CHINA'S RAPIDLY GROWING OIL EXPORTS: CAN EXPANSION CONTINUE?

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00794R000100640001-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 19
• Document Creation Date: December 22, 2016
• Document Release Date: May 13, 2011
• Sequence Number: 1
• Publication Date: March 1, 1986
• Content Type: REPORT

Directorate of Secret
Intelligence
China's Rapidly Growing
Oil Exports:
Can Expansion Continue?
Secret
EA 86-10009
March 1986
Copy 3 2 7
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Directorate of Secret
Intelligence
China's Rapidly Growing
Oil Exports:
Can Expansion Continue?
This paper was prepared by
of East Asian Analysis.F-
Comments and queries are welcome and may be
directed to the Chief, China Division, OEA, on
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Secret
EA 86-10009
March 1986
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China's Rapidly Growing
Oil Exports:
Can Expansion Continue?
Scope Note The prospect of oil for export is the primary incentive for foreign
countries-especially the United States-to invest in oil in China. This
paper evaluates China's ambitious plans to increase oil exports and points
up those factors that will have an impact on China's ability to meet those
goals.
iii Secret
EA 86-10009
March 1986
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Secret
China's Rapidly Growing
Oil Exports:
Can Expansion Continue?
Key Judgments Beijing has nearly doubled the volume of its crude oil exports in the past
Information available two years, making China the world's 13th-largest oil-exporting country. At
as of 25 February 1986 less than 600,000 barrels per day (b/d), these sales are still too small to af-
was used in this report.
fect the world oil market, but they are increasingly important to the East
Asian market-particularly Japan and the Philippines. Moreover, Beijing's
drive to increase exports is offering substantial investment opportunities for
US firms engaged in both onshore and offshore exploration as well as those
that provide equipment and techniques to extend the life of older fields.
The search for oil, in fact, has already become the largest component of
foreign investment in China; foreign oil firms since 1979 have invested $1.7
billion; 35 percent of this has been from the United States.
Beijing has been able to raise production and sales of both crude oil and pe-
troleum products by:
? Encouraging the introduction of foreign equipment and expertise to
enhance recovery techniques and exploit new finds.
? Implementing a conservation program to limit domestic consumption of
oil.
? Undercutting OPEC prices to bolster its own sales.
? Aggressively marketing its oil and oil products overseas.
Because of growing domestic demand for oil and the glut in the world oil
market, China is unlikely to sustain last year's 27-percent growth in the
volume of exports over the next few years. Nonetheless, we believe there is
a strong possibility that China will be able to increase exports to 1 million
b/d by 1990. Recent discoveries of oil on the periphery of existing onshore
fields have considerably brightened prospects for a steady increase in
production to 3 million b/d. China's continuing desire to maximize foreign
exchange earnings, moreover, suggests that Beijing will keep up its
pressure on domestic industry and households to limit oil consumption.
Finally, the Chinese are expanding oil terminals and pipelines to ease
current logistic bottlenecks.
The recent downturn in the international oil market will complicate but
probably not change China's export plans. Given Beijing's considerable
need for foreign exchange, we believe that China would probably not
reduce its oil exports significantly even if international oil prices fell below
$10 per barrel. Beijing's announcement that it intends temporarily to
freeze the volume of its oil exports is, in our opinion, a political gesture to
Middle Eastern countries and will not last. Indeed, the Chinese have a
history of undercutting OPEC, and we expect them to continue attempts to
expand their share of the market.
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Falling oil prices will exacerbate China's trade deficit, which approached a
record $14 billion in 1985, according to Chinese statistics. If Beijing
maintains 1985's export volume and world crude prices average $18 a
barrel, we estimate that China will lose $1.6 billion in foreign exchange
earnings this year. China will probably react to the trade deficit and the
loss of oil revenues by imposing stricter controls on imports, and perhaps
scaling back some large development projects, but we expect acquisitions of
oil-related equipment and technology to continue.
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Key Judgments
Opportunities To Earn Foreign Exchange 1
How China Boosted Oil Exports
11 Seeking New Markets
Prospects for Continued Export Growth: Pluses and Minuses 2
Implications for the Domestic Economy 6
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 )Lake
Baikal
Figure 1
Oil and Gas Basins
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? Tasharik
Xinjiang
"Tarim
? Lhasa
NEPAL BHU.
