For Chinese peasants, an oil boom goes bust

THE BALTIMORE SUN

JINGBIAN, China - Consigned by geology to be among China's poorest farmers, the peasants in northern Shaanxi province, on the front porch of the Gobi Desert, hoped for a better life under the Communist Party, which made its base in this region during the revolution.

The farmers' great chance finally came during the 1990s, when the state allowed them to take part in private oil drilling, an ambitious experiment in free enterprise in the undeveloped Chinese countryside.

But when the experiment ended abruptly last year, it became a disaster for tens of thousands of farmers, a failure ordained this time by both geology and Communist rule.

The farmers had found plenty of oil: From 1994 until last year, 4,500 to 5,000 oil-producing wells were drilled in northern Shaanxi, eventually generating tens of millions of barrels of oil a year, far more than expected. But few of the farmers profited from their efforts.

The majority of them, those who poured all their savings and borrowed money into dry holes, plunged themselves into desperate poverty. That was the work of geology and luck. Those fortunate ones who struck oil flourished for a time, apparently on their way to amassing unprecedented rural fortunes. But their wells were then suddenly seized by the government for little compensation. It drove most of those investors, too, deeply into debt.

The poor are poorer

One of the poorest areas of China is now, in some ways, even poorer, except for the government and its officials and friends here, who are richer than ever. The fall of the peasant oil barons of northwest China raises the question of when, if ever, under Communist rule China's capitalist economic miracle will reach the hundreds of millions of farmers in the country's poor interior.

"Only some people get to become rich," said He Jianjun, a farmer and shop owner, standing by one of the three wells he owned, a yellow derrick creaking as it bobbed up and down above him. All three were seized last year. They are now operated by a new oil company, literally by and for the government; the new firm's general manager is also the deputy county chief.

"The government didn't 'confiscate' my wells; they robbed my wells," He said.

He and other would-be barons have hired an experienced lawyer in Beijing, Zhu Jiuhu, who expects to represent more than 100 private oil companies and thousands of investors who claim that the government's seizure of their wells was illegal. Zhu hopes eventually to represent virtually everybody with a stake in a northern Shaanxi oil well - tens of thousands of investors - in what might be the largest lawsuit against the Chinese government in history, seeking to restore ownership of the wells, which Zhu and the investors say are worth at least $845 million.

That puts to the test another government-espoused ideal that does not yet exist: the rule of law. Under China's one-party government, the political interests in Shaanxi that seized the wells also control the courts. That makes it unclear whether a court will even accept the case, much less give it a fair hearing.

When some investors in the nearby city of Yan'an tried to sue last year the court there refused to hear the suit; Zhu said that provincial authorities had ordered in writing that no Shaanxi judges hear the oil drilling issue. Liu Jinyan, director of the petrochemical industry bureau in the city of Yulin, which includes Jingbian County, denied that any such order existed.

Liu also said there is no legal problem to resolve anyway. In a telephone interview, he said that by confiscating the wells, local governments were not robbing the well owners but instead enforcing a central government directive putting an end to the private drilling experiment in northern Shaanxi.

"The small number of people who suffered were those who didn't follow the country's policy," Liu said. "They faced against the wind breaking the law."

The oilmen's lawyer calls this subterfuge. The government directive was issued in 1999, four years before the wells were confiscated, and was kept secret from the peasants, Zhu and his clients said. Jingbian County officially stopped granting permission to drill a year later, in October 2000, but those with the right connections could still drill new wells.

Most important, Zhu said, until last year, government officials allowed private wells to keep operating as if there had been no change in policy. Beijing had also ordered that the oilmen be fairly compensated for their seized assets; the counties' offers for all the wells added up to about $157 million, barely one-sixth what the oilmen and Zhu contend the wells are worth.

Thousands of the yellow derricks the peasants once owned are still pumping 24 hours a day, but now on behalf of the state. They produce about 130,000 barrels a day on average, less than 4 percent of all production in China, the world's fifth-largest producer and second-largest consumer of petroleum. With a rise in crude prices, the oil has become more valuable since the wells were confiscated last year.

"Before, whenever I visited my wells, my spirits would be high," He said. "Now, whenever I visit, I just feel depressed."

Standing on a mountain shelf of dust and dirt, a scattering of pumps dotting the horizon, He, 45, still looks like a peasant magnate. He wears a black shirt and dress slacks and shoes that are standard-issue for today's rural businessman, worth maybe a month's income for some families here.

But now he is more than $100,000 in debt, he said, almost half in bank and co-op loans on which he is unable to pay even the interest, the rest owed to family members and friends who are themselves financially ruined.

"The government used the dictator's way to take back the wells by force, and now a lot of the peasants can't even afford food," He said. "In the whole of northern Shaanxi, more than 100,000 people were involved in this oil drilling business, and now the government has no credibility with us at all. ... We don't even have the right to sue or complain."

