CHINA: EARLY OFFSHORE OIL RESULTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00310R000200100002-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 21
• Document Creation Date: December 22, 2016
• Document Release Date: September 7, 2010
• Sequence Number: 2
• Publication Date: September 1, 1984
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
Directorate 1f
Intelligence
China:
Early Offshore Oil Results
-Seeret
EA 84-10163
September 1984
Copy 328
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
Intelligence
China:
Early Offshore Oil Results
China Division, OEA
are welcome and may be directed to the Chief,
This paper was prepared b
Office of East Asian Analysis. Comments an queries
Secret
EA 84-10163
September 1984
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
Secret
China:
Early Offshore Oil Results
Key Judgments Results in the first year of China's major offshore oil exploration drive
Information available have been disappointing-both to the Chinese and to many of the 30
as of 9 August 1984 participating Western oil firms. Several firms have already sharply
was used in this report.
reduced their expectations for major offshore discoveries. Exxon and its
joint-venture partner, Royal Dutch Shell, may have made one potential
commercial discovery. But it appears to us that, with about 10 dry wells al-
ready drilled on some of the best prospects in the South China Sea, chances
are against discoveries large enough to have a big impact on China's oil
production
Chinese officials have also privately expressed considerable concern over
the lack of early success. While it is still too soon to predict how much oil
China will eventually produce from its continental shelf, it now appears
that initial projections by several oil companies of a total of 1 million
barrels per day by the mid-1990s, let alone Chinese predictions of 2 million
b/d, are too high. This could cause major problems for the Chinese
economy in the 1990s, including the possibility that oil exports-20 percent
of current hard currency earnings-might have to be eliminated or even
that China might be forced to import oil.
Beijing now faces a difficult decision scheduling a new round of bidding for
the large areas not included or not taken in the first round in 1983. At least
one large-sized prospect remains to be drilled in the area already leased.
There are also many moderate-sized prospects that could yield profitable
oilfields. A major discovery before the second round began would help
stimulate interest so that Beijing could avoid easing its heretofore strict
contract terms. Many companies, however, are trying to convince the
Chinese that, if Beijing waits until too many dry wells have been drilled,
Western interest in the offshore regions may weaken
The Japanese, who along with two French companies were the first to sign
exploration agreements with China in 1980, have recorded some success in
the Bohai. They have decided to go ahead with construction of an early
production system for their first discovery. Development decisions on three
other discoveries are expected this fall. Production from the Bohai, about
half of which will be exported to Japan, could, thus, reach 50,000 b/d or
more by 1990.
Secret
EA 84-10163
September 1984
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T00310R000200100002-2
The French, in contrast, have abandoned their Bohai lease after three dry
wells and only grudgingly have agreed to go ahead with a pilot develop-
ment project on an oilfield discovered in their Gulf of Tonkin block. They
would have abandoned that block also, but Beijing improved the terms of
the contract.
Atlantic Richfield has made a potentially huge natural gas discovery south
of Hainan Island. ARCO also signed its lease ahead of the main 1983
bidding contest and now must decide whether the gas is marketable. It is
currently considering building a multibillion-dollar urea fertilizer complex
on Hainan that would use the gas as feedstock. However, ARCO needs to
gain extensive participation from other foreign investors.
China's purchases of US oil technology, particularly for onshore work, will
continue to increase even without major offshore discoveries. The Minister
of Petroleum's visit to the United States in September underlines Beijing's
awareness that it needs new technology to enhance production from its
mature onshore fields and that it needs to speed up its search for new oil re-
serves. We, and many in the industry, however, have considered the energy
sector-and particularly offshore oil-the best opportunity for long-term
US investment in China. Lack of success in finding major oil deposits,
especially if combined with continued problems in expanding cooperation
in nuclear power and coal mining, would limit the prospects for deepening
Sino-US economic relationships.
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T00310R000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
secret
The Bohai-Japanese Success but French Failure 1
Yinggehai-ARCO Considering Natural Gas Development 6
Pearl River Mouth Basin-Dry Wells Cloud Prospects 10
Outlook 13 ,
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
Figure 1
Oil and Gas Basins
-- w -
AF "`
d,an claw,
Cease-Fire
.Line/~(h ~esn /inc
~ conbel
INDIA
* Ulaanbaater
MONGOLIA
aeahanz
? Selected oilfield
Scale 1:30,000,000
500 Kilometers
Soo Miles
SOVIET U N 1 0 N
Zhaoshui Cha
Hanoi
*
!Lake
Baikal
Guangxi-
-Guizhou
Nanning
Guangzhou
3hon ~SeeuI\
SO TH
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
China:
Early Offshore Oil Results
During May-December 1983, China signed contracts
with Western oil companies, setting in motion the first
intensive effort to find oil in China's continental shelf.
