CHINA PUSHING BIGGER FOREIGN ROLE IN ONSHORE EXPLORATION

China is stepping up its campaign to attract more foreign investment to boost onshore exploration.

After years of moribund drilling activity and lagging production growth, China in the past year has done an about-face on foreign exploration and development investment.

During the 1980s China focused its invitations to foreign companies to conduct E&D in its offshore frontiers. With rare exceptions, little onshore acreage was made available. And the most prospective area, the Tarim basin of China's remote, rugged northwestern region, was zealously guarded as the province solely of state petroleum agencies.

China's offshore has not yielded the spate of giant fields that had been hoped for, and foreign multinational interest in Chinese E&D dwindled in recent years.

Although Beijing opened the South China and Bohai seas to foreign exploration 14 years ago, the country's offshore has contributed little to production. Of China's total production of about 2.8 million b/d in 1992, only 80,000 b/d came from offshore fields.

The government last year added the East China Sea to the list of foreign participation acreage, and bidding only recently got under way (OGJ, July 19, P. 27).

Trying to cope with the world's most explosive economic and oil demand growth, China is projected to become a net oil importer by 1995--perhaps sooner (OGJ, Sept. 20, Newsletter).

That spurred Beijing to begin a campaign to attract E&D investment to onshore provinces (OGJ, Sept. 28, 1992, p. 23).

Beijing has opened onshore exploration acreage in 10 mostly northern and western provinces, including the prized Tarim basin, with prospects featuring a postulated combined potential resource of 40-60 billion bbl of oil and 87.5 tcf of natural gas. And joint venture opportunities in currently producing fields soon will be available.

NEW APPROACHES

Chinese government officials last week disclosed plans to award additional acreage in the Tarim basin in a second bidding round, citing foreign companies' strong showing in the first round.

The enthusiasm shown for foreign investment in Tarim E&D is sparking plans for expansion of the region's petroleum infrastructure, including added refining capacity and a megaproject to transport Tarim crude to China's industrial heartland via pipeline to the central part of the country..

Beijing disclosed Feb. 17 it will offer onshore acreage in 12 areas covering 420,000 sq km under a competitive tender for risk exploration contracts (OGJ, Feb. 22, Newsletter). Under the first bidding round, five blocks in the Tarim basin are up for bid.

Beijing also is opening 14 blocks in 10 major oil producing areas, including Daqing, Shengli, Liaohe, and Zhongyan, to foreign cooperation in an effort to boost oil recovery.

Apart from the open tender bidding rounds, a handful of joint venture exploration contracts signed in 1990-93 will see some seismic work and drilling this year.

In addition to offering big chunks of acreage in large area-wide tenders, unlike the piecemeal approach in the past, the government is sweetening terms with a new production sharing contract model.

In outlining its oil policy, state petroleum monopoly China National Petroleum Corp. (CNPC) now stresses the use of foreign as well as domestic resources and capital and targets foreign markets for investment. On average about $1.9 billion/year is spent on oil and gas exploration in China, with about half that coming from foreign sources.

At the same time, CNPC is considering bidding for exploration rights in Peru, India, New Zealand, Indonesia, Australia, and Papua New Guinea. The company is seeking foreign sources of crude oil to make up for looming domestic supply shortfalls.

TARIM BIDDING

Beijing expects to award foreign oil companies exploration rights in the Tarim basin as early as December, said Zeng Xingqiu, vice-president of CNPC subsidiary China National Oil & Gas Exploration & Development Corp. (Cnogedc).

CNPC authorized Cnogedc to handle all onshore bidding.

Deadline for submitting bids on first round Tarim acreage is Oct. 31. In late February 1994, Cnogedc will inform bidders of results of bid evaluation, then contract negotiation will begin Mar. 1, 1994.

The second bidding round, scheduled for first quarter 1994, will offer more exploration blocks in the Tarim basin and elsewhere as well as 10 producing, areas for improved oil recovery projects (OGJ, Apr. 12, p. 36).

The Tarim first round acreage consists of five blocks totaling 72,730 sq km, about one eighth of the total basin area.

In all, more than 60 foreign oil companies from 17 countries have submitted bids for exploration in the Tarim basin under the first round.

A number of companies have disclosed plans to form bidding groups to assess the first round Tarim blocks.

They include:

• A group led by Exxon Corp. 35%, with other interests held by Mobil Corp. 35%, British Gas Exploration & Production Ltd. 15%, Sumitomo Corp. 7.5%, and Indonesia Petroleum Ltd. 7.5% (OGJ, Sept. 6, p. 40).

• A group of Shell Exploration (China)/Pecten Thailand 36%, Amoco Orient Petroleum Co. 36%, Total China 18%, and Marubeni Corp. 10%.