I N D hmandu ~* a
Selected oilfield
Province-level boundary
0 500 Kilometers
0 500 Miles
East
China
Sea
Sea MMP.NII~pPINES
Boundary representation is
not necessarily authoritative.
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NORT
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China's Rapidly Growing
Oil Exports:
Can Expansion Continue?
petroleum industry to produce more oil. The China
National Chemical Import and Export Corporation
(Sinochem), Beijing's crude oil trading firm, has
opened offices in the United States, Japan, West
Germany, Panama, France, Hong Kong, and Macau.
In addition, Beijing has purchased more than $600
million in petroleum technology and equipment from
US firms. The bulk of the additional oil found at
existing onshore fields with the help of this equipment
has been exported. In 1985, crude oil and petroleum
product exports earned an estimated $6.4 billion,
about 23 percent of China's foreign earnings.
Since then, Beijing has strongly pressed its
foreign exchange earnings,
Opportunities To Earn Foreign Exchange
With skyrocketing needs for foreign exchange to
finance its modernization program, China over the
past few years has sought ways to greatly increase
exports. Because increasing international constraints
limit sales of two major Chinese exports-textiles and
apparel-Premier Zhao Ziyang in early 1984 identi-
fied oil exports, along with tourism and arms sales, as
the areas with the greatest potential for increasing
How China Boosted Oil Exports
Beijing has been able to increase its oil exports
because new finds and enhanced recovery techniques
have boosted China's total oil output. With the help of
resident foreign experts and foreign technology, Chi-
na increased its oil production by 8 percent in 1984
and another 9 percent in 1985 to almost 2.5 million
b/d. Of this increase, 80 percent was exported. Al-
most half of the increased production in the past few
years has come from new finds at China's second-
largest field-Shengli, located in Shandong Province.
China has been remarkably successful at limiting
domestic oil consumption through conservation efforts
so it can increase exports. The country's annual
consumption of oil declined by 11 percent between
1978 and 1982, from 1.82 million b/d to 1.62 million
b/d. Most of the decrease resulted from a cutback in
Table 1
Chinese Crude Oil and Petroleum Product
Exports and Foreign Exchange
Earnings, 1970-85
Oil Crude Oil Petroleum Foreign
Production Exports Product Exchange
(Thousand (Thousand Exports Earnings
b/dJ b/d) (Thoa~sand (Milliat
b/d) US ~1
1976
1,738
169.5
38.8
774.9
1977
1,873
182.1
39.3
I ,Ol 1.9
1978
2,081
226.3
43.5
1,278.8
1979
2, 123
268.6
60.7
2,446.5
1980
2,113
265.5
83.8
4,320.6
1981
2,024
275.1
91.8
4,942.2
1982
2,042
293.6
105.4
4,896.8
the burning of crude and fuel oil in power plants and
industrial boilers and furnaces. Beijing began convert-
ing such plants to coal in 1978, and since 1981 it has
imposed a tax on direct fuel and crude oil consump-
tion to discourage this wasteful practice. In 1981, the
State Council responded to widening shortages of
gasoline and diesel fuel (caused by China's limited
refining capacity and increased demand for transpor-
tation) by imposing quotas on the fuel allocated for
every vehicle in China.
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Figure 2
China: Crude Oil and Petroleum
Product Exports as a Percent of Total
Oil Production, 1970-85
Percent
30
Seeking New Markets
Beijing also has intensively sought new markets to
expand its crude oil exports. Beijing reportedly began
direct sales to South Korea in 1984, and, during his
July 1985 visit to the United States, Vice Premier Li
Peng suggested to Vice President Bush that the
United States should consider buying Chinese oil
under along-term arrangement. Party General Secre-
tary Hu Yaobang signed a document while visiting
Australia in April 1985 that inaugurated China's first
shipment of Daqing crude to Australia. Last August,
an article in one of China's leading economic journals
even proposed that China take advantage of the
recent downturn in the Soviet Union's crude oil
production to increase exports to Eastern Europe.
