Two oligarchs triggered our quarrel with China

TALK about the power of the oligarchy, and by “oligarch” I mean not just any magnate but one who has the capacity to get a state agency to do what he wants for his particular business project.

This particular case involves not just one oligarch but two, a foreign one and a Filipino one. What they got the Republic to do — through two administrations — was so significant that it nearly got us into a shooting war with the superpower in our part of the world, China.

This explains why after 10 years that Philippine-China relations flourished despite the two countries’ disputes over the Spratlys, these quite suddenly broke down in 2011.

What was being fought over: the Sampaguita Field in the Reed Bank in the contested Spratlys. Map by author using Google Earth Pro

For all its declarations of nationalist fervor in asserting Philippine sovereignty, the Aquino 3rd administration’s antagonistic stance toward China and its 2013 suit against the superpower in an international venue was triggered by a mammoth business project launched in 2008 by the First Pacific Co., one of the biggest public-utility and infrastructure conglomerates in the Philippines.

China dashed their dreams to become South China Sea oil giants: the Indonesian Salim, his CEO Pangilinan and Razon. Photos from First Pacific and International Container Terminal Services annual reports

Container-port billionaire Enrique Razon Jr., who got a 30-percent stake in this project, played a crucial role in getting that project launched.

Portrayed by its savvy PR as owned by its high-profile CEO Manuel V. Pangilinan, the Hong Kong-based First Pacific is 44-percent owned by Indonesian Anthony Salim, 2-percent by Pangilinan and the rest of the shares held by wealthy US individuals and firms, through the Hong Kong stock market.

The First Pacific project involved the exploration and extraction of gas and oil from an area called the Sampaguita Gas Field in the Reed Bank. For all the reports of vast quantities of oil and gas in the South China Sea, more sober analysts — such as the US Energy Information Administration  — had concluded that if hydrocarbons of commercial quantity would be extracted from that area, it would be in the Sampaguita Field of the Reed Bank.

Malampaya

What bolstered that idea was that Reed Bank was just 250 kilometers away from the Malampaya Gas Field (operated by Shell and Chevron) whose three wells since 2001 have been providing 30 percent of the country’s energy consumption through the gas it provides five power generators. One estimate was that the Sampaguita Gas Field had, according to First Pacific’s oil-exploration firm Forum Energy, minimum gas reserves up to 3.4 trillion cubic feet, bigger than Malampaya’s reserves of 2.6 trillion cubic feet.

First Pacific’s ambition was quickened by the fact that Malampaya wells were expected to run dry by the mid to late 2020s. “We will operate the ‘next Malampaya’,” Pangilinan had remarked.

It was reports of vast quantities of oil and gas in the same Sampaguita Field in the Reed Bank that actually took us to the Spratlys. A geophysical survey of the South China Sea by the United Nations Economic Commission for Asia in 1968 and 1969 that claimed vast hydrocarbon deposits beneath it prodded then President Ferdinand Marcos to secure those purported deposits by seizing and occupying seven islands close to it from 1970 to 1974.

To formalize sovereignty over the area, Marcos in 1978 through Presidential Decree 1596 decreed to be formed a Kalayaan Island Group that encompassed the islands he seized as well as 20 other features, and most importantly the Reed Bank. Marcos marked out this area as Philippine territory, a municipality of Palawan. This was the first and only expansion of Philippine territory from that defined by the 1898 Treaty of Paris in which Spain sold its Philippine colony to the United States.

Marcos ignored the vehement protests of China, Vietnam and Taiwan; the three each claimed that they had sovereignty over these areas, established not only as early as the 12th century, in the case of China and Vietnam, but also through certain treaties with the imperialist powers before and after World War 2.

Consortium

A consortium of Filipino, US and Swedish firms drilled exploratory wells in the Sampaguita Field in 1976, and while some gas deposits were found, these were subsequently classed as non-commercial and abandoned. The area vanished in the radar of oil exploration companies.

Fast forward to 2006, when a small firm Forum Energy Plc, owned by British oil-industry engineers reported that its new seismic survey on the Sampaguita Field showed commercial-scale hydrocarbons that could be bigger than Malampaya, and that it was “world-class.”