Initial drilling results from this program, and more
complete results from several smaller tracts leased
since 1979 have now given us a better understanding
of China's offshore potential. These results, except in
the Bohai where Japanese firms are operating, have
not been good and are causing concern both among
Chinese officials responsible for maintaining China's
oil self-sufficiency and among the companies, which
have already spent over $1.2 billion in China and are
obligated to spend at least another $1 billion.
Exploration Results
Currently there are a record 11 or 12 drilling rigs
working off the China coast, including four owned
and operated by US firms, five or six owned by the
Chinese but leased to foreign companies, and two
being operated by the Chinese Ministry of Petroleum.
Foreign firms are now working in all but one of
China's offshore basins-the East China Sea Basin is
the exception-and the Chinese Ministry of Geology
is expected to renew its stalled exploration program in
that basin this fall. The pace of exploration is speed-
ing up and by late this year 15 to 20 rigs will be
operating. So far the foreign companies have drilled
about 40 wildcat exploration wells ' in addition to
about 50 wildcat wells that the Chinese drilled be-
tween 1967 and 1983. By the end of next year, 40 to
50 more wells could be drilled, offering a good idea of
the continental shelf's oil potential.
Foreign companies had expressed considerable doubt
as to whether China could set up the support infra-
structure to allow them to operate efficiently. As
might be expected, the first operators, especially the
French, encountered many difficulties. In October
1983, poor weather forecasting and untried rescue
operations played a role in the sinking of the Glomar
Java Sea, the first US rig to work offshore, and the
loss of the entire 80-man American and Chinese
crew-although the ultimate responsibility lies with
the US operator. With the establishment of at least 10
joint ventures servicing offshore drilling rigs, opera-
tions now appear more efficient, and the costs of
drilling each well-about $10 million-are coming
down. In contrast to the Java Sea incident, this past
July a new Chinese offshore weather service accurate-
ly predicted the path of a typhoon in the Yellow Sea,
and the crew of a British Petroleum drilling rig was
safely evacuated by helicopter before the storm
struck.
The Bohai-Japanese Success but French Failure.
The Japan-China Oil Development Corporation-a
joint venture formed by a large consortium of Japa-
nese industrial firms led by the Japan National Oil
Company and the Chinese National Offshore Oil
Corporation (CNOOC)-is moving agressively to
complete exploration of its large Bohai lease by the
end of 1986. So far, 17 of the 24 wildcat wells agreed
upon in the 1980 contract have been drilled; seven oil
and gas fields have been discovered-at least three
appear commercially viable. A decision to go ahead
with early but limited development of the first field,
BZ-28-1,2 was reached last year, and it is scheduled to
come on line in 1987. In addition, the Japanese are
well along in the development of a small field discov-
ered by the Chinese in the early 1970s; it is scheduled
to start producing by the middle of 1985. So far the
Japanese have spent about $500 million for explor-
atory drilling and $100 million for development. In
addition, CNOOC has spent about $100 million for
its share of development costs, borrowed from the
Japanese Ex-Im Bank under a long-term low-interest
loan facility.
2 For Bozhong (central Bohai) grid number 28, prospect number
one. In Chinese well nomenclature, a third digit, such as BZ 28-1-2,
represents the number of a given well on that structure-in this
example, the second well.
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Secret Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
Table 1
China: Offshore Oil Leases
Share
(percent)
Date Signed
Blocks
Status
100
29 May 1980
South, West
Sixteen exploration wells drilled. (Seven discover-
ies, with two development projects under way.)
Elf Aquitaine (France)
75
29 May 1980
Central
Three dry wells drilled.
Total Exploration (France)
25
Lease abandoned.
Yellow Sea
British Petroleum
45
10 May 1983
23/06
One well under way.
Broken Hill Proprietary (Australia)
20
Petrobras (Brazil)
15
Ranger Oil (Canada)
10
Petro-Canada
10
Chevron (US)
50
2 December
24/11
Texaco (US)
50
1983
Cluff (UK)
100
29 October 1983 10/36
Pearl River Basin
British Petroleum
45
10 May 1983 14/29
Five wells drilled.
Broken Hill
20
27/31
(Four dry wells and one show well.)
Petrobras
15
28/27
Ranger Oil
10
26/14
Petro-Canada
10
Occidental Petroleum (US)
55
6 August 1983 28/23
One dry well.
Hispanoil (Spain)
15
Ampol (UK)
10
CRS (Australia)
10
Tricentrol (UK)
10
Occidental Petroleum
55
6 August 1983 26/79
Two dry wells.
Elf Aquitaine (France)
22
Tricentrol (UK)
10
Total (France)
7
Promet (Singapore)
6
Exxon (US)
50
23 August 1983 40/01
Two show wells and one dry well.
Royal Dutch Shell (Netherlands)
50
04/27
Japan National Oil Co.
100
5 September 28/14
First well planned for October 1984
1983
Japan National Oil Co.
