CHINA: THE SEARCH FOR OFFSHORE OIL

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00554R000100200004-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 29
• Document Creation Date: December 19, 2016
• Document Release Date: February 12, 2007
• Sequence Number: 4
• Publication Date: October 1, 1982
• Content Type: REPORT

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iZ-N, "irPvtnrntP of secret
China: The Search
for Offshore Oil
Secret
EA 82-10113
October 1982
Copy 3 10
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Directorate of
Intelligence
China: The Search
for Offshore Oil
]Office of East Asian Analysis.
Comments and queries are wecome and may be
directed to the Chief, China Division, OEA, on
This assessment was prepared by
Secret
EA 82-10113
October 1982
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Secret
China: The Sear
for Offshore Oil
Key Judgments China and 33 Western oil companies are about to complete four years of
Information available negotiations for rights to explore and develop large sections of the Chinese
as of 19 August 1982 continental shelf. We expect contracts will be signed early in 1983 and that
was used in this report.
exploration will begin late next year. Japanese and French firms have
already signed contracts and are well into exploratory drilling. One US
firm, Atlantic Richfield, and its Kuwaiti-owned partner, Santa Fe, has also
signed a contract[ I 25X1
The contracts, in the form of production-sharing agreements, represent a
long-term commitment by the companies to work closely with the Govern-
ment of China-in some cases for as long as 35 years. The firms have spent
more than $300 million, mostly for geophysical surveys, since talks with
Beijing began in 1978. An additional $2 billion is now being committed to
the first phase of exploration. If no oil is discovered, the firms can write off
the investment and back out of the program. If exploration is successful,
development expenditures could rise to $20 billion or more-by far the
largest Western investment under consideration for China-and profits for
the firms could reach billions of dollarsi 25X1
Offshore oil production will not help solve China's current energy shortage.
Even when it comes on stream in the late 1980s, it will in our view do little
more than offset what we expect will be sharply declining onshore
production. Success or failure of the offshore program will, however,
determine whether China will continue to be an oil exporter in the 1990s-
oil currently provides 20 percent of China's foreign exchange earnings-or
whether it will join the ranks of the oil-importing countries at substantial
cost to its foreign financial position 25X1
China had little choice but to abandon its policy of self-reliance in offshore
exploration. A decade-long effort netted small proven reserves and insig-
nificant production. Meanwhile, onshore petroleum reserves have been
drawn down, output has peaked, and prospects in easily accessible sections
of the country are dim. Offshore sedimentary basins offer the best hope for
quick new discoveries, but China lacks the technology to explore and
develop them effectively. 25X1
Extensive geophysical surveys undertaken by both China and Western
firms and some exploratory drilling indicate good potential for commercial
oil discoveries in the Bohai and Tonkin Gulfs and in the South China Sea.
Only in the Yellow Sea have the surveys been disappointing. The East
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EA 82-10113
October 1982
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 China Sea is considered to have the best prospects, although there are as
yet far fewer data to go on and no indication that China intends to open it
to Western firms. 25X1
velop.
Estimates of potential offshore petroleum resources are very tenuous at this
early point in the exploration program. Chinese and occasional Western
claims that there are over 100 billion barrels of ultimate crude oil reserves
are not warranted by existing data. In our view a better guess is a range be-
tween 15 and 30 billion barrels, which will take decades to discover and de-
Slope.
Significant production of offshore oil will not begin before 1986 or 1987
and is unlikely to contribute much to the country's total output until early
in the next decade. In the decade of the 1990s, we believe offshore output
will rise to 1 or possibly even 2 million barrels per day, more than enough
to offset declining onshore output. Such production would be comparable
to present output rates in the UK's North Sea fields or Alaska's North
West.
The involvement of US firms in China's offshore exploration program
carries both opportunities and risks. Success in discovering and producing
offshore oil will serve as an obvious and tangible benefit of China's opening
to the West and to the United States in particular. Expanded investment
and trade in both upstream and downstream facets of the petroleum
industry could serve as an example for other industries. Failure to find oil,
on the other hand, would have severe repercussions on China's economy
and could spread doubts in China about the advantages in dealing with the
in these areas.
The involvement of US firms in sea boundary disputes between China and
its neighbors is another risk, particularly in the Tonkin Gulf where Beijing
is challenging Vietnamese claims. In our view, tensions between the PRC
and such important US allies as Taiwan, Japan, and South Korea in the
Yellow and East China Seas are also likely to rise as exploration proceeds
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-Y541
C. Technological Support for Offshore Exploration
D. Regulations of the People's Republic of China on the Exploration 31
of Offshore Petroleum Resources in Cooperation With Foreign
Enterprises
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China: The Sear Ill
for Offshore Oil
Onshore Prospects Dim
China's oil and gas production peaked in 1980 at
slightly more than 2 million barrels per day (b/d) of
oil and 14 billion cubic meters of gas. This output
satisfied the country's basic requirements and allowed
exports of approximately 350,000 b/d of crude oil and
petroleum products. Oil output has since fallen by
about 4 percent and gas output is down by a more
severe 24 percent. Oil exports, which contribute over
20 percent of the country's foreign exchange earnings,
have held up despite the production decline, but
allocations of oil to industry, agriculture, and even to
the military have been squeezed.
Figure 1
China: Oil Production by Field, 1960-82
The primary cause for declining output is a substan-
tial drawdown of onshore reserves in the past five
years, especially in the key northern and northeastern
basins. Only one major discovery was made in this
region in the decade of the 1970s-the Renqiu fields
in 1976. Thus, we calculate that total proven plus
prospective oil reserves in this region have declined to
7 or 8 billion barrels, equivalent to only a 10-year
China's oil production is concentrated in several large
oilfields in the Sungliao Basin in Manchuria and in
onshore portions of the Bohai Bay Basin in north
China. Daqing oilfield, in the center of the Sungliao
Basin, produces half the country's output, and
Shengli, Gudao, Dagang, and Liaohe, all along the
coast of the Bohai, and Renqiu, about 100 kilometers
inland, contribute another 40 percent. Almost all of
these fields are in mature stages of production and
decline is imminent if not already under way. Daqing,
for instance, has exhausted over half its reserves, and
oilfield managers publicly admit to being in a struggle
to maintain output rates. The Shengli and Renqiu
fields have already suffered declines in the last two
years. Some exploratory drilling is continuing in the
Bohai Bay and Sungliao Basins, and small fields such
as the recently discovered Dongpu field continue to be
discovered. Nevertheless, most geologists believe the
best prospects in both basins have been drilled
(figure 1).
