The South China Sea (23 page)

China's 1992 territorial law, its oil survey work, the Crestone contract and other displays of Beijing's seriousness about its ‘U-shaped line’ claim had deeply worried the governments of Southeast Asia. For some time, the six members of the Association of Southeast Asian Nations (ASEAN) had been discussing whether Vietnam should join their ranks. There were many factors to consider but as the oil confrontation escalated, the diplomacy accelerated. A flurry of visits and meetings in April and May 1994 led to an announcement on 11 July that Vietnam would be invited to join – even though it hadn't formally applied for membership. On 19 July, news of the
Tam Dao
standoff leaked to the outside world just as the final preparations were being made for the ASEAN foreign ministers’ meeting at which the formal invitation would be extended to Vietnam. A week after the meeting, the Chinese military staged highly publicised exercises on Hainan Island demonstrating, in the words of the official media, ‘almost the entire range of armaments, equipment and techniques’.
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Such heavy-handedness only increased Southeast Asia's nervousness about China's intentions.

ASEAN's invitation may have been the trigger for a sudden change of tactics by Beijing. On 5 September 1994, after a month of closed-door discussions, it was announced that Jiang Zemin would make the first ever visit to Vietnam by a Chinese president. And by the end of the month, the Chinese had also offered to lend Vietnam $170 million to refurbish
outdated manufacturing plants. Both sides were making a determined effort to repair relations. One reason may have been to smooth relations with ASEAN but another was probably that Beijing was already making secret preparations to occupy Mischief Reef (see Chapter 3). Around this time news had leaked from Manila that Alcorn Petroleum had begun survey work in another disputed area of the Sea, the Reed Bank off the Philippines. Perhaps the de-escalation with Vietnam was simply a ploy to divide potential opposition to the impending operation. This would also explain why, in January 1995, as the Mischief Reef incident unfolded, the Chinese authorities told Crestone to slow down its exploration work.

The situation was at stalemate. Thompson didn't have the funds to develop any prospects into commercial propositions. Crestone needed a company with an equally blasé attitude to political risk and much deeper pockets. What Thompson needed was a company like Benton Oil and Gas: a veteran of the rough and tumble of post-Soviet Russia. During 1996, on the back of the oil boom, Benton's share price tripled: it was ready for a piece of South China Sea action. On 24 September 1996 Benton agreed to buy Crestone for a cool $15.45 million. The deal was signed on 6 December with Benton noting that ‘Crestone's primary asset is a petroleum contract with CNOOC’.
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That was Block WAB-21, from which not a barrel of oil had yet been extracted. Once again, Randall C. Thompson had managed to turn a commercial nothing into a large pile of gold. Crestone's shareholders, of whom there were now around 130, made a tidy pile. Benton's fate wasn't so rosy. In 1998 and 1999, with the oil price crashing to $12 per barrel, the Benton Company was forced to write off a staggering $204 million. It survived by selling assets. But in mid-August 1999 the company's founder Alex Benton filed for personal bankruptcy and by September he'd been forced to resign as Chairman and CEO.

On 14 May 2002 Benton Oil and Gas changed its name to Harvest Natural Resources, making it sound more like a manufacturer of granola bars than an oil company with a penchant for political risk. It still owns the Chinese rights to Block WAB-21 though it now values them much less. In 2002 it wrote off their worth by $13.4 million dollars (almost 90 per cent of what it paid back in 1996). However, it still nurses the hope that one day they may come good. Between 2003 and 2008 it spent $661,000 on exploration and data acquisition in the block and presumably more
since then, though it no longer itemises the expenses in its annual reports. Randall Thompson enjoys a fine life in Colorado, taking his grandchildren fishing. He's still active in the oil business and at the time of writing is seeking out new prospects off Italy, Morocco, New Zealand and South Africa. He still owns the rights to 4.5 per cent of the proceeds of Block WAB-21 – if it is ever drilled.