33
29 October 1983 15/53
Getty (US)
31
Sun (US)
20
Texas Eastern (US)
16
Phillips (US)
50
29 November 15/11
Pecten (US)
50
1983
Chevron (US)
33
2 December 16/08
Texaco (US)
33
1983
Agip (Italy)
33
ARCO (US)
80
19 September 50/35
Two dry wells and two gas wells drilled.
Santa Fe (Kuwait)
20
1982
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
secret
Table 1(continued)
Share
(percent)
Date Signed
Blocks
Status
Total Exploration (France)
50
29 May 1980
09/28
Fourteen wells drilled-including seven wildcats,
Elf Aquitaine (France)
30
four of which found oil. One development pro-
Idemitsu (Japan)
20
gram under way.
Idemitsu (Japan)
62
5 September
22/22
First well planned for August 1984.
Natomas (US)
33
1983
Cluff (UK)
5
Pennzoil (US)
44
15 November
22/36
First well planned for October 1984.
Sun (US)
36
1983
Ampol (Australia)
10
Hispanoil (Spain)
10
Sun (US)
36
15 November
23/25
First well planned for December 1984.
Pennzoil (US)
44
1983
Ampol (Australia)
10
Hispanoil (Spain)
10
The Ministry of Petroleum, buoyed by the Japanese
success, set an ambitious output target of 160,000 to
200,000 b/d of oil production in the Bohai in the mid-
1990s. The Japanese Ex-Im Bank, which ultimately
will finance most of the effort, concurs in this assess-
ment and estimates it will cost about $5 billion.
Private Japanese firms would provide about $1 billion;
the Japan National Oil Company, about $1.5 billion;
and the Ex-Im Bank would make available to China a
$2.5 billion long-term, low-interest loan
Japanese industry officials warn that the drilling
results may not be as promising as they look on paper.
Structural and stratigraphic traps in the Bohai tend to
be of only moderate size and are heavily faulted, while
potential reservoir rock layers are discontinuous-a
result of their continental and lakebed origins rather
than the usually more prolific marine beds. These
factors led several large US firms to turn down
opportunities to explore in the Bohai. Positive signs,
on the other hand, include high test flow rates and a
crude oil type that is much lighter than that found in
onshore portions of the Bohai Basin.
Following extraordinary drilling success in 1981 when
their first four wildcat wells each hit oil, the Japanese
agreed to raise their exploration commitment from
$210 million to $600 million and to extend the
exploration period by two years to 1987, in order to
allow for sufficient appraisal wells to prove their
discoveries. A total of 24 appraisal wells are now
scheduled through 1986; about 15 have already been
drilled. The appraisal work has been difficult, howev-
er, because of the complex geology, and the Japanese
still profess to have little idea of how large the
potential reserves are. Ironically, only five of the first
eight appraisal wells hit oil, a worse record than the
wildcat drilling. Even with the results of four apprais-
aJ wells on the BZ-28-1 field-one of which was
dry-there is some doubt about the field's commercial
viability. A sixth well on the site is now under way.
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
Figure 2
China: Bo Hai Oil Exploration
Support base
Concession limit
Oilfield
Discovery well
Scale 1:4,000,000
0 25 50 75 Kilometers
ILL
0 25 50 75 Miles
4 "-- -' V BZ 28-1-1
Chengbei 00
BZ 25.10 ?BZ 34-1-1
Shogli
He
%Z 34-2-1
Japan-China
Oil Development
Corporation
Tang Ke, the Minister of Petroleum, has reportedly
put intense pressure on the Japanese to go ahead
rapidly with development of the BZ-28-1 field be-
cause of a need to demonstrate to doubters in Beijing,
and to the worldwide oil industry, the viability of the
offshore program. A compromise with the more cau-
tious Japanese was worked out last year: the field will
be developed early, but only in part, so initial produc-
tion may well be considerably below the field's ulti-
mate capacity. Based on the reported design capacity
of the storage facility, the field's output will be less
than 20,000 b/d. While costing much less than the
Yellow Sea
billion dollars or more that a full development would
cost, it could work to the Japanese disadvantage if the
field turns out to be a large one-and it has a
potential of several hundred million barrels. Under
the terms of their contract, the Japanese have rights
to a share of production for only the first 15 years
after start of production.
