China and Vietnam

China and Vietnam are largely agrarian societies ruled by Communist parties. To rebuild their economies and maintain their monopoly power, the ruling parties have allowed fragments of a market economy to develop in a move towards socialist market economies. These reforms include opening up areas to foreign participation previously inaccessible. Privatization in these areas has been restricted mainly to production-sharing agreements (PSAs) and joint ventures.

Unlike the countries of the FSU and Eastern Europe, both China and Vietnam in the past decade have experienced tremendous growth, which has increased the demand for energy supplies. In recent years, both countries have maintained a positive trend in the production of energy resources. However, China's energy sector recently has had trouble keeping up with its rapidly expanding economy, which is outstripping its energy supplies and raising its dependence on imported oil. Vietnam's emerging energy industry, on the other hand, is developing as a potential major net exporter of petroleum products and gas in the Asian-Pacific market.

China

China's petroleum industry is still under strong central control. Little has been done to allow foreign ownership of China's assets in its oil and gas industry. The industry is dominated by four large state-owned corporations: two state petroleum companies and two downstream companies {see Endnote 169}. The largest of the two petroleum companies is the Chinese National Petroleum Corporation (CNPC), an integrated industrial organization founded in 1949 to plan, organize, and manage the exploration and development of onshore oil and natural gas resources. The CNPC controls more than 95 percent of China's onshore oil and natural gas fields. All offshore oil and gas exploration andproduction is under the control of the second petroleum company, the China National Offshore Oil and Gas Corporation (CNOOC). It was founded in 1982 to act as the state representative in joint developments with foreign companies of China's offshore oil and gas reserves. The China National Petrochemical Corporation (Sinopec), the state refiner, was formed in 1983 to develop an integrated Chinese refining and petrochemical system. The China National Chemical Import and Export Corporation (Sinochem) is the import and export company responsible for trading international crude oil and oil products. It is the country's main importer of crude oil.

In 1993, China became a net oil importer for the first time. China's strategy is to increase domestic oil and gas output by stabilizing production in eastern China's mature fields, by increasing the focus on exploration and development in the western regions and by continuing to encourage offshore development. Central to this strategy is an expansion of exploration and production joint ventures with foreign companies.

Thus far, China has adopted a very limited form of privatization. Most foreign activity is in production-sharing contracts. Most oil and gas production comes from onshore activity; however, until recently, most foreign activity had been limited to offshore exploration and development. In 1993, the need to meet production targets led China to open up onshore areas to foreign investors with the first of three investment auctions.

Eastern China, the country's traditional producing region, is where most of the country's large oil and gas fields are located. Oil production from eastern fields accounts for more than 90 percent of the country's total crude oil production of 3 million barrels per day {see Endnote 170}, but these aging fields are beginning to decline.

China has recently emphasized exploration and development expenditures in western regions, particularly in the Xinjiang region of the northwest. Most onshore tracts offered to foreign investors in the three investment auctions are located in this area. Crude oil production in 1994 from the Xinjiang region in northwest China was 225,000 barrels per day {see Endnote 171}. The three major basins in the Xinjiang region are Tarim, Turpan-Hami, and Junggar. Experts believe Tarim is the most promising as far as the possibility of finding "elephant-class" discoveries. However, Tarim's remoteness and lack of infrastructure have made it difficult for transportation facilities to keep up with discoveries, temporarily reducing production. To entice foreign companies who are concerned about getting their oil to market, China has launched a massive infrastructure expansion program in this region which will include pipelines, a trans-desert highway, parallel rail lines, and expanded storage.

Offshore crude oil production in 1994 averaged 130,000 barrels per day {see Endnote 172}, 4.5 percent of China's total crude oil production. Until recently, all foreign activity was limited to offshore exploration and development. Offshore China was opened to foreign investors in 1982. Since then, the CNOOC has held four investment auctions. By 1994, foreign investment in China's offshore oil and gas exceeded $4 billion. Currently, there are 12 offshore oil and gas fields in operation, of which four include participation with foreign partners - ACT Operating Group of Agip SpA, Amoco and partners, Chevron, Japan's JHN Group, Phillips Petroleum, and Texaco {see Endnote 173}.

