Oil Companies Sign Up for China's Oil Riches

Last month three major oil companies signed agreements with China to explore and drill for oil, ending a year long round of bidding among 33 foreign companies for a share of China's rich offshore oil deposits. Because of the size of the agreements, the terms will be watched closely by other oil companies and Third World countries.

The largest contracts involved Occidental Oil Corporation and a consortium headed by Exxon and the Royal Dutch Shell Group. These companies are expected to invest more than $200 million in oil exploration in the South China Sea.

Other companies which have signed contracts with China include Atlantic Richfield Company, which is now drilling south of Hainan Island with Kuwaitiowned Same Fe International, and a consortium of five corporations headed by British Petroleum. Agreements are expected soon with Caltex Petroleum Company, Texaco, and the Japan National Oil Company.

Since 1981, when China opened its continental shelf to exploration, oil companies have conducted extensive seismic and geological studies of the area. Oil analysts estimate that offshore drilling could yield as much as 100 billion barrels of oil. This would make the area one of the richest oil fields in the world and China a major oil exporter. Full-scale production is not expected until the early 1990s, however: by that time foreign oil, corporations will have spent over $75 billion.

Because of the enormous expenses involved, the oil companies are trying to guarantee themselves a major cut of the oil that is eventually found and minimize their share of the drilling expenses. One New York-based oil analyst, who spoke to Multinational Monitor on the condition that he not be identified, says that the financial terms reached so far-which have not been made public--are "more generous than they need to be," reflecting China's desire to induce foreign investment. "They don't want to be too tough and scare away other oil companies," he says.

But overly favorable contracts could put smaller countries at a disadvantage when bargaining with oil companies. "Occidental, after the deal with the Chinese, can go into another country and say, `the Chinese gave us 20 percent, how can you give less'?" the analyst points out. "China is so big and important that its decisions simply knock everyone out." China's large oil fields could also pose a threat to OPEC, particularly since it has not supported formal pricing cartels in the past.

In response to increasing oil prices and their own balance of payment problems, a number of non-OPEC countries are also beginning to develop their offshore oil reserves. They include:

• South Korea, which has signed exploration contracts with the Japanese government and three American firms, Texaco, Ko-Am (a consortium of three small companies), and Zapped. The latter, better know as the Zapata Oil Exploration Company, was founded by U.S. Vice President George Bush;
• Liberia, which signed a contract this year with Standard Oil of Indiana to spend $26 million over the next five years to drill four oil wells;
• Benin, which is using aid from the World Bank and funds from Norway's Saga Corporation to finance offshore exploration; and
• Guinea-Bissau and Ghana which are both conducting seismic surveys with World Bank funds.

Although the investments in China are large, recent trends do not indicate an increase in Third World investments by the oil corporations. "If you look at the figures, you will see that investment is down from five years ago," says Steve Born, an oil analyst with Tanner Associates in New York.

Companies are investing in countries like Liberia and South Korea in order to "have a bit of a foothold," says Born. "They don't want to let other countries steal the possibilities."

But as Third World countries increase their oil investments they are beginning to rely more on their own expertise. China, for example, is insisting that the companies train Chinese geologists, construction companies, and field personnel, so the "foreign experts" can be phased out within a few years. And Ghana has begun to conduct its own feasibility studies so it can "bargain from a stronger position," according to an embassy official in Washington.