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Directorate of Secret Intelligence China's Rapidly Growing Oil Exports: Can Expansion Continue? Secret EA 86-10009 March 1986 Copy 3 2 7 Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 Directorate of Secret Intelligence China's Rapidly Growing Oil Exports: Can Expansion Continue? This paper was prepared by of East Asian Analysis.F- Comments and queries are welcome and may be directed to the Chief, China Division, OEA, on 25X1 25X1 Secret EA 86-10009 March 1986 Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 1 1 . . I L 11 --.- I : . . ` .. I I I I I I L 1-_ .. -. 1-I1L_... Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 1 11 . Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 China's Rapidly Growing Oil Exports: Can Expansion Continue? Scope Note The prospect of oil for export is the primary incentive for foreign countries-especially the United States-to invest in oil in China. This paper evaluates China's ambitious plans to increase oil exports and points up those factors that will have an impact on China's ability to meet those goals. iii Secret EA 86-10009 March 1986 25X1 25X1 Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 J_ 1l Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 Secret China's Rapidly Growing Oil Exports: Can Expansion Continue? Key Judgments Beijing has nearly doubled the volume of its crude oil exports in the past Information available two years, making China the world's 13th-largest oil-exporting country. At as of 25 February 1986 less than 600,000 barrels per day (b/d), these sales are still too small to af- was used in this report. fect the world oil market, but they are increasingly important to the East Asian market-particularly Japan and the Philippines. Moreover, Beijing's drive to increase exports is offering substantial investment opportunities for US firms engaged in both onshore and offshore exploration as well as those that provide equipment and techniques to extend the life of older fields. The search for oil, in fact, has already become the largest component of foreign investment in China; foreign oil firms since 1979 have invested $1.7 billion; 35 percent of this has been from the United States. Beijing has been able to raise production and sales of both crude oil and pe- troleum products by: ? Encouraging the introduction of foreign equipment and expertise to enhance recovery techniques and exploit new finds. ? Implementing a conservation program to limit domestic consumption of oil. ? Undercutting OPEC prices to bolster its own sales. ? Aggressively marketing its oil and oil products overseas. Because of growing domestic demand for oil and the glut in the world oil market, China is unlikely to sustain last year's 27-percent growth in the volume of exports over the next few years. Nonetheless, we believe there is a strong possibility that China will be able to increase exports to 1 million b/d by 1990. Recent discoveries of oil on the periphery of existing onshore fields have considerably brightened prospects for a steady increase in production to 3 million b/d. China's continuing desire to maximize foreign exchange earnings, moreover, suggests that Beijing will keep up its pressure on domestic industry and households to limit oil consumption. Finally, the Chinese are expanding oil terminals and pipelines to ease current logistic bottlenecks. The recent downturn in the international oil market will complicate but probably not change China's export plans. Given Beijing's considerable need for foreign exchange, we believe that China would probably not reduce its oil exports significantly even if international oil prices fell below $10 per barrel. Beijing's announcement that it intends temporarily to freeze the volume of its oil exports is, in our opinion, a political gesture to Middle Eastern countries and will not last. Indeed, the Chinese have a history of undercutting OPEC, and we expect them to continue attempts to expand their share of the market. Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 Falling oil prices will exacerbate China's trade deficit, which approached a record $14 billion in 1985, according to Chinese statistics. If Beijing maintains 1985's export volume and world crude prices average $18 a barrel, we estimate that China will lose $1.6 billion in foreign exchange earnings this year. China will probably react to the trade deficit and the loss of oil revenues by imposing stricter controls on imports, and perhaps scaling back some large development projects, but we expect acquisitions of oil-related equipment and technology to continue. Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 Secret Key Judgments Opportunities To Earn Foreign Exchange 1 How China Boosted Oil Exports 11 Seeking New Markets Prospects for Continued Export Growth: Pluses and Minuses 2 Implications for the Domestic Economy 6 Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 )Lake Baikal Figure 1 Oil and Gas Basins Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 ? Tasharik Xinjiang "Tarim ? Lhasa NEPAL BHU. I N D hmandu ~* a Selected oilfield Province-level boundary 0 500 Kilometers 0 500 Miles East China Sea Sea MMP.NII~pPINES Boundary representation is not necessarily authoritative. Sanitized Copy Approved for Release 2011/05/13: CIA-RDP04T00794R000100640001-8 NORT Lisahe KO A ?rte Ycr~sr7?n ~~zn5 he *Beijingl('a? ve iow *P , .yang Huabei g u Dagnnp' Dalianoenarcane irSeoul Bu uro ZhaoBhul 2hongyuan SO TH Ch ging A ~ , hangil ingdao KO A ~i?dinha Shando Yellow Sea Lanzhou Van --h .row Sea Beoji' Jinughan j . Shanghai Chan Jai . rWuhan `~^'' ADaging Harbin Fuyu- Shenyang - - ~------ --~ -1 - Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 China's Rapidly Growing Oil Exports: Can Expansion Continue? petroleum industry to produce more oil. The China National Chemical Import and Export Corporation (Sinochem), Beijing's crude oil trading firm, has opened offices in the United States, Japan, West Germany, Panama, France, Hong Kong, and Macau. In addition, Beijing has purchased more than $600 million in petroleum technology and equipment from US firms. The bulk of the additional oil found at existing onshore fields with the help of this equipment has been exported. In 1985, crude oil and petroleum product exports earned an estimated $6.4 billion, about 23 percent of China's foreign earnings. Since then, Beijing has strongly pressed its foreign exchange earnings, Opportunities To Earn Foreign Exchange With skyrocketing needs for foreign exchange to finance its modernization program, China over the past few years has sought ways to greatly increase exports. Because increasing international constraints limit sales of two major Chinese exports-textiles and apparel-Premier Zhao Ziyang in early 1984 identi- fied oil exports, along with tourism and arms sales, as the areas with the greatest potential for increasing How China Boosted Oil Exports Beijing has been able to increase its oil exports because new finds and enhanced recovery techniques have boosted China's total oil output. With the help of resident foreign experts and foreign technology, Chi- na increased its oil production by 8 percent in 1984 and another 9 percent in 1985 to almost 2.5 million b/d. Of this increase, 80 percent was exported. Al- most half of the increased production in the past few years has come from new finds at China's second- largest field-Shengli, located in Shandong Province. China has been remarkably successful at limiting domestic oil consumption through conservation efforts so it can increase exports. The country's annual consumption of oil declined by 11 percent between 1978 and 1982, from 1.82 million b/d to 1.62 million b/d. Most of the decrease resulted from a cutback in Table 1 Chinese Crude Oil and Petroleum Product Exports and Foreign Exchange Earnings, 1970-85 Oil Crude Oil Petroleum Foreign Production Exports Product Exchange (Thousand (Thousand Exports Earnings b/dJ b/d) (Thoa~sand (Milliat b/d) US ~1 1976 1,738 169.5 38.8 774.9 1977 1,873 182.1 39.3 I ,Ol 1.9 1978 2,081 226.3 43.5 1,278.8 1979 2, 123 268.6 60.7 2,446.5 1980 2,113 265.5 83.8 4,320.6 1981 2,024 275.1 91.8 4,942.2 1982 2,042 293.6 105.4 4,896.8 the burning of crude and fuel oil in power plants and industrial boilers and furnaces. Beijing began convert- ing such plants to coal in 1978, and since 1981 it has imposed a tax on direct fuel and crude oil consump- tion to discourage this wasteful practice. In 1981, the State Council responded to widening shortages of gasoline and diesel fuel (caused by China's limited refining capacity and increased demand for transpor- tation) by imposing quotas on the fuel allocated for every vehicle in China. 25X1 25X1 -iil - Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 ~._ . L~ _i i .. Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 Figure 2 China: Crude Oil and Petroleum Product Exports as a Percent of Total Oil Production, 1970-85 Percent 30 Seeking New Markets Beijing also has intensively sought new markets to expand its crude oil exports. Beijing reportedly began direct sales to South Korea in 1984, and, during his July 1985 visit to the United States, Vice Premier Li Peng suggested to Vice President Bush that the United States should consider buying Chinese oil under along-term arrangement. Party General Secre- tary Hu Yaobang signed a document while visiting Australia in April 1985 that inaugurated China's first shipment of Daqing crude to Australia. Last August, an article in one of China's leading economic journals even proposed that China take advantage of the recent downturn in the Soviet Union's crude oil production to increase exports to Eastern Europe. At the same time, Beijing has been encouraging countries holding trade surpluses with China to bal- ance their trade by importing