Natural gas makes up only about two percent of China's domestic energy production and has long been overshadowed by the country's coal and oil production. However, environmental concerns have led China to recently shift its oil and gas exploration and development emphasis towards natural gas, both on-and offshore. The CNPC plans to step up gas exploration and development in western China. Gas production is expected to increase offshore since China's largest offshore gas field, Yacheng 13-1 {see Endnote 174}, began producing in early 1996. In addition, the Sichuan gas project has been proposed to develop and rehabilitate fields in the Sichuan province, where most of China's gas is produced, in order to halt the decline in field productivity {see Endnote 175}.

By the end of 1994, China's total refining capacity had reached 3.4 million barrels per day, making it the fourth largest refiner in the world, after the United States, the FSU, and Japan {see Endnote 176}. The country's refining capacity is rising, but not fast enough to accommodate China's soaring domestic demand for refined products. Thus, China has embarked on a major restructuring and expansion plan and started to encourage foreign joint venture participation. The focus is to modernize the industry to international standards and to add an additional refining capacity of about 1.4 million barrels per day by year 2000 {see Endnote 177}. Beginning in the early 1990s, Sinopec led efforts to expand capacity and build new "grassroots" refineries by decentralizing the refining industry. It began to allow other Chinese oil companies, such as the CNPC, to build refineries. However, government restrictions limiting market access have made it difficult for potential foreign investors to finalize projects. For example, France's Elf Aquitaine pulled out of a proposed $2.5-billion refinery project in Shanghai at the end of 1995, while Shell has yet to reach an agreement with Chinese officials to build a refinery in the Guangdong province, after seven years of negotiations {see Endnote 178}. As a result, although many proposals have been submitted by foreign companies, presently there are only two foreign companies with investments in China's refining industry--France's TOTAL owns a 20-percent stake in a northeastern Chinese refinery, while ARCO owns a stake of 9.9 percent in the Zhenhai Refining and Petrochemical Company {see Endnote 179}.

Vietnam

Unlike the countries of the Former Soviet Union and Eastern Europe, who are restructuring their mature oil and gas industries, Vietnam is building a nascent oil and gas industry, spurred by foreign investment. Due to this investment, Vietnam with virtually no hydrocarbon production a few years ago--produced 171,000 barrels per day of oil in 1995 {see Endnote 180}. The country is already on its way to becoming a major source of petroleum in the Asian-Pacific energy market. Vietnam opened its economy to foreign investment in 1988. However, U.S. companies did not begin investing until 1994, when the twenty-year U.S. trade embargo was lifted. Vietnam has tried to make the country more attractive to foreign investors by various reforms in its petroleum law. The country's first petroleum law was ratified in July 1993. This law assigns upstream and downstream petroleum operations to the state-owned enterprise, Petrovietnam, founded in 1977. It also gives the company the power to parcel acreage to select contractors based on competitive investment auctions or other government-announced programs. Most foreign investments are in the form of production-sharing agreements or joint ventures. Vietnam also is directing foreign investor activity toward the building of infrastructure to include refineries, gas pipelines, and hydrocarbon-fueled power plants. Unlike many former Communist economies in transition, where uncertainty is causing lengthy delays, Vietnam has established a stable legal and tax environment that reduces uncertainity and enables companies to quickly move from the initial stage of signing agreements to the stage of producing the fields.

However, regional territorial disputes are an impediment to the development of some of Vietnam's offshore petroleum resources. Hydrocarbon potential off the Spratly Islands in the South China Sea and competition for additional energy reserves recently reignited a long-standing feud between China and Vietnam surrounding ownership of the Islands and adjacent waters. The territorial dispute arose again when China awarded an exploration block in the disputed waters to the U.S. independent oil company Crestone Energy Corporation. Later, Vietnam awarded an adjacent block to a Mobil-led consortium. Six countries China, Vietnam, Taiwan, Philippines, Brunei, and Malaysia all lay claim to this part of the South China Sea {see Endnote 181}.