At the same time, Beijing has been encouraging
countries holding trade surpluses with China to bal-
ance their trade by importing Chinese oil. In August
1984, for example, Chinese leaders made a strong
pitch to a visiting economic delegation from Chile to
reduce Chile's $80 million trade surplus through oil
purchases. Chile later agreed to buy 730,000 barrels
of Chinese crude, worth about $19 million.
Beijing also has expanded its oil exports by undercut-
ting OPEC prices. For example, Beijing's official
June 1985 price for Daqing crude was $27.35 per
barrel, about 50 cents below the price of comparable
OPEC crudes. Moreover, China sold much of its
crude oil at the spot market price of $25.80.
China dropped its
price to Japan for Daqing crude last June by 60 cents
a barrel retroactive to April, cautioning its Japanese
customers against disclosing this discount to avoid
irritating other oil-producing countries before the July
OPEC meeting. More recently, Beijing has been
forced to drop its oil price below $20 per barrel to
maintain its share of the weakening international
market.
China has occasionally reduced the price of its oil to
"friendship prices" for certain countries. For example,
Thailand received oil at a discounted price during the
1979-80 oil crisis, and the Philippines for many years
has received about 15 percent of its total oil needs
from China at reduced prices and with deferred
payment arrangements.
Prospects for Continued Export Growth:
Pluses and Minuses
In our view, recent discoveries of oil on the periphery
of onshore fields in China have considerably bright-
ened Beijing's outlook for increased oil exports. These
unexpectedly large finds have caused Beijing to raise
its projection for 1990 crude oil production to 3
million b/d, a 5-percent-per-annum increase over
1984 production, which we believe is achievable. We
believe Beijing could export as much as one-third of
this output, based on our estimate that China will
need almost 2 million b/d for domestic use by 1990.
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Table 2
Major Oil Exporters a
and Producers, 1984
Country
Thousand
b/d
Country
Thousand
b/d
Saudi Arabia
3,760
USSR
12,415
USSR
3,420
United States
10,385
Mexico
1,600
Saudi Arabia
4,690
Iran
1,576
Mexico
3,010
Venezuela
1,362
United Kingdom
2,580
Nigeria
1,162
China
2,286
United Arab
Emirates
973
[ran
2,195
Kuwait
955
Venezuela
1,875
Indonesia
949
Canada
1,555
Libya
947
Indonesia
1,440
Iraq
943
Nigeria
1,405
United Kingdom
770
Iraq
1,170
China
553
Libya
1,115
Norway
535
Algeria
990
Significant new finds at Shengli and several other
fields are the primary reasons for China's optimistic
oil outlook. Beijing recently predicted that production
at Shengli-after rising by 20 percent or more in each
of the past two years-will increase by 1990 to 1
million b/d, double current production. Beijing has
announced plans to invest 25 billion yuan ($7.8 billion)
over the next five years to raise the field's production
further. The Chinese predict that Shengli's Gudong
field, discovered in 1984 and located at the mouth of
the Yellow River, will produce over 150,000 b/d in
Growing Foreign Involvement in China's
Onshore Oil Production
Beijing has opened its onshore oil industry to on-site
joreign technical assistance over the past few years.
Several US and French firms are doing extensive
seismic surveys in Xinjiang Province in western Chi-
na. Another I~S.firm is helping the Chinese with
directional drilling at Shengli, and a French jirm has
assisted the Chinese in developing enhanced recovery
techniques at Daging. Some of these projects are
being.financed by the World Bank. The prospect oJ'
additional Chinese oil Jor export is the primary
incentive jor foreign companies to explore at both
China's offshore and onshore areas. Foreign firms
have conducted extensive surveys oJl China's coast
for oil, at minimal cost to Beijing.
In March 1985, Beijing opened 1.83 million square
kilometers in 10 southern provinces to oil exploration
by.foreign.firms. This unprecedented action opened a
largely unexplored area. Some Chinese officials have
indicated Beijing will also open up northwestern
China to foreign exploration during the next few
years. Oil discovered inland may be more d1fjicult to
export than offshore oil because of logistic problems,
but Beijing could conceivably provide foreign oil
Jcrms with oillrom their existing coastal.fields in
exchange for exploration and development work in-
land.
The search for oil, both onshore and offshore, has
become the largest component ojjoreign investment
in China. Foreign oil.firms have already invested $1.7
billion, about 35 percent Jrom the United States, and
this,figure will probably grow significantly as a result
of onshore exploration that is beginning now.