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
Korea
Daiia Bay
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
aecrei
Table 2
Japanese Oil Discoveries in the Bohai
Field
Date Completed Oil Test
(b/d)
Gas Test
(million
cubic
feet
per day)
API
(degrees)
BZ 28-1-1
May 1981
7,560
Appraisal-2
May 1982
4,400
-3
October 1982
1,500
-4
November 1983 NA NA
NA
-5
December 1983
Dry
-6
Under way
BZ 25-1-1
October 1981
2,700
0.99
33.5
Appraisal-2
December 1982
1,400
0.60
34.0
-3
November 1983
NA
NA
35.0
-4
December 1983
NA
NA
39.0
CFD 13-1-1
November 1981
2,000
1.3
34.7
Appraisal-2
NA
NA
NA
NA
-3
November 1983 NA NA
NA
BZ 28-2-1
February 1983
1,800
0.32
30.3
BZ 34-2-1
February 1983
12,200
6.7
36-38
BZ 27-4-1
May 1983
4,000
74
BZ 34-1-1
April 1984
3,800
60
Other fields discovered by the Japanese are included
in table 2 and in figure 2. Feasibility studies on two of
the discoveries-BZ 25-1 and CFD 13-1-are sched-
uled to be completed this fall. The Japanese are also
studying the possibility of developing the prolific BZ
34-2 field in conjunction with the BZ 28-1 field. Bids
from Japanese and US engineering firms have been
requested for a single-point mooring system (SPM)
that would serve both fields. Small tankers will unload
the oil from a permanently moored tanker that will
serve as the main storage facility.
In addition to developing their own discoveries, the
Japanese agreed in 1980 to rework the small Cheng-
bei field, which the Chinese had discovered in the
early 1970s but had been unable to develop. The
Chinese production platform has been torn down and
new platforms-one built in Japan, the other built in
oil.
Tangu under Japanese supervision-have been in-
stalled. The drilling of production wells is almost
complete and production should begin late next year
at a rate of about 10,000 b/d of heavy, poor-quality
Half the development work for both the Chengbei
field and the BZ fields is being financed by the
Japanese industrial consortium-most of which in
turn is guaranteed by the government-owned Japan
Oil Company-and half by the Japanese Ex-Im Bank,
which has designated at least $500 million out of a
1979 $2 billion "energy" loan to China to cover the
Chinese share of developement costs.
Because the loan was offered on concessionary
terms-6.25 percent and a 10-year grace period on
repayment-the Japanese agreed to the OECD "Gen-
tlemen's Agreement" principle that it not be tied to
purchases of Japanese products. Japanese firms still
have a major competitive advantage in bidding for
projects, but in several cases US firms successfully
competed against Japanese firms, including contracts
for a storage platform and a workover rig for the
Chengbei field. One of these US firms, largely be-
cause it is participating in a joint venture with the
Chinese Offshore Platform Engineering Company,
also has a good chance of winning the SPM contract.
In contrast to the Japanese success, two French firms,
Total Exploration and Elf Aquitaine, which also
signed an exploration contract with the Ministry of
Petroleum in 1980 for a large part of the Bohai,
drilled three dry wells during 1981-83. Early this year
they announced they were abandoning the block and
writing off their $50 million investment. The Ministry
of Petroleum has taken back the rig leased to the
French and is now drilling a well in the northern part
of the Bohai. The French continue to operate in the
Gulf of Tonkin and in the Pearl River Mouth Basin.
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
Beibu Gulf-French Frustrations. In May 1980, at
the same time that the Japanese and French firms
signed exploration contracts for the Bohai, the French
also signed a lease for a large section of the Beibu
(Tonkin Gulf). Substantial Chinese drilling and seis-
mic surveys had already shown considerable oil poten-
tial. The French drilling program has run into many
equipment and personnel difficulties, including the
crash of a light airplane that killed the French project
manager and several other Frenchmen. Nevertheless,
14 French wells were drilled by last summer, at which
point exploration was halted pending an evaluation of
the results.
The
French had hoped to develop at least one of the two
fields the Chinese had discovered-Wushi 16-1 or
Wei 12-1. Four appraisal wells, however, proved
neither field is large enough for commercial develop-
ment. New wildcat drilling in the meantime turned up
at least two more fields-Wei 10-3 and Wei 11-1.
Again, costly appraisal wells demonstrated only small
oil reservoirs.
In late 1983, the French firms-which by this point
had been joined by a group of Japanese firms which
contributed $50 million to the effort-told the Minis-
try of Petroleum they would abandon their lease
unless the Chinese agreed to sweeten their contract.
Specifically, they stated that the Wei 11-1 field was
not commercial and that the commercial value of the
Wei 10-3 field could only be determined after a year's
production history was obtained. The foreign firms
agreed to help develop the field on a trial basis using a
permanently fixed jack-up rig-from which six pro-
duction wells would be drilled-and a storage tanker.
In return the Chinese were asked to agree to a three-
year, 49-51 split of the oil instead of the 25-75 basis
under the original contract. Oil production could
begin by the end of 1986. After one year of production
the companies would decide whether to construct a
more permanent platform which could be on line by
1990. The output split from that platform would
revert to the original contract plan.
Beijing agreed to this change in the contract despite
the precedent it sets for other companies wishing to
renegotiate terms. The firms also extended their
exploration contract for two years and agreed to drill
four to six more wildcat wells.
