China Offshore Oil ‘Boom’ a Bust, Western Firms Find

Many of the world’s leading oil companies have spent a great deal of money--more than $1.5 billion--here during the last few years, for, among other things:

--Rents as high as those in Hong Kong or New York City.

--Houston-level salaries for Chinese oil workers, who themselves generally get to keep no more than $75 a month.

--Shuttling foreign oil workers in and out of China, at a cost of about $250,000 per person per year.

All this to drill off the South China coast for oil reserves once believed to be a match for those of the North Sea or Alaska’s Prudhoe Bay.

To show for their time and money, though, the companies have found moderate amounts of oil of uncertain commercial value.

Still, most of the foreign firms are continuing to bid for exploration contracts, not wanting to give up yet and hoping to preserve their toehold in China.

The stakes are huge, and not just for the oil companies. China has been counting on offshore oil to help ease the nation’s energy problems and earn vital foreign exchange for its ambitious modernization program.

But the early grand hopes have now been dashed. Oil company executives admit that they were far too optimistic, and the Chinese government has recently begun to emphasize the possibilities for future foreign drilling on the mainland in an effort to dampen the gloom.

“Fundamentally, the first round has been disappointing and unsuccessful,” said George V. Wood, general manager of British Petroleum’s China operation, which has drilled 14 wells and has 14 dry holes. “The biggies that were possible are almost certainly not there. Rather than Prudhoe Bay-sized discoveries (10 billion barrels), we’re talking about 50 to 100 million barrels of recoverable oil at best.”

Robert O. Anderson, chairman of the board of the Atlantic Richfield, observed during a trip here in September that “some discoveries have been made, but the problem has been size.”

Chinese Not Talking

A spokesman for the China National Offshore Oil Corp., the state-owned oil company, turned down a request for an interview, saying that all the available information about offshore oil prospects has already been published.

However, China--in the midst of a second round of negotiations for the sale of offshore oil tracts--continues to project an upbeat mood. Qin Wencai, president of the state-owned oil company, told the government’s China Daily recently that the foreign oil companies’ disappointment “is premature.”

The official New China News Agency said early this month that “considerable progress has been made over the last six years since China began seeking foreign help to develop offshore oil fields.”

China is already one of the world’s 10 leading oil producers. Its mainland wells, particularly the large fields at Daqing in Manchuria and at Shengli near Bohai Bay, turned out about 730 million barrels of crude oil last year. Most of this is used in China, but a portion of it is exported, particularly to Japan.

Although China has operated the wells on the mainland on its own, it invited foreign companies to help in offshore ventures, hoping to obtain the latest offshore drilling technology and to develop the hoped-for bonanza more quickly.

Throughout the late 1970s and early 1980s, Chinese authorities and Western oil experts alike tended to view China as the most important untapped source of petroleum in the world.

“Even the most conservative estimates are staggering,” Newsweek magazine said in 1975. “. . . Some Western oilmen and intelligence experts even equate Chinese reserves with those of the entire Middle East.”

Now, oil company executives look back ruefully on those days of rosy expectations.

“Everyone was so optimistic at the outset, particularly the Chinese,” said Murray C. Hudson, president of Esso China. “They thought all we had to do was sink one well and come up with major finds.”

So far, Esso has drilled nine wells off the China coast and brought in “only one that has given us any encouragement,” Hudson said. As a result, “we think any discoveries are likely to be small; we don’t think there are any major discoveries of Middle Eastern levels.”

In the first round of bidding for offshore oil exploration that began in 1982, China signed 19 contracts with 28 companies representing nine different countries. The final contract in this first round was signed Nov. 12, with Amoco Orient Petroleum.

According to figures published by the New China News Agency, these contracts have resulted in the drilling of 49 wells. Of these, seven have shown oil and gas flow.

Number of Explanations

Why have the results been so much poorer than expected? Over the last couple of years, a number of explanations have been offered. Some oil executives say the main problem is the nature of the oil being found off the China coast.