Beijing also has begun building more refineries to
expand its production of petroleum products. It re-
cently signed a $500 million joint venture agreement
with a group of overseas Chinese to build a new
refinery in Fujian Province capable of handling
60,000 b/d of crude oil. In January 1985,~~
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 South Korea. South Korea has been an attractive
market for Chinese oil, especially because of its close
proximity to China's oilfields. China has reportedly
shipped crude oil directly to South Korea since 1980,
usinglalse bills o,J'lading, and Japanese oil brokers
have transshipped Chinese crude to South Korea via
Japan. This trade reached a new stage in thelall of
1984 when, according to press reports, Beijing appar-
ently made itsjirst direct sale oj'crude oil to South
Korea without resorting to false documents. Press
accounts of the sale indicated that South Korean
buyers had become dissatisfied with the 30- to 40-
cent per-barrel.fees Japanese middlemen were charg-
ing to handle these transactions. Beijing also hopes to
take advantage of Seoul's desire to reduce its depen-
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Important CustomersJ'or China's Oil
Japan. Japan buys about 40 percent of China's crude
oil exports, most oJ'it under their Long-Term Trade
Agreement (LTTAJ, which was renewed in January
for 1986-90. China's crude oil exports were worth
about $2.2 billion in 1985 and provided about S
percent of Japan's oil needs. Several months of
contentious bilateral negotiations ended in December
with Japan agreeing to increase its annual minimum
import commitment by 10 percent from 160,000 b/d
to 176,000 6/d. This compromise balanced China's
desire to expand exports to offset its large bilateral
trade deficit (over $S billion in 1985) with Japan's
slack demandlor oil. In addition, Japan has been
recently buying about 60,000 b/d of Chinese crude on
the spot market at favorable prices. In response to US
and Chinese complaints about its nontarlff barriers,
Japan recently opened its market toloreign gasoline,
and China sent the~rst shipment in January.
United States. During 1982-84, China exported about
25,000 b/d oj" leaded gasoline to the United States,
worth an average of $400 million a year. Much of it
was sold at discount prices at gasoline stations on the
West Coast cater it was blended to raise the octane
level. Gasoline exports dropped to 15,000 b/d in the
first ha(J'of 1985 as the demandlor Chinese gasoline
weakened in response to new US environmental regu-
lations that reduced permissible lead-content levels.
The Chinese rapidly expanded their crude oil exports
to the United States in 1985, in part to replace the
lost gasoline market. By mid-1985, crude oil exports
to the United States were triple the 1984 volume.
dency on Middle Eastern crude. We have no indica-
tion of any sales being made in 1985.
North Korea. China has exported crude oil to North
Korea for over a decade, providing as much as haU'of
P yongyang's needs. North Korea's proximity to
China's major oiUields has made it possible to ship
Chinese crude oil directly by pipeline to the Ponghwa
refinery in northwestern North Korea.
North Korea's 1984 trade
protocol with China called for importing 30,000 b/d
of crude oil. In October 1984, North Korea reportedly
made an urgent request Tor another 730,000 barrels
of crude to replace oil that Iran could no longer
provide.
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Table 3
China's Oil Exports to the
United States,
1980-85
Barrels Million Barrels Million
per day US $ per day US $
First half of 1985.
b Does not include light oils or kerosene.
el~tng also has announced plans to invest $200
million over the next six years to modernize its large
refinery at Maoming in Guangdong Province. By
1990, China hopes to export 30,000 b/d of petroleum
products from Maoming.
Oil terminals and pipelines in China's major ports are
being expanded to accommodate additional exports. A
$30 million project will add new oil facilities at the
ports of Dalian, Qingdao, Nanjing, and Qinhuangdao.
In May 1985, China signed a contract with a Canadi-
an firm to help design a new 71-centimeter crude oil
pipeline that will connect Shengli oilfield to the port
of Tianjin. The new pipeline will have a capacity of
400,000 b/d, double the existing pipeline. At Dalian,
officials are soliciting foreign bids fora $900,000
system to heat crude oil being pumped in or out of the
port's storage tanks used for export.
Although we expect China's exports to grow through
1990, several factors combine to keep China from
becoming a major player in the oil export market.
