OPPORTUNITIES, PROBLEMS SEEN IN CHINA'S REMOTE TARIM BASIN

China's offering of onshore blocks in the vast Tarim basin for competitive bidding by foreign firms has created "significant opportunities" for international oil companies, says a U.S. oil company spokesman. Since announcing the opening of the Southeast Tarim basin to participation by foreign firms in February (OGJ, Feb. 22, Newsletter), "response has been very strong," said Wang Tao, president of China National Petroleum Corp. (CNPC).

April 12, 1993

7 min read

Since announcing the opening of the Southeast Tarim basin to participation by foreign firms in February (OGJ, Feb. 22, Newsletter), "response has been very strong," said Wang Tao, president of China National Petroleum Corp. (CNPC).

Wang, speaking at a China/U.S. seminar in Houston early this month, said as of the end of March 61 oil companies from 16 countries plan to bid on the five blocks in the southeast part of the basin offered for exploration and development in the first round.

The seminar, sponsored by CNPC and Halliburton Co., focused on conditions and extent of exploration in the Tarim basin and terms of this first bid offering. Also outlined were CNPC's strategy for developing the country's resources and a new joint venture agreement between Halliburton and CNPC.

Before the seminar began, contracts also were signed between CNPC and Chemtall Inc., ICT Co., Input and Output Inc., Reda, Sun Microsystems, and CDC.

CNPC expects to buy additional equipment and services in the U.S. (OGJ, Apr. 5, Newsletter).

CNPC officials outlined a broad strategy at the seminar for developing China's oil industry. Zhang Yongyi, CNPC vice-president, said goals are to stabilize oil and gas production in the east and quicken exploration in western areas, develop the country's downstream processing capability, and make CNPC a multinational oil company.

"Political and social conditions are stable," Wang said.

Robust economic growth will mean growing demand for petroleum products. China's gross national product has increased 7.9%/year during the last 6 years, Wang said. It increased 12.% in 1992.

TARIM BASIN POTENTIAL

Oil company representatives agree the potential of the 570,000 sq km Tarim basin is great. Reserves estimates range from 10 billion to 30 billion bbl of oil, and the area is lightly explored.

But there are high costs and great uncertainties involved in exploring and developing this potential, including the remoteness and harsh operating conditions of the region and the lack of pipelines and other infrastructure. These must be taken into account in setting bidding terms and negotiating contracts, company spokesmen say.

Geologic structures have been modeled, some discoveries made, and some fields developed to a commercial level, CNPC said. Transportation and communication infrastructure for the region also have been improved. A 400 km highway to the oil region is scheduled for completion next year, and plans are well along for a pipeline.

The 410,000 sq km open to foreign companies is divided into 12 regions. The first round will cover 72,300 sq km in the southeast part of the Tarim basin.

Gravity reconnaissance, aeromagnetic surveys, and 2D and 3D seismic surveys have been conducted in the basin, said Tong Xiao Guang, vice director, CNPC exploration bureau. In addition, 130 wildcats and appraisal wells totaling 700,000 m have been drilled.

Tong said extent of this work includes gravity recon, 510,000 km of 1:500,000-1:1,000,000 and 130,000 km of 1:100,000-1:200,000; aeromagnetic, 630,000 sq km of 1:1 million and 380,000 sq km of 1:200,000; seismic, 100,400 line km of 2D and 1,586 sq km of 3D.

Other survey work has also been done in the basin (OGJ, Jan. 11, p. 45).

Seismic exploration requires special techniques because of sand dunes, Tong said. Conditions are similar to those in Saudi Arabia's Rub al-Khali.

The five block offering is the first step in opening this area of China. David F. Work, vice-president of exploration, Amoco Production Co., said the region "will attract exploration dollars for years to come."

However, a pipeline to handle Tarim production is a critical consideration, Work said. Ownership of the pipeline and pipeline tariffs will be key factors in assessing the economics of a Tarim basin contract, he said.

More blocks need to be opened to support a pipeline, and an early confirmation of the potential of the basin is needed to optimize infrastructure development.

Work said, "Experience shows fiscal and contractual terms will be fair." China will be "a good place to invest."

Work also said China's natural gas potential is great, including coalbed methane.

Amoco has more than $200 million invested in the South China Sea, and it continues to explore there. Amoco Chemicals also began production last year in China.

PIPELINE PLANNED

Liu Song Wei, president of China National Oil Development Corp. (Cnodc), said CNPC is committed to build a pipeline to provide a pipeline for Tarim basin oil.

It is in the design stage, and construction is expected to begin in 1994. Liu said pipeline tariffs, however, will not be a part of negotiations to award rights on the first round of blocks.

The 3,500 km pipeline from Korla in Xinjiang Autonomous Region in the basin to Luoyang in Henan Province would have a capacity of 400,000 b/d. Liu said the line is to be completed in 1997 "to be ready when discoveries are made."

OFFERING DETAILS

Cnodc, a CNPC subsidiary, is responsible for conducting the bid offering, negotiating contracts with foreign firms, and monitoring contract performance.

In agreements with foreign companies, Liu said, the foreign firm will take the risk, a joint venture will be formed for development when a discovery is made, and production will be shared between the foreign partner and CNPC according to contract terms.

Companies can still register and make application to bid, Liu said. Purchase of data packages and site investigation will take place between Apr. 20 and Sept. 20. The deadline for submitting bids is Oct. 31.

In late February 1994, Cnodc will inform bidders of the result of bid evaluation, then "contract negotiation" will begin Mar. 1, 1994.

Here are key exploration contract issues and elements:

Companies can bid individually or in groups, but a company cannot participate in more than one group. A bidding group can include as many as five members.
The exploration period will be 8 years involving three phases. The development period begins when a development program is approved and continues until the approved program is completed.
A 15 year production period starts when commercial production begins.
Relinquishment is 40% of the acreage after the first phase and 50% at the end of the second phase after deducting development and producing areas, After the third phase, all except development and producing areas will be relinquished.
Crude oil allocation will include a consolidated industrial tax of 5%, royalty on a scale increasing with production to 12.5% for production of more than 1 million tons/year, recovery of operating, exploration, development, and other costs at 60%. Crude oil prices will be referenced to world oil market prices.
The foreign contractor will operate the block. The joint management committee will be chaired by CNODC with contractor's representative as vice-chairman.
Contracts will reflect a preference for using Chinese personnel, goods, and services when competitive. Training of Chinese personnel and transfer of technology also will be required by the contract.

Liu cited two special incentives for Tarim basin contracts. The first will make the domestic oil market "available" to the contractor. Oil will be sold only to Cnodc for payment in U.S. dollars at prices referenced to international markets. Also, Cnodc will build a trunk line to ship natural gas from the field "if production and the market" support such a pipeline. Again, gas will be sold only to Cnodc for U.S. dollars at a price determined "by an international formula."

If there is not enough gas to warrant a trunk line, exploration periods could be extended. The program announced in February includes two bidding rounds. The second, scheduled for first quarter 1994, will offer more exploration blocks and 10 fields for enhanced oil recovery projects.

Estimated original oil in place in the 10 fields to be offered for enhanced recovery is 720 million tons, Liu said. Recovery to date is 23%.

In these fields, the infrastructure is good, Liu said. Gathering, other surface facilities, pipelines, and communication and transportation are available, as are skilled personnel.