Even with the contract adjustment, the foreign part-
ners probably will not recover their $150 million
exploration costs and what we estimate will be about
$100 million for their half of the pilot development
project costs unless they come up with a larger
discovery. Total Exploration, the operator for the
project, estimates recoverable oil reserves at between
26 million and 62 million barrels and acknowledges
that only at the higher end of the estimate would
earnings exceed development costs enough to allow
partial recovery of the exploration costs. The field will
probably produce only about 15,000 b/d and that for
only two or three years if oil reserves turn out to be in
the lower range of the French estimate. The foreign
share of the oil will be exported to Japan.
The Chinese, at least publicly, are more optimistic
about the area. US Consulate officals in Guangzhou,
for instance, report that the Chinese believe the Wei
10-3 field holds about 150 million barrels of recover-
able oil. The Chinese also have asked the French to
relinquish the the Wei 11-1 field so that they can
develop it on their own.
The Chinese also included eight smaller blocks south
of the French concession in their 1983 competitive
bidding program. Two were picked up by Sun and
Pennzoil, which will operate in a partnership, and a
third was signed by another US firm, Natomas, in
partnership with a Japanese firm, Idemitsu, and a
British firm, Cluff Oil. Drilling will begin in each of
these three blocks this fall. The firms remain optimis-
tic about finding modest-sized, yet profitable oilfields,
but they have said that there is little chance of major
discoveries. The other blocks remain open
Yinggehai-ARCO Considering Natural Gas Devel-
opment. Atlantic Richfield, which reached an explo-
ration and development agreement with China in
1982, before the competitive bidding program was set
up, has drilled three of its seven promised wildcat
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
Figure 3
China: South China Sea and Gulf of Tonkin Oil Exploration
Hanoi"=
(
my// // I
05/ // I
JAY /
cr/ /
09/ /
Oj
4(f( ftsu
ooea~nL.,gVi: Gaup
(Mghtirgsle 1slavd)
Haman
Sao
,Wencheng 19-1-15
/
/
/
/
/
/
/
/
Enping 122
En ping
Occidental
000
EN
GettyIJNOC
Occidental
Texaco!
Chevron/
AGIP
Panyu 24-1-1
iyu 16-1
aiping 1-1.1
Panyu 27.2
Panyu 27-1-1
------------------
China-Vietnam
Hypothetical
Equidistant
Line
Paracel
Islands
-----------------
deplt'
100'me{et ldepP
eye
500.E
^ Support base
---- Seismic area limit
M Concession area
o Dry well
? Discovery well
G Oil show
- Gas well
Scale 1:4,500,000
50 100 Kilometers
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
Secret
Table 3
South China Sea Wells
A critical factor in any decision to develop even a
huge offshore gasfield, however, is the marketability
of the gas. Gas transportation costs are very high and,
because ARCO and the Chinese have already ruled
out costly LNG facilities, a local market for the gas
must be found or developed before it makes sense to
develop the gasfield. Studies have shown, moreover,
that the gas will be too expensive to replace coal-fired
power or industrial plants, and building a widespread
distribution system for the gas would be prohibitively
Atlantic
Yacheng
January 1983
Dry
Richfield
8-2-1
Yacheng
August 1983
Gas discovery
13-1-1
Ledong
July 1984
Suspended
30-1-1
Yacheng
August 1984
Gas
13-1-2
confirmation
Lingtao
August 1984
Dry
35-1-1
British
Enping
November
14/29
Oil show
Petroleum
18-1-1
1983
Kaiping
February
27/31
Dry
1-1-1
1983
Yangjiang
26-1-1
Panyu
May 1984
28/27
Dry
27-1-1
Enping
July 1984
14/29
Dry
12-1-1
Panyu
Under way
28/27
27-2-1
Occidental
Yangjiang
April 1984
26/29
Dry
36-1-1
Panyu
May 1984
Dry
16-1-1
Panyu
Under way
28/23
Dry
expensive.
In December 1983, ARCO proposed that a fertilizer
complex with a capacity of 7 million tons of urea per
year, by far the largest urea plant in the world, be
constructed on Hainan Island. It would use the
natural gas as its feedstock. Specifically it suggested
that two joint ventures be formed: one with extensive
ARCO participation would develop the gasfield and
build a distribution system at a cost of about $500
million; the second between the Ministry of Petroleum
or CNOOC and unspecified foreign chemical or
industrial firms would build and operate the $3-4
billion fertilizer complex, purchasing the gas from
ARCO on a US dollar basis.
Petroleum Minister Tang Ke and Premier Zhao
Ziyang enthusiastically endorsed the fertilizer concept
but suggested a single joint venture be set up, with
ARCO taking the lead, and that an even more
expensive compound fertilizer plant be considered
instead of simply an ammonia/urea complex. They
also stated that, because of the project's prospective
24-1-1 size and the Ministry of Petroleum's foreign exchange
Wen
19-1-1
constraint, China would waive the usual requirement
Wen
19-2-1
wells and has made what may be a very large natural
gas discovery. A successful appraisal well was com-
pleted in August 8 kilometers south of the gas discov-
ery well-Yacheng 13-1-1-to help delimit the field.