.Shengli and Renqiu are estimated.
h Projection based on first half output.
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s
Numerous small sedimentary basins in central and
southern China have some potential for oil and gas.
The Ministry of Petroleum has expended considerable
effort exploring them because their locations are often
close to consuming areas. Many small oilfields have
been discovered and developed despite low productivi-
ty and high costs that would have made them non-
commercial in the West. Total output from these
fields is less than 100,000 b/d, only a few percent of
the country's output. 25X1
The far west may ultimately be the best source of new
petroleum reserves. Three very large prospective
basins, Qaidam, Tarim, and Junggar, may ult'
yield 10 billion barrels of oil each
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year exploration ettort on the margins o t ese
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desert areas has yielded a half dozen or so fields, but
severe climatic and logistical problems have prevented
development of all but two of them. So far no fields
have been found that are big enough to warrant the
3,000-kilometer pipeline needed to move oil to the
PRC's main consuming areas. Most of the area lacks
even rudimentary roads and shifting sand makes any
kind of construction work difficult. The Chinese have
admitted publicly that even with a major exploration
campaign it could be the end of the century before
significant output can be obtained from the west. By
that time there is little doubt that the onshore eastern
fields will be depleted and that the country will face a
severe oil shortage if alternative resources have not
been discovered and developed (figure 2).
Indigenous Offshore Exploration Fails
The continental shelf is thus the only likely source of
oil that can be expeditiously exploited. The Chinese
have been at work offshore for over a decade, but with
rather poor results. As early as 1967 China's Ministry
of Petroleum launched an offshore exploration pro-
gram in the Bohai just off the onshore Dagang and
Shengli fields. In the past 15 years over 100 wells
have been drilled there with several small discoveries.
In 1968 a geophysical survey of the East Asian
continental shelf by the UN Economic and Social
Council for Asia and the Pacific (UNESCAP) raised
considerable hopes among Western and Chinese geol-
ogists for discovering oil resources in the Yellow Sea
and the East and South China Seas. The Chinese then
expanded their program to include these areas, and
about 25 wells were drilled in the Yellow, East China,
and South China Seas and in the Gulf of Tonkin.
Although a good percentage of these wells discovered
some oil, few if any located reserves large enough to
be considered commercial. Only in the Bohai was a
development program started and oil actually pro-
duced
There are both geologic and technological factors
behind the Chinese failure to discover and produce
large reserves:
? The complex geology of the Bohai Bay Basin where
exploratory work was centered required better seis-
mic surveys and more sophisticated analytical tools
than China has been able to develop.
? Equipment problems often prevented completion of
exploratory wells to target depths. Lack of good
mud control, for instance, and the absence of large
enough blowout preventers have often created major
pressure control problems, particularly in the East
China Sea and in the Gulf of Tonkin. In addition,
recording instruments often failed to work and
made it difficult for the geologists to interpret what
the drill bit was penetrating.
? The Ministry of Petroleum and the petroleum
equipment industry are far behind the state of the
art required to efficiently produce oil offshore once
it is discovered. Strategies used for onshore produc-
tion including very intensive development of fields 25X1
and large-scale water flooding are far more complex
and costly in the offshore environment. 5X1
Abandoning Self-Reliance
By mid-1978, Beijing began to realize that the coun-
try's exploration program was failing to find the new
oil reserves needed to pursue oil self-sufficiency poli-
cies and to support an oil export program. Late that
year overly ambitious plans for producing 3 million
b/d of oil by 1980 and 4 million b/d by 1985 were
abandoned, and Beijing publicly admitted that it
would be doing well just to hold output at 2 million
b/d through the mid-1980s.1
Concern over possible oil shortages and the prospects
of reduction in earnings from oil exports contributed
to the massive readjustment of economic plans and
policies in the winter of 1978/79. Japanese officials
were told, for example, that several major petrochemi-
cal plants on order from Japan would have to be
canceled for lack of an assured feedstock supply. New
policies were quickly put into effect to slow the rate of
increase in the demand for oil. Plans to convert the
country's railroads to diesel fuel, mechanize agricul-
ture, and build up the small petrochemical industry
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Figure 2
China: Prospective Oil and Gas Basins
1 may!^`nd,oo clsrrn
Cease-Fire)
Line 'Chinese bne
of control
fi tsUs
(Ordes)
Lanzhou Xian
Baoji'
Kunming
Junggar
Urumqi
* Ulaanbaatar
MONGOLIA
East
China
East China
Sea
Tjai-pei
g--s Taiwan
~-'-' MACAU (U.K.)
(Port)
aeibu l Zhanjiang
elan )pearl River
Shenyang
LiaoheA
Bongpu, j ~. ? rs SOLJTH
F ,`Shengll < KOREA
(North China)
an Wuhan
Jianghan
eooneary reo,oaentat~on ~a
00? oecossar~iy awho~~tat~vo.
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were shelved or severely cut back. Where possible,
electric power plants were told to shift back to coal,
and. hydropower began to receive more emphasis for
future power supply. These measures contributed to
an actual decline in petroleum consumption last year,
although we believe the primary factor behind the
energy savin s was an overall decline in heavy indus-
trial output.
