Oil firms don't dig the dry holes in China

China is pushing ahead with offshore oil development despite sagging interest by foreign oil companies. China National Offshore Oil Corporation (CNOOC) announced yesterday that an additional 93,000 square kilometers (36,000 square miles) of offshore area will be open to bidders. This completes the offerings in the second round of offshore bidding started last November.

The development of China's oil resources is a high priority for the government. China needs oil to meet its growing domestic energy demands and also would like to use oil exports to help finance its economic modernization program.

The new areas are in the Pearl River Mouth Basin in the South China Sea and in the southern part of the Yellow Sea north of Shanghai.

The results of almost two years of exploration by 31 companies off China's coast -- at an estimated cost of $1 billion -- have been disappointing. Out of the 59 exploratory wells drilled under licenses granted from the first round of bidding opened three years ago, 27 have found oil and gas.

However, only two of these finds may contain large enough quantities of oil to be profitable, industry sources say. Both finds are in the Pearl River Mouth Basin.

China's oil development program has made some gains because of modest increases in onshore production. In 1984, China produced an estimated 112 million metric tons of crude oil.

However, Western oil analysts say, China cannot depend solely on onshore drilling to reach its goal of producing 150 million tons a year by 1990; it also needs commercial finds of offshore oil.

To sweeten the deal for oil companies in this round, CNOOC has said that it will adopt ``more flexible policies'' -- a more favorable profit split and a much lower ``contribution'' from foreign contractors -- to encourage the development of small and medium-sized fields.

It appears that China will scale down and possibly eliminate requirements for companies providing assistance in developing China's domestic oil industry. Requirements for personnel training and technology transfer would remain, said the CNOOC spokesman.

CNOOC also is expected to reduce the exploration commitments for oil companies in the second round, said one Western oil company representative in Peking.

The number of companies that have paid to see geophysical data on tracts in the Yingge Sea Basin south of Hainan Island is a good measure of the interest in China's offshore oil.

With the deadline to purchase the data today, only 22 foreign oil companies have paid -- far below the 40 companies which reportedly showed an interest in the new areas late last year, and less than the 31 companies which actually committed themselves to drill in contracts signed after the first round in 1983.

The number indicates, Western oil company representatives say, that while there is disappointment in the results of offshore exploration so far, there is still solid interest in the prospects for oil and gas off the China coast.

``The cost of the Yingge Sea East data package is not high,'' said one US oil company representative. ``It is worth taking a peek to see what's there, but the real test is who is actually going to put in their bids in the second round.''

Despite the current world oil glut and the lack of enthusiasm among oil companies, oil industry analysts here say, CNOOC needs to sustain the momentum for offshore exploration. The maintenance of oil-exploration services and support facilities as well as China's own energy development goals require that offshore exploration proceed steadily through the end of the decade.

Contract negotiations for the second round are expected to take place later this year, and actual drilling under these contracts would begin in 1986, or about the time drilling commitments from the first round of bidding should have been fulfilled.