China's Wild West: The Promise and the Danger of Xinjiang Oil in the Desert, Cotton in the Lowland, Wind Energy on the Steppes

Jonathan S. Landrethg | April 24, 2000

In mainland China's desolate Northwest, in a place called Xinjiang, the boom is on. With a number of big deals in energy and agriculture over the past few months, government deregulation and tax breaks have combined with millions of dollars of foreign investment to build up Xinjiang as China's new "New Frontier."

The Xinjiang Uighur Autonomous Region, as it is officially known, is currently the focus of many developers' attention. One reason: the province's barely tapped desert oil reserves are estimated to be three times greater than those in North America. Another: a recently discovered water reserve has given new hope to the province's already huge cotton industry. And now, another natural resource, wind, is to be exploited to make Xinjiang a good prospect for the some 300,000 ethnic Chinese being encouraged by Beijing to move each year to the historically turkic and Muslim region. To promote the migration, National People's Congress Chairman Li Peng attended the opening ceremony of the 1,446km South Xinjiang Railway, which stretches all the way to the desert oasis city of Turpan.


Urumqi, Xinjiang's capital, is designated a special economic zone by Beijing, free of normal taxes, in hopes of building up Chinese control of the strong oil, coal and cotton trades that have developed in the city. The move has proved a successful incentive and now ethnic Chinese make up 80 percent of the city's inhabitants, with Uighurs, Hui (Chinese Muslims), Kazakhs and White Russians making up the rest of the population. Xinjiang is opening up to influence from even further away than Beijing, as it planned to spend US$168 million in overseas investment in 1999. An official document released to the Xinhua news agency late last year showed that the total investment included US$128 million in overseas loans and US$40 million in direct foreign investment, 33 per cent more than in 1998. Xinjiang, which borders eight countries including Russia and India, reported a combined import and export volume of US$6.2 billion in the last five years. Imports grew an average 6.9 percent each year to reach US$3 billion for the latest five-year period.


Official figures show that Xinjiang accounted for more than one-fourth of China's cotton output since 1995 and has an estimated 2.4 billion tons of proven oil and gas reserves.

The central government of China has increased its support for economic growth in the central and western parts of the country during recent years, directing to these areas more than 60 percent of the loans granted by international financial institutions and foreign governments. Government experts have released a series of papers that predict the market potential of central and western China, Xinjiang in particular, will be considerably greater than that of the eastern regions.

As China's State-owned enterprise reform enters a critical stage, businesses in Xinjiang need more overseas investment and advanced technology and management expertise for enterprise restructuring and renovation. At the same time, Xinjiang has also stepped up its efforts to attract overseas capital and improve its investment environment. Huge amounts of overseas investment have poured into China since the country launched its market economy drive in the late 1970s.


In the last five years, Xinjiang has signed 815 cooperative agreements with overseas investors through the launching of economic and trade fairs, with actual utilized overseas investment totaling more than US$1.15 billion. Uighurs, the ethnic minority who still make up more than half of the province's population, are quickly being outpaced by the Chinese in terms of growth. Uighurs speak Chinese as a second language after their own turkic tongue, and there are now 8 million Chinese among the total provincial population of 18 million. This is a huge increase from the founding of the People's Republic in 1949, when there were only 200,000 Han Chinese settled there.

Beijing's plans for Xinjiang to absorb the spillover of the country's enormous population -- a sort of lebensraum for the Chinese -- come violent separatist protests by Islamic fundamentalists and turkic nationalists in the province.
Just before the fiftieth anniversary of China's National Day on October 1 last year, the government sent a strong message, executing a 20-year-old Muslim separatist for the alleged bombing of a police barracks in 1998.


This calculated move reflects Beijing's awareness that Uighurs have greater affinity with the turkic peoples and the Russians who still run much of the economy of the former Soviet Republics on Xinjiang's Western border than they do with the migrant Chinese now occupying their nominal capital. Xinjiang is a valuable trade passageway to those former Soviet Republics that now form a sizable and newly autonomous Central Asia -- Uzbekistan, Kazakhstan, and Turkmenistan. The province's westernmost city, Kashgar, with its ruins dating to the Middle Ages, looks to Mecca and Islam for guidance, not to Beijing.

Kazakhstan has agreed to cooperate with Beijing, agreeing on Nov. 24 to a joint crackdown on religious extremism, ethnic separatism and terrorism. China's big three state-owned oil companies are prime among the companies that Beijing is counting on for the continued development of Xinjiang. These SOEs--China National Offshore Oil Corporation (CNOOC), ChinaPetrochemical Corp (Sinopec), and China National Petroleum Corp (CNPC)--account for 12 percent of the value of the country's state assets. Much of the expected US$3 billion in profits on combined revenues of 700 billion RMB (US$85 billion) in 1999 came from the oilfields of Xinjiang.