The company estimates gas reserves could be as high
as 200 billion cubic meters, enough to produce at a 5-
billion-cubic-meter annual rate. China's total gas
production currently is only 12 billion cubic meters a
year.
for majority Chinese ownership.
ARCO is currently considering the Chinese proposal
and is searching for industrial firms willing to invest
billions of dollars in such a venture. The World Bank
and British and Japanese firms have been approached,
and at least one group of Japanese firms-including
C. Itoh and Mitsubishi-appear interested. A major
question is whether the now-depressed world market
could absorb a big increase in synthetic fertilizer
output in the 1990s. The urea plant would increase
China's urea production capacity by 40 percent and
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2 ,
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
Figure 4
China: Production- Sharing Contracts a
China National Offshore
Oil Corporation Profit
share
' This assumes an x factor of 50 which divides the profit oil evenly between
the Chinese Government and the joint venture. It also assumes CNOOC
participates in the joint venture at a maximum 51-percent share.
might eliminate China's urea imports, most of which
come from the United States and Japan. Alternative-
ly, the plant might export fertilizer to earn foreign
exchange needed by the foreign partners of the joint
venture.
Pearl River Mouth Basin-Dry Wells Cloud Pros-
pects. Oil companies have been interested in the Pearl
River Basin since seismic surveys were completed
there in 1979. Company geologists have estimated the
area may ultimately yield 5-10 billion barrels of oil
from the approximately 130 prospective field locations
identified in seismic analysis. This is greater than the
combined potential of all of China's other offshore
basins excluding the East China Sea Basin. Several
large anticlinal formations combined with proven
hydrocarbon source rocks and what appear to be good
reservoir rocks suggested the possibility of giant-sized
fields that could each produce hundreds of thousands
of barrels per day.
In March 1983, in its first round of international
bidding, China opened about one-third of the basin
area in 23 separate blocks. By December, bids for 13
of these blocks, encompassing virtually all those in
shallow and moderately deep water, had been accept-
ed and the round was closed. The 10 remaining blocks
are in water too deep to warrant exploration unless
large discoveries are made closer to shore. Many
attractive prospects remain, however, in close-in areas
not included in the first round of bidding.
British Petroleum-which is leading a group of four
Canadian, Australian, and Brazilian oil companies-
won four Pearl River Basin blocks and one block in
the Yellow Sea. Two of the Pearl River Basin blocks
are considered among the six best blocks, as ranked
by one major US firm. British Petroleum was the first
to sign in May 1983 and began what probably will
amount to a $200 million drilling program in Septem-
ber. The company has already drilled five wells in the
Pearl River Basin and is currently drilling a sixth
there and the first well in its Yellow Sea block.
25X1
25X1
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
,ecret
The Contracts -A Form of Production Sharing
Japanese and French oil companies were the first to
negotiate offshore drilling rights in 1979 and 1980,
and their contracts served as a model for an ARCO
contract signed in 1982 and for the 18 contracts
signed last year. In all cases, the foreign firms have
agreed to pay 100 percent of exploration expenses-
defined as a specified number of wells per lease. The
exploration phase is in most cases divided into three
intervals-usually three, two, and two years. At the
end of each interval the contracting firm can abandon
the lease with no further obligations; otherwise, it
must agree to a specified number of new exploratory
wells or proceed with the development phase.F_
if commercial-scale quantities of oil are discovered,
the Western firms will enter into a joint venture with
the Chinese National Offshore Oil Corporation
(CNOOC) for development. CNOOC can participate
at anywhere up to a 51 percent share in the joint
venture and will be responsible for that share of
development costs. It is generally expected that
CNOOC will choose the maximum 51 percent share
in all development projects and that it will request
foreign loans to cover a portion of its equity require-
ments. This has been the case in the joint ventures
already signed with the Japanese and the French. F
When production begins, 17.5 percent of the oil will
go to the Chinese Government in the form of a
royalty; 50 percent will go to the joint venture to
repay capital costs for as long as that takes-about
four years in a successful scenario; a percentage of
the remainder, known as the Xfactor, will go to the
joint venture as its profit share for 15 years. After
that, all ownership and operations revert to the
Chinese. The size of the X factor or profit share-
which constituted the major part of each company's
bid-is further complicated in that the bids are
differentiated with respect to the productivity of
individual fields. For small fields the firms could
specify a profit share close to 100, while for large
fields they were obligated to specify much lower X
factors. As in the case of the oil share going to capital
recovery, the foreign firms will split the profit share
with CNOOC on the basis of CNOOC's participation 25X1
in the joint venture. The foreign firm's profits are
then taxed at a 50 percent income tax rate. This tax
is generally credited against income tax in the com-
panies' home countries. 25X1
Beijing has instructed the companies to hold details
on the X factor bids very closely. But, from what we
know of prior negotiations, we have an approximate
idea of the profit share. At a late stage in the
negotiations, Beijing was holding out for a 50 percent
X factor for fields producing 50,000 to 100,000 b/d-
the range firms believe is most likely to apply. This
would allow the firms a before-tax profit share of 25X1
about 8 percent of the oil until capital costs are
repaid and about 17 percent after that. The firms also
may be asked to market CNOOC's capital recovery
and profit oil on the world market so that a total of
30 to 50 percent of the oil might be exported.
