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Cablegate: China/Energy: Das for Energy and Sanctions

VZCZCXRO3653
RR RUEHAG RUEHBC RUEHCN RUEHDE RUEHDF RUEHGH RUEHIK RUEHKUK RUEHLZ
RUEHVC
DE RUEHBJ #5609/01 2090835
ZNR UUUUU ZZH
R 280835Z JUL 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 2575
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNIRA/IRAN COLLECTIVE
RUEHIL/AMEMBASSY ISLAMABAD 6426
RUEHKL/AMEMBASSY KUALA LUMPUR 2319
RUEHMO/AMEMBASSY MOSCOW 8332
RUEHNE/AMEMBASSY NEW DELHI 4143
RUEHNY/AMEMBASSY OSLO 0844
RUEHUNV/USMISSION UNVIE VIENNA 1030

UNCLAS SECTION 01 OF 02 BEIJING 015609

SIPDIS

SIPDIS

SENSITIVE
DEPT FOR EAP/CM AND EB/ESC SIMONS
DOE OIC FOR PUMPHREY, OEA FOR CUTLER
E.O. 12958:N/A
TAGS: ETTC ECON ENRG EINV EPET PREL IR CH
SUBJECT: CHINA/ENERGY: DAS FOR ENERGY AND SANCTIONS
SIMONS' MEETINGS WITH CHINESE ENERGY COMPANIES, CNOOC AND
SINOPEC

REF: (A) BEIJING 14156, (B) BEIJING 13771,

(C) STATE 104474
1. (SBU) Summary. On July 12 and 14, Deputy Assistant
Secretary (DAS) for Energy and Sanctions Paul Simons, held

SIPDIS
separate meetings respectively with China National Offshore
Oil Corporation (CNOOC) President Fu Chengyu, and Sinopec
Vice President Zhang Yaocang. CNOOC President Fu said it
was a misunderstanding in the United States of how China's
state-owned enterprise (SOE) system operates that doomed
CNOOC's bid in 2005 to buy the U.S. energy company UNOCAL.
Fu also stated that the Chinese Government has been slow to
diversify the country's energy mix out of concern over the
financial costs to Chinese consumers of doing so. Sinopec
Vice-President Yaocang said that the dynamic nature of
China and the United States' energy markets make it
critical that the countries' energy companies cooperate.
He also stressed that Sinopec's arrangement with Iran was
in the form of a service contract, not a direct investment,
and that the value of the contract was less than $20
million. End Summary.

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CNOOC: We Are Our Own Masters, Not Beijing

2. (SBU) CNOOC President Fu began the meeting by
expressing his dissatisfaction with the view in the United
States that the Chinese Government manages CNOOC. He
stated that this misunderstanding doomed CNOOC's efforts to
purchase UNOCAL. Fu said that although CNOOC is a SOE, the
company follows international market standards and it must
be profitable in order to meet the concerns of its outside
shareholders. He insisted that the Chinese Government only
provides CNOOC broad policy support, not financial support.
He said that financing for the deal was to be arranged
through the parent company through issuance of new equity
shares and bank loans. Fu said that the National
Development and Reform Commission (NDRC) and other Chinese
Government offices are oblivious to functioning of the
international oil market, and any direct interference from
them in CNOOC's operations would be haphazard and
potentially harmful. (Note: Although Fu blamed CNOOC's
negative publicity in the United States for the company's
failed bid, he acknowledged that the Chinese Government had
expressed its own reservations about the endeavor, in
particular questioning whether CNOOC was overpaying for
Unocal's assets. End Note.)

Fu: Chinese Government Slow To Implement Energy
Diversification

3. (SBU) In response to a question raised by DAS Simons
about China's future energy mix, Fu stated that current
consumption levels of coal in China are too high. He said
that over-reliance on coal is causing significant
environmental damage to the country. Fu said that Beijing
supports diversification away from coal, but nevertheless,
the Chinese Government is an obstacle to the implementation
of broader energy diversification. The Central Government
believes the country's energy market is too immature to
support cleaner energy sources, such as LNG. Fu noted that
CNOOC's own analysis suggests that the Chinese market would
support up to 20 percent of China's energy needs being met
with natural gas.
4. (SBU) Fu stated that the Central Government has a goal
of moving to market based pricing for energy, but is wary
of doing so in a single step. The Central Government has
raised petroleum product prices twice in the past year and
is monitoring consumer reactions to those increases. Fu
said that the high international prices of cleaner energy
sources, such as LNG, are impediments to Beijing's pushing
market based pricing and energy diversification. He stated
that CNOOC's own analysis indicates that Chinese consumers,
particularly those in the developed coastal areas of China,
can afford higher energy prices. These coastal areas can
support prices similar to those in the United States, South
Korea, and Japan. Fu said that his goal is to help Beijing
become more trusting of the market and its capacity to
correctly regulate China's energy consumption and energy
mix.

BEIJING 00015609 002 OF 002

Sinopec: Sino-U.S. Energy Relations Are Vital

5. (SBU) Sinopec VP Yaocang began his comments by stating
that he believes that the U.S. and China have the most
dynamic energy needs in the world. He said that he hoped
recognition of this fact would lead China and the United
States to enhance future energy cooperation. Yaocang noted
the importance of Chinese and U.S. energy companies working
closely together and highlighted Sinopec's good
relationship with Chevron as an example. He noted that
toward this end, Sinopec has given Chevron the best
locations in China for their joint-venture retail stations
favoring the company over other joint venture partners.
Yaocang stated that he believes this type of successful
cooperation in China should lead Sino-U.S. energy company
partnerships to pursue projects in the United States as
well.

Yaocang: Committed to Iranian Oil Project, But Mum On
Strategic Petroleum Reserve
--------------------------------------------- --------

6. (U) Econ M/C and DAS Simons raised reports of Sinopec's
involvement in the Iranian oil sector, noting the USG's
serious opposition to any commercial energy deals with Iran
at this point. Yaocang confirmed that Sinopec signed a
service contract with Iran in June 2005, but stressed that
it was structured as a service contract as opposed to a
long-term investment. Yaocang noted that according to
Iranian national law, oil and gas resources belong to the
Iranian Government and ownership is not allowed to be
shared with foreign companies or countries. The contract
was valued at less than 20 million dollars, is expected to
last four years and entails Sinopec development of two
exploration wells in the Ganser Block and the laying of
some 700 kilometers of pipeline. Yaocang stated that
Sinopec is committed to fulfilling its contract with Iran
but he took note of U.S. reservations regarding any
projects that enhance Iran's oil development.
7. (SBU) In response to DAS Simons' question on the status
of China's strategic petroleum reserves (SPR)program,
Yaocang said that Sinopec's stocks were held for commercial
purposes only and were unrelated to Beijing's efforts to
build a separate strategic reserve. Yaocang indicated that
Sinopec's own petroleum reserves are distributed throughout
its distribution network rather than concentrated in a
single location and suggested that the company operates
with a large reserve in order to hedge against supply
disruptions.
8. (SBU) EB/ESC DAS Simons cleared this report.
RANDT

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