China Faces Dry Hole in Its Bid to Develop Oil : Exploration: Beijing may find few takers for its offer to open 12 potentially large tracts. Western firms appear more interested in Kazakhstan in former Soviet Union.

Two years late and many dollars short, the Beijing government may find few takers for its offer to open 12 potentially large oil tracts to foreign exploration and production. The move may do less than China’s leaders had hoped to strengthen the troubled Chinese oil industry, according to some industry observers.

Last Wednesday, China National Petroleum Corp. President Wang Tao formally asked for bids to develop what could be the country’s most lucrative oil reserves. The first round of bidding for exploration rights will take place in March.

The action was an admission that China needs outside expertise and investment to meet the energy demands of a booming economy, and marked a major policy shift from former leader Mao Tse-tung’s insistence on a self-reliant Chinese oil industry.

This could be a boon for U.S.-based oil companies, which have largely shifted their exploration efforts overseas. China estimates that its newly opened fields have a potential 57 billion barrels of oil, more than twice current U.S. proven reserves.

But this would have been a lot more attractive before the fall of the Soviet Union in 1991. Before then, oil companies looking for new exploration sites had pressed China to open its far west area. But now, with the gigantic reserves of the former U.S.S.R. open to them, the energy companies may be less willing to make such an immense investment.

The biggest attraction in Wednesday’s offer is the Tarim Basin in China’s far west. It could have reserves, say the Chinese, as big as Saudi Arabia’s, or at least Alaska’s North Slope.

Just across the border from the Tarim Basin, however, is the Republic of Kazakhstan, with immense oil reserves of its own. To international oil companies with limited funds to invest, even the political uncertainties and odd business climate of Kazakhstan may be a lot more inviting than grim-faced China, where Western business methods are even less known and respected.

“There’s only so much money to spread around,” said one cautious oil company executive.

China is wooing foreigners because it can’t get its oil out of the ground fast enough to meet growing energy demands.

In fact, oil production in China, the world’s fifth-largest producer, has declined while imports have grown 50% to 100% annually in recent years.

“Which is why there is pressure on China to stem the fall in its own production,” says David Fridley, a China specialist with the Honolulu-based East-West Center.

But the Chinese, says Fridley, lack the necessary investment capital and oil field technology to turn the decline around fast enough to keep China’s economy growing.

All the tracts offered to foreign companies for exploration have suffered production declines in recent years, he notes. In eight of them, the Chinese hope primarily to lure investment; in the other four, they want companies with the skills to enhance production from existing wells. U.S. oil field technology is widely considered the most advanced in the world.

Until Wednesday’s announcement, foreign oil companies had been restricted to the role of hired hands in China’s most promising fields, in the northern and western interior. They had been allowed to engage in the potentially lucrative exploration and production business only in the relatively oil-poor southern and offshore interior areas.

“We’re interested” in the new opportunities, Los Angeles-based Unocal Corp. spokeswoman Janet McClintock says with the measured enthusiasm virtually all the oil companies are using as they prepare to bid against each other. “We have a lot of experience in Southeast Asia,” she adds, “which is one reason we’re looking at China, among other places.”

In 1983, Atlantic Richfield Co., based in Los Angeles, discovered commercial quantities of natural gas instead of oil in its hunt off the Chinese coast and has become a major partner with China and Kuwait’s national oil company in a $1.2-billion project that includes a 500-mile gas pipeline.

Amoco Corp. has been in China since 1985, when it began offshore exploration. It has recently proposed a $600-million development with the Chinese government, to start offshore production. Amoco, headquartered in Chicago, was also the first major U.S.-based petroleum company to sign a contract for onshore exploration in China, in May, 1992. Amoco could be active in exploring the newly opened territories. “We’ve been looking forward to it for a long time,” Kevin Rolens, vice president of Houston-based Amoco Orient Petroleum Co., said in Beijing after the offer was made.

But so far, the biggest foreign producers of offshore oil have been the members of the ACT group--Agip (Overseas) Ltd., a subsidiary of the state oil company of Italy, and subsidiaries of Chevron Corp. and Texaco Inc.

“It’s been a very positive experience for us with the Chinese,” says Marjie Heyman, coordinator of new venture projects in the Far East for Chevron Overseas Petroleum Inc. San Francisco-based Chevron is evaluating the newly opened tracts to decide whether it will enter the bidding for exploration rights.

Yet by Fridley’s estimate, foreign companies have sunk nearly $3 billion over 12 years in offshore projects in China and are producing only 70,000 barrels of oil a day for their trouble. “Saudi Arabia wouldn’t even turn on the taps for that production,” Fridley says.

As for the territories opened last week, the Tarim Basin--like the Alaskan North Slope--is extremely inhospitable. It is one of the most harsh and remote deserts in the world and would also need a long, expensive pipeline to bring the oil to a deep-water port.

Equally unattractive is China’s business climate. Even compared to the former Soviet Union, China has less predictable taxation, makes it harder for companies to take their profits out of the country and has less dependable transportation and communication systems.

“It’s just the difficulty of doing business in China,” Fridley says.