INTELLIGENCE MEMORANDUM CHINA: PETROLEUM EXPORT PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700070013-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: November 16, 2016
• Document Release Date: January 7, 2000
• Sequence Number: 13
• Publication Date: August 1, 1974
• Content Type: IM

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~a: P~#rcaleum Export Prospects Aug 74 ;
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Secret
No Foreign Disse>i
Intelligence Memorandum
China: Petroleum Export Prospects
Secret
ER IM 74-13
August 1974
Copy N2 63
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NATIONAL SECURITY INFORMATION
Unauthorized Disclosure Subject to Criminal Sanctions
Classified by 015319
Exempt from General Declassification Schedule
of E.O. 11652, exemption category:
?58(1)1 (2), and S3)
Automatics y declauiflod om
date Impossible to determine
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No Foreign Dissem
China:
Petroleum Export Prospects
A. The People's Republic of China (PRC) will earn about US $350 million
from the sale of 4 million metric tons of crude oil to Japan during 1974 and
may offer another million tons before yearend.
B. The Chinese have told Japan that they are ready to expand oil exports
up to 10 million tons in 1975 and to 50 million tons (1 million b/d) in 1980.
? Reserves are large eno,igh to support the 1980 level of exports, even
without production from offshore fields.
? If production accelerates or even if it only continues its current
average growth of 22%, the PRC will still have generous leeway for
using oil to modernize the economy.
C. Limited offshore exploitation is confined to the shallow waters of the
Po Hai (Gulf). Activity in the deeper waters of the continental shelf has been
limited to geological surveys.
D. Only if the PRC encounters unexr ,cted difficulties in achieving the
output of crude oil necessary to meet increased domestic and export requirements
will it be interested in joint ventures, direct foreign investment, or product sharing.
E. The abundance of oil will ease, not solve, China's deep-seated problems
grounded in population pressure, low productivity, and technological lags.
Note: Comments and queries regarding this memorandum are welcomed. They
i ma be directed to Mr of the Office of Economic Research,
25X1A25X1A
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1. China will export at least 4 million tons of crude oil to Japan in 1974,
and Chinese ofl.'icials have suggested that much larger amounts will be available
to Japan during the rest of the decade. Peking has also entered other Asian oil
markets, promising to deliver small quantities of petroleum products and crude
oil to Hong Kong, Thailand, and the Philippines. This memorandum reviews the
place of petroleum in the PRC energy supply position, the recent growth of the
petroleum industry, and current policies for petroleum developmont and assesses
the prospects for China's becoming a major exporter of petroleum.
Energy Supply Position
2. The PRC used an estimated 365 million tons (SFE basis)' of primary
energy in 1973. China consumes about the same amount of energy as Japan, West
Germany, and Great Britain; only the United States and the Soviet Union use
more (see the chart). Coal accounts for almost four-fifths of all primary energy
produced. It provides directly or indirectly 85%x-90% of the power for industry,
generates 75%% of all electric power, and powers 80% of the railroad locomotives.
Coal also is a major raw material for the rapidly developing chemical fertilizer
and other petrochemical industries.
3. Other significant contributors to China's primary energy output are
petroleum and hydroelectric power. In 1973 the petroleum industry provided about
19% of total primary energy output. Hydroelectric power c-)ntribuies only about
3% of the total primary energy output. China has no nuclear powerplants.
4. Currently, energy supplies are tight, and coal production has not kept
tip with demand.2 Although the rapid growth of petroleum supply gives Peking
the option of substituting oil for coal, the regime has taken only limited steps
in this direction, at least partly because of China's huge reserves of coal. More
important, the regime appears to believe that China's increasing oil supplies are
better used to expand the petrochemical industry and to earn much-needed foreign
exchange.
1. Standard Fuel Equivalent (calorific value of 7,000 kilocalories per kilogram).
2. An assessment of this situation ,'.s included in ER RP 74-5, China: Energy Supply Problems, March 1974,
Secret No Foreign Dissem.
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Energy Comparisons, 1973
Primary Energy Electric Power
Consumption Output
(Million Metric Tons of (Billion Kilowatt Hours)
C 1., ..-I....J r....i r....i.._~__..
