Background

   Chinese officials are worried that President Clinton, who promised to take a tougher line with Beijing than his predecessor President Bush, might try to attach human rights conditions to China's Most Favored Nation (MFN) trade status, which covers billions of dollars in its exports to the US.  There is also the question of the US trade deficit, which deteriorated in 1992 for the first time in five years. The two worst offenders were China and Japan.  The deficit with China widened from US$12.4 billion in 1991 to US$18.3 billion last year.  This prompted the Clinton administration to press both governments to open their markets to US products.

   Partially as an effort to assuage the US position, Chinese Premier Li Ping called for joint efforts to improve Sino-US ties shortly after it had released three prominent dissidents.  Li said that the quickened pace of economic construction in China provides many good chances for the development of economic, trade, scientific and technological relations.  He added that China was ready to cooperate immediately with US business circles in areas like energy, communications and telecommunications.  He made a special pitch to American oil companies, saying:  "The US is one of the earliest nations willing to share its oil technology with us."

   As part of this relaxation policy, Li, who was trained as an electrical engineer and is the prime mover behind China's drive to develop its energy resources, announced on 17 February 1993 that China would open up vast new on-shore areas to overseas oil exploration teams.  He particularly welcomed American companies to participate in the exploration and joint development of the new areas, which include the potentially oil-rich Tarim Basin in the far western region of Xinjiang.  Also included are beaches and shallow areas of north China's Bohai Gulf and the prospective fields scattered throughout northeastern, central and northern China.  Exploration rights will be sold in two rounds of bidding beginning in March 1993.

   For decades, China insisted on self-reliance in exporting oil and other minerals, reluctant to let foreigners profit from its natural wealth.  Beginning in the late 1970's, foreigners have been allowed to explore limited areas, mostly off-shore, but few have found commercially viable deposits and the most promising areas have been off-limits.  Now western oil companies are pinning their hopes on on-shore fields, including the Tarim Basin.  Tarim is believed to hold the world's largest untapped oil reserves; more oil than Saudi Arabia or the North Sea.

   The opening was also prompted by almost stagnant domestic oil output at a time of surging economic growth.  The Chinese economy grew by 12% last year, and is forecast to grow by almost 10% each year until the end of the century.  The Chinese oil industry in particular is starved for cash because of the government's policy of subsidizing oil sales.  Existing wells, most of which were drilled in the 1950s and 1960s, are running dry and it is costing more and more to keep them operational.  Official reports indicate China may become a net importer of oil by 1995.  At present, China produces much of its own petroleum but remains a net importer with rapidly expanding demand.  Foreign participation will accelerate development.

New Prospecting Areas

   Twelve new on-shore areas will be opened to foreign companies.  The first round of bidding will be held in March for five blocks in the southeast part of the Tarim Basin in the far western region of Xinjiang.  The second round of bidding for the remaining new areas will take place by the end of this year of the beginning of next year.  These areas for new risk exploration are:  Sanjiang, Heilonguang Province; Hailar, Inner Mongolia; Baoding, Hebi Province; the beach areas of Bohai Bay in Hebi and Shandong Provinces; the city of Tianjin; Zhoukou, Henan Province; Chen Hu-Tu Di Tang, Hubei Province; the Hexi area in Gansu Province and Inner Mongolia; and north of the Caidamu Basin in Qinghai Province.  At the same time China will select 14 areas in 10 existing developed oil fields for cooperation with foreign companies on enhancing the oil recovery rate.

The Race for Concessions

   British Petroleum (BP) is ahead in the race to exploit China's on-shore reserves.  BP has beaten other companies in grabbing a foothold in the Xinjiang region because, unlike some companies, it strictly honored its contracts during its unsuccessful search for oil in the South China Sea in the early 1980s, and China seems willing to recognize this.  BP is in the process of improving its access to information concerning the vast Tarim Basin, and is discussing the possibilities of developing a small oilfield in central Xinjiang.

  BP and the China National Petroleum Corporation (CNPC) signed a letter of intent in September to investigate cooperation in risk exploration of on-shore areas of the east and northwest covering 116,000 square miles.  BP has also held talks with Chinese officials about developing the Quiling oilfield in the Turfan Basin in Xinjiang.

   The Exploration Company of Louisiana was given a jump on the new fields.  It signed a contract last week to form a joint venture to explore 79 square miles of shallow water in the Bohai gulf -- the Zhao Dong Block.  It plans to begin drilling the first exploration well before the end of 1993; seismic activities have already begun.  Under the terms of the agreement, Exploration Co. is responsible for all exploration costs.  The contract further states that if a discovery is made, oil and gas production and related development and operating costs will be shared 49% by Exploration Co. and 51% by China National.  Operations will be conducted through a joint management committee, and the contract requires that the first well be begun within the first 15 months after execution of the contract.

   The Royal Dutch/Shell Group is involved in production in the South China Sea, but off-shore oil finds have been disappointing and it is now pinning its hopes on on-shore fields.  Shell Exploration (China) Ltd. and the Pecten Orient Company (both members of the Royal Dutch Shell Group) have contracted with China to search for oil in an inland basin.  It was only the fifth on-shore exploration contract China has signed with a foreign company.  The contracted area covers 3,570 square miles in the Subei basin in Jiangsu Province, on China's east coast.  Shell and Pecten will soon begin to collect seismic data, and may begin drilling prospecting wells on a risk basis before the end of 1993.

   The Shell Group, Amoco and BP will certainly join in the bidding for on-shore oil exploration blocks when the first round is held in March.

Difficulties to be Faced

   One crucial problem would be transporting the oil to the coast 2,200 km to the east, via a pipeline costing a fortune.  At present Xinjiang has just a single track railway to move oil to the industrial east coast, but if reserves are found to be large enough, BP will likely become involved in the pipeline project.  Weak international oil prices could also discourage the massive foreign investment needed to prospect the vast area.

   Foreign companies will take the entire risk for the new exploration.  Then, once oil is found, the companies can either establish joint ventures with the Chinese side to develop it, or they can develop it themselves.

Related Activities

   There is some cause for concern over possible hostilities over the Spratly Islands, which are in an area of the South China Sea thought to be rich in oil.  They are claimed by China, Vietnam, and four other southeast Asian states.  China recently signed a contract with a US company to explore for oil and gas in the contested area, offering its navy for protection. 

  China and Japan's Mitsubishi Corp. will carry out a joint feasibility study on an ambitious 4,200 mile natural gas pipeline.  The "New Silk Road," as it is being called, would snake through the gas fields of the central Asian republic of Turkmenistan through Uzbekistan and Kazakhstan to the Chinese province of Xinjiang.  Once in China, the gas would be shipped to Japan.  The pipeline would cost several billion dollars to build, and would be one of the longest of its kind in the world.