That these farmers ever had the right to acquire oil wells was remarkable enough. If the government had known how many of them would strike oil, the farmers would likely never have been given the chance. But this land had never before made anyone rich.

Generations of farming on the Yellow-Earth Plateau, as the locals call this area, produced a seemingly inescapable downward spiral of poverty. The plateau's windblown, dusty slopes, deforested, overpopulated, cut through by ancient ravines, are among the most eroded in the world.

Poverty drives the peasants to farm the land more intensively, but their determination exceeds the crumbling soil's ability to yield crops, triggering more erosion, worse farming conditions and deeper poverty.

Came the revolution

These natural conditions helped explain the success of the Communist cause here nearly 70 years ago. Mao Tse-tung's rebels sought refuge among cave-dwellers in the hills in this area after the arduous Long March ended in 1935. The region had suffered famines in the preceding decades that claimed an estimated 3 million lives. The impoverished survivors, virtually forgotten by the rest of China, were prepared to embrace a peasant revolution.

But Mao's disastrous political and economic campaigns wrought havoc and famines throughout the country. The economic reforms heralded by Deng Xiaoping beginning in the late 1970s helped lift hundreds of millions of Chinese out of poverty and enriched some, but the impact was limited here.

Deng famously allowed, "Let some people get rich first," implying that the rest of the population would later get its chance. Most in the deep interior have yet to see that chance. The gulf between rural poor and urban rich has become one of the widest income gaps in the world.

In 1993, the per capita income for farmers in Jingbian County was $83 a year by a generous calculation, barely half of the national average for farmers then, and less than one-eighth that of the average Beijing household. Many people here still lived in their ancestral caves or simple shacks, and the unfavorable condition of the land remained a bitter constant.

But unknown to these farmers, the land had always contained one possible escape from poverty, buried thousands of feet beneath them in Triassic and Jurassic sandstone.

The earliest recorded mention of oil in this region was by a geologist in the first century A.D. But the oil in northern Shaanxi was stored in pockets, not in a vast field, and would be difficult to extract for a profit.

The Communists tried, but after drilling a series of costly dry or nearly dry holes over decades, the state's oil monopoly all but gave up hope on this corner of Shaanxi, experts say. By 1994, the stage was set for an experiment in private enterprise: state oil officials allowed the local governments to sell drilling rights in two parcels totaling 417 square miles in 15 counties.

The early investors, typically, were among the best-connected and best-informed peasants, businessmen and big players from outside the province, the sort with friends in government; they acquired the choicest spots and stood the best chance of making money. But they sank their wells on the peasants' farms - further despoiling the land and ground water while paying modest annual fees for the privilege.

When some of the wells produced oil and started making money, the farmers saw their chance.

He's friend Wang Ping, a wheat, bean and corn farmer and the owner of a noodle shop, was an early peasant oil-driller, having seen a military unit from Lanzhou sink one of its first wells on his small plot of farmland. In 1996, he paid about $6,000, half of his family's savings, for the right to drill on roughly 250 acres of land.

Then he dug deep into his pockets and into the pockets of everybody he knew. When he struck oil and wanted to sink more wells, he dug still deeper for more money.

Pooling the cash

Under the leadership and prodding of the better-connected farmers and businessmen like Wang, these close-knit communities of extended and interconnected families pooled their cash, sold livestock and took out high-interest loans to buy shares in wells. Within a few years, virtually entire villages were betting their accumulated life savings and more on oil.

Ren Tinggui, 75, sold his stocks of corn, beans and sunflower seeds, and two of his four sheep, to invest $1,200 in 1997 in one of Wang Ping's wells, next-door to Ren's home, on land owned by one of Ren's sons. His sons invested thousands of dollars more.

"The risk was pretty high," he said, but he felt the family had little choice. Most of his farmland was on steep slopes and had been reclaimed in the last decade for reforestation, and the rest of his land was difficult for farming.

The perverse, desperate logic of the eroding Yellow-Earth Plateau was that families gambled not just their savings but their land on oil wells. The gamble would have paid off for Ren. Wang struck oil, and the well would produce enough oil - currently more than seven barrels a day - to provide a modest return on their investment.

He, taking what he considered a more cautious approach, decided in 2000 to buy up seemingly dry or marginal wells and improve them with the help of experts. He mortgaged his street-front shop for $24,000 and took out another loan for $36,000, he said.

Friends and others invested another $36,000, and relatives invested close to $50,000. His nephew borrowed $12,000 from the bank to buy a stake, his niece another $6,000. He's wells began producing more oil, and a profitable return seemed assured in the coming years.

By this time, less than 10 years after private drilling began, the oil business was distorting the local economy beyond recognition.