Hard Coal Output
(Million Metric Tons)
.United States
USSR
China
Petroleum
Products Output
(Million Metric Tons)
Japan
United Kingdom
West Germany
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Crude Oil Supplies
5. China achieved sell-sufficiency in
crude oil in 1965 and is now the world's 13th
largest producer. Output of crude oil in 1973
was 53 million tons (see the table). PRC crude
production in 1973 was about the same as
Algeria's (53.5 million tons); was the second
largest in East Asia, close behind Indonesia (66.2
million tons); and was the second largest of the
'Communist producers, behind the USSR (421
million tons). Crude oil output in China grew
at a rate of 22% per year during 1965-73, and
output in 1974 is planned to rise by 30% to
about 70 million tons.
field)
, an
d (2
o
ld
er
)
fi
ld
e
s
i
h
n t
e western part
of the country (Yu-men, Tsaidam, Karamai, and
Yen-ch'ang). (For the location of major Chinese
6. The crude oil is coming from (1)
relatively new fields in Manchuria (the Ta-ch'ing
field), north China (the Ta-kang and Sheng-li
fields), and central China (the Chien-chiang
China: Crude Oil Production
Million Metric Tons
1950
0.2
1965
10.8
1966
14.0
1967
14.0
1968
15.0
1969
20.3
1970
28.5
1971
36.7
1972
43.0
1973
53.0
19741
70.0
petroleum facilities, see the map.) The rapid growth in output since 1965 is the
payoff from wide-ranging geological surveys started 20 years ago and from
preparatory field development carried out in the late 1950s and early 1960s.
Approximately 8 years elapsed between the initiation of general prospecting activity
and the achievement of large-scale production in 1963 at the Ta-ch'ing field; almost
10 years were required for development of the Sheng-li and Ta-kang fields.
7. There are no authoritative estimates of oil reserves in the PRC. The most
comprehensive US study available estimates reserves to be 2.7 billion tors, but
other studies give higher figures. Considering that large areas have not yet been
surveyed, actual reserves are probably much larger. The search for new resources
is continuing. As new fields move into production, the oil exploration teams move
to new areas. The main thrust of the Chinese effort is still on land.
8. Offshore exploration has barely begun. Exploitation of offshore oil has
been confine(! to the shallow Po Hai. The Po Hai fields, which are adjacent to
and probably part of the highly productive oil basin underlying the onshore Ta-kang
and Sheng-li fields, could begin to produce in the next few years. Large-scale
production from the Po Hai is probably 8 to 10 years off, and perhaps longer,
because of technical difficulties involved in offshore exploration.
9. Activity in the deeper waters of the continental shelf in the Yellow,
East China, and South China seas has been limited to geological surveys. The Chinese
have not had the equipment and technology necessary for drilling. During the last
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Railroad
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year, however, China has committed about $150 million to equip itself' with rigs
and supply ships for decpwater exploration.
10. China's willingness to spend scarce foreign exchange for deepwater
exploration seems less the result of an urgent need for the oil than of fears that
foreign rivals will stake out prior claims on the continental shelf. The Chinese
clash with the South Vietnamese over the Paracel Islands in January 1974 reflected
PRC sensitivity on the issue; the PRC has a drilling rig operating on one of the
islands. The PRC supported the 200-mile resources limit claimed by a number of
other nations at the Law of the Sea Conference in Caracas and adamantly held
to that position in the recently suspended negotiations with Japan for a formal
fisheries agreement.
Oil Refining and Transportation
11. The PRC has given high priority to refinery construction since the
iiiid-1960s. Current Chinese refinery capacity is probably in excess of 60 million
tons, and additional capacity is under construction. The progress in construction
and the absence of Chinese interest in importing refinery equipment suggests that
the PRC will be able to construct sufficient refining capacity for its own needs.
12. Chinese transportation facilities have been hard pressed to keep pace with
the growth of crude OR production. For the past 18 months, the railroads have
experienced a widespread - but not crippling - shortage of tank cars. The PRC
inventory of tank cars, which stood at 46,000 cars in 1973, has increased by 50%
since 1969, but production of crude oil nearly tripled during the same period.
The difference has beLn made up by increased use of pipelines and coastal tankers.
13. Almost half of the Chinese domestic tanker fleet, which now totals about
600,000 deadweight tons (DWT), has been acquired or built;,ince 1971. Additional
tankers - all less than 50,000 DWT - are under construction in Chinese shipyards.
