Institution changes in oil exploitation in Northern Shaanxi
The institutional system determines the arrangement of power/rights and interests. The evolution of institutions concerning the resources of oil & gas has always been controlled by the central government.
Entry and elimination of private capital in oil exploitation
(1) Centralized control by the central government, private capital only can enter by contract
The right to exploit oil & gas resources is concentrated in the big three central state-owned enterprises authorized by the State Council. Private capital & enterprises have two ways to gain rights to oil & gas drilling: First, they can apply for mining rights to (former) Ministry of Petroleum Industry, the competent department under the State Council, but this needs the enterprise to have certain qualifications. The second way is to rent oil (gas) wells of state oil enterprises by a cooperation agreement. The latter is easier and be used in Northern Shaanxi according to ‘The oil and gas exploration, mining registration management interim measures’ (effectively promulgated on December 24, 1987, named ‘87 interim measures’) .
(2) Eliminate private capital: The ‘oil and gas resources integration movement’
The ‘Oil and gas resources integration movement’ (1996-2005), is an administration campaign to close and bar the illegal oil (gas) production sites, was carried out by the State Council. The campaign has two reasons, first is the technological breakthroughs which lead to the potential value enhancement of low-grade oil & gas fields, and the second is macroeconomic control by the central government'. This campaign was intended to strengthen the management power of the central government over oil & gas resource exploitation. According to these new policies, oil & gas resources exploration would be issued as the national-level registration management, approved by license issued by the state council and the Ministry of Land and Resources. Local governments and relevant departments had no right to accept the application for oil and natural gas resources exploration, or to issue licenses for exploration and mining. The ‘87 interim measures’ were repealed on February 12, 1998. Since then, private enterprises had no lawful basis to conduct oil & gas exploitation activities. In 2001, the State Council issued documents to rectify some irregularities in the mining of mineral resources.
Possibility of local power’s challenges under multi-scale management
The changes of oil and gas resource management systems mainly consider the economic dependence on oil & gas resources, global oil & gas supply relations, and domestic regulatory capacity. Within China, the oil production system is authorized at the central level. This results in some problems such as the single vertical mining management, conflicting between single-dimension mining ownership (central government) and dual land ownership (state & collective) [65-66].
Resource exploitation and management are cross-regional and cross-level affairs, especially related to local areas in terms of land use. This is an opportunity for local power intervened in vertical mining systems. In China, the conflict between local residents and nonnative oil production units reveals the resistance from local forces. But scattered struggles of ordinary residents are not sufficient to affect the macro-level distribution of interests. A more equitable interest distribution system of oil & gas resources could be created only through the dialogue among governments at all levels. The pattern of oil resource exploitation in Northern Shaanxi was formed in the game among different levels of state-owned enterprises and the governments behind them, private capital, local residents.
Stakeholders in oil exploitation in Northern Shaanxi
(1) Yanchang oilfield
The Yanchang Oil Bureau was established in 1949, and was delegated to the Shaanxi Provincial Government in 1958 by the former Ministry of Petroleum and Industry, and then to Yan’an, a prefecture-level city, in 1966. In 1986, the former Ministry of Petroleum and Industry agreed that oilfiled areas could be rented by local county governments to benefit local economy. In 1998, Shaanxi Provincial Party Committee decided to merge Yanchang Oil Bureau with other enterprises to form a wholly state-owned enterprise, Shaanxi Yanchang Petroleum Industry Corporation, which is under the direct control of the provincial government. In September 2005, Shaanxi Yanchang Petroleum (Group) Co., LTD. was established and took over the drilling and mining companies from 14 counties (districts) of Yan'an and Yulin City.
(2) Changqing oilfield
In 1971, Changqing Petroleum Exploration Bureau, under the Ministry of Petroleum, entered the Northern Shaanxi region and began to enjoy the exploration rights to the oil field along with the Yanchang Oil Bureau. In 1993’s oil and gas resources registration, about 82.5% of the oil field in Northern Shaanxi was registered to Changqing oilfield. Changqing oilfield (now named Petro China Changing Oilfield Company) is a regional company of the CNPC and belongs to the ‘central army’.
Yanchang oilfield and Changqing oilfield all have oil exploration & exploitation rights.