In order to have a chance of meeting future petroleum
requirements, Beijing completely revamped its explo-
ration and development policy. The most important
policy change was with regard to offshore oil. Previ-
ously the Ministry of Petroleum had purchased some
Western equipment for offshore work but had done all
the exploration work on its own. Beijing, as best we
can determine given the limited reporting available,
first directed the Ministry of Petroleum to selectively
enlist the help of Western and Japanese firms in the
offshore effort then, spurred on by a 1979 disaster in
which an imported jack-up rig capsized, killing all 72
aboard, virtually halted the Ministry's independent
program in favor of letting the foreign companies take
over.
Joint venture agreements were signed with the Japan
National Oil Company and with France's Elf Aqui-
taine and Total Exploration in 1979. The same year,
US and other international oil firms were asked to
participate in a major seismic exploration project in
the South China and Yellow Seas. Atlantic Richfield,
in a separate request, was asked to help explore and
develop an area south of Hainan Island where the
Chinese had located some oil
The Ministry of Petroleum also began to increase its
use of foreign contractors for specific onshore jobs.
For instance, a US firm was brought in for an
Offshore Seismic and Drilling Results
Exploratory work on China's continental shelf that
has already been completed under the 1979 agree-
ments includes 11 wells drilled in the Bohai Bay, the
Beibu Gulf (Gulf of Tonkin), and the Yellow Sea, as
well as high-quality geophysical surveys of those areas
and the South China Sea. All together, we calculate
that the firms have spent over $300 million in their
attempts to evaluate the oil and gas prospects. The
most important area that has not been evaluated by
the firms is the East China Sea, where China contin-
18-month project to control four wells which had Chinese and some Western press estimates of the
blown out of control in the Tarim basin. In addition, volume of China's potential offshore oil resources lie
US, French, and Japanese companies were hired to do in a 100- to 300-billion-barrel range-the top of this
seismic surveys over sections of the aidam Junggar, range would make China a new Saudi Arabia. These
and Ordos basins. estimates often include the unwarranted assumption
that each structure is completely filled with oil. In
some estimates barrels are confused with tons-a
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difference of a factor of seven-and in others recover-
able reserves are assumed equal to oil-in-place. Typi-
cally less than half of the oil-in-place can be recovered
utilizing existing technology.
We believe that 15 to 30 billion barrels of recoverable
oil is a better though admittedl still rough estimate
of possible oil resources.
Even these estimates represent the potential for a
great deal of oil, at the higher end of the range
equivalent to slightly more than all the remaining
proven reserves in the United States. At current
market prices 30 billion barrels of oil would be valued
at close to $1 trillion-three times China's GNP.
Tens of billions of dollars will be required to exploit
such deposits if exyloratorv drilling proves they exist.
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We believe the importance of the offshore exploration
program can perhaps best be illustrated by the use of
three scenarios corresponding to degrees of success
the companies may have in locating oil reserves
offshore China
Optimistic Case -A New North Sea. The 100 large
geologic structures in the Pearl River Basin plus the
30 or 40 structures in the other areas that are being
put up for bid certainly have, in our estimation, the
geologic potential for reserves in the 20- to 30-billion- 25X1
could eventually add another 10 or 20 25X1
billion barrels, more than the Norweigan sector of the
North Sea. 25X1
Discoveries on this order of magnitude would have a
very significant impact on China's economy and on
the firms that discovered and produced the oil. We
believe the important results of such discoveries could
be as follows:
Implications For China
and US-Chinese Relations
US leadership in offshore oil exploration and produc-
tion technology presents a good opportunity for long-
term expansion of US commercial and political rela-
tionships with China. We believe the offshore
contracts that China is currently negotiating with US
firms may, in fact, become one of the most important
commercial ventures yet signed with a Communist
country. Billions of dollars, perhaps tens of billions of
dollars, of Western investment eventually may be
involved, but, more important, the contracts will
represent a commitment by both the oil companies
and. the Chinese Government to deal with each other
on a day-to-day basis for as long as 35 years. Over
time, if the exploration program proceeds satisfactori-
ly, we believe US firms will exert a powerful influence
on the Chinese petroleum industry and could make an
important contribution to China's economic develop-
ment
barrel range of Britains's sector of the North Sea
fields. The East China Se 25X1
? Total Chinese oil production, after stagnant or
possibly declining output through the mid-1980s,
would rise gradually through the 1990s to perhaps 4
million b/d by the end of the century. Offshore
output could contribute perhaps 2.5 million b/d of
the total by then, equivalent to current North Sea
output rates. Onshore output will likely have de-
clined from the current 2 million b/d, even consider-
ing a possible startup of some new western oilfields.
? Chinese crude oil exports would increase to perhaps
1 million b/d from their current 350,000 b/d rate in
order to pay off the approximate $30 billion invest-
ment by foreign oil firms and to give the firms thei
after-tax profit shares 25X1
F Net Chinese earnings from petro- 25X1
eum exports could still double their current annual
rate of about $4.5 billion.
? The impact on the world oil market of an additional
650,000 b/d would be small, but it would allow
Japan-the most likely market-a greater degree of
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diversification from Middle East sources. Exports of
500,000 b/d to Japan would raise China's share of
that market from the current 4 percent to about
10 percent. If China's currrent trading patterns are
maintained, some 100,000 b/d of China's exports
might reach the US west coast, a welcome possiblity
as Alaska's North Slope is expected to be in steep
decline by the mid-1990s.
? China's domestic consumption of oil could rise at an
annual average rate of about 5 percent in the 1990s
after flat or even declining consumption in the
1980s. This would allow significant improvements in
the country's transportation and petrochemical sec-
tors, since coal and hydropower are expected to
supply most of the increase in other industrial fuel
requirements.
? US firms would stand in a good position to aid in
the upstream segments of China's petroleum indus-
try-everything from drill bits to offshore produc-
tion platforms, as well as in downstream segments-
the refining industries. Continued growth in the
industry would be dependent on opening areas in
deeper waters offshore and in the western basins,
both of which would present new opportunities for
US firms.