Chinese oil. In August 1984, for example, Chinese leaders made a strong pitch to a visiting economic delegation from Chile to reduce Chile's $80 million trade surplus through oil purchases. Chile later agreed to buy 730,000 barrels of Chinese crude, worth about $19 million. Beijing also has expanded its oil exports by undercut- ting OPEC prices. For example, Beijing's official June 1985 price for Daqing crude was $27.35 per barrel, about 50 cents below the price of comparable OPEC crudes. Moreover, China sold much of its crude oil at the spot market price of $25.80. China dropped its price to Japan for Daqing crude last June by 60 cents a barrel retroactive to April, cautioning its Japanese customers against disclosing this discount to avoid irritating other oil-producing countries before the July OPEC meeting. More recently, Beijing has been forced to drop its oil price below $20 per barrel to maintain its share of the weakening international market. China has occasionally reduced the price of its oil to "friendship prices" for certain countries. For example, Thailand received oil at a discounted price during the 1979-80 oil crisis, and the Philippines for many years has received about 15 percent of its total oil needs from China at reduced prices and with deferred payment arrangements. Prospects for Continued Export Growth: Pluses and Minuses In our view, recent discoveries of oil on the periphery of onshore fields in China have considerably bright- ened Beijing's outlook for increased oil exports. These unexpectedly large finds have caused Beijing to raise its projection for 1990 crude oil production to 3 million b/d, a 5-percent-per-annum increase over 1984 production, which we believe is achievable. We believe Beijing could export as much as one-third of this output, based on our estimate that China will need almost 2 million b/d for domestic use by 1990. 25X1 25X1 25X1 25X1 25X1 25X1 Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 - ~..1 1 I Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 Secret Table 2 Major Oil Exporters a and Producers, 1984 Country Thousand b/d Country Thousand b/d Saudi Arabia 3,760 USSR 12,415 USSR 3,420 United States 10,385 Mexico 1,600 Saudi Arabia 4,690 Iran 1,576 Mexico 3,010 Venezuela 1,362 United Kingdom 2,580 Nigeria 1,162 China 2,286 United Arab Emirates 973 [ran 2,195 Kuwait 955 Venezuela 1,875 Indonesia 949 Canada 1,555 Libya 947 Indonesia 1,440 Iraq 943 Nigeria 1,405 United Kingdom 770 Iraq 1,170 China 553 Libya 1,115 Norway 535 Algeria 990 Significant new finds at Shengli and several other fields are the primary reasons for China's optimistic oil outlook. Beijing recently predicted that production at Shengli-after rising by 20 percent or more in each of the past two years-will increase by 1990 to 1 million b/d, double current production. Beijing has announced plans to invest 25 billion yuan ($7.8 billion) over the next five years to raise the field's production further. The Chinese predict that Shengli's Gudong field, discovered in 1984 and located at the mouth of the Yellow River, will produce over 150,000 b/d in Growing Foreign Involvement in China's Onshore Oil Production Beijing has opened its onshore oil industry to on-site joreign technical assistance over the past few years. Several US and French firms are doing extensive seismic surveys in Xinjiang Province in western Chi- na. Another I~S.firm is helping the Chinese with directional drilling at Shengli, and a French jirm has assisted the Chinese in developing enhanced recovery techniques at Daging. Some of these projects are being.financed by the World Bank. The prospect oJ' additional Chinese oil Jor export is the primary incentive jor foreign companies to explore at both China's offshore and onshore areas. Foreign firms have conducted extensive surveys oJl China's coast for oil, at minimal cost to Beijing. In March 1985, Beijing opened 1.83 million square kilometers in 10 southern provinces to oil exploration by.foreign.firms. This unprecedented action opened a largely unexplored area. Some Chinese officials have indicated Beijing will also open up northwestern China to foreign exploration during the next few years. Oil discovered inland may be more d1fjicult to export than offshore oil because of logistic problems, but Beijing could conceivably provide foreign oil Jcrms with oillrom their existing coastal.fields in exchange for exploration and development work in- land. The search for oil, both onshore and offshore, has become the largest component ojjoreign investment in China. Foreign oil.firms have already invested $1.7 billion, about 35 percent Jrom the United States, and this,figure will probably grow significantly as a result of onshore exploration that is beginning now. Beijing also has begun building more refineries to expand its production of petroleum products. It re- cently signed a $500 million joint venture agreement with a group of overseas