China Courts Foreign Firms In a Quest for New Oil Sources

CHINA, once a major Asian energy exporter, is desperately seeking new sources to quench its demand for oil.

A high-profile delegation of 10 geologists from the China National Offshore Oil Corporation is in Houston this week for its first overseas oil promotion aimed at heightening China's international profile and luring foreign exploration, capital, and technology to untapped fields. Thirteen blocks totaling 16,000 square kilometers in the South China Sea will be up for bid from today until Friday.

After decades of boasting about its self-sufficiency and rejecting oil multinationals, China's courtship of foreign companies is needed to find replacements for fading domestic oil fields and crude to stoke its economy, analysts say.

Last year, China, the world's fifth-largest oil producer, became a net importer, of 110 million barrels, or 22 percent more than in 1992. Though it still exports some 140 million barrels of high-grade crude, consumption surged 15 percent to 1.1 billion barrels while production leveled.

With demand expected to grow 7 percent yearly until 2000, China could import more than 1 billion barrels without new domestic finds. ``From the point of view of the oil companies, this is the best long-term market around,'' a Western economist in Beijing says. ``China needs major new discoveries to keep the tap flowing.''

In the early 1980s, China chose to open its industry to major foreign oil companies. Although these companies have spent more than $3 billion looking for oil offshore, they have only small finds to show.

The best producers have been two fields operated by a consortium grouping Agip of Italy with the Chevron Corporation and Texaco Inc. of the United States. In 1992, it signed a contract to develop the two fields near the mouth of the Pearl River in the South China Sea and commit $280 million in investment.

Last December, Chinese officials awarded five leases to Cluff Oil (China) Ltd. of Hong Kong and two to a consortium comprising Japan Petroleum Exploration Company and Tei Koku Oil Company of Japan in the East China Sea, off the coast of Zhejiang province.

But offshore production, which is expected to peak in 1997, is unlikely to make up for fading onshore fields, Western analysts say. The China National Offshore Oil Corporation estimates that offshore reserves hold 6 billion barrels, only about one-fifth of which can be recovered economically.

China's potentially richest target is the remote Tarim Basin in western Xinjiang province. Chinese geologists estimate the Texas-sized area could have as much oil as Saudi Arabia, though some foreign executives have cautioned that its development is less promising than hoped and is contingent upon construction of a 1,800-mile pipeline to eastern China.

In 1993, Beijing opened up five blocks in the area for bidding; in February, it awarded exploration rights on one block to a consortium including Agip, Elf Hydrocarbures Chine of France, Japan Petroleum Exploration, Japan Energy Companies, and Texaco.

China's oil thirst also propels its controversial exploration efforts in the disputed Spratly Islands in the South China Sea. Thought of as an Asian naval flash point, the Spratlys' oil potential has drawn competing claims to the atolls from China, Vietnam, Taiwan, Malaysia, the Philippines, and Brunei. In a move that has heightened tensions over the islands, US-based Crestone Energy Corporation has begun a China-supported oil search in a 10,000-square-mile zone. Another Chinese tender is pending.

Not to be outdone, Vietnam signed an exploration contract with US-based Mobil Corporation this year - a pact that Beijing branded ``illegal.'' Vietnam and China fought a naval skirmish over the area in 1988. ``This dispute could simmer for some time without blowing up,'' an Asian diplomat says. ``But, eventually, all the claimants will be forced to sit down and find a resolution.''

But foreign interest in the Chinese oil sector pilots on the government's commitment to economic reform, Western analysts say. This year, Beijing stunned executives when, in the face of a growing glut, it imposed a temporary ban on oil imports. Seen as a retreat from deregulation of oil prices that began two years ago, the ban followed heavy imports that drove down prices on the domestic market by more than 20 percent. Analysts say the move has virtually ended future trading in petroleum in Shanghai.

In addition, worried about spiraling inflation, the government is expected to reimpose price ceilings on gasoline and diesel fuel this summer. In 1992, China initiated reforms aimed at bringing domestic prices up to international levels. ``This has created great uncertainty among oil companies and traders dealing with China,'' a foreign oil executive says.

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