About one-fifth of the 53 million tons of crude produced in 1973 was moved
in domestic tankers, mainly from Dairen, Tsingtao, and Chin-huang-tao, to refineries
in Shanghai and Nanking. The products from these refineries are primarily
distributed! in the oil-deficit areas of central and south China.
14. The PRC recently completed a major pipeline running from the Ta-ch'ing
field in Manchuria through the city of Fu-shun to new oil-loading facilities at the
port of Chin-huang-tao. Although no progress has been made on a planned branch
pipeline from Fu-shun to Dairen, construction is reportedly under way on a pipeline
from the Sheng-li field in Sha,)tung to the port of Tsingtao. Chinese spokesmen
have said that the main purpose of these pipelines is to faci'itate the export of
oil, which now moves to port mainly by tank cars.
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Petroleum Consumption
15. Aside from fueling its growing defense establishment, the PRC is also
using its Oil supplies to develop the petrochemical industry; to supply expanding
civil air, merchant marine, and truck transportation services; to increase the supply
of fuels for irrigation and farm machinery; and to generate a portion of its electric
power. Even the Chinese consumer has felt direct benefits: kerosene for home
use was removed from the list of rationed commodities in 1972. Consumption
of petroleum products in these sectors cannot be estimated with any precision,
bat it is clear that the sharply increased supply of petroleum is causing important
changes in almost every sector of the economy and is contributing to the general
modernization of the economy. The leadership, however, continues to control the
allocation of petroleum strictly. Supplies are channeled to priority users, and
recurrent campaigns are mounted for the conservation of petroleum by every
consumer.
Petroleum Export Policy
16. Peking entered the international petroleum market in April 1973 with
a sale of I million tons of crude oil (20,000 b/d) to Japan. Prior to this, Chinese
exports had been limited to small quantities of petroleum products for political
allies such as Albania, North Korea, and North Vietnam. Chinese sales of crude
oil to Japan in 1974 will be at least 4 million tons (80,000 b/d), worth about
$350 million.3 China has also started to export small quantities of petroleum
products to Hong Kong (300,000 tons) and Thailand (125,000 ton; scheduled).
17. Oil exports are a welcome addition to China's offerings. Large imports
of wheat and new multibillion dollar programs to buy industrial plants have forced
China to seek new means of financing its trade. Aside from expanding its use
of short-term and medium-term credit to meet its immediate financial needs, Peking
has moved to increase earnings from exports. Prices of Chinese goods have been
raised and new markets have been opened for traditional exports. In the next few
years, exports of petroleum could provide one-half billion dollars annually, thus
contributing measurably to China's ability to pay for its rapidly expanding imports.
Political Uses of Oil Exports
18. Peking is using "oil diplomacy" in its relations with Japan and a number
of other Asian nations. The agreement to ship 125,000 tons of diesel fuel to
Thailand in 1974 and a promise to provide the Philippines with 250,000 tons of
crude oil, possibly in 1975, are part of the PRC attempt to normalize relations
with these states. The prospect of expanded shipments of crude oil for Japan was
apparently' used in the negotiations concluded ti April 1974 for a civil aviation
agreement. Soon after the agreement was reached, the Chinese told the Japanese
that they were ready to expand oil exports up t-) 10 million tons in 1975 and
3. PRC oil impo,: s arc nominal. Small quantities of crude are imported from Albania and special products
are imported from several other countries.
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to 50 million tons (1 million b/d) in 1980. The Japanese announcement in late
July that a delegation was being sent to Peking to begin negotiations for a long-term
oil agreement may signify that the PRC is ready to make good on its promise.
The export of 50 million tons of oil in 1980 would provide Japan with 12% of
its projected consumption and, at current Middle East prices, could earn China
about $4 billion.
19. The offer also appears to have been used to counter Soviet influence
in Japan. China in effect offered the Japanese twice as much oil as they would
have received from the Tyumen project (25 million tons a year), a project that
now appears doubtful.
Prospects for Oil Exports
20. Peking's plans to expand oil exports substantially during the next five
years are borne out by the construction of new oil-handling facilities at the ports
of Chin-huang-tao and Tsingtao and the purchase of dredging equipment needed
to make Chinese ports deep enough for large tankers. (For a list of Chinese
purchases and negotiations for petroleum-associated equipment, see the Appendix.)