Chinese to build a new refinery in Fujian Province capable of handling 60,000 b/d of crude oil. In January 1985,~~ 25X1 25X1 -;,, - Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 South Korea. South Korea has been an attractive market for Chinese oil, especially because of its close proximity to China's oilfields. China has reportedly shipped crude oil directly to South Korea since 1980, usinglalse bills o,J'lading, and Japanese oil brokers have transshipped Chinese crude to South Korea via Japan. This trade reached a new stage in thelall of 1984 when, according to press reports, Beijing appar- ently made itsjirst direct sale oj'crude oil to South Korea without resorting to false documents. Press accounts of the sale indicated that South Korean buyers had become dissatisfied with the 30- to 40- cent per-barrel.fees Japanese middlemen were charg- ing to handle these transactions. Beijing also hopes to take advantage of Seoul's desire to reduce its depen- Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 Important CustomersJ'or China's Oil Japan. Japan buys about 40 percent of China's crude oil exports, most oJ'it under their Long-Term Trade Agreement (LTTAJ, which was renewed in January for 1986-90. China's crude oil exports were worth about $2.2 billion in 1985 and provided about S percent of Japan's oil needs. Several months of contentious bilateral negotiations ended in December with Japan agreeing to increase its annual minimum import commitment by 10 percent from 160,000 b/d to 176,000 6/d. This compromise balanced China's desire to expand exports to offset its large bilateral trade deficit (over $S billion in 1985) with Japan's slack demandlor oil. In addition, Japan has been recently buying about 60,000 b/d of Chinese crude on the spot market at favorable prices. In response to US and Chinese complaints about its nontarlff barriers, Japan recently opened its market toloreign gasoline, and China sent the~rst shipment in January. United States. During 1982-84, China exported about 25,000 b/d oj" leaded gasoline to the United States, worth an average of $400 million a year. Much of it was sold at discount prices at gasoline stations on the West Coast cater it was blended to raise the octane level. Gasoline exports dropped to 15,000 b/d in the first ha(J'of 1985 as the demandlor Chinese gasoline weakened in response to new US environmental regu- lations that reduced permissible lead-content levels. The Chinese rapidly expanded their crude oil exports to the United States in 1985, in part to replace the lost gasoline market. By mid-1985, crude oil exports to the United States were triple the 1984 volume. dency on Middle Eastern crude. We have no indica- tion of any sales being made in 1985. North Korea. China has exported crude oil to North Korea for over a decade, providing as much as haU'of P yongyang's needs. North Korea's proximity to China's major oiUields has made it possible to ship Chinese crude oil directly by pipeline to the Ponghwa refinery in northwestern North Korea. North Korea's 1984 trade protocol with China called for importing 30,000 b/d of crude oil. In October 1984, North Korea reportedly made an urgent request Tor another 730,000 barrels of crude to replace oil that Iran could no longer provide. 25X1 25X1 25X1 25X1 25X1 25X1 25X1 Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 Secret Table 3 China's Oil Exports to the United States, 1980-85 Barrels Million Barrels Million per day US $ per day US $ First half of 1985. b Does not include light oils or kerosene. el~tng also has announced plans to invest $200 million over the next six years to modernize its large refinery at Maoming in Guangdong Province. By 1990, China hopes to export 30,000 b/d of petroleum products from Maoming. Oil terminals and pipelines in China's major ports are being expanded to accommodate additional exports. A $30 million project will add new oil facilities at the ports of Dalian, Qingdao, Nanjing, and Qinhuangdao. In May 1985, China signed a contract with a Canadi- an firm to help design a new 71-centimeter crude oil pipeline that will connect Shengli oilfield to the port of Tianjin. The new pipeline will have a capacity of 400,000 b/d, double the existing pipeline. At Dalian, officials are soliciting foreign bids fora $900,000 system to heat crude oil being pumped in or out of the port's storage tanks used for export. Although we expect China's exports to grow through 1990, several factors combine to keep China from becoming a major player in the oil export market. Almost half of China's current supply of oil is pro- duced at Daqing, a mature field in northeastern China where production may start declining in the Table 4 China: Oil Output by Major Producing Areas Total Daqing Shengli Huabei Liaohe Other (Rengiu) 1983 2,121 1,040 376 211 122 372 1984 2,286 1,068 459 203 153 403 1985 a 2,496 1,106 540 206 180 464 next few years. Enhanced recovery