Results have been very disappointing. The first well
hit oil but in noncommercial quantities. The other
four have been dry
it appears to us that BP has
alrea y drilled into the best prospect within each of its
two best blocks. In April, a BP official publicly
reacted to adverse publicity coming out of Hong Kong
on the third well. He argued that it was far too early
to write off the blocks and that at least another year
of drilling would be required to determine whether the
blocks have commercial potential. No private com-
mentary by BP is available.
Occidental Petroleum is the lead company in two
separate consortiums, each of which won one Pearl
River Basin block. It has drilled three dry wells and a
fourth well is scheduled to be drilled this fall. We
have little specific data on these blocks. One company
report, even before the third dry well was completed
in August, stated that Occidental no longer holds high
25X1
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
expectations for the area. A company spokesman
stated, for instance, that the first hole was the "dri-
est" he had ever seen.
Exxon and its partner, Royal Dutch Shell, have
drilled two wells into the Wen 19-1 prospect in their
western block, which all the major companies felt was
the most promising in the Pearl River Basin. Not only
was the structure considered large enough to hold a
billion-barrel field or larger, seismic anomalies had
been noted that often indicate the presence of hydro-
carbons. The first well, even though it encountered
some oil, was very disappointing. The company re-
ported it found only thin hydrocarbon source rocks, an
absence of good cap rocks, and heavy faulting, which
it says diminishes prospects for the entire western half
of the basin. Oil had at one time been in the structure
but-probably because of the faulting-had long
since migrated elsewhere.
Full results of the second well are not yet available
although they may be more positive. It was drilled
just south of the first well where, according to the
company, chances of a discovery are greater. Drilling
encountered some oil at a relatively shallow depth
and, thus, was reported as a "major" discovery by the
Chinese. Some company officers and Chinese geolo-
gists also believe that oil will be found in a structure
that underlies the Wen 19-1 structure, which-com-
bined with the shallow reservoir-may make commer-
cial development feasible although probably not on
the scale originally hoped for that field. The company
states that the results of the well show the need for
more careful analysis of the very complex deeper
stratum. Five more wells are slated for that block.
Exxon has also drilled one dry well in its eastern
block. The contract with CNOOC calls for a total of
five wells in that block
Drilling is scheduled to begin in the remaining five
blocks this fall and winter. The Japan National Oil
Company is the lead company for two blocks, one of
which includes Sun Oil and Getty. A Caltex (Chev-
ron/Texaco) joint venture with Italy's Agip won two
blocks, which were merged into one because they were
contiguous. It includes a large number of moderate-
sized prospects and one potential giant field. Phillips
and Pecten have one block that looked like it had good
potential, at least originally.
other parts of the basin, the company has reduced its
expectations of finding a commercial-scale oilfield
from 1 in 6 to 1 in 20.
Following the first particularly disappointing
well drilled by Exxon, Qin Wencai, director of
CNOOC, called a special meeting of Chinese oil
officials in Guan zhou. The consensus of the meeting,
vas that
mil companies should be drilling deeper and that
the results were not as bad as might appear. Never-
theless, many participants in the meeting stated that
the Chinese must be careful not to exaggerate the oil
potential of the Pearl River Basin. Chinese press
releases have consistently stretched the truth about
what is known regarding potential offshore oil re-
The Chinese are now faced with a dilemma of
whether to quickly open up a new set of leases
before-as one company says-the bottom falls out of
the market. If a new round of bidding occurs before a
major discovery, there is little doubt that the Chinese
will have to allow the firms a much higher X factor. A
higher X factor combined with only modest discover-
ies, however, could mean that a substantial share of
the offshore production would end up as the foreign
companies' capital recovery oil and profit oil.
In a nation still suspicious of Western capitalism, this
could become a serious political liability, particularly
if the Chinese economy were strained as a result of
stagnant onshore oil production. As reported by the
US commercial officer in Guangzhou, Qin Wencai
and State Counselor Kang Shien (the previous energy
czar) favor an immediate opening of the second round,
while the Minister of Petroleum Tang Ke leads a
group that favors delaying the round until some
positive results appear.
