Energy & Resources

Local difficulties

Shaanxi-based SOE energy producers at loggerheads over drilling rights


Battle front: China’s top oil major is literally fighting with a local rival

After overthrowing the Ming Dynasty in the seventeenth century, the new Manchurian rulers seized large amounts of land around Beijing for nobles and soldiers from their Eight Banners army. Aside from being a means to reward their military efforts, the property transfer was also meant to smooth their transition to a livelihood based on farming.

Likewise, soldiers in China’s Red Army – perhaps most famous for surviving the Long March to Yan’an during the 1930s – were looked after following their victory in the Chinese Civil War.

And Yan’an – the old revolutionary base of the Communist Party – still enjoys a special status. Indeed, one legacy of its historic role was another major property transfer in 1994.

This saw PetroChina Changqinq, a unit of state-owned oil giant CNPC, cede 1,080 square kilometres of oil and gas fields to local governments in northern Shaanxi including Yan’an and the city of Yulin (now known as China’s Kuwait).

The local authorities benefited greatly from this oil windfall. Yet it also sowed the seeds for a decades-long tussle between PetroChina Changqing and Yanchang Petroleum, an entity formed by the Shaanxi provincial government to control the ceded resources.

The longstanding feud has invoked some of the martial spirit of Yan’an’s past.

According to Jiemian, a news portal, the most recent conflict broke out on January 23 in Suide county in Yulin, when Yanchang hired men to remove some vehicles from a PetroChina Changqing mine. One of the latter’s “mine guards” was badly injured (his arms and legs were broken).

“A gang of 130 thugs, armed with sticks, forcibly moved their drilling equipment into two unexploited wells,” said a representative of PetroChina Changqing. “[They are] in direct confrontation with our 130-plus mine defenders.” (The latter term is a measure of the extent of the bad blood – it’s suggestive of a force somewhat better equipped for a fight than conventional corporate security guards.)

Incidents like this, Jiemian reported, have happened 149 times over the past 10 years of which 44 conflicts were reported last year alone. There have been at least 33 injuries since 2008.

The CNPC subsidiary told Jiemian that its conflict with Yanchang Petroleum before 2013 was mainly over oil reserves. But the tension escalated in recent years when both sides scrambled to obtain new rights to extract natural gases.

It is estimated that the PetroChina Changqing spent over Rmb400 million ($63.2 million) on ‘defending drilling rights’ – i.e. hiring ‘muscle’ – last year.

“The nub of the problem is the unaligned interests of the central and local governments,” said Zhao Xuanmin, professor at Xi’an Shiyou University. While PetroChina Changqing pays tax to the central government, Yanchang Petroleum contributes to the Shaanxi government. More significantly, Yangchang has long been the biggest taxpayer to the province, handing over Rmb30 billion ($4.72 billion) in 2016.

As a consequence the Shaanxi government doles out “preferential treatment” to Yanchang Petroleum, says Ren Liuyi, deputy director at the Oil and Gas Research and Development Centre at the China University of Petroleum.

These favours include expediting the issuance of its land use permits and – where it favours Yanchang – turning a blind eye to the feud between the two state-owned enterprises and the unrulier tactics employed.

At the root of the long-standing enmity is the confusing ownership of the newer gas drilling sites across Shaanxi.

In China a company can only extract resources from a field after obtaining both mining rights from the central government and a land use permit from the local government. But in Yanchang’s case it has received land use permits for sites where the mining rights had already been awarded in Beijing to PetroChina Changqing.

A truce between the pair was attempted in 2012. To stem the acrimony both CNPC and the provincial government established a joint venture with registered capital of Rmb2 billion. CNPC had a 51% stake and Yanchang the remainder. But the joint venture – designed to resolve the differences between the central and local governments – proved inefficient and ultimately unworkable.

“[It] did little drilling … without much production,” an industry source told Jiemian. “Basically the operation was stagnant.”

Violent disputes then broke out again in 2014.

Aside from its struggle with China’s biggest oil major, Yanchang has picked fights with local entrepreneurs too. Under cover of a government directive, the company absorbed drilling rights and assets from smaller private players. About 5,500 wells in Shaanxi with the potential to produce 4 million tonnes of oil per year were bought, affecting 1,000 private companies and 100,000 investors. They allege that prices paid to them were a fraction of the assets’ true worth.

Amid President Xi Jinping’s anti-corruption campaign, Yangchang has found itself mired in more and more lawsuits lodged by private investors seeking retrials and redress. One is related to Yulin Kaiqilai Energy Investment, which in December notably won another lawsuit against the Xi’an Institute of Geological and Mineral Exploration – another provincial government-owned entity.

Kaiqilai and the Xi’an Institute signed a contract in 2003 and later successfully identified a coal reserve in Yulin that was said to be worth as much as Rmb380 billion. But in 2006 the Xi’an Institute brokered a fresh contract with another company registered in Hong Kong – cutting Kaiqilai out of the deal.

This Hong Kong company, later backed by none other than Yanchang Petroleum, reaped the benefits from Kaiqilai’s exploration efforts. Litigation followed as Kaiqilai pressed for its original contract to be honoured but when the Supreme People’s Court in Beijing was about to adjudicate the case the Shaanxi government used its influence to request the case be kicked back to its own provincial courts.

Cue Xi’s anti-graft programme and a changing tide. With purges of corrupt officialdom running rampant, Kaiqilai’s renewed efforts to get the Supreme Court to take on the case succeeded and the private sector firm’s contract was finally upheld, ending 12 years of litigation and righting a wrong.

This legal victory suggests that Yanchang may now have to worry about lawsuits from other aggrieved parties in the oil and gas sector finding their way to the Supreme Court in Beijing too. One party that won’t be shedding any tears if this proves the case: PetroChina Changqing.

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