South China Sea Competing Maritime Claims: Risks and Rights for Oil and Gas Companies

Introduction

On 12 July 2016, an international arbitral tribunal (the “Tribunal”) constituted under Annex VII to the United Nations Convention on the Law of the Sea (“UNCLOS”) unanimously ruled in favour of the Philippines and against China in its landmark decision in the South China Sea Arbitration Award of 12 July 2016 (the “Award”) (See  The Republic of Philippines v. The People’s Republic of China, Permanent Court of Arbitration, Award of 12 July 2016).  Despite its significance, the Award did not put to rest the disputes in the South China Sea.  China declared that it did not accept the ruling and reiterated its sovereign rights in the area (See China’s Declaration).  Meanwhile, other coastal States, such as Indonesia, Malaysia and Vietnam, maintain their own claims in the region.  Tensions are ongoing, particularly regarding a number of exploration and/or exploitation activities in the area.

Against this background, international oil companies (“IOCs”) with activities in the South China Sea face uncertainty and even disruption in their everyday operations.  It is therefore crucial for these companies to be fully aware of both the risks they face and the rights they have under international law.

Background

The Tribunal rejected China’s claim to “historic rights” over almost all of the South China Sea.  It made clear that it considered that China’s self-proclaimed “nine-dashed line” lacked any foundation in international law.  It also found that China had violated the Philippines’ sovereign rights within the latter’s EEZ in a number of ways, including by interfering with Philippine fishing and oil exploration activities.

Following the Award, in November 2018, the Philippines and China signed a memorandum of understanding jointly to facilitate oil and gas exploration and exploitation in relevant maritime areas (See  Memorandum of Understanding between China and the Philippines).

Despite these developments, the South China Sea remains a largely disputed area.  Other coastal States, such as Vietnam and Malaysia, have invoked their sovereign rights over maritime areas falling within China’s “nine-dashed line”.  In July 2019, tensions in the region arose again.  China reportedly sought to block oil and gas exploration off the Malaysian and Vietnamese coasts, while pursuing its own energy exploration in disputed waters.

Risks that IOCs face in disputed maritime areas

IOCs pursuing activities in the area face a number of risks.  For example, there is uncertainty regarding which State holds exclusive rights over the oil and gas resources in multiple areas.  In other words, IOCs with existing rights over disputed areas face a potential change in jurisdiction.  If that risk were to materialise, their exploration and/or exploitation rights would not be guaranteed towards the new sovereign.

Further, oil activities in disputed maritime areas pending a final delimitation agreement might, in certain circumstances, be deemed internationally wrongful.  UNCLOS does not expressly prohibit exploration and/or exploitation activities undertaken unilaterally by a State or its licensee.  Nonetheless, a number of international tribunals have enjoined oil and gas activities pending the resolution of a disputed maritime area if the activity risks permanent prejudice to another party’s rights.  This has included drilling for both exploration and production which permanently alters the features of the continental shelf at issue, but has not previously limited geological surveys that do not involve drilling (See Aegean Sea Continental Shelf (Greece v. Turkey), International Court of Justice, Order of 11 September 1976; Guyana v. Suriname, Permanent Court of Arbitration, Award of 17 September 2007).  At the same time, the tribunal in Ghana v. Côte d’Ivoire found that, because maritime delimitation “has a constitutive nature and cannot be qualified as merely declaratory”, activities in a disputed territory prior to delimitation are not de facto wrongful (See Ghana v. Côte d’Ivoire, International Tribunal for the Law of the Sea, Judgment of 23 September 2017, paragraph 591).

Other risks include potential overlap of concessions licensed to different companies by different States; potential legal action taken by neighbouring States seeking the termination of exploration and/or exploitation activities pending a final settlement of the dispute; a moratorium imposed by the Host State; disruption of the petroleum activities by other neighbouring States; claims for compensation against the IOC for the extraction of resources under the licence of one State when, eventually, a block is determined to belong to another State; and even retaliatory acts against IOCs by States opposing the exploration activities pursued in the disputed areas.

International law can protect the rights of IOCs active in the South China Sea

In view of these risks, IOCs with activities in the South China Sea should be aware of how international law can protect their rights towards both the Host State and other States with competing maritime claims.

First, companies and neighbouring States may be able to rely on the findings of the Tribunal regarding China’s claims to “historic rights” and the “nine-dashed line”.  This would mean that, presumably, there is no overlap of legitimate claims, that the undertaking of petroleum activities by these States was permissible despite the lack of China’s authorisation and that China’s interference is unlawful.

Second, international law may protect IOCs’ rights through the legal doctrine of acquired rights.  According to this doctrine, a new sovereign ought to recognise and give legal effects to the rights that private persons acquired from the former sovereign.  As applied today, this doctrine would hold that the vested rights of IOCs may still be protected even towards a new sovereign.

Third, IOCs may reasonably argue that they acted in good faith and under the lawful authority of a sovereign in acquiring exploration and/or exploitation rights in the area.

Fourth, IOCs may seek protection of their investments under their respective contracts with the licensing State.  This could include representations from the licensing State that it has exclusive sovereign rights over the licensed block.  Careful attention must also be paid to force majeure clauses, stabilisation clauses and local legal doctrines of frustration and impossibility.

Last but not least, subject to contractual constraints such as minimum exploration commitments, operators can limit their activities to portions of a block that are more assuredly in the exclusive control of the licensing State.  In many cases, licensing States also prefer this approach.  Doing so demonstrates good faith and mitigates the risk of any finding of international wrongfulness.

The way forward

IOCs with activities in the South China Sea face complexities and heightened risks arising from competing maritime claims from multiple States.  The Tribunal in the South China Sea Arbitration issued a landmark decision.  However, the lack of enforcement mechanisms under UNCLOS and the geopolitical context create difficulties in everyday operations.  International law can help tackling these difficulties but it is contingent on specific circumstances, such as the type of activities pursued and the area in which these activities are carried out.  Each situation must be assessed on a case-by-case basis.  IOCs active in the area should therefore proceed with caution.  They must ensure that they have sufficient capacity and competent legal advice to protect their vested rights.