? China's industrial structure could change as success
in oil industry joint ventures encouraged other
Chinese industries to become more receptive to
foreign investment. Location changes, including
possibly rapid industrialization of southern China,
particularly Guangdong Province, could also occur.
Hong Kong and even Taiwan would also be affected
by the impact of a booming oil program in the South
China Sea.
? Success offshore China would intensify jurisdiction-
al pressures in disputed areas of the East Asian
continental shelf. The Taiwan issue would be cen-
tral to almost any settlement. Japan, South Korea,
and Vietnam would also likely become embroiled
(appendix B).
Pessimistic Case: Baltimore Canyon Revisited. The
Baltimore Canyon area, off the Atlantic Coast, was
considered by the US Geological Survey as a very
good prospect for oil and gas in 1975. Several years
and several billion dollars later, no commercial re-
serves have been identified.
Because of the breadth and variety of prospects off
the Chinese coast, we believe it is unlikely that no
commercial reserves will be located. Nevertheless, oil
.exploration is still much less than an exact science and
there is always the possibility that the firms will not
find significant quantities of oil. The impact would be
in our estimation very critical to China:
? Unless large new reserves were quickly located in
eastern China, Chinese petroleum output would
decline sharply from the mid-to-late 1980s through
the mid-1990s. Exports would quickly dry up and
China would become a net importer by the early
1990s. These imports would not be large enough to
influence the world market in the main because
China would not be able to afford large imports of
oil. Shortage of foreign exchange created by the
absence of exports would severely limit China's
ability to import capital equipment for other
industries.
? The Western oil firms would lose whatever money
they put into exploration but would not incur the
much larger development expenses. Most firms
would probably pull out after the first or second
stages of exploration in order to cut their losses.
? China's energy policy, in particular Beijing's will-
ingness to depart from the self-reliant policies of the
past few years, would come under domestic criti-
cism and perhaps be reversed. Western firms proba-
bly would be criticized for not exploring thoroughly.
Foreign exchange shortages and dissatisfaction by
both the firms and the Ministry of Petroleum would
make it difficult to take the next logical step-
exploration of the far west on a joint venture or
consortium basis 25;K1
More Likely: A New Indonesia. Indonesia produces
over 1 million barrels a day of oil from offshore
reserves in the southern part of the South China Sea.
Our best estimate is that China's offshore oil output
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in the 1990s will be slightly less than that of Indonesia,
or about 1 million b/d. Even this moderate level of
production has important implications for China and
its relations with the West:
Offshore output in this case would do little more
than offset an expected decline of about 500,000
b/d onshore a decade from now. Oil exports, after
falling in the mid-1980s, might regain current rates,
but net earnings would fall as development costs
would have to be repaid
? Domestic oil consumption could grow at only about
1 percent per year until major reserves were devel-
oped in the far west. This growth-only matching
expected population growth-would make it diffi-
cult to improve the capabilities of the transportation
and petrochemical sectors for supporting the overall
goals of industrialization. Tough decisions balancing
the trade-offs between foreign exchange earned
from oil exports and the domestic use of fuels would
be necessary.
? Continuous disputes could be expected between the
Minsitry of Petroleum and the foreign firms over
whether to develop marginal oilfields. Firms would
have invested billions of dollars in the larger oil-
fields and would need to stay on good relations with
Beijing to protect their equity. Beijing, in order to
maximize output, however, would push the firms to
develop small, and in the firms' view, uneconomical,
fields.
? The relatively small scale of the development pro-
gram--perhaps 20 production platforms-would
make a much smaller impact on China's petroleum
equipment industry than in the optimistic scenerio,
but large investments would still be required to
modernize the refining industry to improve the
efficiency of oil use. Chinese industry would be
heavily influenced by the US firms and good oppor-
tunities would remain available for these firms to
sell equipment and engage in joint exploration pro-
grams onshore.
Uri Participation Not Assured. At best, months of
difficult negotiations still remain before contracts
with the bulk of US firms are signed. ARCO's
difficulties over contract details that held up signing
for over a year could, moreover, be repeated. Several
smaller firms have already dropped out
Nonparticipation by the major US firms would, we
believe, greatly retard the program, but foreign oil
companies could take up some of the slack. British
Petroleum, for instance, is organizing a block of five
non-US companies to bid jointly on blocks. Royal
Dutch Shell, despite Beijing's dispute with the Neth-
erlands over submarine sales to Taiwan, retains its
eligibility to bid. Smaller companies such as the Japan
National Oil Company will probably win some blocks
even with US competition, and as long as they have
access to subcontractors-many of which are Ameri-
can-for specialty jobs, they could move ahead with
an exploration program.
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A limited program with no direct participation by the
US majors would, we believe, be much more depend-
ent on early discoveries than would be the comprehen-
sive program now being planned by the Chinese.
Early success would stimulate the interest of the oil
firms, who can provide the capital needed to carry out
a thorough exploration program; early failures, how-
ever, would quickly dry up interest and funds and
delay further exploration for decades. Beijing would
also be confronted with a situation in which Japanese
capital might play a dominant role, a possibility for
which Beijing has already expressed concern.
China, by letting US firms take the lead in the
important South China Sea seismic survey program,
has in our view already underlined the high value it
places on participation by these firms in the oil
exploration program. Ministry of Petroleum officials
have stated that they will do whatever it takes to
include the US majors. Large-scale production off-
shore China is to a considerable extent a state-of-the-
art problem and will continue to be through the end of
the century as exploration proceeds to deeper waters.
Beijing recognizes that it must accept some degree of
dependence on the US oil companies in this endeavor
but will couple this new dependence with a deter-
mined effort to improve its own technological base
(appendix C) in order to retain as much self-reliance
as possible.