Virtually all Vietnamese exploration and production activity occurs off Vietnam's southeastern coast. By the end of 1994, after two licensing auctions and the signing of 25 offshore production-sharing agreements, the number of exploratory wells rose considerably {see Endnote 182}. Most petroleum production in Vietnam occurs in three fields, Bach Ho, Rong, and Dai Hung. The Bach Ho and Rong fields are operated by VietSovPetro, a Vietnamese-Russian joint venture. Bach Ho, the country's first and largest producing oil field, was discovered in 1975 by Mobil, which abandoned the well when the U.S. withdrew from Vietnam. The well was later developed in 1986 by VietSovPetro. Both the Rong and Dai Hung fields led by a BHP consortium composed of BHP, Petronas of Malaysia, Total, Sumitomo, and the Vietnam Oil and Gas Corporation came on line in 1994 {see Endnote 183}. Newly discovered fields could be on line soon, raising the country's production even further. For example, Petronas is developing its Ruby field, while Mitsubishi and Japan National Oil are developing the Rang Dongfield, with production in both fields to start by 1997. Other fields that could come on line are the Flying Horse, discovered by Lasmo; the Red Orchid and the West Orchid (both located in disputed waters), and the Sunflower North and South Fields, discovered by BP; as well as two other unnamed fields, one discovered by Total and the other discovered by Shell/Pedco. These major fields are all located in the Nam Con Son Basin {see Endnote 184}. Despite initial exploration successes, geological difficulties are making it hard to estimate recoverable reserves, raising concerns over the viability of some projects. Several fields that were originally thought to be quite large are now being downgraded--for example, the BHP consortium's Dai Hung field and the Mobil consortium's Thanh Long block. Further, BHP is considering abandoning its Dai Hung project if new terms cannot be negotiated {see Endnote 185}. Several recent gas discoveries have opened up the future of the gas industry in Vietnam. Perhaps the most significant activity involves two major gas field strikes in southern Vietnam drilled by British Petroleum (BP) and its partners, India's ONGC, and Norway's Statoil, with reserves estimated at a combined 2 trillion cubic feet {see Endnote 186}.

Another area of discovery with potential gas reserves is at the Hai Thach gas field. It may take a few years before reserve estimates can be formulated, but if the country's proven natural gas reserves are estimated between 12-35 trillion cubic feet, Vietnam plans to commit itself to the development of a natural gas industry for domestic use as well as possible export markets {see Endnote 187}. In April 1995, Vietnam commissioned a consortium comprised of BP, British Gas, Mobil, and Mott Ewbank Preece to develop a master national gas plan {see Endnote 188}. In the meantime, Vietnam's first gas pipeline (built by Hyundai of Korea) went into operation in 1995, bringing production ashore from the Bach Ho field {see Endnote 189}. Vietnam also is studying the possibility of exporting gas via pipeline to Thailand {see Endnote 190}.

Substantial upstream activity has led to Vietnam's generating plans for downstream oil and gas infrastructure projects. As Vietnam's economy grows, it plans to reduce its reliance on imports by building its first oil refinery by the year 2000. Vietnam commissioned two feasibility studies regarding the possible construction of a 130,000 barrels-per-day refinery. France's TOTAL, a consortium member of the study, withdrew from the project over objections concerning the chosen site, located in a remote area of central Vietnam. South Korea's LG Group, Petronas of Malaysia, and Conoco were chosen to replace TOTAL, but the companies said that no decision has been made beyond a feasibility study since there are doubts about the viability of the project {see Endnote 191}. Vietnam hopes to build a second 100,000- barrels-per-day refinery after the first plant comes on line {see Endnote 192}. In the meantime, Petrovietnam has asked for bids to begin studies for a second refinery, likely to be located in the northern part of the country. Despite foreign involvement in upstream activities, Vietnam has denied foreign investors access to its retail sector {see Endnote 193}.