techniques, the discovery of a new pool of oil, and introduction of foreign technology helped production at Daqing to rise by 3 percent in 1985 to 1.10 million b/d. But US experts working at Daqing report that the Chinese have saturated Daqing with new wells, and this is likely to lead to faster depletion rates. In addition, we believe the water-cut ratio at many wells is in excess of 70 percent, a further indication of the onset of declining production.' Beijing will need to find large quantities of new oil in the coming years to replace Daqing, and the disap- pointing results of the offshore oil search have encour- aged China to accelerate onshore exploration efforts. China is now pinning its hopes on largely unexplored areas in southern and western China, but the lack of a transportation infrastructure to move oil out of China's interior makes the potential for exports from these areas along-term goal. ' Water is frequently injected into older oilfields to force the remaining oil to the surface. Eventually [he percentage of water being pumped out of the wells grows to significantly exceed the levels of crude oil being pumped, indicating the onset of declining Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 25X1 25X1 25X1 25X1 Figure 3 Major Importers of Chinese Crude Oil, 1980-84 Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 Philippines Figure 4 Major Importers of Chinese Petroleum Products, 1980-84 In addition, the waxy and heavy quality of Chinese crude oil has made it difficult to export to countries lacking the necessary refining capabilities.Z Beijing has tried to deal with this problem by increasing its exports of petroleum products, which also have a higher value than crude oil, but China's limited refining capacity has restrained this growth (see inset). China's rapid economic growth has caused domestic consumption of oil to begin rising again, which also may constrain China's oil exports. We believe that China has already achieved many of the easy gains in oil conservation, although additional incentives such as increases in the domestic prices for crude oil and petroleum products are possible. The rapid growth in vehicular traffic in China could negate the conserva tion efforts, but Beijing has, so far, been largely successful at rationing its domestic gasoline supply. several types of automobile fuel were unavailable in parts of China last summer because of the drive to increase exports. Implications for the Domestic Economy The domestic shortage of crude oil and petroleum products resulting from the push for export growth will exacerbate China's transportation bottleneck and constrict economic growth. Large amounts of coal and other vital commodities already lie idle because of the shortage of rail capacity and the lack of vehicles and adequate roads. By 1990, even allowing for oil con- sumption to rise to 2 million b/d, supplies will remain tight, lowering the prospects of easing the transporta- tion crunch despite the ongoing investment in infra- structure and the production of vehicles. 25X1 25X1 Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 Secret Table 5 Estimated Chinese Annual Foreign Exchange Earnings From Crude Oil and Petroleum Product Exports: Scenarios Exports (barrels per day) Average Price per Barrel of Oil, 1990 15 20 25 30 Note: We have assumed that 20 percent of exports will be in petroleum products-worth about 25 percent more than crude-on the basis of China's recent product mix for oil exports. exports to China-should also be sustained. Moreover, with lower world oil prices, we estimate China's earnings from petroleum exports could de- cline $1.6 billion from last year's earnings of nearly $6.4 billion.3 With little chance of turning to alterna- tive commodities to compensate for the expected drop in oil earnings, Beijing will need to slow its runaway imports to reverse the growing trade deficit. Restric- tions are already in place on commodities that China can produce domestically, including such consumer durables as color televisions, refrigerators, radio cas- settes, and motor vehicles. But Beijing will also need to cut deeper into its import shopping list. We believe these cuts will begin with capital equipment purchases for postponed or canceled government projects. We also expect Beijing will continue its efforts to slow down its overheated economy, which grew at an estimated 18 percent last year. But we also believe Beijing will continue to encounter problems slowing economic growth and, therefore, will achieve only moderate success in reducing industrial and capital equipment purchases. Consequently, the effect on US exports to China, more than one-third of which are machinery and transport equipment, will be marginal. Moreover, demand for raw materials and chemicals- which represent an additional 25 percent of US ' This assumes export volume at the 1985 level and an average price of $18 per