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Cablegate: Lng Expansion - a Key Component in South China's Energy

VZCZCXRO3686
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0007/01 0030702
ZNR UUUUU ZZH
R 030702Z JAN 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6783
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 02 GUANGZHOU 000007

SIPDIS

SENSITIVE
SIPDIS

EMB BEIJING FOR DOE
USDOE FOR OFFICE OF THE SECRETARY
USDOE FOR INTERNATIONAL AFFAIRS
USDOE FOR FOSSIL POLICY AND ENERGY
STATE FOR EAP/CM, EB/TRA, AND EB
STATE ALSO PASS USTR FOR CHINA OFFICE

E.O. 12958: N/A
TAGS: ENRG ECON EMIN SENV PGOV TRGY CH
SUBJECT: LNG Expansion - A Key Component in South China's Energy
Strategy

REF: A) Guangzhou 418, B) Guangzhou 419

1. (U) Summary: South China is betting big on liquefied natural gas
to diversify its energy mix and plans to expand LNG import capacity
dramatically over the next few years. Fujian Terminal will become
the region's second LNG terminal in 2009. Dapeng Terminal in
Shenzhen, currently China's only operational LNG terminal, also
plans to expand. In addition, pipeline construction will bring more
natural gas to south China, with Guangdong's provincial government
planning to increase natural gas usage as its primary 'clean-energy'
alternative to coal. As south China makes a move into cleaner
energy sources, the region could in the long-term develop into a
fertile market for LNG. End summary.

-----------------------------------
Growing LNG Capacity in South China
-----------------------------------

2. (U) South China's capacity to import LNG will expand dramatically
over the next few years. Thus far, the National Development and
Reform Commission (NDRC) has approved nine LNG terminals
countrywide, two of which will be located in the south China cities
of Xiuyu, Fujian, and Zhuhai, Guangdong. The Fujian Terminal is set
to have a capacity of 2.6 million tons per annum (mtpa), while the
Zhuhai Terminal will have a 3.5-mtpa capacity. According to FACTS
Global Energy, an energy consulting firm, two additional south China
terminals are planned for Guangxi (3 mtpa capacity) and Hainan (2
mtpa capacity), pending NDRC approval.

3. (U) The Fujian Terminal, which is already under construction, is
a joint venture between China National Offshore Oil Corporation
(CNOOC) and U.S.-based Air Products and Chemicals, Inc. Total
investment in the project is expected to reach RMB 300 million
(US$40 million). The terminal will become fully operational in 2009
and will be China's first plant to capture cold energy as the LNG is
regasified. The cold energy will be used in the production of
industrial gasses. CNOOC has reported that five city gas
distributors and three power plants in Fujian are scheduled to
purchase 2.6 million tons of LNG per year imported from Indonesia
over a 25-year period.

--------------------------------------------- -----
Dapeng Terminal: 1 Year in Operation and Expanding
--------------------------------------------- -----

4. (U) China's only operational LNG port terminal is also in south
China. The Dapeng LNG Terminal, located in Shenzhen, began
operations September 28, 2006. The joint venture has 11 major
shareholders, including CNOOC Gas and Power, Co. (33%), BP (30%),
and Shenzhen Gas Corporation (10%). Dapeng Terminal currently has
three 160,000-cubic-meter LNG storage tanks and a 385-km pipeline
transmission system that delivers gas across south China. As of
August 2007, Dapeng Terminal had taken delivery of 43 LNG shipments
carrying a total of 2.25 million tons of LNG. Expansion in the
planned second phase of the terminal includes enlarged storage
capacity, expanded trucking facilities, and a new terminal and
pipeline construction. Dapeng supplies 63.4 percent of its imports
to power plant customers, including Guangdong Huizhou LNG Power Co.,
and 36.6 percent to gas companies in five major Pearl River Delta
cities.