Almost half of China's current supply of oil is pro-
duced at Daqing, a mature field in northeastern
China where production may start declining in the
Table 4
China: Oil Output by Major
Producing Areas
Total Daqing Shengli Huabei Liaohe Other
(Rengiu)
1983 2,121 1,040 376 211 122 372
1984 2,286 1,068 459 203 153 403
1985 a 2,496 1,106 540 206 180 464
next few years. Enhanced recovery techniques, the
discovery of a new pool of oil, and introduction of
foreign technology helped production at Daqing to
rise by 3 percent in 1985 to 1.10 million b/d. But US
experts working at Daqing report that the Chinese
have saturated Daqing with new wells, and this is
likely to lead to faster depletion rates. In addition, we
believe the water-cut ratio at many wells is in excess
of 70 percent, a further indication of the onset of
declining production.'
Beijing will need to find large quantities of new oil in
the coming years to replace Daqing, and the disap-
pointing results of the offshore oil search have encour-
aged China to accelerate onshore exploration efforts.
China is now pinning its hopes on largely unexplored
areas in southern and western China, but the lack of a
transportation infrastructure to move oil out of
China's interior makes the potential for exports from
these areas along-term goal.
' Water is frequently injected into older oilfields to force the
remaining oil to the surface. Eventually [he percentage of water
being pumped out of the wells grows to significantly exceed the
levels of crude oil being pumped, indicating the onset of declining
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 Figure 3
Major Importers of Chinese Crude
Oil, 1980-84
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Philippines
Figure 4
Major Importers of Chinese
Petroleum Products, 1980-84
In addition, the waxy and heavy quality of Chinese
crude oil has made it difficult to export to countries
lacking the necessary refining capabilities.Z Beijing
has tried to deal with this problem by increasing its
exports of petroleum products, which also have a
higher value than crude oil, but China's limited
refining capacity has restrained this growth (see inset).
China's rapid economic growth has caused domestic
consumption of oil to begin rising again, which also
may constrain China's oil exports. We believe that
China has already achieved many of the easy gains in
oil conservation, although additional incentives such
as increases in the domestic prices for crude oil and
petroleum products are possible. The rapid growth in
vehicular traffic in China could negate the conserva
tion efforts, but Beijing has, so far, been largely
successful at rationing its domestic gasoline supply.
several types
of automobile fuel were unavailable in parts of China
last summer because of the drive to increase exports.
Implications for the Domestic Economy
The domestic shortage of crude oil and petroleum
products resulting from the push for export growth
will exacerbate China's transportation bottleneck and
constrict economic growth. Large amounts of coal and
other vital commodities already lie idle because of the
shortage of rail capacity and the lack of vehicles and
adequate roads. By 1990, even allowing for oil con-
sumption to rise to 2 million b/d, supplies will remain
tight, lowering the prospects of easing the transporta-
tion crunch despite the ongoing investment in infra-
structure and the production of vehicles.
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Table 5
Estimated Chinese Annual Foreign
Exchange Earnings From Crude Oil
and Petroleum Product Exports: Scenarios
Exports
(barrels per day)
Average Price per Barrel of Oil, 1990
15 20 25 30
Note: We have assumed that 20 percent of exports will be in
petroleum products-worth about 25 percent more than crude-on
the basis of China's recent product mix for oil exports.
exports to China-should also be sustained.
Moreover, with lower world oil prices, we estimate
China's earnings from petroleum exports could de-
cline $1.6 billion from last year's earnings of nearly
$6.4 billion.3 With little chance of turning to alterna-
tive commodities to compensate for the expected drop
in oil earnings, Beijing will need to slow its runaway
imports to reverse the growing trade deficit. Restric-
tions are already in place on commodities that China
can produce domestically, including such consumer
durables as color televisions, refrigerators, radio cas-
settes, and motor vehicles. But Beijing will also need
to cut deeper into its import shopping list. We believe
these cuts will begin with capital equipment purchases
for postponed or canceled government projects. We
also expect Beijing will continue its efforts to slow
down its overheated economy, which grew at an
estimated 18 percent last year. But we also believe
Beijing will continue to encounter problems slowing
economic growth and, therefore, will achieve only
moderate success in reducing industrial and capital
equipment purchases. Consequently, the effect on US
exports to China, more than one-third of which are
machinery and transport equipment, will be marginal.
