Almost a century after becoming the site of China's first land-based oil well in 1907, northwest China's Yan'an city is facing a water crisis caused by the booming oil industry.

The city on the Loess Plateau was the base of Mao Zedong and the People's Liberation Army for 13 years, but now it battles to keep its water reserves uncontaminated by the thousands of nearby oil wells and pipelines.

Yan'an -- belying its reputation as a poor, desert city -- has benefited from the country's development and large-scale oil production to become the second largest economy in Shaanxi Province after Xi'an.

The increasing amounts of water used in the oil industry and for agricultural irrigation and urban domestic use has led to falling levels in the city's rivers, particularly the main Yan River, and deteriorating water quality.

"Water is Yan'an's biggest problem," says Han Chang'an, director of the Yan'an environmental protection bureau, adding that oil-contaminated waste water from petroleum processing is the most alarming threat.

An inspection team of the Standing Committee of the National People's Congress (NPC), China's legislature, has visited Yan'an to check the local government's implementation of three environmental protection laws on solid waste, water and air pollution.

The city's sole source of drinking water, Wangyao Reservoir, lies 65 kilometers northwest. The NPC team recorded eight oil plants, 1,133 oil wells and nearly 300 kilometers of oil pipelines within the reservoir valley, posing serious pollution risks.

A more serious problem exists in the Yan River basin, which has 26,000 wells and more than 800 kilometers of pipelines. Its water quality once dropped below class V, unsuitable even for agricultural irrigation.

"Oil pollution of the Yan River is serious and protecting the water source is going to be an arduous task," said Xu Yongqing, head of the inspection team and member of the NPC Standing Committee.

Han Chang'an says the bureau received more than 400 reports of pollution, most related to oil, last year.

Since 2002, Yan'an has forced Changqing oil company, a subsidiary of China Petroleum, to close 51 wells in the reservoir basin and the remaining 26 by the end of this year. More than 70 percent of wells along the Yan River valley now have basic waste disposal facilities. The water quality of the river has been labeled class IV and suitable for industrial use.

But at exploration sites of Shaanxi Yanchang Petroleum group, a large local oil corporation, the inspection team found only 53 percent of its yearly 6.4 million tons of waste water was properly treated before discharge in the city.

The remaining polluted water was injected underground or discharged into rivers. "It's illegal. We imposed more than 1.2 million yuan (US$150,000) in fines for unlawful waste discharge practices last year, most from Yanchang," says Han.

However, fines fail to discourage such behavior, especially for large businesses like Yanchang, he adds. The key lies in persuading businesses to set up water treatment facilities and enhance their environmental protection awareness.

"We've worked out a five-year plan to deal with petroleum pollution. Yanchang is required to invest two billion yuan (US$25 million) in building treatment facilities in five years."

Under the plan, all petroleum businesses in Yan'an are required to improve their water treatment capacity and upgrade pipelines to ensure safe oil transfer in a bid to control oil pollution in three years and achieve a clean environment in five years.