China, Arco, and Santa Fe sign 25-35 Year Oil Deal

Atlantic Richfield Co. (Arco) and Santa Fe International Corporation have signed a preliminary agreement with the People's Republic of China to begin oil exploration in the South China Sea this fall. The agreement is the first of its kind between an American oil company and China.

According to Arco spokesperson Mickey Parr, the 25-35 year contract is a "production sharing agreement," meaning that any oil found will be shared among Arco, Santa Fe International, and the China National Oil and Gas Exploration and Development Corp. Arco will bear 80% of the exploration costs, and Santa Fe 20%. Both firms conducted seismic and geophysical studies in the area from March of 1979 until last year.

Few details about the agreement are available because of a strict secrecy clause China exercises in its trade pacts with foreign companies, and Parr declined to comment on the profit breakdown among the three oil companies involved.

Other oil exploration contracts between China and French and Japanese corporations date back to last year. The French firm Total's contract with the South China Sea branch of China's state-owned company calls for the two enterprises to share all losses and risks, with the Chinese company providing 51076 of overall investment and Total 49%. Total will have priority to buy Chinese crude, get a cut of production from the area, and be paid in crude for its equipment and personnel during the roughly 20-year term of the contract.

U.S. oil companies considered certain provisions in Chinese agreements with the French and Japanese unreasonable, and thus have been working with "the China national Oil and Gas Exploration and Development Corp. for nearly three years to draft a model contract spelling out commercial guidelines on production sharing and the division of risk. The ARCO-Santa Fe agreement, announced on June 4, is the first result of these efforts. Parr declined to specify its differences from the French and Japanese agreements.

A spokesperson for another oil company said as many as 30 U.S. oil firms including Texaco, Chevron, Exxon, Phillips, and Mobil, are interested in negotiating with the Chinese, and some have already begun seismic testing..

However, potential agreements with other American oil companies will most likely be delayed. A new five-year Chinese economic plan was disclosed in mid-June that calls, among other things, for limited foreign investment.

China needs foreign equipment and technology to exploit its badly-needed oil reserves in the South China Sea, according to Dan Stein of the U.S. Commerce Department-but this is the third time the Chinese have delayed oil exploration contracts, and "there is talk among the industry that the Chinese are trying to get out of the ARCO-Santa Fe agreement," Stein said.

There's a basic internal debate over how much they're willing to mortgage their natural resources to the "foreign devils," he added.