The Buzz

A Plan to Save the South China Sea from Disaster

Editor's Note: The image above depicts possible joint development areas in the South China Sea that could be created to which an open-access, common carrier energy infrastructure could be added. Such joint development and collective infrastructure could reduce or solve territorial tensions. 

Arbitration, joint development, coordinated investment, shared infrastructure.  The plan above could offer an “everybody wins,” face-saving solution to the increasingly dicey situation in the South China Sea. None of the points are novel. All are on the table or represent logical extensions to existing initiatives. 

Arbitration 

The Philippines has appealed to the Permanent Court of Arbitration established under the United Nations Conference on the Law of the Sea over China’s claim to waters near the Philippines.  Vietnam is likely to follow suit. This, after China placed a deep-sea oil exploration rig—accompanied by a protective flotilla—in waters claimed by Vietnam.  China has refused to respond to the Philippines’ UNCLOS appeal, claiming the arbitration court lacks jurisdiction. China’s certain to take the same stance with Vietnam.

While the jurisdiction of UNCLOS in the particulars of the Philippine-Chinese, Vietnam-Chinese cases is arguable, international arbitration still looks like the best bet on a menu of second-bests. Given this, the Philippines and Vietnam should continue to multilaterize the South China Sea issue. This draws uncomfortable attention to China, which could encourage China to moderate her unilateral assertiveness pending better solutions. 

Joint Development Areas

A second track—China’s favored track—should also be pursued: bilateral negotiation. China, Vietnam and the Philippines all have voiced qualified support for Joint Development Areas (JDAs) in the South China Sea. JDAs therefore, could provide the most promising medium-term avenue for avoiding escalating incidents that could lead to war.  

JDAs have pedigree. They’ve been around for decades. A number exist all around the world, including in the South China Sea. JDAs enable countries to indefinitely postpone resolution of disputing offshore claims while they jointly develop the oil and gas resources within them. Several disputed Chinese-Vietnam, Chinese-Philippine offshore areas look suitable for JDAs. These could lead to others. If JDAs were established (a big if), multilateral investment could follow. 

Coordinated Investment

China is a major investor in Southeast Asia, particularly in infrastructure.  China Southern Power Grid has built cross-border electricity grid interconnections with Vietnam. State Grid of China is several years into a 25-year contract to operate and upgrade the Philippine electricity grid. 

Therefore, this emerging situation of “coop-frontation”—deepening economic ties on the one hand between the Philippines, Vietnam and China and worsening territorial tension on the other—creates awkwardness all around. 

Shared Infrastructure

As China’s internal infrastructure needs wind down, China’s state champion energy infrastructure companies (like State Grid, China Southern Power Grid and China National Offshore Oil Company—CNOOC) face atrophy, shrinkage and decline. They need new projects. That’s why China is looking abroad. Viewed through this domestic Chinese industrial policy prism, China Southern Power Grid’s Vietnam interconnections, State Grid’s investments in the Philippines (and Australia) and CNOOC’s aggressive recent placement of an oil and gas exploration rig off Vietnam make a bit more sense. So does China’s proposal to provide majority capital for a $50+ billion Asian Infrastructure Investment Bank (AIIB). 

If JDAs were established in the South China Sea between China, Vietnam and the Philippines, China’s proposed AIIB could provide the infrastructure funding to develop the South China Sea’s offshore energy resources and bring them to market. 

With JDAs, China gets a regional “social license” for her domestic infrastructure state champions to build new projects.  Vietnam, the Philippines and (potentially later) other Southeast Asian nations, meanwhile, get new infrastructure they can’t afford to build on their own. 

But this happy symbiosis, however, begs the question: who controls the infrastructure once it’s built? But this may be less of a problem than it appears. 

China, like Europe, is  “unbundling” its domestic energy markets to separate ownership of energy generation assets and energy transmission infrastructure.  The aim is to enhance energy market competition, encourage new energy market entrants and increase energy supply security. Applying this plan to the South China Sea, energy transmission infrastructure built to serve JDAs could be built and operated on an “open-access, common-carrier” model. This would avoid the problem of one party (read China) exploiting control of the infrastructure to squeeze the neighbors.

A rough draft for such an infrastructure already exists in the Association of Southeast Asian Nations’ (ASEAN) proposed Trans-ASEAN Gas Pipeline (TAGP) and Trans-ASEAN Electricity Grid (TAEG). Both are aimed at deepening and broadening ASEAN’s energy markets to increase supply security, and lower prices.

In their most extensive forms, both the TAGP and TAEG look tailor made for providing access to new oil and gas supplies from the South China Sea developed through JDAs. 

Pan-Asian Energy Infrastructure

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