Oil from China

Quietly, a host of U.S. companies --General Motors, Ford, IBM, Genesco, among others--have been negotiating to sell goods to China or set up plants there. But some of the biggest hopes are for Yankee traders to buy oil for the lamps of America. Last week, in a move that seems to signal a new economic pragmatism by Peking's post-Mao leaders, Coastal States Gas Corp. became the first U.S. company ever to buy oil from the People's Republic. The Texas firm signed a deal to bring 3.6 million bbl. of crude into California, beginning early next year.

Over the past few months, the Chinese approached Gulf Oil and several other U.S. oil majors to discuss possible oil sales, but these firms were not very interested. All were put off by the generally low quality of Chinese crude, the high cost of Pacific shipping and the glut of Alaskan oil on the West Coast. Still, Peking wanted the hard dollars that an oil sale would bring, and the terms of the Coastal States deal were made more attractive than the previous contracts offered to the other companies. The price is believed to be far enough below OPEC levels to offset higher shipping costs. In addition, Coastal States was given a chance to buy some of China's limited production of low-sulfur, higher-quality crude, which not only is in short supply around the world but also is especially attractive in the environmentally strict California market.

The deal is very small by oil standards: 3.6 million bbl. will barely supply a fifth of one day's consumption in the U.S. Still, Peking's willingness to make a pact with Coastal States provides fresh hopes for other American oil companies that would like China's reserves.

Some studies suggest that China may have as much as 70 billion bbl., roughly half that of Saudi Arabia. At least 50% of this is thought to lie deep offshore, where the Chinese lack the technology to explore and drill. Peking has already swapped some oil for Japanese imports. Now it desperately needs new oil production to supply its own increasing needs and to pay for its booming imports and ambitious development plans.

At least six U.S. oil firms, including Exxon, Phillips Petroleum and Union Oil, have sent top-level delegations to Peking to discuss possible joint ventures. The theme of all the talks was the same: China would own any oil that was found, but the firms, in exchange for their technological expertise, would win the right to buy some oil at below OPEC prices.

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