The Reagan administration has made a series of diplomatic contacts during the last six weeks to protect the competitive position of U.S. oil companies in the multibillion-dollar bidding battle to develop China's vast offshore oil reserves, according to knowledgeable officials.
The contacts followed intelligence reports in late September that Japan is seeking a favored position in the bidding by offering $400 million in new economic aid for oil development elsewhere in China.
The State and Commerce departments and U.S. Trade Representative William E. Brock have expressed grave concern about the integrity of the bidding process to Chinese and Japanese officials through senior embassy personnel in Peking, Tokyo and other Asian consulates.
At stake are drilling rights to China's offshore deposits in the South China Sea near Hong Kong. "In the oil industry, it is seen as one of the last great oil plays for the rest of this century," said Daniel Yergin, Harvard energy lecturer and author.
Led by Exxon, Mobil, Texaco and Chevron, U.S. companies have invested about $200 million in seismic testing there since 1979 on China's promise that one-third of charted drilling sites will be awarded to foreign companies in an open competition.
Although U.S. officials sought and received assurances from China that the bidding process will be conducted fairly, they said they cannot evaluate the impact of the Japanese initiative until late this year.
"Maybe we're just paranoid, but I don't think so," said a spokesman for Brock. "We're just concerned that Japan doesn't suddenly find itself with the best drilling tracts as if by magic."
The episode shows how U.S. diplomatic, intelligence and private industry officials regularly work together to protect U.S. commercial interests. It also offers a close view of the emerging economic alliance between China and Japan, whose relations have been chilly since World War II.
A new Asian alliance was central to discussions between Japanese and Chinese leaders in late September. U.S. officials said that during a Sept. 26 private discussion in Peking between Japan's then-prime minister Zenko Suzuki and Chinese Premier Zhao Ziyang, Suzuki mentioned Japan's recent $400 million funding commitment to an oil development project in northern China and then requested "special consideration" for Japanese drilling firms competing against U.S. companies in the South China Sea.
The Chinese premier's response was positive but not definitive, U.S. officials said. "The Chinese haven't done anything yet," one official said. "But at least initially, Zhao gave the wrong reply [to Suzuki] in private" suggesting Chinese approval of the arrangement, the official said.
"We thought we detected a pattern of the Japanese seeking the advantage for Japanese oil companies due to the fact that they were being rather generous with the Chinese in the north, and we thought it would be wise to remind them that we take this very seriously," Brock's spokesman said.
Following the intelligence reports, U.S. officials had no immediate pretext for approaching the Chinese and expressing concern. But Brock was said to have raised the matter "delicately" with Shintaro Abe, Japan's minister for international trade, at a private dinner during the first weekend in October.
Days later, however, U.S. officials received translations of the dialogue between Suzuki and Zhao as it was released to the Japanese press. One of these reports provided a pretext for action by U.S. officials.
An account in the Japanese newspaper Asahi Shimbun quoted Suzuki as saying to Zhao, "China has resources whereas Japan has technology and economic power. If Japan cooperates with China in this gigantic economic construction, it will put the entire Asian economy on the road to success . . . I understand Japanese firms have participated in the South China Sea bidding. I solicit your consideration on their behalf."
Zhao's reply, as reported publicly, was friendly but carefully avoided any open statement of favoritism by noting, "I understand that Japanese companies are applying. . . . If all conditions are equal with those of companies of other countries, I would like the Japanese to undertake the development."
These public reports provided a somewhat ambiguous "overt pronouncement" of favoritism toward the Japanese but were enough on which to act, one U.S. official said.
On Oct. 7, Deputy Secretary of State Kenneth W. Dam cabled U.S. embassies in Peking and Tokyo and consulates in Shanghai, Canton and Hong Kong. He directed officials to express grave U.S. concern at high levels about the possible implications of granting Japan's request for special consideration.
The U.S. ambassador to China, Arthur W. Hummel Jr., met with officials in the Chinese foreign ministry, officials said. In addition, the embassy's commercial attache, Melvin W. Searls, formerly of Exxon, met with officials of the newly created China National Offshore Oil Co.
"We have made a point to the Chinese that any reports that the Japanese are going to be treated preferentially in the bidding are not looked on favorably by the U.S. government," a State Department official said.
In Washington, the Japanese Embassy would not comment on the reports, but officials in Tokyo denied that the $400 million commitment to the Bohai Bay development project was intended as a sweetener to gain special favor.
One U.S. oil company official in Tokyo suggested that Japan was using other investments as a lever on the Chinese but emphasized, as did other officials, that U.S. oil companies are not likely to be excluded from the South China Sea because U.S. drilling technology surpasses that of other interested nations.
Government and industry officials appeared most concerned, however, that Japan might unfairly gain the choicest drilling sites.
Although China's oil would not be available until the 1990s, its eventual flow could help to moderate world oil prices and add to crude supplies outside the volatile Middle East.
Oil industry experts say China's oil fields may rival those on Alaska's North Slope. No matter who produces the oil, most of it would likely be sold to Japan, reducing its dependence on Mideast and perhaps Soviet oil, they say.
Competition to develop China's resources over the next 20 years will be fierce and has pitted Japan's heavy industries against the major U.S. oil companies.
U.S. companies comprise about half of the 33 companies bidding for development rights, and the capital requirements for developing China's oil are estimated at from $10 billion to $20 billion over the next 20 years. If U.S. firms succeed in winning a large portion of the drilling awards, one official estimated that 30,000 Americans could be living along the South China coast within a few years.
During Suzuki's September visit, the Japanese party formally signed a $244 million loan to China requiring no interest for the first 10 years and 3 percent interest payments thereafter.
In the northern China field at Bohai Bay that was the object of Suzuki's $400 million offer, three test wells have produced promising results, but initial development cost projections have ballooned from $200 million to $600 million for the joint-venture company formed to develop the field, the Japan China Oil Development Corp.
Japanese national oil company officials estimate the total cost of developing the field at $3 billion to $4 billion, with China ultimately providing 51 percent of those funds. Japanese officials said, however, that China has not put up any matching funds because of a shortage of foreign exchange reserves, and these officials had no indication of when the one-sided funding arrangement will change.
Thus, Japan's offer to pick up the entire development bill was very attractive to the Chinese, U.S. officials said.
Some U.S. officials see the competition for South China Sea oil as setting the tone for commercial relations between the United States and China over the next decade. In return for oil concessions, China has asked for massive training programs for its nationals in western law, accounting and engineering and has extracted large production-sharing arrangements on oil finds.
"What the [U.S.] companies bought was the right to participate in the bidding," said David Denny, a former Commerce Department official at the National Council for U.S.-China Trade.
"The Chinese did commit themselves to open, competitive bidding and, if they don't abide by that, it will be bad in their contracting but it will also undermine Chinese credibility for generally conducting fair and open bidding."