Forum Energy a year earlier had bought the government-given rights to explore the field for hydrocarbons from another exploration company Sterling Energy.  President Gloria Macapagal Arroyo’s administration gave the firm such authority in 2002, under a so-called Geophysical And Exploration Contract No 101 (GSEC 101)

The owners of Forum Energy in 2006 and 2007 sold their shares to Philex Mining, through a subsidiary, Philex Petroleum (later renamed PX Petroleum).  From November 2008 to January 2010, First Pacific in a highly controversial corporate takeover became the main stockholder of Philex Mining, spending an enormous P25 billion for its prize.

In First Pacific’s calculus, P25-billion ($500-million) investment in buying Philex would be well worth it. Revenues of Philex’s Forum Energy from a fully producing gas field on the scale of Malampaya, if just based on 10-percent stake, would be $10 billion.

China

They underestimated China’s response however. In contrast to its economic and military weakness when Marcos grabbed the Kalayaan islands, China at this time was emerging as a superpower, and started to enforce its sovereignty claims in the Spratlys (which it calls Nansha Islands).

Its China National Offshore Oil Corp. had become its third biggest oil corporation and in the 1990s started to move into disputed areas in the   South China Sea, in joint ventures with US firms. Vietnam had started to be aggressive in undertaking hydrocarbon exploration in areas near its coasts, in joint ventures with other US firms such as Mobil Corp. as well as with the Russian Rosneft.

Arroyo during this period was moving the country closer to China and in 2005 entered into a “Joint Marine Seismic Undertaking” between the oil firms of the Philippines, China and Vietnam to conduct seismic exploration in the Spratlys.

However, it turned out to be another fodder for anti-Arroyo forces at the time, which claimed loudly but very stupidly that it was a “sell-out” as the area was “indisputably Philippine territory and therefore against the Constitution.” The US of course helped out in the propaganda since the trilateral agreement meant that the Philippines was moving out of the US orbit towards its arch-rival in Asia.

Agreement

When the agreement ended in 2008, First Pacific went full throttle to control Philex, whose subsidiary, Forum Energy, had the authority to explore in the Reed Bank.

China got wind of developments that a big firm had bought out Forum Energy, which could be explained only if it intended not just to do exploration work but also to extract hydrocarbons in the Reed Bank.

Alarmed, China got assurances in 2007, 2009 and February 2010 from President Arroyo’s Foreign Affairs secretary, Alberto Romulo, that the Philippines would not convert GSEC 101 into a service contract, which would authorize it not just to explore but extract gas and oil.

However, in August 2007, and finalized early 2008, container port magnate Razon through his firm Monte Oro Grid Resources took a 30 percent interest stake in GSEC 101, paying $1.7 million in cash.  That was actually small change for Razon, who after all could spend P200 million for his personal golf course, the Country Club.

It was Forum, which was actually paying Razon in kind — his 30 percent stake in GSEC 101 — for his “services.” Forum Energy’s 2009 annual report explained what these are:  “To assist in obtaining all regulatory approvals for the conversion of GSEC 101 into a Service Contract.”  Its chief executive Russel Harvey even outrightly explained: “Monte Oro (Razon) we are confident will assist us in a timely conversion of the Service Contract.”

Sampaguita Field

The Arroyo government through its energy department issued Forum Energy its Service Contract (SC 72) covering the Sampaguita Field on Feb. 10, 2009, which authorized it to develop and extract for hydrocarbons in a specific area. (Malampaya’s was SC 38.)
China vehemently protested, and claimed the Philippines had gone back on its word. In a note verbale on Feb. 22, 2010, expressed “its strong objection and indignation” to the government’s authorization of Forum Energy to extract oil and gas in a part of the Reed Bank

It pointed out: “The act of the Philippine side has seriously infringed upon China’s sovereignty and sovereign rights and goes contrary to its commitments on the South China Sea issue and to the maintenance of peace and stability in the South China Sea. It is illegal, null and void.”