China is also actively engaged in acquiring tankers of more than 50,000 DINT to
transport crude oil for export. The tonnage of tankers in the Chinese international
fleet has doubled in the past year and now totals almost 200,000 DINT.
21. The goal of 50 million tons of crude oil for export in 1980 appears
feasible. Reserves are large enough, even without production from offshore fields.
If production accelerates, or even if it only continues to grow at 22% - the rate
achieved during 1965 -73 - the PRC could export 50 million tons in 1980 and
still provide a generous leeway for using oil to modernize the economy.
22. If the PRC encounters uni xpected difficulties in achieving the output
of crude oil necessary to meet increased domestic and export requirements, it might
change its attitude toward direct foreign participation in the development of the
petroleum industry. The PRC's present position is against joint ventures, direct
foreign investment, and product sharing. Nevertheless, "cooperative"
arrangements - arrangements initiated by the PRC rather than a foreign party and
presented as a straightforward commercial exchange of technology and equipment
for a specified quantity of production ?- cannot be ruled out. Some such
arrangement may be required for the PRC to exploit fully the oil reserves in the
shoal water of Po Hai. Exploitation of the deeper waters off the Chinese coast
almost certainly will require foreign, and particularly US, technology.
23. The emergence of the PPC as a major petroleum exporter in Asia will
enhance its influence in the area, ac:d continued Arab attempts to manipulate world
oil supplies will strengthen this influence. Rapidly increasing oil supplies will be
a major factor in modernizing the PRC economy and will greatly fay;ilitate China's
use of foreign trade to develop the economy. China's oil resources will ease, but
not solve, the underlying problems of low levels of prcductivity, population
pressure, and technological lag, which constrain the pace of Chinese economic
growth.
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Country and Company
Purchases
Denmark
One semiclevating platform, for drilling N.A.
to 5,000 meters
An unidentified European
country
One seismic vessel fully equipped with N.A.
steam bubble gear
Purchased Dec 1973, delivered
Mar 1)74.
Compagnic Genc.alc Seismic vessel with crew for offshore 2
Gcophysique exploration
Service contract Sep i973.
]-long Kong
Weco Shipping Ltd. (AarliL-
Floating Drydock Co., Denmark)
Japan
Eight offshore supply ships
Purchased 1974 (?)
Sumitomo Shoji, Marine Ind.,
Niigata Ei:ginccring
Two ADS-I'v diving systems; one 500-
ton survey vessel
N.A.
Ordered prior is Jan 1974.
Netherlands
N.V. Industrieelc
Haudelscombinate
Singapore
Robin Loh
Robray (me.nber of
Robin group of
companies)
No. 2 Hakuryu used heavy-duty dri'Iing
rig
Four training suction hopper dredges
Four offshore drilling rigs for up to
300 feet
Two offshore oil drilling rigs (three-leg
jack-ups for 300 ft., drill to 20,000 ft.)
Ordered late 1973 for 1975
delivery.
Purchased Sep 1972.
39.3 Contract early 1973.
12-15 per Preliminary contract May
unit 1974; to be delivered
before the end of 1975.
30 per rig Preliminary contract
I lus 7.5 per scheduled for Jul 1974,
rig for asso- delivery by end Nov 1975.
ciated Armco
Steel Corp.
equipment
9
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Sweden
Atlas Copco
United States
Rucker Co., George
Space Corp.
Heavy drilling and prospecting equipment 3.6
Preliminary contract
May 1974; to be delivered
before the end of 1975.
Contracts 1974, delivery
second half 1974.
Japan
Hitachi and Mitsubishi
Two large self-propelled rigs with
8,000-horsepower ratings
Drilling platform for 53-meter depth,
3,500-meter drill hole
Negotiating Jun 1974.
Negotiating Jun-Jul 1973.
Nippon Steel, Mitsui,
Teikoku Oil
Peking discussions
Oct 1973.
United States
Baker Trading Co.
Secondary recovery equipment
50-100
Negotiating spring 1974.
Four jack-up rigs
N.A.
Negotiations Jun 1974.
Three type-17(-4 seismic data processing
systems, with spare parts
2.99
Proposed Jul 1974 for
sale.
10
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