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The China National Offshore Oil Corporation's first foray into disputed waters failed to deliver any oil and, worse, united Southeast Asia in alarm. For 13 years Li Peng's offer of joint development was politely ignored: other governments weren't willing to ‘put aside the question of sovereignty’. Vietnam, Indonesia, Malaysia and Brunei continued to lease their offshore waters to international oil companies and Crestone's block remained an anomaly. There was no need to seek any kind of joint development with Beijing. But in 2003 one government broke ranks. Surprisingly it was the country that, until then, had most strongly advocated a united ASEAN front towards Chinese encroachments: the Philippines. A small group at the top of Manila politics engineered the about-face, almost as a private initiative. They bypassed the established policy-making structures and set relations with China – and the region – on a radically different course.

In 2003, Jose de Venecia Jr was speaker of the House of Representatives, the lower house of the Philippine parliament, and president of the ruling party, the Lakas-Christian Muslim Democrats. As a young man, he'd made a fortune supplying Filipino labour to contractors in the Middle East and later he'd been involved in the first oil exploration off the coast of Palawan island. With money, family connections and political muscle he was a significant force in Philippine politics. He also made a point of developing close relations with China through, among other things, the International Conference of Asian Political Parties (ICAPP), which he launched in 2000, and the Association of Asian Parliaments for Peace (AAPP), of which he was president.

In 2003 Gloria Macapagal Arroyo had been Philippine president for two years, in which time trade with China – mainly exports of raw materials – had tripled: from $1.8 billion in 2001 to $5.3 billion in 2003.
With the US focused on its ‘war on terror’ in the Middle East, China saw an opening. In 2001, Beijing offered $400 million in soft loans for the ‘NorthRail’ project to link Manila to the former US airbase in Clark Economic Zone. When the project finally broke ground on 5 April 2004 the keynote speech, paying copious thanks to the Chinese government, was delivered by its main proponent: Jose de Venecia.
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Like de Venecia, Eduardo Manalac had been part of the team that drilled the Philippines’ first offshore oil well in 1974. Unlike de Venecia, Manalac had stayed in the oil business, spending 28 years with the American company Phillips Petroleum, including seven as its China Exploration Manager. In 2000, he helped discover China's largest offshore field (in the Bohai Bay – far from any international boundary disputes) and was awarded both the Chinese government's ‘Friendship Award’ and CNOOC's ‘Model Worker Award’. As a professional, Manalac knew exactly what was wrong with the Philippine oil sector. After retiring from Phillips, he offered his services to his homeland ‘as payback for the cheap university tuition I once enjoyed’ and in March 2003, was appointed Undersecretary of Energy. Although very different people with very different interests, Manalac and de Venecia would broker a deal between the Philippines and China that would startle the region.

Manalac knew China well but he wanted the Philippine oil and gas sector to stand on its own feet. He believed the real problem was internal: the small circle of local companies with access to the Ministry of Energy but not enough capital to invest in exploration. They were crowding out international players who might be ready to risk a few hundred million dollars to drill a well in untried waters. During 2003, Manalac organised the Philippines’ first ever transparent bidding round to try and attract big companies to explore offshore. ExxonMobil took the rights to an area of the Sulu Sea but none was interested in the South China Sea. Manalac believed the prospects were good but, if the Philippines was ever to escape its near-total dependency on imported oil, it would need a different approach, one that took account of the geopolitical situation. ‘My sense was that none of the big guys would dare enter that area as long as there are multiple [territorial] claims. Being as it's deep water it will entail a large amount of capital to drill and develop,’ he recalls. ‘I asked whether the President would support an idea where we go with the other
countries that are claiming and do a joint development effort. And she said yes.’