This was followed by another diplomatic note a few weeks later on May 13, 2010, which urged the Philippines to “immediately withdraw the decision to award [the] service contract.” It reiterated its earlier reminders that Romulo himself had assured it that no such service contract would be issued.

The administration of Arroyo which ended on June 30, 2010, and the successor Aquino 3rd administration, completely ignored the Chinese protests, and did not even reply.

Romulo

On Feb. 23, 2011, after getting the Arroyo holdover Foreign Secretary Romulo to resign his post and offer him the post of Commission on Audit chairman, President Aquino appointed Albert del Rosario as Foreign secretary.

Nothing in his administration’s announcements of this appointment mentioned that del Rosario was close to both First Pacific’s main owner Anthoni Salim and CEO Pangilinan and that he was for many years a member of its board, and reportedly had shares in the firm worth at least P50 million.

All was set for the final launch of First Pacific’s ambitious plan — to extract Malampaya-scale natural gas from the Reed Bank, and become one of the region’s biggest energy firms.

Just a few days after del Rosario’s appointment, the Aquino government gave the go-signal to First Pacific’s survey vessel MV Veritas Voyager to start its seismic surveys in the Reed Bank.

On March 2, 2011, two China Marine Surveillance vessels, together with seven Chinese fishing vessels, drove Veritas Voyager away from Reed Bank.

Nansha

A Chinese official told them then they had no authority to explore for hydrocarbons in what it called Liyue Tan (Reed Bank) in its claimed Nansha Island (Spratlys) archipelago, since it was part of its territory, and that the Chinese government had not given any entity authority to extract hydrocarbons there. China announced it would not allow any such exploration in the Reed Bank.

First Pacific and Razon’s ambition to become energy tycoons — on the scale of Shell and Chevron, which operated Malampaya — was stopped dead in its tracks.

Aquino was livid or more likely told by this Foreign secretary to be livid, telling him this was a question of Philippine sovereignty, and that he must protest China’s “bullying”.

Aquino practically declared his government would go to war over the Reed Bank, which he called — without any legal document to justify it — “Claro M. Recto” Bank to rouse nationalist sentiment.

In his second State of the Nation Address in July 2011 — to the surprise of most Filipinos who didn’t have a clue about this foreign affairs issue — he declared in melodramatic fashion: “What is ours is ours… We will defend Recto Bank as if it were Recto Avenue.”

From then on, Aquino’s government took a belligerent stance against China, with his Foreign secretary del Rosario telling the world that the US was solidly behind the Philippines in “resisting Chinese bullying.”

Aquino was so confrontational against China that in April 2012 he sent the Navy’s newest warship the BRP Gregorio del Pilar — which not coincidentally the US had rushed to provide the Philippine Navy a few months back — to help assist the Coast Guard in arresting Chinese fishermen in Bajo de Masinloc, or Scarborough Shoal.

China claimed the Philippines had militarized the dispute, claiming a high moral ground and sending civilian vessels to bear down on the confrontation. The US State Department’s Assistant Secretary for East Asian and Pacific Affairs Kurt Sullivan fooled del Rosario, saying that the Chinese had agreed to leave the shoal, prompting the Foreign secretary to order the Philippine vessels to move out in June — leaving China’s vessels as the sole occupier of the shoal, to this day.

That’s how we lost Bajo de Masinloc. Both as a smokescreen to that colossal blunder, and prodded and technically helped by the US which wanted some kind of international ruling to demonize China’s claims in the South China Sea, the Aquino government filed its arbitration suit against China in January 2013.

That’s how powerful oligarchs are, that they could even set our foreign policy on a disastrous course.

They have created though, with the Yellows’ help, such an intense anti-Chinese racism in this country that it will be well-nigh impossible for government to enter into joint exploration and extraction of hydrocarbons in the Spratlys, really the only way for us to get oil and gas in that hotly contested area that has become issues of intense nationalism for China and Vietnam.

On Friday: How on earth could Salim, Pangilinan and Razon think that China wouldn’t assert its claims over the Reed Bank? Short answer: The US was behind them.

(Note: This article is a shortened version of two chapters of my forthcoming book Colossal Hoax: The PH Suit vs China,” in which I provide sources for my claims in this piece.)


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