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Two Precedent-Setting South China Sea Joint Development Areas – Analysis

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Creating two South China Sea Joint Development Areas (JDAs) — one off Vietnam, the other off the Philippines — will lower worsening political tensions between China and Southeast Asia.

One of the two JDAs could be located off between Chinese occupied Triton Island in the Paracels and the northern Vietnamese coastal city of Da Nang.

The other JDA would be located in the Reed Bank area west of the Philippine Island of Palawan.

Both would involve China National Offshore Oil Company (CNOOC) working with, respectively, Vietnam’s state-owned Petrovietnam in Vietnam and privately-held Philex Petroleum of the Philippines.

The arrangement would be highly symbiotic.

Vietnam and the Philippines would gain a deep-pocketed partner. China’s CNOOC — which desperately needs to boost its oil and gas reserves — would get a badly-needed ‘social license’ to operate in the South China Sea.

CNOOC would provide capital and technology; Vietnam and the Philippines would provide political legitimacy.

All three countries publicly support the concept of South China Sea joint development areas as an alternative to war.

Infrastructure funding the two JDAs could be provided by the Asian Infrastructure Investment Bank (AIIB). Since all three countries are members, this would ensure multilateral input — building trust.

Given the above the AIIB’s first loan — which it plans to make later this year — should go to funding the Trans-ASEAN Gas Pipeline (TAGP) and Trans-ASEAN Electricity Grid (TAEG) projects.

The two JDAs above would be the AIIB’s second loan.

The two sets of loans would be highly synergistic and immensely symbolic of China’s public commitment to peaceful, bilateral resolution of South China Sea territorial issues.

The projects also would represent a major step toward the realization of China’s Maritime Silk Road and one One Belt, One Road projects concepts of a more integrated Asian energy and trade economy. The projects also would mark a major step toward building the first regional interconnections for State Grid Corp of China’s proposed Global Energy Grid.

Given the above, establishing JDAs in the South China Sea connected by building multilaterally-useful infrastructure solves several pressing regional political problems at once.

Perhaps most important, it saves face all around. It offers the opportunity for mutually-beneficial climb downs by all sides from increasingly aggressive displays of maritime nationalism in the South China Sea that could spark war through an accident at sea.

It achieves this by enabling China to claim it’s dealing with territorial disputes in the South China Sea only bilaterally. At the same time, it enables smaller countries like Vietnam and the Philippines to claim precedents for cooperative behavior in the South China Sea.

The unattractive alternative that looms in the background, of course, is war.

JDAs will give CNOOC increased access to the South China Sea at lower political cost to China. This enable CNOOC to build reserves and avoid politically-destabilizing layoffs. It will also achieve one of the main aims of China’s creation of the AIIB: to channel China’s large US dollar reserves into infrastructure projects for CNOOC, State Grid and others..

Southeast Asia, meanwhile, would also share in the benefits. It would host shore-based infrastructure for the JDAs. It would also host regional clearing markets for South China Sea oil and gas, most likely in Singapore.

This would help establish an ‘Asian’ price for hydrocarbons, increasing downstream market efficiency. It would also increase the long-term incentives for building Pan-Asian networks in gas, electricity and data.

All of this, over time, will progressively bind the economies of China and Southeast Asiamore closely together to everyone’s benefit.

The JDA concept has been around for decades. Several exist throughout the world. Under aJDA, disputing claimants to an offshore area shelve their claims indefinitely while they work together to develop and share the resources within the area. Final territorial determination is postponed until the resources are exhausted and the political stakes are lower.

Vietnam and the Philippines are ideally suited for agreeing to JDAs with China. China’s ill-defined and poorly-documented Nine-Dotted Line claim to virtually the entire South China Sea has left it politically isolated. Given the increasing risk of conflict at sea, JDAs offer a valuable, face-saving climb down. The importance of this should not be underestimated.

Starting with North Vietnam and Reed Bank, precedents would be set for later JDAs off southern Vietnam between the Mekong Delta and Indonesia’s Natuna Island. Scarborough Shoal off Philippine Luzon, another hot button South China Sea location, could also be developed as a JDA.

So could offshore areas southeast of Taiwan.

Taken together, these would create ideal extension opportunities for a Pan-Asian Gas Pipeline connecting Indonesia to China up both sides of the South China Sea. Subsea fiber optics also traverse these routes, and State Grid and others have proposed laying high capacity subsea electricity power lines along the routes between now and 2050.

It’s hard to overestimate the benefits of precedent that peaceful establishment of Joint Development Areas in the South China Sea between China and her neighbors can have over the long-term economic and political development of Asia.

A pathway of progress stems from taking the first step. All sides should do so.

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Stewart Taggart

A former economic and energy market journalist in the United States, Western Europe and Asia, Stewart is the founder and principal of Grenatec. Sydney-based Grenatec is a research organization studying the viability of a Pan-Asia Energy Infrastructure. This infrastructure would be comprised of parallel natural gas pipelines, high capacity power lines and fiber optics cables stretching from Australia to China, Japan and South Korea.

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