“Chinese oil, as far as I can see, is very high in wax content, and so it’s hard to flow,” British Petroleum’s Wood said. “You’re going to have to produce a lot of wells to get any reasonable accumulation.”

Another executive, who asked not to be identified by name, said Chinese officials forced the oil companies to bid against one another in the dark, without letting the companies see the available geological data.

“We didn’t have access to the Ministry of Geology’s logs,” this official said. “There was conniving by the Chinese. We all made huge commitments, which we regret now.”

For their part, Chinese officials tend to put some of the blame on the oil companies, suggesting that they have been less than skillful in their drilling techniques.

“The location of the first wells was not very accurate,” Ma Qifu, deputy general manager of the Nanhai East Oil Corp., a Canton-based subsidiary of the state oil company, said last year.

An official of one company operating in China said that Chinese officials had accused his firm of failing to use the latest technology in its offshore drilling and had suggested that the use of outdated equipment was responsible for the failure to find oil.

Despite the setbacks, most of the foreign companies are taking part in the second round of bidding for offshore tracts: The New China News Agency reported recently that China has received 24 bids from 10 countries. On Nov. 8, a group of three Japanese oil companies signed the first contract from this second round.

Few of the oil companies are ready to drop out, both because they hope their luck will improve and because they want to retain their entry to China.

“The first round of bidding has given leads to areas where there’s a greater chance of finding oil,” Wood said, “and . . . once you get involved in China, it can’t be a short-term investment.”

One lure that keeps the oil companies in China is the dream of obtaining permission to drill on rich fields on the Chinese mainland. China is still believed to have large untapped petroleum reserves in areas such as Manchuria in northeastern China and perhaps in the deserts of Xinjiang in the Northwest.

In July, China opened up 10 provinces in southern China for exploration and development by foreign oil companies. However, oil company executives working in China say the areas involved are those where the logistics of exploring for oil are most difficult and where the chances of success are slight. The companies are still hoping to get access to more promising areas.

Substantial New Money

If not a great deal of oil, the offshore drilling efforts have brought in substantial amounts of new money to South China, particularly to Canton and the coastal town of Zhanjiang.

Here in Canton, several of the oil companies have their headquarters in what is, for China, a lavishly furnished office building with fashionably dressed secretaries from Hong Kong. British Petroleum now spends more than $100,000 a month to house its people at Canton’s China Hotel, according to a hotel spokesman.

Since the oil companies began operating in China, they have been embroiled in frequent sparring with Chinese authorities over the rents, salaries and other expenses they are required to pay.

“They (Chinese officials) are trying to put themselves in a position of making money even if we don’t find any oil,” said Richard L. Stallings, managing director of the ACT Operators Group, a consortium that represents Chevron, Texaco and AGIP, the Italian State Agency for Hydrocarbons.

Generally, each oil company is required to pay Chinese workers salaries comparable to those paid in its home country. Most of this money goes to the Chinese government, with only a small portion is kept by the worker.

The oil companies also complain that China requires them to hire an exorbitant number of workers, making China one of the most expensive places to drill for oil in the world.

“The Chinese can give you figures showing that it costs no more to operate here than in South Yemen, Madagascar or some other out-of-the-way hell hole,” one oil industry official said, asking that his name not be used. “The problem is, we could run in those other places with 30% of the staff we have here. It’s the overall numbers of workers that get you.”

In order to persuade people to come to China, some of the firms involved in the offshore drilling operations have resorted to some unusual recruiting practices.

In Canton’s White Swan Hotel, a homesick young American chemist who tests the quality of oil said his company had told him he had a chance to go overseas, and gave him a choice of working either in China or in Bangladesh, a country even less developed and more impoverished than China. He quickly picked China.

“It turned out it was all designed to make me feel better about being sent to China,” he said. “When I got over here, I found out the company doesn’t even have anything in Bangladesh.”