(3) County state-owned drilling & mining companies in Yan'an and Yulin City
Since the late 1980s, state-owned drilling & mining companies have been set up by counties where oil resources are located in Northern Shaanxi. They rented part of the oilfield area from the Yanchang oilfield. On April 13, 1994, the China National Petroleum Corporation and the Shaanxi Provincial Government signed an agreement to solve disputes over oil exploitation in Northern Shaanxi. In 2005, oil drilling & mining companies in 14 counties of Yan’an and Yulin were combined into Shaanxi Yanchang Petroleum (Group).
(4) Private capital
In the late 1980s, due to a shortage of funds and technology, counties in Yan’an and Yulin began to introduce individuals and private enterprises to oil exploitation in the form of joint operation of the oil well. Local governments issued ‘business licenses’ allowing investors to exploit oil. By the end of 1998, the total investment in the oil exploitation of Yan’an and Yulin counties had reached 5.05 billion yuan, and 3.29 billion yuan came from the private capital. By the end of 2000, there were 1,039 private oil investors, 4,473 wells and a crude oil production capacity of 1 million tons[67-68]. Since 2003, oil wells have been merged one after another, causing the ‘Northern Shaanxi oil case’.
County state-owned drilling & mining companies and private capital had no oil exploration rights or formal exploitation rights, but they could extract oil by leasing from Yanchang oilfield and acquiring informal authorization from local governments.
The variation of the main scale of oil production in Northern Shaanxi is comprehensively sorted out (see Fig.3). Changqing oilfield, as a central state-owned enterprise, has owned the oil & gas exploitation rights in Northern Shaanxi since 1971. Yanchang oil is a legal entity and makes a very torturous experience. The county drilling & mining companies finally acquired legal status through reorganization. Private capital was ‘illegal’ and was eventually retracted and banned.
1) Through the control of oil & gas resource ownership, the central government ensures national energy security and a reasonable allocation of energy resources, obtains economic benefits from oil and gas exploration by the national petroleum corporation. 2) The Shaanxi provincial government tries to promote the development of the regional economy and obtain income by participating in oil & gas exploration. 3) County governments in Northern Shaanxi are particularly keen to increase their fiscal revenue from oil and gas. Oil production contributing more than 80% of the local fiscal revenue in some counties. Therefore, local governments (provincial-prefecture-county level) and their state-owned enterprises represent alliances with closely related interests. By contrast, 4) although private capital has a dual operation and contractual relationship with the local state-owned enterprises, there is no strong government support behind it. 5) Local residents often have conflicts with oil companies as well as with mining enterprises over land compensation.
Politics of scale in the decentralization of oil exploitation rights
In this stage, the relationship between the central and local governments is quite harmonious.
Promotion from the top: Decentralization based on the emotion linked to Old Revolutionary Base Areas and the unique geology of the oilfield
In 1958, Yanchang Oil Bureau was devolved to Shaanxi Province and then to Yan'an. The decentralization of the mining authority was promoted from the top. However, oil exploitation did not truly promote the development of the Northern Shaanxi regional economy before the late 1980s, but led to a ‘particularity’ opportunity in terms of mining rights re-allocation – the intervention of local (prefectural and county government) forces was affirmed.
The decentralization of oil exploitation rights was mainly promoted from the upper level of government. The first reason for decentralization was the state support for the development of Old Revolutionary Base Areas. Second, the geological structure of the Northern Shaanxi oil field is characterized by small and scattered deposits, low permeability of the oil layer, which results in high cost and technical difficulty in exploitation Therefore, many counties set up oil drilling companies. On April 13, 1994, under the approval of the State Council, the China National Petroleum Corporation and the Shaanxi Provincial Government signed an agreement on the exploitation of oil resources in Northern Shaanxi Province (hereinafter referred to as ‘the agreement on April 13’).
Promotion from the lower-level: Suppression triggered by economic interests at the local level
In addition to the support from the central government, there was a promotion from the lower-level local forces, mainly reflected in the conflicts between local enterprises/residents and Changqing oilfield. China's highly centralized and unified system of oil& gas rights excluded local governments and residents in resource exploitation or benefit distribution. Even in Northern Shaanxi, oil & gas exploitation had not been able to lift local residents out of poverty for a long time.1 So, another force began to promote the decentralization of oil exploitation. The ‘struggle’ of the local oil enterprises and residents from the lower-level, forced the central enterprises to compromise (see Fig.4). Local governments were the beneficiaries and protectors of these activities.