• A group of British Petroleum Co. plc, Mitsubishi Corp., Itochu Corp., and Nippon Oil Co.

• A group led by Agip SpA and including Texaco Inc., Ste. Nationale Elf Aquitaine, and Nikko Kyodo Co.

• A group led by Phillips Petroleum Co. Phillips recently said it has not decided whether it will bid for Tarim acreage.

TARIM CONTRACT

Cnogedc was to have drafted and delivered to foreign applicants by last May 31 a new model production sharing contract (PSC) said to include more favorable terms designed to attract risk exploration in the Tarim basin (OGJ, Apr. 12, p. 36), China Features reported.

Those new terms include:

• An exploration term of 8-9 years vs. the usual 7 years because of the Tarim blocks' rotation in the remote Taklimakan Desert. As with the existing PSC, foreign companies must pay all exploration costs.

• Because of the region's inadequate infrastructure, foreign operators are allowed to delay a development decision for as many as 7 years after commercial hydrocarbons are found. Generally, companies will be allowed a 3 year waiting period on oil discoveries with the potential to produce more than 10,000 b/d. Beijing will set the term of the suspension period.

• Foreign companies will be allowed to market their shares of production domestically.

• Foreign companies involved in Tarim E&D also will be allowed to participate in downstream projects.

In the event of a commercial discovery, China will become an equity participant by paying 51% of development costs. Of resulting production, 62.5% is earmarked as "cost oil" and goes to the foreign partner. The foreign partner then earmarks sales of cost oil to cover production costs 20%, taxes 5%, and a progressive royalty. The rest of the 62.5% of production represents return on E&D investment.

Currently, onshore royalties break out as 7% for production of 4,000-10,000 b/d, 10% for 10,001-15,000 b/d, and 12.5% for 15,001-20,000 b/d. Zeng Xingqiu recently said Beijing is considering a royalty exemption for production of less than 20,000 b/d.

Of the other 37.5% of production, called "profit oil," China will retain a certain percentage to be negotiated before a contract is signed. The remainder of the 37.5%, called "sharing oil," is split 51% China and 49% foreign partner.

SECOND TARIM ROUND NEEDED

Cnogedc last week said the five Tarim blocks currently up for bid are not enough to go around.

It plans to offer more acreage in the southeast arm of the Tarim basin outside the five first round blocks after the first round bidding closes.

Cnogedc expects to sign at least five contracts under the first round.

It has shot seismic surveys totaling 2,226 line km covering the five first round blocks.

Those five and their respective areas are Yatongguuzi 9,814.3 sq km, Xiaoertang 14,698.1 sq km, Qiemo and Tulabei each 14,475.4 sq km , and Washixia 19,267.2 sq km.

Prospects for both Tarim bidding rounds took on added luster earlier this year when CNPC disclosed the biggest strike to date in the basin. Its 4 Tazhong discovery well initially flowed 1,824 b/d of oil and 1.86 MMcfd of gas. Later tests yielded flow rates of 3,705 b/d of oil and 2.28 MMcfd of gas at high wellhead pressure.

CNPC plans a 1,100 sq km 3D seismic survey of the central part of the basin and appraisal drilling to follow up the discovery. The Tazhong structure is the biggest identified to date in China, and CNPC's preliminary estimate of potential reserves is 730 million bbl.

The 4 Tazhong will see development starting in July 1994 and is slated to be on stream by 1996.

TARIM GEOLOGY

Among the information CNPC is making available to foreign companies interested in Tarim E&D is an evaluation of the basin's hydrocarbon potential by Kenneth J. Hsu of Tarim Associates AG, Zurich.

The consulting firm has been involved in Chinese exploration studies for 15 years and Tarim petroleum geology studies for 7 years.

Hsu developed a buried euxenic basin model for generation of Tarim hydrocarbons that he contends explains the genesis of source beds containing postulated hydrocarbons totaling more than 350 million bbl of oil equivalent, the origin of structural and stratigraphic traps, including an oil bearing anticline 230 km long and 120 km wide with 2.4 km of closure, and the history of hydrocarbon maturation and migration.

There is evidence, Hsu says, that large volumes of trapped hydrocarbons have been prevented from being overly mature because of their migration into old traps prior to burial under Cenozoic sedimentary load. Tarim oil is being produced from Mesozoic and Paleozoic reservoirs at depths of more than 6,000 m. Paradoxically, Hsu said, gas and condensate are produced from 3,000 m deep Miocene reservoirs in the Tarim basin because of their late migration.

