UPDATE 2-China's Xi sees bigger role for joint energy exploration with Philippines

* Duterte "assertively" raises S. China Sea concerns
* Xi asks Philippines to thwart China-focused gaming
* Meeting comes as maritime tensions escalate
* U.S., EU, Vietnam, Malaysia concerned about security

(Recasts, adding context, details from Duterte spokesman)
SHANGHAI, Aug 30 (Reuters) - Chinese President Xi Jinping
said China and the Philippines could take a "bigger step" in the
joint development of oil and gas resources in the South China
Sea if they can properly handle their dispute over sovereignty.
Xi made the remarks on Thursday in a meeting in Beijing with
Philippine President Rodrigo Duterte, whose largely pro-China
foreign policy and reluctance to challenge its maritime
assertiveness has drawn widespread domestic criticism.
The visit comes amid a recent rise in tension on several
fronts, with Chinese vessels challenging energy assets and the
sea boundaries of Malaysia, Vietnam and the Philippines.
The United States has accused China of "coercive
interference" and holding hostage $2.5 trillion of oil and gas
in the region, while the European Union on Wednesday said it was
worried about a deterioration in the maritime security
environment, and suggested "mediation or arbitration" by third
parties.
Britain, Germany and France on Thursday said they were
concerned about the potential for "insecurity and instability"
in the South China Sea. In a televised news conference in Beijing on Friday,
Duterte's spokesman Salvador Panelo said the president was
steadfast in raising the Philippines' concerns about China's
maritime conduct, including the secretive passage of its
warships numerous times within Manila's 12-mile territorial sea.
"He doesn't want that repeated again," Panelo said.
The firebrand leader also conveyed to Xi his desire for
China to comply with a 2016 arbitration ruling that invalidated
its claim to sovereignty over most of the South China Sea, and
made clear Manila's economic entitlements.
Duterte raised that in a way that "unequivocally,
assertively but friendly" Panelo said, adding that Xi was not
offended, but reiterated that China did not recognise the
arbitral ruling and would not budge on that.
Experts say Duterte's unwillingness thus far to press the
issue or build international support behind enforcing the ruling
has enabled China to consolidate its maritime power and further
expand its military assets on its artificial islands.
A report on the meeting by state news agency Xinhua made no
mention of the ruling.
It said Xi urged the two sides to "set aside disputes,
eliminate external interference, and concentrate on conducting
cooperation, making pragmatic efforts and seeking development".
"As long as the two sides handle the South China Sea issue
properly, the atmosphere of bilateral ties will be sound, the
foundation of the relationship will be stable, and regional
peace and stability will have an important guarantee," it quoted
Xi as saying.
The two sides could take a "bigger step" in the joint
development of offshore oil and gas, it quoted Xi as saying.
That could be extremely complex and sensitive, however, as
both countries claim jurisdiction over the Reed Bank, the main
site of the oil and gas reserves, despite the arbitration award
declaring that Manila had sovereign rights to exploit them.
The Philippines is proposing a 60-40 sharing arrangement in
its favour.
China's claims in the South China Sea, through which more
than $3 trillion in ship-borne trade passes each year, are
contested by Brunei, Malaysia, the Philippines, Taiwan and
Vietnam.
Panelo also said Xi told Duterte that he would appreciate it
more if the Philippines could "eliminate" its China-focused
gaming operations, which employ tens of thousands of Chinese
workers and target online users in mainland China, where
gambling it is forbidden.