(1) Local governments and residents often seek interests from oil exploitation through ‘land ownership’. That is, central state-owned enterprises like Changqing oilfield have the oil mining right, but the land where the oilfield located is owned to the local governments and collective. Land ownership is a major motivation in land compensation negotiations. For example, Changqing oilfield often faces the local governments’ refusal to approve of land, and the difficulty to expropriate the land due to the high asking price of the local governments. On average, the actual compensation cost per hm2 of land expropriated by Changqing oilfield is 4.4 times higher than the prescribed fee. On the other hand, due to layer upon layer of holdings and occupation, landless farmers do not get fully compensate usually. Residents in the oilfield area often compensate for the loss and give vent to their dissatisfaction through irregular and illegal means.
(2) The struggle of local enterprises is mainly manifested as ‘cross-border’ harassment. Due to huge economic benefits and the unclear demarcation of the registered oilfield area, conflicts and even violent incidents often occur among central enterprises (Changqing oilfield), provincial enterprises (Yanchang Oil) and county drilling & mining companies[2,67]. According to statistics, since the 1990s, more than 70% of the oil and gas blocks in Changqing oilfield have been the object of harassment. From 2000 to 2005, there were 2.95×104 cases of damage to oil well facilities, stealing of crude oil, illegal drilling oil in China, among which 1.95×104 cases, or 66.1% of all cases, occurred in Changqing oilfield, causing economic losses of RMB 2.79×108[2,70].
(3) Decentralization of the exploitation right by local governments. The ‘4.13 agreement’ failed to avoid the subcontract of exploitation right. Oil exploitation is a high-investment, high-risk industry. In the past, Counties in Northern Shaanxi were very poor, their drilling & mining companies generally faced bankruptcy. Therefore, the public ‘invitation’ was issued to introduce private capital to oil exploitation by attracting investment and selling well sites. The local government signed business licenses and relevant procedure allowing investors directly to engage in oil exploitation. However, according to the applicable laws mentioned above, such authorization is ‘illegal’. A growing number of mining entities caused disorder, waste of resources and damage to the ecological environment.
Powerless scale-up from the weak party
At this stage, Changqing oilfield, a central state-owned enterprise, was ‘powerless’ to cope with the disorder caused by the interference, destruction and cross-border mining by local forces. Resulting from the separation of land ownership and mining rights, oil exploitation inevitably concerned local governments, and residents, and accepted relatively high costs in oil exploitation. On the other hand, the involvement of enterprises in oil exploitation in Northern Shaanxi was adopted by the central government. What Changqing oilfield could do be to protect its registered area of oilfield as much as possible. At the same time, they actively sought to ‘scale-up’ through reflecting to the central government about the chaos, waste of resources and environmental damage of oil exploitation in Northern Shaanxi, and demanded to abolish the local oil exploitation rights.
Politics of scale in the centralization of oil exploitation
In the face of intense conflicts and disorder, remediation has begun, which is reflected in the centralizing oil exploitation rights and restructuring of local mining enterprises. First, in the late 1990s, China's petroleum industry was greatly restructured and reformed, with countrywide action ‘Oil and gas resources integration movement’ (1996-2005). In this context, the Shaanxi Provincial Party Committee and Provincial Government upgraded the management scale of the state-owned capital of the Northern Shaanxi oil industry in 1998. The Yanchang Oil Bureau (administration by Yan’an), Yanlian Industrial Group, and oil refinery countries of Yulin area, was merged into the newly founded Shaanxi Yanchang Petroleum Industry Corporation, directly under provincial administration.2 The state-owned capital and the related exploitation rights of Northern Shaanxi oil rose up at the administrative level. After that, the reorganization of the oil production in Northern Shaanxi began gradually, especially for private capital oil wells. In the early stage of centralization, the most important politics of scale was to push-down action step by step by the government. In the late stage, the politics of scale embodied as the conflict between the third-level local government and private capital (see Fig.4).
Scale-down: Downward pressure from the government
(1) The central government pushed down the scale of private capital
On December 22, 1999, the State Economic and Trade Commission’s report revealed that these joint venture units were very complex and had no qualifications for oil & gas exploration and exploitation at all. In November 2000, the Shaanxi Provincial Government issued an urgent notice to stop illegally attracting capital for oil production. In September 2002, the State Economic and Trade Commission, the Ministry of Supervision and other relevant departments came to Shaanxi and demanded that the ownership, management rights and usufruct of the private capital’ oil well should be recovered immediately.