Meanwhile de Venecia cultivated his links with the Chinese leadership. In April 2002 he organised the third annual meeting of his AAPP in Beijing and in March 2003 he was head of the government delegation to the first Philippine trade fair in Shanghai.
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In September 2003 he hosted Wu Bangguo, who was both his counterpart as head of China's National People's Congress and also the chairman of the AAPP. While in Manila, Wu witnessed the signing of a $1 billion currency swap arrangement between the two countries’ central banks (intended to defend the Philippines against a repeat of the 1997 Asian financial crisis) and addressed a meeting of congressional leaders. Afterwards de Venecia told journalists that ‘Mr Wu proposed a joint exploration and development programme in the Spratlys’. De Venecia endorsed the idea, saying ‘These areas are idle and we might as well let them bloom for joint profit sharing or multiple profit sharing by all.’
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And it was agreed that ‘a major Chinese oil exploration company’ would send a delegation to Manila in November. On 10 November 2003 a letter of intent to ‘engage in a joint programme to review, assess and evaluate relevant geological, geophysical and other technical data available to determine the oil and gas potential of the area’ was duly signed between the Philippine National Oil Company (PNOC) and CNOOC.
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Quietly, Manalac and CNOOC executives drew up the boundaries of an exploration area. The western boundary had to avoid Malaysian waters but the northern and eastern limits were just a matter between the two sides. Ultimately it covered 143,000 square kilometres north and west of Palawan – including, but extending far beyond, the area of shallow sea known as the Reed Bank. Manalac knew the idea of sharing the resources was intensely controversial both at home and abroad but, as another PNOC manager explained later, ‘30 per cent of something is better than 100 per cent of nothing’. The question was how to structure the agreement to avoid all the potential pitfalls of Philippine politics and ASEAN diplomacy. Manalac asked to be transferred to the Philippine National Oil Company so the agreement with the China National Offshore Oil Company could be structured as a commercial rather than an inter-governmental arrangement. It was a thin ruse since both companies were state-owned enterprises.

In July 2004, when President Gloria Macapagal Arroyo (GMA to her friends and enemies) withdrew the small Filipino military contingent from Iraq, relations with Washington turned distinctly frosty. She responded by seeking ‘comprehensive engagement’ with China and the channel was Jose de Venecia. He had already arranged for the Chinese Communist Party to host the third congress of the International Conference of Asian Political Parties in Beijing in September 2004 and during August GMA was suddenly invited to give one of the keynote addresses. On 18 August, GMA reshuffled her cabinet and moved Eduardo Manalac from his job as Undersecretary of Energy to President of PNOC. Five days later de Venecia told reporters that GMA would lobby for joint exploration with China during her visit to Beijing. ‘We should not allow regional differences to prevent us from developing,’ he said after delivering a speech on the impact of high oil prices on the Philippine economy.
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A week later, on 1 September, Manalac, now no longer a member of the government, signed what was called the Joint Marine Seismic Undertaking with his old friend, the President of the China National Offshore Oil Company, Fu Chengyu.

The Joint Marine Seismic Undertaking or JMSU was the brainchild of a small group around GMA. Professor Aileen Baviera, one of the Philippines’ best-informed regional analysts, says the Department of Foreign Affairs and the National Security Council were ‘largely excluded’ throughout the negotiation process.
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While some of the JMSU proponents, including Manalac, were motivated by a desire to improve the country's energy security and reduce its reliance on imports, others had less high-minded interests. De Venecia seems to have been keen to promote his own position as a power broker and gatekeeper for Chinese investment in the Philippines. (Such deals duly followed, particularly during the visits of President Hu Jintao in April 2005 and Premier Wen Jiabao in January 2007.) There was also a coterie of business people keen to conclude lucrative deals with Chinese companies. This ultimately included GMA's husband, Jose de Venecia's son and others in their circles. These elite cliques appear to have taken control of the country's foreign policy and bent it in their own interests.

Outside the mansions of Manila the reaction was astonishment. ASEAN diplomats wanted to know why the Philippines had undermined years of
principled calls for regional solidarity. The Vietnamese were livid. For six months they hammered Filipino diplomats with protests but in the end decided it was better to be included in the survey than not. On 14 March 2005, PetroVietnam signed up to an expanded, three-year Joint Marine Seismic Undertaking. The China National Offshore Oil Company would handle the survey, PetroVietnam would process the data at a centre run jointly with an American company, Fairfield, and the Philippine National Oil Company, which had little else to offer, said it would organise the analysis. On 1 September an elderly CNOOC survey ship, the
Nanhai 502
, left Guangdong province with experts on board from all three countries. Over the next 75 days they gathered 11,000 kilometres of seismic data, covering the entire JMSU area. On 16 November the ship docked at PNOC's supply harbour in Batangas, south of Manila, where Eduardo Manalac declared that ‘political tensions are history’.
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Others would see it differently.