Loan default? DOF says Reed Bank gas can be sold to raise funds

MANILA, Philippines – The cash that can be generated by selling gas from Reed Bank in the West Philippine Sea can be used as payment in the event of a loan default, officials of the Department of Finance (DOF) said on Wednesday, March 27.

This clarification was made after Supreme Court Senior Associate Justice Antonio Carpio warned that the Philippines is at risk of losing the gas-rich Reed Bank due to clauses on sovereign immunity and patrimonial assets in the Chico River irrigation project contract.

Finance Undersecretary Bayani Agabin made the distinction that China cannot claim Reed Bank itself, but the gas in it can be sold. The cash could then be used if a "highly unlikely" default does happen.

Agabin also clarified that they agree with Carpio's statement that gas from Reed Bank can be classified as patrimonial property and can be part of an arbitral award.

But he reiterated the DOF's position that there are safeguards in place in the contract.

"Anumang desisyon ng arbitral tribunal ay kinakailangang dalhin ng counterparty sa isang hukuman sa Pilipinas upang mabigyan ng bisa ito. Ito 'yung tinatawag na enforcement of an arbitral award," Agabin said.

(Any decision of the arbitral tribunal has to be taken by a counterparty to a Philippine court for it to be valid. This is called enforcement of an arbitral award.)

Agabin also clarified that this is not in any way some form of collateral.

"Collateral is, you know, when you want to take out the loan and the [lender] wants security for the payment of the loan. Usually, private example – you want to borrow for your business, banks will require you to put up a collateral," he said.

He went on to explain that collateral is agreed upon by the parties at the start of the loan. There was no mention of any assets put up as collateral in the contract.

2013 report by the United States Energy Information Administration said Reed Bank could hold up to 5.4 billion barrels of oil and 55.1 trillion cubic feet of natural gas.

It was recognized as part of the Philippines' exclusive economic zone (EEZ) when Manila won its historic case against Beijing in 2016. China rejected the Hague ruling. – Rappler.com

Ralf Rivas

A sociologist by heart, a journalist by profession. Ralf is Rappler's business reporter, covering macroeconomy, government finance, companies, and agriculture.

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