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Secret
Appendix B
Territorial Disputes
in the East Asian
Continental Shelf
The East Asian continental shelf claimed by China is
not uncontested. China has made only generalized
claims to the shelf but has frequently disputed claims
made by neighboring countries. Primary areas of
dispute are the central portions of the Yellow and
East China Seas and the Gulf of Tonkin. China until
recently took a cautious approach to exploration in
these waters but more recently has taken up a more
aggressive approach. The PRC is now challenging
Vietnamese claims in the Tonkin Gulf and drilling far
out in the East China Sea close to areas claimed by
Taiwan, Japan, and both Koreas. Discovery of com-
mercial-scale oil resources anywhere on the shelf
would raise these issues to a higher level of sensitivity
and may eventually make settlement more difficult.
The mutual need for oil reserves, on the other hand,
might enable these countries to put aside political
differences in an attempt to negotiate some kind of
agreement.
North and South Korea basically use the equidistance
principle in claiming about half of the Yellow Sea for
Korea. China has at least de facto accepted this
principle for the Korea Bay in the northern Yellow
Sea, where it is giving some assistance to North
Korean oil exploration. Beijing challenged South Ko-
rea's Yellow Sea claim, however, and in 1973 forced
Gulf Oil Corporation to stop drilling in a South
Korean concession which stretched somewhat over the
hypothetical equidistance line. China has consistently
refused to discuss the matter with Seoul, however,
claiming P'yongyang is the only Korean authority.
Poor seismic and drilling results so far have muted the
Yellow Sea problem, and it may not rise again. The
new Chines ons are well he
Yellow Sea.
More problematic is the East China Sea, central
areas of which are contested b China, Taiwan,
Japan, and both Koreas In 1978 Japan and
South Korea reached agreement on a joint develop-
ment zone (JDZ) for the northeastern East China Sea,
compromising each country's position. China immedi-
ately contested the agreement but has done nothing to
prevent Korea from drilling three wells in the JDZ, all
of which were dry. Korean exploration in the area is
intensifying with three new wells to be drilled by
Texaco and the Korean American Oil Company this
year. China also has begun drilling wells just on its
side of the JDZ-the rigs are escorted by military
patrol boats-but the effort has been plagued with
technical difficulties. The JDZ itself may well become
less of an issue if the new Korean wells turn out dry.
Geologically it is considered only marginally prospec-
tive with much better prospects to the south roil
area where the Chinese are drilling. Of course a
Korean discovery could force the issue, which so far
China has refused to discuss.
Potentially more troublesome is the 250,000-square-
kilometer area between the JDZ and Taiwan,28Xrea
of very favorable petroleum geology. Taiwan and
Japan both claim much of the area and in the early
1970s granted concessions to oil companies to explore
and develop it. China immediately disputed both
claims, and little exploratory work was carried out by
the firms. Since 1980, Beijing's Ministry of Geology
has been running seismic surveys in the area but has
not opened it to Western firms for exploration 5X1
Both Beijing's and Taipei's claims are based on the
continental shelf principle, which under most interpre-
tations gives China almost all the prospective area.
Tokyo is on less firm ground in arguing the equidis-
tance principle based on its Ryukyu Island chain and
a small uninhabited cluster of islands, the Senkakus.
These islands-called Diaoyutai in Chinese-also
claimed by China, are central to the legal issu?,5X1
because they clearly rest on the continental shelf,
whereas the Ryukyu's are separated from the shelf, by
the deep Okinawa Trough. Technically, Japanese
25X1
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ownership of the Senkakus would establish a Japanese
presence on the shelf and thus would help to nullif
the continental shelf criterion
Japan has approached the matter very cautiously,
however, and has not officially drawn a line setting
out its claim. Instead it has repeatedly asked Beijing
to negotiate the issue in hopes of working out a joint
development scheme as was arranged with Korea
Taipei's claims to offshore resources both off the
mainland and around the island have been weakened
drastically by its expulsion from the United Nations
and by the recognition of the PRC by Japan and the
United States. Nevertheless, Beijing has followed a
moderate course with regard to Taiwan island, letting
Taiwan's China Petroleum Corporation (CPC) drill in
waters within the island's territoral seas where some
gas has been discovered.
The Pearl River Mouth Basin is uncontested except
for possibly a small section to the northeast which
falls approximately equidistant between Taiwan and
the mainland. CPC drilled one well there in 1977 and
discovered some gas.
Vietnam has proposed that the Gulf of Tonkin be
divided along the 1080 03'18" meridian, which was
used in an 1887 Sino-French treaty to allocate owner-
ship of islands in the northern part of the Gulf (see
figure 4). Beijing denies that that treaty had anything
to do with dividing up the Gulf itself. Again China
refuses to make a specific claim but has suggested a
large "no exploration zone" on the western or Viet-
namese side of the meridian. The most reasonable
alternative to using the median approach is the equi- 25X1
distance formula, which would give Vietnam a larger
share of the northern part of the Gtilf but would give
China more of the central section. China is not likely
to accede to an equidistance approach for fear of
compromising the basis for its claims to the Yellow
and East China Seas.
In addition to these Chinese claims, China also claiIX1
the bulk of the entire South China Sea by virtue of
claims to a number of island groups, which, according
to its historians, have belonged to China for centuries.
26x1
Vietnam, the Philippines, and Malaysia have been 25X1
drilling in the southern part of the South China Sea
for years, however, and it is doubtful China can make
its claims stick. Most of the central area is in waters
too deep to drill using present technology. For these
reasons prospects in the central and southern South
China Sea are not discussed in this paper.' 2 X1
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Appendix C
Technological Support
for Offshore Exploration
Chinese exploration and development contracts will
require the Western partners to purchase as much
equipment and use as many services as can be com-
petitively provided by Chinese suppliers. Many Chi-
nese organizations, including shipyards, oil equipment
manufacturers, and local and provincial committees,
are gearing up with the expectation of providing a
substantial share of the goods that will be required for
a major exploration effort. The generally poor quality
and lack of reliability of many Chinese oil industry
products could slow the program and ultimately make
it more costly. There is little doubt, however, that
Chinese industry will make considerable gains in
efficiency as foreign firms sell and barter Western
technology.
