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Cablegate: The Tiger Sprints Ahead: Exxonmobil First Western Oil Major

VZCZCXRO0654
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0317/01 0680852
ZNR UUUUU ZZH
R 090852Z MAR 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 5880
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 03 GUANGZHOU 000317

SIPDIS

SENSITIVE
SIPDIS

USDOC FOR 4420/ITA/MAC/MCQUEEN
USDOC FOR 1003/ITA/OUS/OC
USDOC FOR 6310/ITA/TD/OIEM/KMURPHY/HBURROUGHS/KHOLLANDE R
USDOC FOR 6000/ITA/TD/RPACE
TRANSPORTATION FOR FEDERAL RAILWAY ADMINISTRATION/KROHN
USDOE FOR OFFICE OF THE SECRETARY - MOURAD
USDOE FOR INTERNATIONAL AFFAIRS/DPUMPHREY/RSPRICE
USDOE FOR FOSSIL POLICY AND ENERGY/MSMITH/ADUCCA
USDOE FOR MSINGER/GRUDINS/JNAKANO
STATE FOR EAP/CM, EB/TRA, AND EB/ESC/IEC
STATE ALSO PASS USTR FOR CHINA OFFICE
USPACOM FOR FPA


E.O. 12958: N/A
TAGS: ENRG ECON EMIN SENV PREF CH TW
SUBJECT: The Tiger Sprints Ahead: ExxonMobil First Western Oil Major
to Launch Fully Integrated Joint Venture in China

REF: A) 05 Guangzhou 32392, B) 05 Guangzhou 32648

THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED AND INCLUDES BUSINESS
SENSITIVE INFORMATION. IT SHOULD NOT BE DISSEMINATED OUTSIDE OF
U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC FORUM WITHOUT THE WRITTEN
CONCURRENCE OF THE ORIGINATOR. IT SHOULD NOT BE POSTED ON THE
INTERNET.

1. (SBU) SUMMARY: ExxonMobil became the first U.S. oil major to
launch a fully integrated refining, petrochemicals, and fuels
marketing joint venture in China with the signing of the contract on
February, 25. Although Chinese partner Sinopec stated in the media
that the company's ability to refine sour crude is not mature,
ExxonMobil believes that the real benefit sought by Sinopec is a
significant relationship with a politically-powerful U.S. company.
The deal also offers significant benefits to ExxonMobil including a
guaranteed purchase contract for 100 percent of the refinery's
output and the modernization and re-branding of approximately 750
fuel stations in Fujian province. This would make ExxonMobil's Esso
brand, at least temporarily, the largest foreign fuel brand in South
China. END SUMMARY.

Joint Venture Details
----------------------

2. (U) As reported in various U.S. and Chinese media sources, on
February 25, 2007 U.S. oil giant ExxonMobil signed contracts
creating the first fully integrated refining, petrochemical, and
fuel marketing joint venture with foreign participants in China.
The deal, which expands on an existing refining joint venture, the
Fujian Refining and Ethylene Joint Venture Project located in
Quanzhou of Fujian Province (ref A), will triple existing refining
capacity from 4 MMt/y (Millions of tons per year) to 12 MMT/y. The
refinery will continue to primarily refine low-sulfur Saudi crude.


3. (U) The project will also construct an 800,000 tons/year ethylene
steam cracker, an 800,000 tons/year polyethylene unit, a 400,000
tons/year polypropylene unit, and produce 700,000 tons/year of
paraxylene (a feedstock for the production of polyester fiber). All
output from the petrochemicals plant is expected to be used
domestically. Fujian Petrochemical Company Limited, itself a 50-50
joint venture between China Petroleum and Chemical Corporation,
better known as Sinopec, and the Fujian government owns 50% of the
refining and petrochemicals joint venture, ExxonMobil and Saudi
Aramco own 25% each.

4. (U) The deal also includes the formation of Fujian Fuels
Marketing Joint Venture Project to market diesel and gasoline
produced by the Fujian Refining and Ethylene Joint Venture Project.
The joint venture will run approximately 750 fuel stations in Fujian
province as well as a network of fuel distribution terminals.
Sinopec owns 55% of the joint venture, ExxonMobil 22.5% and Saudi
Aramco 22.5%.

For China, Deal About More Than Just Capital and Expertise
------------------------------------ ---------------------

5. (SBU) The new deal has been over 12 years in the making with
discussions beginning in 1994 and has seen both Sinopec and
ExxonMobil proceeding deliberately. Sinopec statements in the media
frame the deal with ExxonMobil and Saudi Aramco as providing
technology and capabilities that Sinopec lacks to process the
imported sour Saudi crude oil supplied to the refinery. In
actuality, all the equipment can be bought "off the shelf" from oil
services companies which would also provide training on its use.
The relationships and the potential political capital they give the
Chinese government in the respective countries are more important.


GUANGZHOU 00000317 002 OF 003


6. (SBU) Despite the refinery location in Quanzhou and the fuel
marketing joint venture headquarters to be set up in Fuzhou,
negotiations were largely driven by Sinopec's Beijing office; the
National Development and Reform Commission has had a high degree of
oversight for the deal. It is not by coincidence that ExxonMobil,
the most profitable and highest revenue publicly traded company in
the world, was given access to an almost monopoly position in Fujian
province, just across the straits from Taiwan. Whether a
multi-billion dollar ExxonMobil investment so near Taiwan would
actually lead the company to lobby on China's behalf in the event of
rising tensions is problematic but the Chinese government has likely
given consideration to the possibility of this intangible.

