China: Oil Investors Tapped Out Of Wells

Oil and politics at the local level in Western China. Peter S. Goodman of the Washington Post has a long story on a contested oil field in the Gobi.

Yiqikelike, the first oil field developed in Xinjiang, was drilled in 1958 by Chinese engineers with Russian help. It sits more than 80 miles from the county seat, accessible only by a rough gravel road. Where the only other local industry had been sheep herding, a veritable city took shape -- with brick dormitories housing some 20,000 workers who supported the drilling rigs beneath snow-capped peaks.

For a time, the field yielded 30,000 tons of crude oil a year. By the 1980s, however, production had slipped and costs were climbing. In 1986, the Xinjiang Petroleum Administration Bureau -- a state entity that was a forerunner to CNPC -- ceased operations. Today, the city is a ghost town, the old structures scoured down by the elements to resemble the tan boulders that punctuate the stark landscape.

Some oil continued to gurgle to the surface. In 1987, the government for Akesu district, which includes Kuche, complained to Xinjiang provincial authorities that oil from the wells threatened local drinking supplies. Akesu sought and gained the power to allow villagers to collect whatever oil sprung from the wells. With local government encouragement, peasants with donkey carts began hauling away oil in buckets.

Buckets?!

The local municpality began contracting out access to the wells in return for a cut. This slowly grew under the radar of CNPC, attracting more investors, who have stories like this:

In April 2003, he came for a look. Several hundred men were sleeping in tents and cold sheds amid the all-night puttering of machinery. Discarded parts, blackened oil drums and beer bottles littered the dusty ground. Undeterred, Zheng borrowed money from friends and relatives, combined it with his own meager savings and sunk more than $125,000 into the project.

"It's remote, we have to swallow bitterness, and it's risky," Zheng said. "I don't care. I wanted to make a lot money."

Oil fever also reached Tongxin county in Ningxia province, one of China's poorest, where the Hui ethnic minority community saw it as a path to upward mobility. There, it reached Ma, a father of four who had been making a decent living buying wool from local farmers and selling it to spinning factories.

Ma had about $12,000 in savings. He borrowed another $12,000 from his siblings and began collecting more from local villagers. With Ningxia caught in a three-year drought, the oil business beckoned as salvation. Before he and a friend left for Xinjiang in November 2003, they had collected $360,000, he said.

"From what our friend said, and with the local government support, we thought it was a good investment," Ma said.

Then CNPC decides the operations are getting too big to tolerate:

In April 2003, two Toyota Land Cruisers had arrived, bearing officials from the giant state oil firm. According to Zheng, the leader of the party asserted claims over the wells. "He said, 'This is my personal asset,' " Zheng recalled. "He was extremely angry, rude and unpleasant. He vowed that he would put us out of business."

Zheng thought the local government would protect them. "Here, it's all about personal relationships," he said. "We pay our taxes. Why would they want us to stop?"

But the Tarim Oil Field Authority -- a local CNPC subsidiary -- soon filed a report with Xinjiang provincial authorities declaring that the venture had exceeded its rights to collect oil, according to investors. In late 2003, after an investigation, Kuche authorities ordered a shutdown. The venture pulled strings with local officials to resume less than a month later, but when CNPC found out the following year, another shutdown was imposed.

As the cat-and-mouse game continued, central government officials flew to Kuche in October 2004 to meet with local leaders and the private investors. They returned to Beijing without issuing a judgment. This May, working teams returned to Kuche for further investigation.

And the latest chapter of the story has the issue decided seemingly in favor of the CNPC, with the investors contesting the interpretation of a government decision and playing the ethnic card:

Summer brought a decision: a July 29 document signed by 10 central government ministries. "The oil wells and land ownership should be returned from the unqualified enterprises," the state decreed -- seemingly a victory for CNPC. But the private investors, hoping for more time, are focusing on the section of the ruling that addresses the sensitivity of the involvement of ethnic minorities in the project: "In order to maintain unity among different minority groups and preserve regional stability, the parties should negotiate with CNPC fully and seriously."

So far, no talks have been scheduled. At the oil field, the pumps still groan, depositing a trickle into pools carved into the desert floor.

Hopefully we will get a follow up story sometime.