China's oil industry is in theory capable of supplying
most pieces of equipment, tools, and materials re-
quired for offshore oil exploration. Major oil equip-
ment supply factories in Shanghai, Baoqi, Lanzhou,
and Xian have supplied the onshore industry for years
with everything from seismic processing equipment to
drilling rigs, pipe, and bits. Much of this equipment,
however, has been of inferior quality. Chinese ship-
yards have designed and constructed their own jack-
up rigs and have improvised their own drill ships for
deeper water drilling. Even a sophisticated semisub-
mersible rig is under construction with little foreign
help.
The very success that the domestic oil supply industry
has had poses problems for both the Ministry of
Petroleum and the Western joint-venture partners.
The domestic industry is often powerful enough to
force even the Ministry of Petroleum to buy Chinese-
made equipment, when in many cases the equipment
is of such inferior quality that it leads to abandoned or
out-of-control wells
Billions of dollars in foreign exchange earnings
through the export of crude oil in recent years has
made it easier for the Ministry to import Western
equipment. Most offshore rigs are now imported, as is
a large proportion of the drilling pipe and bits used for
both offshore and onshore drilling. Many of the more
sophisticated imports, however, have been misused
due to stinginess in paying for training, spare parts,
and auxiliary equipment. The capsizing of the import-
ed Bohai 2 jack-up rig in 1979 is only the most
dramatic example. The overall result has been very
inefficient use of both domestic and imported re-
sources over the past decade.
2LKA
Kang Shien, the recently retired Minister of Petro-
leum, was well aware of these problems and was a
leading advocate of the joint venture procedure
whereby Western firms supply material, part9,%(l
management for equipment that is assembled in
China. Projects of this sort have been multiplying in
the last year and should be able to make a substantial
contribution to the exploration effort. Kang was re-
tired but presumably his replacement, Tang Ke, will
follow the same policies.
2
Offshore Mobile Drilling Rigs
The Ministries of Petroleum and Geology currently
own 10 mobile jack-up rigs capable of drilling in
maximum water depths of from 40 to 90 meters
I Eight B of these have been purchased,qXq
Singapore and Japan over the past seven years. Two
each are being used in the Bohai, the East Cl i ? a,
and the Gulf of Tonkin. One has been leased to a US
firm working off Malaysia and another is up for sale.
Early in the offshore exploration effort, China started
its own rig-building program. The Dalian shipyard
built two rigs patterned after the imported Bohai 2.
These have not worked out well. The Bohai 1 is being
retired after only 10 years of sporadic work, 2FdX1
'This figure ded Bohai 2 imported from
Japan in 1973. 25X1
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Bohai 3, which went into service in 1979, drilled only
for a couple of months and has been in port ever since.
Design and material problems, including a cracked
deck and miserable crew quarters, have apparently
caused it to be abandoned.
5X1
5X1
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Production Platforms
A major part of the expense in offshore development
Guangzhou's Hwangpu shipyard is also attempting to
get into the jack-up rig business. It has signed, a joint
venture agreement with a Singapore firm to build a
Bethlehem-design rig with major parts, such as the
legs, imported from Singapore
China has developed only limited experience in build-
ing and operating the floating type rigs-semisubmer-
sibles and drill ships-that will be required in much of
the South and East China Seas. One drill ship was
improvised in the early 1970s by attaching two
freighters in catamaran fashion with a drilling plat-
form between them. The Ministry of Geology import-
ed a semisubmersible, the Nanhai 2, which has been
used. in the Yinggehai Sea. The Chinese wanted to
lease the rig to ARCO for its exploration work, but
ARCO found the rig in need of extensive repairs,
because the Chinese had enlarged the crew quar-
ters---thus changing the center of gravity. These
modifications are now under way in Hwangpu ship-
yard, near Gwangzhou
A third attempt to develop semisubmersibles has been
the design and construction of the Kantan 3 in a
Shanghai shipyard. After more than three years of
construction, the rig appears close to completion, but
the Chinese admit to major design problems which
may prevent it from going into operation.
is the construction of huge permanent platforms from
which development wells can be drilled and oil pro-
duced. These structures must be taller than the water
depth and built to withstand great current, wave, and
wind forces. The Chinese have gained some experi-
ence building small platforms for the shallow-water
Bohai fields-up to about 50 meters of water-but
have yet to attempt constructing the much larger
platforms that will be required farther out in the
Bohai and in most of the other offshore prospective
areas. Production from a good portion of the South
China Sea, for instance, will require platforms from
200 to 250 meters tall-the height of a major sky-
scraper. These platforms can cost upwards of $200
million each, and scores of them will be required if
exploration is successful.
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The Chinese civil aviation service has provided little
in the way of helicopter support services vital to the
safe and efficient use of offshore rigs. Crashes and
poor maintenance have depleted the small helicopter
force they once had. Major steps are being taken to
improve the situation by the time the Pearl River
Basin exploration begins. In a major joint venture
project, China is to assemble 50 medium-size Da 1k 1
phin helicopters with parts supplied from France-
several units have already been built. A few larger
and longer range helicopters are expected to be
imported from the United States. Recently a helicop-
ter service company was set up in Guangzhou and
another is planned, probably for Tanggu, which will
be dedicated to offshore supply work. Western firms
will have to work with these firms, as Chinese law
prohibits them from using their own aircraft. 25X1
Service and Support Bases
Western firms have been somewhat concerned about
the lack of support services for the exploration pro-
gram. Again, however, the Chinese have begun nego-
tiations with foreign suppliers for a wide variety of
support projects which, we believe, if speedily imple-
mented will contribute greatly to the exploration
Support for offshore exploration thus far has been
limited to two marginally adequate bases, Tanggu for
the Bohai and Zhanjiang for the Gulf of Tonkin and
South China Sea, and to the better capabilities of the
Shanghai area for East China Sea work. New bases
are planned for Sanxia on Hainan Island and Qiwan
just north of Hong Kong to better support exploration
in the Yinggehai and South China Sea areas.