Contrary to current assumptions that the source beds of Tarim oil are Paleozoic platform carbonates, Hsu concludes the Paleozoic source beds are euxenic deposits of a deep marine basin. Oil migrated from lower Paleozoic source beds during the late Paleozoic or Mesozoic into karsts and other porous reservoirs on anticlinal structures and under seal beds above regional unconformities. Hsu's report also presents a new interpretation of the pre-Mesozoic structures on the Tanan uplift, the main structural elevation of the five first round blocks.

Most Tarim discoveries to date have been in the northern part of the basin. But recent drilling in the southeast portion of the basin, near the five first round blocks, turned up oil in Jurassic sands and as many as 10 pay zones with combined gross thickness of 150 m, the Ministry of Geology and Mineral Resources reported.

The first geological surveys in the Tarim basin started in 1952, but a major exploration and development effort did not begin there until 1985.

By yearend 1992, CNPC subsidiaries had acquired 107,000 line km of 2D seismic and 1,909 sq km of 3D seismic in the basin. They drilled 127 wildcats and appraisals, 58 of which flowed hydrocarbons at commercial rates.

Officials put the basin's postulated hydrocarbon resource at 134.7 billion bbl of oil equivalent, broken out as 74.1 billion bbl of oil and 290.5 tcf of natural gas. Proved and probable reserves are estimated at 1.46 billion bbl.

TARIM DRILLING, PRODUCTION

Forty drilling rigs are working in the Tarim basin at present. Eleven Tarim oil and gas fields are productive from 14 pay zones. Five fields on stream in the northern and central portions of the basin Lunnan, Donghetang, Sangtamu, Jilak, and Jiefangqudong-produced a combined average of 17,780 b/d in 1992, exceeding the basin's official target by about 2,000 b/d.

CNPC laid a 137 km pipeline to Lunnan last year. The field's productive capacity from 53 wells recently has doubled to about 29,000 b/d while its water cut fell to 10%.

Some pay sands have thicknesses of almost 330 ft, and individual well flow rates average 630-3,711 b/d. In all, about 77 Tarim development wells have been drilled, and another 55 are planned.

Average 1993 production is estimated at 24,000 b/d, reaching 33,000 b/d by yearend and 48,000 b/d in 1994. CNPC has targeted Tarim production of 100,000 b/d of oil and 57.5 MMcfd of gas by 1995. The basin's cumulative production is pegged at about 19.4 million bbl.

Accordingly, CNPC expects to invest $491 million in Tarim development this year, Beijing's China Daily reported.

TARIM INFRASTRUCTURE PLANS

CNPC is conducting a feasibility study of two refineries to process Tarim oil.

Plans call for construction of a 20,000 b/d refinery at Korla, the headquarters of Tarim E&D, with start-up in 1997.

CNPC also plans to build a 100,000 b/d refinery in Southwest China's Sichuan province. Southwest China, where oil demand is soaring, does not have a refinery with capacity greater than 4,000 b/d.

In addition, preliminary work is under way to construct China's longest pipeline to transport Tarim oil. The 3,500 km line from Korla in Xinjiang originally, was to extend to Lanzhou, Sichuan, and Xi'an and terminate at Luoyang in Henan province. From there, Tarim oil would have been shipped through existing pipelines to the Jiangsu port city of Lianyungang for export to world markets.

At a projected cost of $1.75 billion, the pipeline is to have capacity of 400,000 b/d and is to be complete in 1997.

However, in light of soaring domestic demand, China's State Planning Commission decided to earmark Tarim oil for domestic consumption. Now the line is to terminate at the proposed 100,000 b/d refinery at Mianyang, 100 km north of Sichuan's provincial capital of Chengdu.

It still must be approved by the commission, and Beijing says it can finance the project alone but will welcome foreign investment.

Tarim oil currently moves via a 250 km pipeline from a 30,000 b/d capacity, computer controlled oil production gathering center to Korla, then via train to Lanzhou in Gansu province.

The Tarim basin, in southern Xinjiang Ugyur Autonomous Region, covers 560,000 sq km. Two thirds of the basin is covered by the Taklimakan desert, the world's second largest.

Expected to expedite Tarim E&D and boost the regional economy is a 120 km highway, extending into the desert, under construction in South Tarim. At Tarim E&D headquarters in Korla, 90 operating teams drill and monitor wells, conduct geological studies, and provide technical services. As many as 15,000-20,000 Chinese oil workers are involved in Tarim E&D.

With its E&D focus weighted heavily on the Tarim basin, Beijing at first reserved the region for Chinese oil agencies, with only technology and consulting services coming from foreign companies.

China's about-face on self-reliance for Tarim E&D stems from Beijing's realization that work in the region requires huge infusions of capital and advanced technology if major discoveries are to be made. That means foreign multinational participation.

OTHER ONSHORE BIDDING

CNPC plans to make available exploration blocks in other onshore provinces under a second bidding round, to get under way early next year, China Features reported.

