OYSTER BAY, Philippines (Reuters) - Its mangrove-fringed coral reefs support an abundant fish population. Its deep, blue waters are unmuddied by the monsoons that batter the western Philippines coastline.
But a planned visit by U.S. President Barack Obama to Asia starting this weekend could herald the start of dramatic changes to Oyster Bay, a postcard-perfect cove on Palawan Island that the Philippines expects to transform into a port for its naval frigates and eventually for American warships - all overlooking the disputed South China Sea.
Developing this remote island paradise into a military facility could exacerbate tensions with China, whose sovereignty claims over the vast, mineral-rich South China Sea, one of the world's most important waterways, set it directly against U.S. allies Vietnam and the Philippines. Brunei, Taiwan and Malaysia also claim parts of the sea.
Obama is scheduled to leave on Saturday on a four-nation, week-long tour to Asia. But the uncertainty caused by a government shutdown that began on Tuesday could force him to postpone his plans. "You know, we'll see obviously what happens as the week unfolds," White House spokesman Jay Carney said on Monday.
At the moment, however, Obama is scheduled to round off his tour with a stopover in Manila, which is seen as a strong signal of U.S. support for the Philippines despite Washington's professed neutrality in the South China Sea dispute.
Rebuilding ties with the Philippines, including helping to upgrade its ill-equipped military, has been an important part of a U.S. rebalancing of its strategic focus towards Asia that is seen as a bid to check China's growing power.
President Benigno Aquino has launched a $1.8 billion modernisation programme and revived plans to build new air and naval bases at Subic Bay, the largest U.S. military installation in Southeast Asia before it was shuttered in 1992.
Also on the cards is the development of Oyster Bay, which lies about 550 km (340 miles) southwest of Manila.
"It will be a mini-Subic," Commodore Joseph Rostum O. Peña, commander of the Philippines' western navy, said in the first public comments about converting Oyster Bay into a major naval base.
A future port here would extend the reach of the navy's two frigates, both former U.S. Coast Guard cutters, over the disputed Spratly Islands, in the southern part of the South China Sea, he said in an interview from his office overlooking the mouth of the bay.
Long-held plans to develop the port were resurrected by Aquino after the U.S. donated the frigates, now the Philippine Navy's largest ships, in 2011 and 2012.
Oyster Bay is about 160 km (100 miles) from the Spratlys.
"In Manila, the leaders must move behind rhetorical blandishments about a new spirit of partnership and start to detail specific actions that will strengthen Philippine defense capabilities," said Patrick Cronin, an Asia-Pacific security expert at the Center for a New American Security in Washington.
That includes building a permanent home for the Philippines' two big warships. It also means finding strategic areas where the United States could rotate troops, ships and naval aircraft - all within easy reach of territory claimed by Beijing.
"Oyster Bay may be the best choice," said Cronin.
China has grown increasingly assertive in the South China Sea dispute, one of Asia's biggest security headaches. On Sept 3 the Philippines accused China of preparing to build a new structure on a shoal in the sea in violation of the Declaration of Conduct, a non-binding confidence-building agreement on maritime conduct signed in 2002 by China and the 10-member Association of Southeast Asian Nations (ASEAN).
These maritime tensions provide an uneasy backdrop to Obama's Asian tour that includes a regional summit where he is expected to urge China and Southeast Asian nations to resolve differences over the South China Sea.
Efforts to ease the tensions by agreeing a binding Code of Conduct (CoC) between ASEAN nations and China have advanced at a painfully slow pace, with no major breakthrough expected at the East Asia Summit in Brunei that Obama will attend.
China has repeatedly warned the United States to stay out of the South China Sea dispute. Washington has not publicly taken sides, but in July Secretary of State John Kerry reiterated his country's strategic interest in freedom of navigation through the busy sea and its eagerness to see a CoC signed.
The proposed code would not touch on countries' territorial claims, but would set rules governing the behaviour of ships to reduce the risk of misunderstandings that could cause conflict.
China is in "no rush" to sign the CoC, said its Foreign Minister Wang Yi in August. Talks between Chinese and ASEAN officials in Beijing in late September went nowhere. Chinese state media warned in June that a "counter-strike" against the Philippines was inevitable if it continued to provoke Beijing.
China's foot-dragging on the CoC has firmed Manila's resolve to strengthen its military, said a senior Philippine diplomat.
"Of course, we are for peaceful means to resolve dispute," he said, also requesting anonymity. "However, we want a capability that would make other states think twice before they do something foolish in the disputed areas."
In Manila, U.S. and Philippine officials are thrashing out a framework agreement which would improve the Asian nation's ability to protect its maritime borders and increase the number of American ships, planes and troops temporarily stationed there. A fourth round of talks began on Tuesday.
The two sides hope to conclude the deal by Obama's arrival, but a senior Philippine military officer familiar with the negotiations said this was looking unlikely. "There are some legal issues they have to untangle," he said, speaking on condition of anonymity.
A former U.S. colony, the Philippines is ambivalent about the presence of American military personnel, as the populist Aquino is acutely aware.
His late mother Corazon was president when the Philippine Senate voted in 1991 to terminate the Military Bases Agreement, which forced American military personnel to leave the giant Subic Bay facility the following year.
Aquino has vowed to radically boost the Philippines' ability to defend itself by the time he leaves office in 2016. This requires U.S. help, and analysts say the U.S. "pivot" toward Asia could allow him to seek it on more equal terms.
NO FISHING HERE
Oyster Bay's initial upgrade will cost an estimated 500 million pesos and is due to be finished by 2016, the year Aquino leaves office, said Commodore Peña.
Transforming Oyster Bay into a major naval base will cost much more, said some officials.
Current budget constraints prevent the United States from building ports, said Cronin, although some money for Oyster Bay could be sourced from a contingency budget aimed at supporting exercises and defense cooperation.
Last year, U.S. and Philippine commandos staged a mock amphibious assault near Oyster Bay as part of annual military exercises. Local people, who subsist from fishing, are resigned to further disturbances.
"We not allowed to fish in the bay anymore," said Jesus Agpao, 48, head of a local fishermen's cooperative, pointing to where four small Philippine Navy vessels were already moored. He fears bigger ships will pollute the bay and scare away their catch.
Local resident Lorenzo Layacan, 67, said four of the area's five village chiefs opposed the new naval base, fearing the bars and brothels that sprang up around Subic Bay to serve U.S. sailors on shore leave would come up in Oyster Bay as well.
"They are afraid the young women will become prostitutes," said Layacan. (Editing by Jason Szep and Raju Gopalakrishnan)
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