7. (SBU) A second benefit of the joint venture is to supposedly
spread the risk among all parties involved, though Sinopec is taking
on the bulk of the exposure. Throughout early negotiations, Sinopec
insisted that it would purchase 100% of the output of the refinery
at a price linked to global oil prices. In summer 2005, after
global oil prices surged and government-regulated gas prices did not
adjust to meet the rising costs for refiners (ref B), Sinopec told
the joint venture it would be responsible for selling the refinery
output and could find other customers besides Sinopec. Just before
the signing of the contract, Sinopec reversed course again and
changed the terms back to the original take-all position.

8. (SBU) Fujian province has a current oil demand of over 5 MMt/y
and current projections of 10% growth per year in oil product use.
In 2009, when the new refinery upgrades are completed and running at
capacity refinery output should still exceed the demand for gasoline
in Fujian by approximately 5 MMt/y. This surplus capacity will turn
Fujian from its current status as an importer of gasoline to an
exporter and allow Sinopec to move the excess output to the
oil-thirsty Pearl River Delta. Yet if rising oil prices cause
refining costs to exceed government regulated fuel prices again, the
cost among refining partners is Sinopec's alone, as sole purchaser,
to bear.

ExxonMobil - Leaping Ahead in China
-----------------------------------

9. (SBU) ExxonMobil proved an astute negotiator in this deal. Even
while British Petroleum and Shell raced ahead of ExxonMobil to
create their own joint ventures with Sinopec and opened stations
more quickly, ExxonMobil, which had its own 18 stations' diesel
supply cut in the past, insisted that any retail joint venture had
to be integrated into a refinery joint venture. ExxonMobil is more
concerned about the reliability of the gasoline source and the
ability to control costs and capture revenues than having the most
stations. By integrating the refining and retail joint ventures,
the company guarantees that all 750 stations will have a supply of
diesel and gasoline from the Quanzhou refinery even if shortages
begin to occur in the region. Furthermore with Sinopec purchasing
all of the output of the refinery at market prices, ExxonMobil will
have strong incentive to make the refinery the most efficient and
lowest cost producer of fuels in China to maximize their profit.

10. (SBU) The retail fuel stations included in the deal will be
branded with both Esso and Sinopec on the canopy and Aramco on the
pumps. Although the time frame to modernize and expand all 750
stations in Fujian to match ExxonMobil's high standards for retail
stations will be years, the company knows it must use its past
experience in China to change the mindset of Sinopec executives in
the joint venture to accomplish the upgrade.

11. (SBU) Foreign oil companies are still limited to only 30
wholly-owned stations in China despite China's entry into the WTO.
The 18 Esso stations currently operating in Guangdong are some of
the most modern and best producing stations in China though, often
doing six times the volume of a typical Sinopec station. Two Esso

GUANGZHOU 00000317 003 OF 003


stations in Zhongshan, in Guangdong province, were the highest
ExxonMobil fuel stations in the world by fuel sales volume in
February. Additionally, Esso stations have convenience stores and
ExxonMobil is in discussions with Kentucky Fried Chicken to add
drive-thru restaurants to some of its Chinese retail stations. It
is this lack of total dependence on fuel sales, along with external
hedging of the gas price risk, which should allow the joint venture
fuel stations to be a winning bet for ExxonMobil.

Comment - Win-Win Outcome
--------------------------

12. (SBU) The newly created joint ventures provide a win-win outcome
for all parties involved. China and Sinopec secure a 12 MMt/y
source of diesel and gasoline from a relatively stable exporter in
SaQrabia; an injection of financial capital, engineering
expertise, and perhaps most importantly marketing acumen from an
industry leader in ExxonMobil; and spread the commodity and
political risk involved in these large scale projects located so
close to Taiwan. From a market perspective, the most efficient tack
for Sinopec would be to let the refining joint venture sell the
fuels on the open market. It is clear from Beijing's involvement
and Sinopec's take-all purchase provision that China's pursuit to
secure energy sources and refining capacity to feed its own growth
trump any one company's financial gains.

13. (SBU) For ExxonMobil, finances are the major factor. The slow
pace of the negotiation was mainly the result of ExxonMobil's due
diligence and risk management strategies. Having been cut off from
diesel fuel at its stations before, the insistence of combining a
marketing and refining joint venture that can guarantee supply to
the retail stations makes sound business sense, especially knowing
that South China's pace of building new refining capacity continues
to lag behind projected usage growth. It seems to us unlikely that
ExxonMobil has not taken into account China-Taiwan considerations in
the risk assessment of this project. In the event of hostilities in
the region, even with deep pockets and political clout the company's
influence on U.S. policy would be minimal. ExxonMobil itself is far
more likely to benefit from increased Chinese government influence
through the joint venture as Sinopec and the other Chinese oil
majors continue to lobby Beijing for increased flexibility and speed
in the adjustment of regulated gasoline prices to better reflect the
market price of oil.

GOLDBERG

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