25X1
25X1
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
secret
Outlook
The companies emphasize that only about 10 of the
more than 100 prospective field locations have been
drilled in the most highly regarded Pearl River Mouth
Basin and that in other offshore areas-the North
Sea, for example-scores of wells were drilled before
commercial discoveries were made.
three of the our potential giant--
sized prospects (greater than 500 million barrels
reserves) that were offered by the Chinese have
already been drilled with poor results. One of these-
the Exxon discovery-may yield a more modest-sized
oilfield, and about a dozen good-sized prospects (200-
400 million barrels) remain to be drilled. It thus
appears that if commercial discoveries are found it
will be in these moderate-sized fields, but these are
not likely, in the aggregate, to yield the 1 million b/d
that several firms had projected for offshore China,
let alone the 2 million b/d the Chinese have predicted.
Figure 5
China: Oil Production, 1970-2000
Current
i forecast
_ _ - - forecast
I I I I I I 1 1
1970 75
25X1
25X1
25X1
Continued poor offshore findings would have little
impact on China's oil production through the rest of
the 1980s. Beijing, in fact, has recently raised its
expectations of short-term production because of ap-
parent new discoveries in the onshore Shengli produc-
ing area. Departing from the consensus view held by
the Chinese leadership since 1979 that oil output
would remain flat at 2.1 million b/d until 1990, when
offshore oil was expected to come on line, Premier
Zhao Ziyang this spring stated that he thought oil
output would increase by 5 percent per year through
the 1980s. Such forecasts have often been far off the
mark in the past, however, and we remain uncon-
vinced that enough new reserves have been found to
sustain that rate of growth.'
Regardless of short-term trends, a large shortfall from
the expectations of offshore production will hurt the
Chinese economy in the 1990s. China would probably
gradually reduce or eliminate its 400,000 b/d of oil
exports-20 percent of foreign exchange earnings
and step up its exploration of the promising far
western basins in hopes of staving off a necessity for
I I I I I I I I I I I 1 1 1 1 I I I I I I
80 85 90 95 2000
importing oil. Development of the west, however,
could take decades and tens of billions of dollars.
The offshore oil program is important also because it
represents Beijing's first acceptance of large-scale
foreign investment since 1949. This investment could
eventually total well over $20 billion, far more than is
likely in any other sector of the Chinese economy, but
it depends entirely upon successful exploration
The program is particularly important for Sino-US
commercial relations. US oil firms already are play-
ing a prominent role in the exploration program. Of
the 70,000 square kilometers leased by China, 11 US
firms hold rights to 20,000 square kilometers, more
than any other country. They stand to invest billions
of dollars in China if they find oil. This could help set
a solid base for US investment in other sectors and
25X1
25X1
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
allow a gradual extension of US economic influence in
China. Without major discoveries, however, the long-
term linkages between the US oil industry and China
could be severely limited. China certainly needs im-
proved technology to exploit its onshore deposits, and
Petroleum Minister Tang Ke recently stated that
China would welcome further Western participation
in secondary recovery projects and might even open
up some new onshore fields to foreign firms for
development. These projects are less likely, however,
to involve large amounts of foreign investment-and
long-term production-sharing agreements-than
would a successful offshore development program.
One option for Beijing is to restart its own offshore
exploration program, particularly in the promising
East China Sea Basin. The launching of China's first
domestically produced semisubmersible rig this sum-
mer-after at least six years of construction-under
the auspices of the Ministry of Geology, and resumed
drilling by the Ministry of Petroleum in the Bohai and
in shallow waters near Hainan Island, may be signs
that this is occurring. China's indigenous exploration
program in the 1970s was a costly failure, but, aided
by a great deal of new equipment and experience
gained by working with the Western companies,
Beijing may now be feeling more confident. Also, the
lack of immediate success by the big oil companies
and major blunders such as the sinking of the Glomar
Java Sea ? may be providing some satisfaction for
those in the Chinese oil industry that never wanted to
give up their own offshore effort in the first place.
Even if China resumes its own offshore exploration
effort, we believe it will do everything possible to keep
Western firms active offshore. China still has little
experience in developing offshore oilfields once they
are found, and we doubt Beijing feels it can afford to
slow the effort. We estimate-conservatively, we
feel-that China's demand for oil will rise from the
current 1.7 million b/d to about 2 million b/d in 1990
and to 3 million b/d by the year 2000.5 The mature
Daqing oilfield, which currently produces 1 million
b/d-half of the country's oil-will probably begin to
decline before 1988 and will almost certainly be in
decline during the decade of the 1990s. Other than
the offshore basins, there appears to be little likeli-
hood of large enough discoveries in eastern or south-
ern China to offset that decline, let alone allow a
million-b/d increase in production.
25X1
25X1
'A similar incident in the Bohai in 1979 in which a Chinese jack-up
rig capsized with a loss of the entire 70-man crew caused a major
shakeup in the Ministry of Petroleum and undoubtedly helped to
remove resistance to Western firms taking over the offshore
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
 Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2
Secret
Secret
Sanitized Copy Approved for Release 2011/05/19: CIA-RDP85T0031OR000200100002-2