Guangzhou, though somewhat removed from the pro-
spective area, will increasingly serve as a rear support
base. Qingdao is to be set up as the Yellow Sea
support base. We believe major service requirements
such as rig repair will probably be handled by Singa-.
pore and perhaps Hong Kong.
The French firm, Total Exploration, has had the most
experience in relying on Chinese servicing and on the
whole has not been very complimentary. Major com-
plaints have been registered concerning lack of ade-
quate helicopter support, the difficulty of getting
repair work done, and poor living and workin condi-
tions at their Zhanjiang support base.
Communications are also slated for improvement.
CNOOC is attempting to set up a satellite communi-
cations system, using Intelsat IV or V, to link offshore
rigs with their support bases, Beijing headquarters,
and possibly the companies home offices. Negotia-
tions are under way with three US firms and with
Nippon Electric Corporation for the multimillion-
dollar system 25X1
Manpower and Training 25X1
In addition to using as much Chinese-made ecA5)X1
ment as possible, the Chinese will insist-as indicated
in the "model contracts"-on considerable use and
training of Chinese labor in the exploration and
development work. Some training is already under
way both in China where US firms have sent training
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teams and in the United States, where hundreds of
Chinese are enrolled in petroleum engineering
schools
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Appendix D'
Regulations of the People's Republic
of China on the Exploration of
Offshore Petroleum Resources in
Cooperation With Foreign Enterprises
Article I
In the interest of developing the national economy,
expanding international economic and technological
cooperation, and safeguarding national sovereignty
and economic interests, these regulations are formu-
lated to permit foreign enterprises to participate in the
cooperative exploration of offshore petroleum re-
sources of the People's Republic of China.
Article 2
All petroleum resources in the internal waters, terri-
torial waters and continental shelf of the People's
Republic of China and the maritime resources in all
waters within the limits of national jurisdiction of the
People's Republic of China are owned by the People's
Republic of China.
All buildings and structures installed in the aforemen-
tioned sea areas to exploit petroleum and vessels
serving the petroleum operations, as well as the
corresponding onshore oil and/or gas terminals and
bases, are under the jurisdiction of the People's
Republic of China.
Article 3
The Government of the People's Republic of China
protects, in accordance with the legislations of force,
investments by foreign enterprises participating in the
exploitation of offshore petroleum resources, their
share of profit and other legitimate rights and inter-
ests, and their activities in cooperation exploitation.
All cooperative activities to exploit offshore petroleum
resources within the scope of the regulations shall
comply with the laws and decrees of the People's
Republic of China and relevant state stipulations. All
persons and enterprises taking part in the petroleum
operations shall be bound by the laws of China and
shall accept inspection and supervision by the current
authorities of the Chinese Government.
Article 4
The Ministry of Petroleum Industry of the People's
Republic of China is the competent authority in
charge of the exploitation of offshore petroleum
resources in cooperation with foreign enterprises. The
ministry determines forms of cooperation and demar-
cates areas for cooperative exploitation in accordance
with the zones and surface area designated by the
state. It works out plans for the exploitation of
offshore petroleum resources in cooperation with for-
eign enterprises in accordance with the long-term
state economic program, formulates operational and
management policies, examines and approves the
overall development program for offshore oil and/or
gasfields.
Article 5
The China National Offshore Oil Corporation
(CNOOC) is in full charge of the work of exploiting
offshore petroleum resources in the People's Republic
of China in cooperation with foreign enterprises.
CNOOC is a state corporation with the qualifications
of a juridical person which has the exclusive right to
explore for petroleum within the areas of cooperation
and to develop produce and market it.
CNOOC may establish regional subsidiaries, special-
ized companies, and overseas offices to carry out the
tasks entrusted by the head office as the work
requires.
Article 6
CNOOC shall, by calling for bids and entering into
petroleum contracts with foreign enterprises, exploit
' The source of these regulations is FBIS, I I February 1982. Italics
have been added for emphasis.
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offshore petroleum resources in cooperation with for-
eign. enterprises in accordance with the zones, surface
area, and areas demarcated for cooperative
exploitation.
Petroleum contracts referred to in the preceding
paragraph shall come into force after approval by the
Foreign Investment Commission of the People's Re-
public of China.
All documents signed by CNOOC in other forms of
cooperative exploitation of petroleum resources utiliz-
ing technology and funds provided by foreign enter-
prises shall also be subject to approval by the Foreign
Investment Commission of the People's Republic of
China.
Chapter II. Rights and Obligations
of the Parties to Petroleum Contracts
Article 7
CNOOC shall exploit offshore petroleum resources in
cooperation with foreign enterprises by entering into
petroleum contracts. Unless otherwise specified by the
Ministry of Petroleum Industry or in the petroleum
contract, the foreign enterprise that is one party to the
contract (hereafter `foreign contractor') shall provide
exploration investment, undertake exploration opera-
tions and bear all exploration risks. After a commer-
cial oil and/or gas field is discovered, both the foreign
contractor and CNOOC shall make investment in the
cooperative development. Theforeign contractor shall
be responsible for the development and production
operations until CNOOC takes over the production
operations when conditions permit under the petro-
leum contract. The foreign contractor may recover its
investment and expenses and receive remuneration
out of the petroleum produced according to the
provisions of the petroleum contract.
Article 8
The foreign contractor may export the petroleum it
receives and its share and/or purchases and remit
abroad the investment it recovers, its profit, and other
legitimate income according to law.
Article 9
All Chinese and foreign enterprises involved in the
exploitation of offshore petroleum resources shall pay
taxes in accordance with the tax laws of the People's
Republic of China and pay royalties.
Any employee of the said enterprises in the preceding
paragraph shall pay individual income tax according
to law.
Article 10
The equipment and materials imported for the imple-
mentation of the petroleum contract shall be exempt-
ed from customs, or levied customs at a reduced rate,
or given other preferential treatment in accordance
with state regulations.
