Early Bidders and Risks

   Three Japanese companies and British Petroleum (BP) will launch a joint venture to develop oil deposits in China's Tarim Basin.  Mitsubishi and C. Itoh, both major trading houses, and Nippon Oil and BP will begin a joint feasibility study soon on the deposits there.  BP will hold a 75% share of the joint venture, and the rest will be absorbed by the Japanese firms.  BP appears to be leading the rush to the Tarim Basin and elsewhere.  Last autumn the company signed an agreement with China National Petroleum Corporation (CNPC) on investigating cooperation in risk exploration in east and northwest China, and the Qiuling field in Xinjiang Province.

   Italy's Agip, which is already producing oil off the South China coast, also announced it would definitely tender to drill for oil in the Tarim Basin, as will Shell Oil.  Mobil, Exxon and Chevron have also formed a "mutual area of interest" in the Tarim Basin.  Exxon is taking the leading role for the group.

   A British independent group called Premier Oil Pacific Ltd, said it was definitely interested in bidding, but will reserve its decision until it has evaluated all relevant technical data, especially oil source rocks analysis.  The company said it was having difficulty trying to confirm Chinese figures because the Chinese use a different set of criteria from Western oil companies to calculate their source rock potential and reserves.  Premier oil is also looking at blocks closer to the boom areas of south and east China.  Although these areas may not be as technically prospective as the Tarim Basin, they are closer to rapidly developing industrial regions that would be potential markets for the oil.

   Among the possible bidders is Amoco, which announced it will spend only a modest sum on U.S. oil exploration due to declining domestic opportunities and low price.  Proposed higher taxes on energy and business in the U.S. will result in further domestic retrenchment and a shift of capital abroad for the company.  Overseas projects will account for about 70% of its planned US$1.85 billion worth of exploration and production spending this year.  Among the major overseas projects Amoco is eying closely is the Tarim Basin in China.  Other possible projects include the Netherlands, the British North Sea and Vietnam, the latter only if the U.S. lifts its trade embargo this year.

   Analysts believe the oil majors can hardly afford not to consider bidding for concessions in the Tarim Basin, but admit the risks are enormous and that oil companies are not having a good time at the moment with the low world oil price.  They must also take into consideration political factors, including the potential for ethnic strife in some of these areas.  Some firms are also deterred by the remoteness of the areas being opened to bidding, and by the fact that a pipeline costing billions of dollars will have to be built to the coast.  Despite this cautionary note, all agree that prospects for the Tarim Basin are far more encouraging than offshore China, where there were high hopes in the early 80's but disappointing results.

   There have also been complaints that the Chinese are reluctant to share their seismic data with foreign companies, and that they are overcharging for the data.  One oil company official said the Chinese are charging over US$500,000 for some of the East China Sea data packages.  He added that if a company goes into partnership each individual partner must also pay the data fee, so that makes it very expensive to participate.  He viewed this as a disincentive to investing in China, especially where other countries in the region were providing such data at very low cost.

   The consensus is, however, that the Chinese really need to develop their onshore reserves, so they will make them attractive to foreign firms.

Revamping the Petroleum Industry

   Earlier this year, China broke up state monopolies for importing and exporting crude and refined products in a bid to reform the oil sector of its economy.  The move -- the latest in a long series of energy reforms -- creates three integrated oil firms, each able to import and export crude oil and refined products and run refineries.  Previously, firms were largely limited to one function only.  The restructuring is still in process, and confusion among traders abounds at the moment, many calling for the simpler days of the past when they only had to deal with SINOCHEM, but things are bound to improve as the system shakes down.

   The overhaul is essentially designed to increase competition among state oil firms -- breaking their monopolies on certain sectors -- and promises to lift some barriers to foreign involvement in China's oil sector.

   One immediate result of these reforms will be that China will offer more petroleum processing capacity to foreign oil companies.  (At present, over 50% of all refinery capacity in the Asia-Pacific region is located in China and Japan.)  In the past, China has offered foreign oil firms only limited processing at a small number of coastal refineries.  Now foreign companies can approach Chinese refineries directly, or they can ask any of the three state petroleum companies (SINOPEC, UNIPEC and SINOCHEM) to process their crude.

   UNIPEC is a new 50-50 joint venture between SINOPEC and SINOCHEM.  SINOCHEM used to be the sole agent for importing and exporting crude oil and refined products and handling foreign processing contracts.  About seven SINOPEC refineries, which now market oil products and services through UNIPEC, are prepared to process crude oil for foreign firms.  SINOPEC operates 95% of China's 40-50 refineries.  SINOCHEM, which has monopolized crude and product imports and exports since the 1950's, has expanded into production.  It has agreements with foreign firms to build a 100,000 bpd refinery in Dalian.  CHINAOIL is a 50-50 joint venture company with CNPC and SINOCHEM.  It offers foreign traders opportunities to process crude oil in CNPC refineries.  CNPC's plants are mostly inland, and can process up to 70,000 tons of crude per day.

   International oil companies will also be able to enter China's huge refined product market through an oil swap plan with CHINAOIL.  The plan will permit foreign firms to sell their oil products in inland areas.

China's First Oil Exchange

   China opened its first oil futures exchange in Nanjing on 9 March.  The move was a key part of government reforms to move towards a market-oriented economy, particularly a free market in oil.  To compare with overseas markets, the exchange used a swap market rate of 8.22 yuan to the U.S. dollar.  (The official rate at the time was 5.72 yuan = US$1.00.)  The Nanjing market joins two stock exchanges and numerous other commodity markets at the cutting edge of China's reforms.  Its twice-daily trading sessions are timed to coincide with Singapore and London trading.  Other futures exchanges are being planned for Shanghai, Beijing, Tianjin, Shenyang and possibly other cities.

   There are almost no restrictions at the moment; the door is open to anyone who wants to trade.  But there are fears that overheating will develop, so in the future some form of centralized watchdog will be set up to ensure the integrity of the various exchanges.

General Reforms and Other Developments

   Li Peng is almost certain to be elected to a new five-year term as Premier at the upcoming National People's Congress (NPC).  The parliament's work will focus on pushing forward the economic reform policies of Deng Xiaopeng, but any administrative tinkering done at the NPC will in no way bring any significant changes to the absolute power of the Communist Party.  The session will help speed China's progress towards price reform, with a long-term goal of handing over virtually all commodities to market pricing.

       In addition to revamping at home, China's oil industry will launch an aggressive push overseas to tap new sources of production as domestic output slumps.  CNPC is negotiating to buy two Canadian oilfields and two wells in Peru.  It is also bidding for oil development rights in Venezuela and examining options in Indonesia, India, Papua New Guinea and Russia, where international competition will be fierce.  CNPC is also cooperating with Japan's Mitsubishi and the Turkmenistan government to tap natural gas in the central Asian republic.  The three sides are considering a 6,700 km pipeline through Uzbekistan and Kazakhstan to the Chinese port of Lianyunggang for shipments to Japan.  The first phase of the pipeline should be completed by the year 2000.

   CNPC is also considering a joint venture in Singapore this year to sell Chinese-made oil exploration and development equipment to southeast Asian nations.  CNPC hopes to double the value of its overseas engineering contracts this year to US$400 million, and will move into downstream industries such as refining and petrochemical production as discussed above.

   China's oil industry is starved for cash, equipment and technology because of an outdated government policy that forces it to sell oil at artificially low prices to industry.  These types of policies are changing rapidly.