China Is Long Way From Tapping Its Oil Potential : Energy: It has the reserves to be a petroleum superstar. Transportation problems and political indecision are holding it back.

BEIJING —  A man discovers a strange liquid bubbling up from the sand one day in the remote Taklamakan Desert. After lugging a barrel of it over rugged terrain to the closest village, he learns that he has found oil.

That discovery nearly four decades ago has become part of the folklore in a region once regarded as a wasteland on China’s frontier. Since then, oil has been found seeping from the ground in many places in northwestern China’s Xinjiang Uygur Autonomous Region.

Geological studies show that the region may hold some of the world’s largest unexplored oil reserves, a prospect that is especially attractive as the threat of war in the oil-rich Persian Gulf looms.

But because of poor transportation and political indecision, only a trickle of oil from the region has reached refineries.

“China is in a position to be a net gainer because of the Iraq situation, but they’re not really gaining right now,” said a Western diplomat, speaking on condition of anonymity. “The whole industry seems stymied by bureaucratic paralysis.”

China, one of the world’s leading oil-producing nations, faces the prospect of becoming a net importer of crude oil by the end of the century if it doesn’t develop its western fields and tap more offshore reserves.

Officials estimate that 70% to 80% of the country’s oil comes from eastern fields that began producing in the 1960s and are starting to run low.

“It’s very serious for the Chinese oil industry to find new reserves,” said Wu Xunduo, director of the state-controlled China National Offshore Oil Corp. “We cannot work very slow.”

A United Nations agency that oversees oil projects said competing interests in China make it difficult to respond quickly to world developments or to decide how to ensure steady supplies for domestic needs.

“Since you don’t make money from exploration, that becomes a poor cousin to refinery projects that bring in cash,” said Richard Conroy, assistant resident representative for the U.N. Development Program in China.

“You need to put the money in development, but it’s difficult to make that happen when you have these rigid hierarchies of politicians and ministries under tremendous pressure in a state-controlled economy,” Conroy said.

Officials are split over whether to stick to self-reliance in the richest oil fields or to allow participation by foreign companies--which would bring badly needed capital and technology but demand a share of the oil. Many conservative officials oppose letting foreigners share China’s natural wealth.

International companies eagerly pursued offshore exploration when China opened a few areas to foreign participation. Some of the companies predicted that the South China Sea would have world-class discoveries, but most failed to find deposits large enough to make commercial drilling profitable.

Onshore, foreign drilling is allowed only in 10 provinces and one autonomous region in southern China. None is believed to hold large oil reserves.

In the most promising areas--the Tarim Basin in Xinjiang’s Taklamakan Desert and the East China Sea--foreign companies are limited to equipment sales and technical assistance.

“We don’t know what’s really there because the government only tells us what it wants us to know,” said a representative of a U.S.-based oil company, speaking on condition of anonymity. “But we’d all like to be in there exploiting what China has to offer.”

The Tarim Basin, 1,750 miles west of Beijing, is nicknamed the Sea of Death. Sand dunes rise 1,980 feet high across the 216,000 square miles of desert. Temperatures can soar above 120 degrees.

Chinese officials estimate that the Tarim Basin contains more than 18 billion tons of oil, or about one-seventh of the country’s reserves. But a Western oil company representative in Beijing said only a portion of that might be recoverable.

Foreign oil industry experts say a 2,240-mile pipeline would have to be built to bring out oil in commercial quantities. Estimated cost of the pipeline is $8 billion.

The East China Sea’s deposits are more commercially accessible, but territorial disputes with Japan and Taiwan pose obstacles to development there. Chinese officials refuse to release their estimates for oil deposits in the East China Sea.

The United Nation’s Conroy said he sees problems if China decides to go it alone in the northwest and the East China Sea.

“They did it at Daqing, and we hear a lot about that when the Chinese talk about self-reliance,” Conroy said, referring to China’s top-producing oil field in the northeast. China opened Daqing in the isolationist 1960s and used it as a model of what the Chinese could accomplish on their own.

“But there have been a lot of problems there, and they hurt themselves because they tried to get too much, too fast so they could meet their state targets,” Conroy said.

He said that in their haste they let underground geological structures collapse at Daqing and other fields, making it impossible to extract significant amounts of oil.

Wu said there are supporters within China’s oil industry and government for more foreign involvement.

“If we want to develop these areas more quickly, we need foreign participation,” he said. “We’re still waiting” for approval of more joint ventures, he added.