---------------------
Buying from Australia
---------------------

5. (U) Australia's Northwest Shelf has been the exclusive source for
LNG shipments to Dapeng Terminal, and Australia will continue to be
an important source for China's LNG imports. In September,
PetroChina signed a non-binding agreement with Woodside Petroleum,
Australia's largest publicly traded oil and gas company, for a
15-to-20-year LNG supply at 2-3 mtpa from the Browse Basin Gas
Project off Australia's northwest coast. Also in September,
PetroChina signed an agreement with Royal Dutch/Shell for a 20-year
LNG supply at 1 mtpa from the Gorgon LNG Project in Western
Australia. Both agreements are still subject to final company and
government approvals. Additionally, China remains in negotiation

GUANGZHOU 00000007 002 OF 002


with several other countries such as Qatar, Iran, Sakalin (Russia),
and Indonesia to secure long-term LNG supplies.

------------------------------------
Growing Demand in Guangdong Province
------------------------------------

6. (SBU) Guangdong's provincial government is pursuing a plan to
increase natural gas usage as its primary 'clean-energy' alternative
to coal. Qingbiao Wu, Chairman of the Guangdong Oil and Gas
Association (GOGA) told us that natural gas demand in the province
will increase for both residential use and power generation. The
government has set a goal that 50% of residences use natural gas by
2010. It also aims to increase power output fueled by natural gas
to 10% of Guangdong's total power output. Nevertheless, natural gas
still only accounts for 2-3 percent of China's overall energy mix,
versus a world average of nearly 25 percent. Beijing currently
plans to increase China's natural gas usage to 5.6 percent of its
energy mix by 2010.

7. (U) In order to enhance the attractiveness of natural gas to
consumers, the Guangdong Pricing Bureau recently set the natural gas
price cap for residential use at RMB 3.45 per cubic meter and
announced the price would be fixed for one year. Comparatively,
residential-use natural gas is priced at RMB 1.90 to RMB 2.05 per
cubic meter in Beijing and RMB 2.10 in Shanghai. Natural gas used
in Beijing and Shanghai is from domestic sources, which lowers costs
of shipment. LNG utilized in Guangdong, which is imported from
Australia, involves additional overhead costs and limits the
government's ability to control supply costs.

------------------
Pipeline Expansion
------------------

8. (U) Construction of China's longest pipeline will also increase
the supply of natural gas available for south China. China National
Petroleum Corporation (CNPC), China's largest petroleum company,
will begin construction of the pipeline in 2008. It will transport
natural gas from Kazakhstan and Turkmenistan to south China,
stretching 6,500 kilometers from the Xinjiang Uygur Autonomous
Region to Guangzhou. This project is expected to cover double the
distance of the West-East pipeline, currently the longest in China,
and will have an annual capacity of 30 billion cubic meters. Supply
contracts are still under negotiation with Kazakhstan and
Turkmenistan, and the pipeline may also carry domestic gas as
exploration continues in China. The project has a 2010 scheduled
completion date.

9. (SBU) GOGA's Wu also said that PetroChina is planning a second
phase of the West-East pipeline, which will connect to Guangdong
through Hunan and Hubei provinces. The project is expected to carry
natural gas from domestic sources as well as Russia, Uzbekistan and
other central Asian countries. In addition, Guangdong's provincial
government is considering a province-wide distribution network for
natural gas, though the final plan for the project has yet to be
announced publicly.

--------------------------------------------- ---------
Comment-Market Realities and the Price of Clean Energy
--------------------------------------------- ---------

10. (U) China must look overseas for much of this proposed added
natural gas as domestic production is unable to fill the gap.
China's ability to expand LNG use to help meet these goals depends
on its willingness to pay international market prices. Even though,
LNG is an environmentally-friendly alternative, coal remains a much
cheaper option.
In the past several years, Beijing's unwillingness to pay market
price has delayed, or derailed several LNG project negotiations.
Progress on new LNG terminals in South China suggests that Beijing
may have learned from these past failures. If so, as south China
makes a move into cleaner energy sources, the region could in the
long-term develop into a fertile market for LNG.

GOLDBERG

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