Moreover, demand for raw materials and chemicals-
which represent an additional 25 percent of US
' This assumes export volume at the 1985 level and an average price
of $18 per barrel. Petroleum products-nearly 20 percent of oil-
related export volume-earn angroximately 25 percent more per
China would like to increase the share of its exports
of petroleum products, primarily because products
sell at higher prices than crude. During the early
1980s, about one fourth of oil-related exports were
products. That share,lell to one-1c1'th in 1984 and
1985, however, probably because of insurficient refin-
ing capacity. Even so, we estimate that China export-
ed 120,000 b/d of petroleum products in 1985 worth
about $1.3 billion.
YVhile China is expanding its processing capacity, it is
taking bold measures to overcome its refinery short-
age. Most notably, China has taken advantage of
Singapore's excess refining capacity and ships as
much as 100,000 b/d there jor refining and reexport.
The value of China's crude oil exports to Singapore
jumped.from $36 million in 1983 to $591 million in
1984. Singapore's Prime Minister Lee Kuan Yew
visited Beijing in mid-September and won China's
agreement to continue exporting Chinese crude oil at
the rate oj'at least 60,000 b/d jor each of the next
three years.
The uncertainties of the world oil market make it
difficult to predict future foreign exchange earnings
from oil. If the international price of oil remains low,
Beijing will be forced to make further cuts in imports
to reduce its trade deficit. We believe, however, that
Beijing would be reluctant to reduce its oil exports
even at international prices below $10 per barrel,
primarily because oil exports are so crucial to foreign
exchange earnings. At the extreme, we estimate that
Beijing's earnings from oil exports in 1990 could
range from $3 to $11 billion, depending on world oil
prices and the amount of oil and products available
for export (see table 5). We expect that earnings in the
neighborhood of $6-9 billion are most likely.
7X1
25X1
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The International Side
China's growing oil exports will expand the supply of
non-OPEC, non-Middle Eastern oil available at the
market's minimum prices, although Chinese sales will
remain too small to have a significant impact on world
prices. China's oil exports currently amount to less
than 3 percent of the world's trade in oil. Nonetheless,
by 1990, China will probably have an especially
strong influence in the East Asian oil market. Its
sizable merchant fleet and proximity to countries with
rapidly growing economies draw it to this expanding
market. Indonesia will probably remain China's stron-
gest regional competitor, but Beijing may be able to
continue taking advantage of the mismanagement
afflicting Indonesia's petroleum industry, as well as
Jakarta's loyalty to OPEC, to capture more of the
region's oil market.
China will probably continue to appear conciliatory
toward its OPEC competitors, most of which are
countries with which Beijing is trying to improve
relations, but is unlikely to let these efforts stand in
the way of increased sales. For example, during a
March 1985 visit to Venezuela, State Councilor Gu
Mu publicly stated Beijing's support for OPEC's
efforts to stabilize world oil prices; Gu cryptically
added that China would take "active measures" to
cooperate with the OPEC countries on prices. Yet a
Chinese news analysis of the subsequent July OPEC
meeting in Vienna described the cartel as being in a
great predicament because it is losing its reins on oil
prices as non-OPEC countries increase production.
More recently, Beijing claimed in early February that
China would maintain 1986 exports at last year's level
to support OPEC attempts to revive oil prices. Howev-
er, we believe that China will continue to press
exports and that the statement was intended more to
curry favor in the Middle East.
China will also continue to try to expand the sale of
oil and oil products to the United States, but the
relatively low volume will have little direct effect on
the large US market. In fact, leaded gasoline sales to
the United States will continue to decline, although
exports of other products could increase.
More important than Chinese sales to US markets,
however, will be the substantial opportunities for US
firms aiding China in the search for more oil. US
firms have been among the largest participants in
China's search for oil both offshore and onshore. New
opportunities for US oil companies to invest in China
have been created by last year's opening of areas in 10
southern provinces to foreign exploration and develop-
ment. Both at these sites as well as offshore, US
companies will earn substantial fees for providing
equipment and services, and could earn oil as well if
product-sharing arrangements apply to new discover-
ies.
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Secret
Secret
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