Article 11
The foreign contractor shall open a bank account in
accordance with the stipulation of the provisional
regulations for exchange control of the People's Re-
public of China.
Article 12
In implementing the petroleum contract, the foreign
contractor shall use appropriate and advanced tech-
nology and managerial experience and is obliged to
transfer the technology and pass on the experience to
the personnel of the Chinese side involved in the
implementation (hereinafter "Chinese personnel").
In bhe course of petroleum operations, the foreign
contractor must give preference to the Chinese per-
sonnel in employment, keep the percentage of Chinese
steadily rising, and train the Chinese personnel in a
planned way.
Article 13
In the course of implementing the petroleum contract,
the foreign contractor must accurately report the
petroleum operations to CNOOC in due time; and
during the operations it must acquire complete and
accurate data, records, samples, vouchers, and other
original data, and regularly submit to CNOOC the
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necessary data and samples as well as technological,
economic, financing and accounting, and administra-
tive reports.
Article 14
For the implementation of the petroleum contract, the
foreign contractor shall establish its subsidiary or
branch or representative office within the territory of
the People's Republic of China and fulfill the registra-
tion formalites according to law.
The domiciles of the subsidiaries, branches and repre-
sentative offices mentioned in the preceding para-
graph shall be determined through consultation with
CNOOC.
Article 15
The provisions of Articles 3, 8, 9, 10, and 14 of the
regulations shall apply to foreign subcontractors
which render services to the petroleum operations.
Article 16
In order to achieve the hightest practicable ultimate
oil recovery, the operation shall work out an overall
development plan for each oil and/or gas field and
conduct the production operations in accordance with
the regulations and relevant rules promulgated by the
Ministry of Petroleum Industry on exploitation of
petroleum resources and with reference to interna-
tional practice.
Article 17
For the implementation of the petroleum contract, the
foreign contractor shall use the existing bases within
the territory of the People's Republic of China. [fa
new base is needed, it shall be established within the
territory of the People's Republic of China.
The location of the new base and such arrangements
as may be necessary in special circumstances shall be
subject to prior written approval from CNOOC.
Article 18
CNOOC has the right to send personnel to join the
foreign operator in making master designs and engi-
neering designs for the implementation of the petro-
leum contract. Design corporations within the territo-
ry of the People's Republic of China shall have
priority in entering into subcontracts for the master
designs and engineering designs, provided that the
terms offered by these design corporations are
competitive.
Article 19
The operator must give preference to manufacture
and engineering companies within the territory of the
People's Republic of China in concluding subcon-
tracts for all facilities to be built in implementing the
petroleum contract, including artificial islands, plant-
forms, buildings and structures, provided that they
are competitive in quality, price, term of delivery, and
services.
Article 20
As for the equipment and materials required to
implement the petroleum contract, the operator and
subcontractors shall give preference to procurring and
using equipment and materials manufactured and
supplied by the People's Republic of China, provided
that these are competitive.
Article 21
As for the services required to implement the petro-
leum contract, including services for geophysical pros-
pecting, well drilling, diving, helicopters, vessels, and
onshore bases, the operator and subcontractors shall
enter into subcontracts and service contracts with
relevant enterprises within the territory of the Peo-
ple's Republic of China, provided that these services
are competitive in price, efficiency, and service
quality.
Article 22
All assets purchased and built by theforeign contrac-
tor for implementation of the petroleum contract in
accordance with the plan and budget shall be owned
entirely by CNOOC when the foreign contractor has
fully recovered its investment for those assets (but the
rental equipment from any third party is excluded).
Within the term of the petroleum contract, the for-
eign contractor may be allowed to continue to use
those assets in accordance with the provisions of the
contract.
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Article 23
CNOOC is the owner of all the data, records, sam-
ples, vouchers and other original data obtained in the
course of the petroleum operations, as provided in
Article 13 of the regulations.
The utilization, transfer, donation, exchange, sale and
publication of the afore-mentioned data, records, sam-
ples, vouchers and other original data and their
delivery and transmission to outside the People's
Republic of China shall be conducted in accordance
with the rules on the control of data and information
formulated by the Ministry of Petroleum Industry.
Article 24
The operator and subcontractors shall carry out the
petroleum operations in compliance with the laws and
rules on environment protection and safety of the
People's Republic of China, and with reference to
international practice to protect fishery and other
natural resources and prevent the air, seas, rivers,
lakes, and the land from being polluted or damaged.
Article 25
The petroleum produced within the petroleum con-
tract area shall be landed in the territory of the
People's Republic of China or may be exported from
oil and/or gas metering point of offshore terminals.
In case such petroleum has to be landed outside the
territory of the People's Republic of China, the
approval of the Ministry of Petroleum Industry must
be obtained.
Article 26
In case of war, threat of war, or other emergency
circumstances, the Government of the People's Re-
public of China shall have the right to requisition a
portion or all of the petroleum obtained and/or
purchased by the foreign contractor.
Chapter III. Supplementary Provisions
Article 27
Any dispute arising between foreign and Chinese
enterprises during the cooperative exploitation of off-
shore petroleum resources shall be settled amicably
through consultations. If the parties to the dispute fail
to arrive at a solution through consultation, the
dispute may be settled through mediation or arbitra-
tion by an arbitration body of the People's Republic
of China, or through arbitration by another arbrita-
tion body agreed upon by both parties.
Article 28
In case an operator or subcontractor violates the
regulations in conducting petroleum operations, the
Ministry of Petroleum Industry is authorized to warn
the operator or subcontractor and demand remedy
within a limited time. Should the operator or subcon-
tractor fail to remedy the violation within the speci-
fied time, the ministry shall have the right to take
necessary steps, even to the extent of suspending its
right to conduct the petroleum operations. All eco-
nomic losses so incurred shall be borne by the party
responsible.
The party responsible for serious violation of the
regulations shall be fined or even be sued before
juridical authorities by the Ministry of Petroleum
Industry.
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