When CNOOC shelved it's planned $2 billion initial public offering last October, it was partly because many investors were not satisfied with their explanations about the regulatory role of the government. Soon afterwards, Beijing announced it would no longer set mandatory barrel production targets or gets involved with the oil's direct distribution.
Moreover, Beijing says it plans oil price deregulation after the big three have gone public in both Hong Kong and New York.

Even before all the foreign joint-venture support comes in, Xinjiang oil producers are gearing up for increased production. The Tahe Oilfield, at Tarim in Xinjiang, recently began operations with an annual output of about two million tons, according to the state news agency Xinhua.

Xinhua said 60 wells at Tahe would pump 4,000 tons a day, bringing Tarim's annual oil output to seven million tons. Still, according to one official who spoke to Xinhua, CNPC's plans to drill for 100,000 metric tons of oil in Xinjiang wouldn't be easy because of "lack of experience."


Since the early 1990s, Xinjiang has maintained an average annual increase in oil production of 13 percent, or 1.2 million tons. This has offset the fall-off in petroleum production in the eastern off- and on-shore drilling operations.
China has long been plagued by insufficient oil reserves. In the east, which currently provides more than 80 percent of the country's annual oil output of more than 140 million tons, recoverable reserves have been declining. Xinjiang is soon expected to be producing 23 million tons of oil annually, contributing 20 per cent of total national oil output.

Beginning in the late 1980s, China headed west in its search for oil resources. Exploration focused mainly on Xinjiang, which geologists estimate has more than 30 billion tons of petroleum and gas resources.
According to Xinhua reports more than 50 billion yuan (US$6.03 billion) have been spent looking for oil and gas in the three basins of Tarim, Junggar and Turpan-Hami. As a result, 15 oil and gas fields have been found in the Tarim Basin, which is as large as France, with 600 million tons of proven reserves.


One Texas-based petroleum and natural gas company is trying to bring modern know-how to China's wild west by trying to harness another of Xinjiang's natural resources: wind.

The Tang Energy Group Ltd. announced in last month that it would invest US$40 million to build two wind-powered electrical-generating farms in China's Northwest desert in cooperation with a local wind-power company. According to an agreement signed by the two companies and reported by Xinhua, the projected wind-power generating farms, each with an output of 20,000 kilowatts (kW) will use 600-kw wind-driven generators developed by the Xinjiang Wind Power Co. The company's generators are already in use for power generation in the region's nine major wind zones over a combined area of more than 90,000 square miles. The project may potentially produce more than 800 billion-kilowatt hours (kWh) of electricity annually.
E. Patrick Jenevein III, president of the Texas-based Tang Energy Group, told Xinhua that there are broad prospects for exploring and utilizing wind-power resources in Xinjiang considering the strong support of State policies governing wind-power exploration in China.


Jenevein said he hopes to build more new wind-power generating farms in other places in China on the basis of this co-operation with Xinjiang. The Xinjiang Wind Power Co. is engaged in high-technology research. Last year, the company signed a contract with the Jacobs Company of Germany for the transfer of technology and spare parts to build 600-kw wind-driven generators.

Just as oil is Xinjiang's subterranean gold, cotton is king above ground. Leading officials announced last spring at the Ninth People's Congress in Beijing that the cotton industry was one of the "two pillars" that had suffered in the Asian crisis but in which they had "full confidence." In 1998, Xinjiang, China's largest cotton producer, focused on quality cotton production and sought to raise growing efficiency. Farmers produced more than 1.3 million tons of cotton in 1998, accounting for one third of the nation's total cotton output.


Xinjiang has enjoyed much of its sustainable and fast growth thanks to the use of overseas funds during the past 16 years. By early 1999, Xinjiang had used US$49 million in overseas loans to help develop agriculture in addition to overseas grants of US$8 million.

Xinjiang began using overseas funds to develop agriculture in 1983. In 1996, six farming technology centers and seed stations were funded by the first phase of a World Bank-financed agricultural irrigation project in the Tarim basin.

The second phase of the project, which involves US$150 million, is currently underway. Water control facilities, agricultural and environmental projects will be built in 22 counties and cities in southern Xinjiang.
Another bit of good news came for thirsty Xinjiang came when geologists discovered a gigantic underground water reserve along the banks of the Weigan River, storing an estimated 200 million cubic meters of water in an area of more than 20 square kilometers, China News Service reported in May of last year.

The underground water supply, enough to irrigate some 20,000 hectares of farmland, promises a great relief to the acute water shortage and promises a buffer of about two years of water consumption for the 1.5 million residents of the capital Urumqi, according to the geologists' report.


Lest one get the impression that China's frontier is being left behind as the economy of the country's gold coast is being driven by hi-tech and Internet businesses, last year's report on the Development of the Internet in China by the China Internet Network Information Center (CNNIC), stated that Xinjiang had 72 domain names registered to China's world wide web space.
Xinjiang is also one of six provinces to benefit from a recent deal between American Motorola, China Unicom and China Mobile's existing networks. The three-way partnership will allow cellular subscribers in China's Wild West to be among the additional 2.35 million added to the cellular network.