China hangs its future on oil, but foreign companies have doubts
This week the official Chinese news agency released a jaunty statement predicting large production of oil before the end of the decade. While oil-bearing areas have been located and oil-producing wells sunk, some foreign operators bearing the cost and risk of China's exploration program are having difficulty matching such unrestrained optimism.Skip to next paragraph
Subscribe Today to the Monitor
Chinese officials are fond of estimating China's offshore oil reserves as being between 75 and 150 billion barrels. The highest foreign estimate made public is 30 billion.
''You just can't make a firm estimate until you've done some drilling,'' says the chief of Esso's China operations, Murray Hudson. Esso expects to begin wildcatting early in 1984. ''We've made an aggressive proposal and our costs will be great. Obviously we're aiming at being successful but we are realistic enough to realize that we may never recover a cent,'' he adds.
Although competition to win exploration rights has been intense since last year, many foreign operators are treading cautiously.
The tough terms demanded by China - despite last year's slump in world oil prices, attempts to exclude foreign firms from the oil support industry, and the recent sinking of the drill ship, the Glomar Java Sea - point up potential pitfalls that foreign consortiums face before costs can be recovered.
Arco, Total, Elf, and Japan National Oil corporations have been drilling off China in agreements with the Chinese made before the recent international bidding. Of 18 contracts signed with foreign companies so far this year, only the BHP-BP consortium has begun wildcatting in the South China Sea.
One operator, who asked not to be named, said that the hard bargain driven by the Chinese may require renegotiating contracts, if and when oil is discovered.
No details of the 18 contracts signed this year between the China National Offshore Oil Corporation (CNOOC) and foreign companies have been released, but a model contract upon which all were based was published last year.
Foreign operators are to bear all exploration costs. CNOOC has a 51 percent option to participate in the development and production phases. A 17.5 percent royalty levied on gross production will be split into recovery of operating and investment costs. Any production in excess of this becomes profit oil and is taxable at an effective rate of 70 percent.
The main negotiating factor - the ''x factor'' - is the division of profit oil at various levels of production. Crude oil purchasing and pricing was also covered by the contract and CNOOC retains the right to veto export destinations.
The French oil company, Total, which has been operating in the Gulf of Tonkin since 1981, has already reached the appraisal stage.
The company closed down its operations for the typhoon season to evaluate the results of the 14 wells it has sunk. Although it is believed to have found oil in four of the wells, it has not yet resumed operations. Several industry sources have said that the company may be reluctant to go ahead with the next stage under their present contract.
''Their seeming reluctance to get back into action could mean two things,'' one industry source said. ''Either the results weren't good enough. Or they weren't viable under the terms of their contract, and Total needs to get some concessions out of the Chinese before they can go ahead.''
Officially Total has denied that it is biding time, but they are being closely watched by 27 companies poised to spend a total $2 billion in the next three years on oil exploration in China.
Originally there were some fears that the ups and downs in Chinese-United States relations may encourage China to limit the number of exploration contracts awarded to American companies, who made up half of the 102 bids received by the Chinese.
But last year, the Reagan administration is believed to have made a number of contacts to try to ensure that diplomatic strains would not disadvantage US firms.
Although a non-American consortium, led by British Petroleum, was awarded the first and prize contract areas in the Pearl River basin of the South China Sea in May of this year, American companies are well represented in the contracts awarded since then.