Oil Investors Tapped Out Of Wells

In 1994, Kuche gave a formal contract to a newly private firm called Ruipuseng Co. to haul away as much crude oil as it could, paying about $12 to the local government for every ton. The firm's partners put up about $250,000, they said in interviews. Half went for oil-pumping equipment, and the other half went to the local government.

For the first five years, the Ruipuseng investors lost money, but by 2000, with oil prices climbing, the venture became profitable. In 2002, the company extended its contract with the Kuche government and forged a joint venture with a firm from Qinghai province, Mangya Heli Development Co., which had a background in oil drilling and had experienced other disputes with CNPC.

The new venture, Deli Petroleum Development Co., punched some 80 new wells into the terrain. The Deli investors acknowledge that their contract forbids the drilling of new wells but maintain that their actions were not a breach because they simply sought to boost the pressure in the old wells.

But CNPC disagreed. "Their work was preparation for larger-scale prospecting and drilling," said Zhou Yikai, deputy general manager of a CNPC subsidiary that handles declining wells. "They have already violated the national mining and natural resources laws."

The expansion required significant capital to pay for the drilling work, newer pumping machines and road improvements. The Qinghai company brought in $25 million, but the partners also launched a drive for new funding, eventually bringing in more than 2,000 teams of outside investors.

Zheng Biao, who now runs daily operations, was one of the newcomers. Formerly a provincial office worker, he had no background in oil and little capital. But he had heard that there were riches in Kuche.

In April 2003, he came for a look. Several hundred men were sleeping in tents and cold sheds amid the all-night puttering of machinery. Discarded parts, blackened oil drums and beer bottles littered the dusty ground. Undeterred, Zheng borrowed money from friends and relatives, combined it with his own meager savings and sunk more than $125,000 into the project.

"It's remote, we have to swallow bitterness, and it's risky," Zheng said. "I don't care. I wanted to make a lot money."

Oil fever also reached Tongxin county in Ningxia province, one of China's poorest, where the Hui ethnic minority community saw it as a path to upward mobility. There, it reached Ma, a father of four who had been making a decent living buying wool from local farmers and selling it to spinning factories.

Ma had about $12,000 in savings. He borrowed another $12,000 from his siblings and began collecting more from local villagers. With Ningxia caught in a three-year drought, the oil business beckoned as salvation. Before he and a friend left for Xinjiang in November 2003, they had collected $360,000, he said.

"From what our friend said, and with the local government support, we thought it was a good investment," Ma said.

But even as Ma handed over the money, CNPC was already trying to shut the venture down.