In addition to making more acreage available in the Tarim basin, CNPC will offer blocks in the Sanjiang basin in Heilongjiang province, Baoding basin in Hebei, Zhoukou basin in Henan, Huahai basin in Gansu, Hailar basin in Inner Mongolia Autonomous Region, Bohai Sea tidelands including offshore acreage in less than 5 m of water, Dacheng basin in Hebei and the city of Tianjin, Qiuxian basin in Hebei and Henan, Chenhu Tuditang basin in Hubei, Hexi basin in Gansu and Inner Mongolia, and northern Qaidam basin in Qinghai.

All the second round acreage lies in sedimentary basins close to fields with well developed infrastructure.

At the same time, CNPC will offer 14 blocks in 10 major producing areas to participation by foreign companies in an effort to boost recovery in China's aging fields beyond the current rate of 30% of original oil in place. Crude reserves under the 14 blocks are estimated at a combined 5.34 billion bbl. Cnogedc's Zeng told a Singapore conference earlier this year talks were under way with Exxon and Texaco regarding methods to improve recovery.

EXISTING CONTRACTS

Work is beginning to pick up in the onshore exploration areas opened to foreign participation in 11 southern provinces beginning in 1984.

Beijing's piecemeal approach in this effort has resulted in very little exploration to date.

The first contract was signed in 1985 by Cnogedc forerunner China National Oil Development Corp. (Cnodc) and an Australian group led by Australia's CSR Orient Pte. Ltd. Under the 7 year contract, CSR was to explore an area in Fushan county on Hainan Island. CSR later became the first non-Chinese company to discover hydrocarbons onshore China (OGJ, Oct. 3, 1988, p. 36), although CSR later declared its Jinfeng oil and gas find noncommercial.

Poor economics forced CSR to quit development there after discovering combined reserves estimated at 6.06 million bbl of oil equivalent, China Features reported.

A Tulsa independent, Myung & Associates Inc., later became the first U.S. company to obtain an onshore PSC in China when it signed a joint venture E&D agreement covering about 20,000 acres of the original 600,000 acre CSR block that encompasses the Jinfeng strike (OGJ, Oct. 15, 1990, p. 26)

At yearend 1990, a group made up of Fletcher Challenge Ltd., Santa Fe Energy Resources, and Nomeco Oil & Gas Co. signed a PSC with Cnodc covering a 15,900 sq km area in the Dongting basin of Hunan province. Plans called for the group to spud the first of two wildcats last August.

Cnodc signed a third PSC with Energy Development Corp. (EDC) in October 1991 covering a 14,423 square km block in the Boyang basin of Jiangxi province. EDC has acquired 660 line km of seismic data and identified a 70 sq km structural trap, China Features reported. Plans call for a wildcat to spud in the fourth quarter.

EDC's exploration program is expected to cost $30 million. In the event of a commercial discovery, development could begin in 1995.

The fourth onshore PSC was signed with Amoco Orient Petroleum Co. in May 1992. It calls for Amoco to explore 5,126 sq km in the Fuyang basin of Anhui province. The contract term is 30 years with the first 7 years for exploration. Amoco has identified a 40 sq km structure, Chinese industry sources say. Fuyang geology is comparable to that in Huabei oil field.

1993 PSCs

Three PSCs were signed this year, one involving a nearshore, shallow water prospect.

Shell Exploration (China) Ltd. and Pecten Orient Co. in February signed a PSC calling for exploration on an 8,930 sq km block encompassing the Yancheng, Baiju, and Hai'an areas of northern Jiangsu province. Just east of a number of producing oil and gas fields, the area is believed to be highly prospective. Seven structures have been identified on the Jiangsu block.

About the same time, Exploration Co. of Louisiana (XCL) signed a PSC with Cnodc covering acreage off the Bohai Sea coast (see map, OGJ, Mar. 1, p. 28). The Zhaodong block is a 197 sq km tract extending from the shoreline near Dagang oil field into coastal tidelands in about 5 m of water.

The 22 year PSC calls for XCL to drill at least seven wells during an initial 7 year exploration phase. Seismic and geological data show the presence of a 10,000 m deep sedimentary section that includes source rocks productive in Dagang oil field. Dagang is China's sixth biggest producer at 78,000 b/d. XCL has a seismic survey under way and is expected to spud the first well before yearend.

The exploration joint venture agreement disclosed most recently is one covering the Nanpanjiang block in southern China's Hunan, Guangxi, and Guizhou provinces (see map, OGJ, May 31, p. 24). Premier Consolidated Oilfields plc signed that agreement. Premier won exploration rights to the block under an initial 12 month term. It can then sign a PSC covering all or part of the area.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.