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Crude Fight

With his nylon socks and cigarette pinched between index finger and thumb, Liu looks like any other small-fry entrepreneur in China's hinterland. Yet for two reasons, he is different. First, his business is oil. Second, he's running from the police. Liu, who declines to reveal his full name, changes his cell-phone number weekly and won't pass two nights in the same bed.

His fugitive life is shared by dozens of other wildcat oilmen in northern China's Shaanxi province, where independent drillers are fighting for compensation after the government seized their wells and detained several of those who complained. "I'm in debt to the banks and most people I know, and I can't even return home to visit my parents," says Liu.

As world oil prices creep past $60 a barrel, China has stepped up its search for proven reserves—witness state-controlled oil giant CNOOC's effort to acquire California-based Unocal over protests from U.S. politicians. On home soil, Beijing now battles its own people. More than 10,000 investors, mostly peasants, secured rights to drill for oil in Shaanxi over the past decade, only to see their holdings nationalized. The drillers characterize the government's strategy as "confiscate now, compensate later," and those who have been paid insist they have not been given enough.

In May and June, police arrested nine investors for protesting, and a Beijing-based lawyer was detained after filing a lawsuit against the Shaanxi provincial government on the investors' behalf. "We have not launched a political movement," says a peasant prospector named Zhao Suiling, who says he was compensated at 20¢ on the dollar for his oil wells. "We only want to protect our businesses."

The dispute was born of good intentions. In 1994, when China produced more oil than it consumed, Beijing allowed county governments in Shaanxi to drill for oil in an effort to alleviate chronic poverty. The counties sold mineral rights to citizens for around $10,000 per square kilometer. Entire villages often pooled their money to invest in rights and rigs.

More than 6,000 wells were drilled, and soon the "pump worms," as derricks are known in the local dialect, yielded crude. "I saw people building new houses, hiring teachers for their children," says Liu, who in 1999 formed a company with four other people, borrowed heavily and drilled three wells.

Shaanxi officials say they regretted transferring the rights almost immediately. "Workers in pig slaughterhouses became oil-company bosses," says Wang Dengji, mayor of Yulin city in the center of the oil-bearing area. "They caused serious pollution and serious waste." There was another problem: China deems oil a national resource. The State Council in 1999 declared the independent wells illegal and ordered a "rectification."

Over the next several years, the wildcat wells were steadily taken over by the government. Complaints about inadequate compensation grew until 2003, when the dispute prompted tens of thousands of people to demonstrate in front of town halls throughout Shaanxi. At first, officials negotiated with peasant representatives. When talks stalled, local officials cracked down.

In Ansai county in 2003, protesters say, police rounded up scores of demonstrators, shaved their heads, trussed their arms with twine, and marched them into the courtyard of a government building to be harangued by officials.

The peasants' plight turned into a civil-rights cause in Beijing after an underground DVD depicting the Ansai county crackdown began circulating in the capital. Zhu Jiuhu, one of China's most prominent defense attorneys, took up the cause in May when he tried to lodge a lawsuit against the Shaanxi government on behalf of drillers and investors. The suit was rejected by a provincial court on grounds that the evidence presented was "not objective."

About two months ago, when Zhu visited the province to meet with peasants to prepare an appeal, police arrested him for "disturbing social order." As with nine former well owners detained in May and June on the same charges, police have denied Zhu access to counsel.

Senior officials in Shaanxi downplay the dispute. Governor Chen Deming told foreign reporters in May that the peasants were fairly compensated based on their oil income, which he suggests they under-reported to escape taxes. "They say they earned more, and we say prove it—and pay the tax on it," he asserts, adding that only 10% of investors rejected the government's compensation offer.

Yulin mayor Wang denies that anybody is complaining about anything these days. "There was no conflict with private oil enterprises," says Wang, because "most were happy with the compensation." The city's Communist Party vice secretary told TIME that the reclaimed wells now provide one-third of the town's revenue. Liu, the former driller now in hiding, says his only hope is for top-level intervention: "If leaders in Beijing knew our side, maybe they would help us."

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