Japan plugs into China oil connection with hefty government help

Japan is pressing strongly for greater involvement in China's offshore oil exploration program. The two countries have already struck promising oil and natural gas deposits in the Bohai Gulf off northeastern China, in a major exploration program financed heavily by the Japanese government.

Private industry, meanwhile, is participating in drilling in the Tonkin Gulf between China's Hainan Island and Vietnam. The president of the governmental Japan National Oil Corporation (JNOC) flew to Peking Monday to push Japan's bid for concessions in the South China Sea off the Pearl River.

In part, this activity stems from a Japanese desire to lessen the present heavy dependency on crude oil from the Middle East which is handled by the major Western oil companies. It is also an effective way of reducing a heavy trade imbalance with the Chinese, who for the present do not have a wide range of export products of interest to Japan.

The trend-setter is Bohai Gulf. The Chinese made significant oil discoveries there as long ago as 1972, but were unable to proceed very far through lack of experience.

The breakthrough came with the agreement in mid-1980 for the Japan-China Oil Development Corporation to explore a 10,000 square miles area in the southern and western parts of the Gulf.

On the Japanese side, the government oil corporation has a 60 percent stake, with the rest spread among 48 private companies representing the oil development and refining, electric power, and steel industries.

The Japanese are bearing all the exploration costs, but China will pick up the bill for 51 percent of the price for developing promising oil and gas finds. Japan's reward for all this effort will be 42.5 percent of the commercial production over a 15-year period.

The consortium has so far sunk four wells and obtained sufficiently strong indications to back expectations that there is a major oil and gas field just waiting to be exploited.

But exploration has cost far more than expected. Officials of the development corporation here reckon the final bill will exceed $600 million, compared to an original estimate of $210 million which is already nearly exhausted.

The officials said this was due to drilling to deeper-than-expected levels. The Japan National Oil Corporation, which is putting up 80 percent of the initial investment, found itself short of cash.

Matters were considerably eased last September when then Prime Minister Zenko Suzuki, on a visit to Peking, promised his hosts $400 million in official aid for oil development in return for favoring Japanese companies.

This aroused strong American indignation as it put US firms bidding for exploration concessions at a disadvantage.

The Bohai Gulf project is now to be accelerated. By the end of this year, two extra drilling rigs from China and one from Japan are expected to be on the scene.

Japanese enthusiasm for Bohai is partly due to the fact that oil found so far is of high quality and low sulphur content, comparable to high grade North African crude.

Current estimates are that Bohai could be providing 3 percent of Japan's total imports by the late 1980s, with the added advantage of low transportation costs.

And the China oil connection is likely to grow very quickly. A consortium of five oil companies here recently formed a $3.2 million joint venture to take a 9 .8 percent stake in a Chinese-French exploration program in the Tonkin Gulf.

Chinese-Japanese oil exploration is also spilling over to the land. JNOC currently has a contract with the Chinese Ministry of Geology for preliminary studies in the Ordos Highlands of inner Mongolia.