barrel. Petroleum products-nearly 20 percent of oil- related export volume-earn angroximately 25 percent more per China would like to increase the share of its exports of petroleum products, primarily because products sell at higher prices than crude. During the early 1980s, about one fourth of oil-related exports were products. That share,lell to one-1c1'th in 1984 and 1985, however, probably because of insurficient refin- ing capacity. Even so, we estimate that China export- ed 120,000 b/d of petroleum products in 1985 worth about $1.3 billion. YVhile China is expanding its processing capacity, it is taking bold measures to overcome its refinery short- age. Most notably, China has taken advantage of Singapore's excess refining capacity and ships as much as 100,000 b/d there jor refining and reexport. The value of China's crude oil exports to Singapore jumped.from $36 million in 1983 to $591 million in 1984. Singapore's Prime Minister Lee Kuan Yew visited Beijing in mid-September and won China's agreement to continue exporting Chinese crude oil at the rate oj'at least 60,000 b/d jor each of the next three years. The uncertainties of the world oil market make it difficult to predict future foreign exchange earnings from oil. If the international price of oil remains low, Beijing will be forced to make further cuts in imports to reduce its trade deficit. We believe, however, that Beijing would be reluctant to reduce its oil exports even at international prices below $10 per barrel, primarily because oil exports are so crucial to foreign exchange earnings. At the extreme, we estimate that Beijing's earnings from oil exports in 1990 could range from $3 to $11 billion, depending on world oil prices and the amount of oil and products available for export (see table 5). We expect that earnings in the neighborhood of $6-9 billion are most likely. 7X1 25X1 -,,t - Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 The International Side China's growing oil exports will expand the supply of non-OPEC, non-Middle Eastern oil available at the market's minimum prices, although Chinese sales will remain too small to have a significant impact on world prices. China's oil exports currently amount to less than 3 percent of the world's trade in oil. Nonetheless, by 1990, China will probably have an especially strong influence in the East Asian oil market. Its sizable merchant fleet and proximity to countries with rapidly growing economies draw it to this expanding market. Indonesia will probably remain China's stron- gest regional competitor, but Beijing may be able to continue taking advantage of the mismanagement afflicting Indonesia's petroleum industry, as well as Jakarta's loyalty to OPEC, to capture more of the region's oil market. China will probably continue to appear conciliatory toward its OPEC competitors, most of which are countries with which Beijing is trying to improve relations, but is unlikely to let these efforts stand in the way of increased sales. For example, during a March 1985 visit to Venezuela, State Councilor Gu Mu publicly stated Beijing's support for OPEC's efforts to stabilize world oil prices; Gu cryptically added that China would take "active measures" to cooperate with the OPEC countries on prices. Yet a Chinese news analysis of the subsequent July OPEC meeting in Vienna described the cartel as being in a great predicament because it is losing its reins on oil prices as non-OPEC countries increase production. More recently, Beijing claimed in early February that China would maintain 1986 exports at last year's level to support OPEC attempts to revive oil prices. Howev- er, we believe that China will continue to press exports and that the statement was intended more to curry favor in the Middle East. China will also continue to try to expand the sale of oil and oil products to the United States, but the relatively low volume will have little direct effect on the large US market. In fact, leaded gasoline sales to the United States will continue to decline, although exports of other products could increase. More important than Chinese sales to US markets, however, will be the substantial opportunities for US firms aiding China in the search for more oil. US firms have been among the largest participants in China's search for oil both offshore and onshore. New opportunities for US oil companies to invest in China have been created by last year's opening of areas in 10 southern provinces to foreign exploration and develop- ment. Both at these sites as well as offshore, US companies will earn substantial fees for providing equipment and services, and could earn oil as well if product-sharing arrangements apply to new discover- ies. Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 I I Il A I I II I I I ll I ~I Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8 Secret Secret Sanitized Copy Approved for Release 2011/05/13 :CIA-RDP04T00794R000100640001-8