that? ... It cannot violate the constitution."

But such an arrangement could be complex and sensitive as both countries claim the oil and gas reserves. Sharing them could be construed as legitimizing the other's claim, or even ceding sovereignty.

The Permanent Court of Arbitration in The Hague invalidated China's claim over most of the South China Sea in July last year. China has refused to recognize the ruling, which clarified Philippine sovereign rights to energy reserves within its 200-mile Exclusive Economic Zone (EEZ).

The Philippine energy department last month said it may resume drilling for oil and gas on the Reed Bank, which is within the Philippine EEZ, before the end of the year, offering new blocks to investors in a bidding in December.

The Philippines suspended exploration in the Reed Bank in late 2014 as it pursued the international arbitration.

Minority lawmakers Gary Alejano and Edcel Lagman opposed the plan for an energy deal saying it would be illegal.

"This is contrary to our constitution because these areas should be exclusively for Filipinos," Lagman said.

Cayetano declined to give details of the talks and requested an executive session of congress to divulge information about the venture with a Chinese energy company, which he did not identify.

Manuel Pangilinan, chairman of Philippine oil and gas firm PXP Energy Corp, said this month any joint venture would likely be with "a company like CNOOC", referring to the China National Offshore Oil Corp

Officials from the foreign and energy ministries have said privately any deal would likely be commercial only and both sides would keep the issue of sovereignty out of the equation to avoid complications.

(Additional reporting by Ben Blanchard in BEIJING; Editing by Martin Petty, Robert Birsel)