Philippine President Rodrigo Duterte said that Chinese President Xi Jinping has offered the Philippines a “controlling stake” in a joint energy venture in the South China Sea. The big condition is that China will demand Manila set aside the United Nations Permanent Court of Arbitration’s (PCA) 2016 arbitral ruling that went in favor of the Philippines.

The ruling denied Beijing sovereignty over most of the South China Sea by a demarcation line known as the “Nine Dash Line” and gave Philippines sovereignty of waters within its exclusive economic zone (EEZ). China does not recognize the ruling and continues to act aggressively in the EEZs of other countries like Vietnam and Malaysia.

The Reed Bank, located east of the Philippines and near the Spratly islands, is inside the archipelago’s EEZ and is a key area of interest. The two leaders met recently in China and according to Duterte, he was told by Xi that China would be the junior partner with revenues being split 60% to 40% in favor of the Philippines.

Duterte told reporters on Tuesday when he said, “Set aside your claim, then allow everybody connected with the Chinese companies. They want to explore. If there is something, they said, we will be gracious enough to give you 60%, only 40% will be theirs. That is the promise of Xi Jinping.” China did not immediately respond to requests for comment on Duterte’s remarks.

The biggest concern with this proposal is that it will allow China to gain a foothold in waters where oil and gas might be but is also in a strategic military location. Any country would welcome the billions of dollars in investments, but the risk of China using its huge naval forces to deny its rivals access to their own energy resources looms big. The other concern is that any joint activity would be seen as a legitimization of China’s claim. The “stumbling block” has always been the PAC ruling.

Manila may be acting with a bit of urgency because Philippine's only accessible gas resources at the Malampaya fields are set to run out by 2024.

Philippine Foreign Secretary Teodoro Locsin on Wednesday told news channel ANC that a preliminary agreement between China and the Philippines would avoid stating which country was entitled to the gas. He said, “It’s very clear, no legal position is compromised if we enter into this agreement.” As to the PAC ruling, he added, “It’s final and binding.”

Spratly Island Map
Map of Spratly Islands detailing occupation by neighboring countries, includes map of coral reefs. Reuters