(2) Administrative order from provincial and county governments
As the local fiscal revenue greatly increased and the private capital provided a ‘win-win’ profit, neither the local government nor the private oilfield owners broke this profit distribution balance. Instead, the county government increasingly attracted investment and capital, at the beginning of the issuance of these central & provincial government documents3. With the bringing pressure to bear, the Shaanxi Provincial Government started to rectify the order in March 2003, with the focus on (through forced redemption) reclaiming oil wells from affiliated units (private enterprises). The specific implementation was passed by the municipal governments of Yan'an and Yulin.
(3) Extreme actions: the ‘Northern Shaanxi oil case’
While the removal of private capital in the oil fields is essential, two major problems come into focus: ownership and compensation. On the issue of ownership, the Shaanxi Provincial Government and CNPC fought each other. To get the first-mover advantage, the local government took extreme actions. On May 28, 2003, in Ansai County, more than 40 oil investors were paraded in the streets, and 15 people were arrested formally. On June 16, more than 500 policemen were deployed to arrest 15 oil investors in Jingbian County, and 25 others were listed as wanted men by the police[67,68,72,73]. This is the ‘North Shaanxi oil case’.
Failure of scale-up: Protection of private investors’ rights
Some investors reacted strongly to the mandatory confiscation of oil wells before agreeing on compensation. Since 2003, some private oil wells investors had adopted various means of activism to express their views and try to gain support from the public. These countermeasures included promulgating news reports, participating in TV interviews, seeking legal advice and dialogue, presenting petitions and proposals to the National People's Congress and the Chinese People's Political Consultative Conference, organizing experts’ panels, setting up a website, and even initiating judicial proceedings. When the redemption of oil wells encountered resistance and negotiations proceeded with difficulty, local governments resorted to violent means, such as arrested private enterprise litigators and the lawyers acting on their behalf. The Shaanxi Provincial High Court refused to file the case. ‘Scale-up’ behaviors from private investors were completely suppressed, and there was no powerful third party to help the weak(see Fig.5). The specific actions of both parties in the incident can be seen in[73-76], this paper will not go into detail.4 Throughout this time, local governments turned economic problems into political issues in the name of “national interests”. After the completion of substantive rectification, the political character of the case began to be weakened, and the compensation was passed on to the enterprise level—the Yanchang Group5.
China adopts a centralized management structure. Private oil investors take collective protest actions, such as petitions, lawsuits, noninstitutional protest actions, or mass gatherings and violent confrontations with the local governments. But due to very high protest costs, they were unable to protect private property rights by obtaining concessions from local governments. Also, based on the industry data in the industrial enterprise database from 1998 to 2005, Fengfound that the property rights of private enterprises in the oil & gas field had the lowest degree of protection compared with coal and other mineral resources enterprises.
Rescaling, and conflict continues: the rise of a local state-owned oil enterprise
After the eliminating of private capital, the Shaanxi Provincial Government initiated the second major restructuring in the oil industry in September 2005, allocating the counties’ oil drilling companies and the original Shaanxi Yanchang Petroleum Industry Corporation and its subordinate enterprise to recombine as the ‘Shaanxi Yanchang Petroleum (Group) Co., LTD.’.
The reorganization of enterprises in 2005 has internal and external dimensions of meaning. Firstly, resource exploitation enterprises were integrated with the axis of exploration, drilling & mining, and refining, the management scale of oil production enterprises raised. Secondly, the central state-owned enterprises' aspiration for the oil & gas resources in Shaanxi was repulsed. Mining disorder in Northern Shaanxi justified the central government and enterprises’ aspiration to eliminate the heterodoxy in oil exploitation, and to incorporate it into ‘normal’ management order. If there was no solution to the chaotic order in Northern Shaanxi oil exploitation, the local government would be in a passive position in the game with the central state-owned enterprises. This was the major reason why local governments confiscate private capital’ wells before reaching a compensation agreement.
So far, restructured Yanchang Petroleum (Group) has developed into a great comprehensive enterprise integrating the exploitation and R&D of oil, natural gas, coal, and other resources. It has carried on business across regions. For example, Yanchang Petroleum (Group) has 23 oil production plants and three exploration units, in Shaanxi, Inner Mongolia, Ningxia, and 10 other provinces, and established a dedicated international exploration and development company abroad 6.
Since 2005, The main conflict of oil exploitation in the Northern Shaanxi area has returned to the conflict between Yanchang Petroleum Group (attached to Shaanxi Provincial Government) and Changqing oilfield (attached to CNPC). Conflicts even violent incidents continue from time to time7.