Drilling teams were moving into Jingbian and other counties. A high-interest loan market developed, and gambling escalated from routine to astronomical stakes, with hundreds of thousands of dollars said to be waged on a single bet.

It was a boom time for the county governments, as well, which took their cuts from the privately drilled oil and also collected taxes on each barrel sold. Total government revenue in Jingbian was measured in hundreds of thousands of dollars only a decade earlier. In 2002, the county's total tax receipts exceeded $38 million.

The local state-owned oil refineries and distributors also profited, because the private sellers were obligated to sell the crude at rates well below the market price. Even when the peasants were making money, they said, they weren't making as much as they should.

Tens of thousands of farmers were much poorer for their gamble on oil, too. But tens of thousands of others, having bet on oil men like He and Wang and bigger barons, were winning. Some of the oil bosses were buying cars and nicer homes, or planning to after paying off more of their loans. The children of lucky investing families could attend school without fear that the fees would burden their relatives.

They had no idea that as early as 1999, the private oil experiment was doomed. The central government, ostensibly acting in response to illegal drilling activity in the province, ordered the Shaanxi government to stop selling oil rights and cooperate with China National Petroleum Corp. (CNPC), a state-run oil giant that holds most of the oil rights in northern China, on acquiring existing wells.

The new directive was at least partly intended to settle a squabble between entrenched government interests over the fortune being made here. The land was rich enough in oil that CNPC wanted to buy some of the wells, and to put a stop to illegal drilling. Shaanxi authorities, profiting from their arrangements with the private drillers, wanted the oil for themselves, the oil men and their lawyer contend.

But no one told the owners of the wells. The oilmen said they continued operating and making new investments without knowing that Beijing had decided to stop their experiment, or that different arms of the government were bickering over their land. Last year, local governments started confiscating private oil companies in the 15-county region, apparently heading off efforts by CNPC to buy some of them.

In Jingbian County, where about 1,600 of the producing wells had been drilled, the authorities moved in concert. In May 2003, they posted police by derricks throughout the county, and by early June they had taken control of the wells, saying that the national government had ordered them to do so.

Those who resisted or complained risked arrest; the septuagenarian Ren, left with only two sheep, tried meekly to bar authorities' path to the well on his son's land, and was detained for two weeks.

Futility of complaint

Others were also detained, the peasants and their lawyers said, for traveling to Beijing to file complaints with the nation's antiquated, ineffective petitioning offices. It is not unusual for police from petitioners' home provinces to track them to Beijing and detain them or forcibly send them home.

Liu, the Yulin oil official, denied that this happened.

"Starting to complain to a higher level of government is in itself breaking the law, but they were not detained. It was just that policemen found out what they were doing and advised them to go back," Liu said.

The oil bosses' lawyer, Zhu, said he is not daunted by what he views to be a defiant Shaanxi establishment. He believes the case has taken on national importance.

The sheer scope of the local governments' seizures of private properties in this case, he said, makes it an important test of the central government's ability to develop the private sector, especially in China's interior. Chinese entrepreneurs and foreign investors need to have confidence that their property rights will be respected. Zhu believes the political momentum in China is on his clients' side. Beijing has increasingly emphasized the importance of developing the rule of law, and this year, the government amended the national constitution to include protections for private property and human rights.

But to win a case against such powerful interests, the peasants will likely need political intervention from Beijing.

Such high-level meddling may have saved Zhu's best-known client, wealthy rural entrepreneur Sun Dawu, from a long prison term after he was detained on questionable charges last year by local authorities in his home province.

Top leaders likely have some idea about the case. Some in the state media have reported quite sympathetically on the oilmen's plight. However, two of the most influential outlets, the official New China News Agency and China Central Television, have parroted the local government line, reporting that after state confiscation, the oil wells' production has improved under more skilled, professional operators, benefiting the public.

"Before oil was only making a small number of people rich," the New China News Agency reported last month. "Now, oil is bringing wealth to all the people."

Everything lost

The peasant barons say that if they can't win their wells back or get a favorable settlement, the effects will touch far more than just a small number of rich people. Tens of thousands of farmers who invested their savings and borrowed cash will have lost everything, with little hope of recovering.

"They have lost their money, sold their beans, sold their eggs and sold their sheep," said Wang, who lost eight producing wells. "They can't even feed themselves."

Many of the younger, able-bodied men, have migrated in search of work. .One of the women left behind, Hao Baolian, said she cries when she sees the trucks come to take the oil away. She and her son, Jia Wei, eat only thin porridge now, they said.

Jia may have no choice but to leave soon like his father. The Yellow Earth Plateauhas succumbed to all the drilling.

"All the crops are dying. We cannot drink the water anymore. The water tastes salty," Jia said. "And the land has been eroded. People must migrate to find work."

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