1. (C) SUMMARY: John Carlson, Director General of the
Australian Safeguards and Nonproliferation Office (ASNO),
told us his late-February trip to Beijing to begin
exploratory discussions on an "agreement for cooperation" on
uranium sales to China went well overall. He described his
interactions with the Chinese as friendly and positive as PRC
officials agreed to all but one of the GOA's standard
"safeguards" requirements for uranium transfers. Beijing's
one objection was to the condition that China place its
nuclear energy facilities where Australian uranium was
located under "voluntary offer" to the IAEA. Chinese
officials argued that doing so in a Nuclear Weapons State
(NWS) was a waste of IAEA time and money. Nonetheless,
Carlson was confident that the PRC could eventually be
persuaded to do so, and he intended to draw French
counterparts into the discussions with China so they could
describe France's method for placing certain facilities under
voluntary offer as required by its bilateral agreements with
supplier nations. Carlson also provided an analysis of
future Chinese energy needs and capacity. He said the
Chinese had subtly indicated they were not producing
weapons-grade fissile material. He also gave us details of
PRC R&D efforts with South Africa to manufacture pebble-bed
nuclear energy reactors and said Australia might be
interested in importing them someday. END SUMMARY.



2. (C) ASNO DG John Carlson gave us a readout of his
February 19 - 24 trip to Beijing to begin exploratory talks
on a bilateral cooperation agreement that would enable China
to purchase uranium from Australia under a long-term contract
for its nuclear power reactors. Carlson characterized the
discussions as friendly and positive, with Chinese officials
raising only one "philosophical objection" to the standard
safeguards-type terms that the GOA required in all of its
uranium export agreements.

TERMS OF AGREEMENT: WHAT CHINA FOUND ACCEPTABLE


--------------------------

--



3. (C) Carlson said the text of the Australian-proposed
"agreement for cooperation" was very similar in substance to
the GOA's agreement with the U.S., and was considered a
standard model for agreements with a Nuclear Weapons State
(NWS). The Chinese had no problem agreeing to a "no military
use" clause, which Carlson said specifically excluded the
right to produce tritium. PRC officials also had no
difficulty agreeing to Australian consent rights for all
retransfers; prohibition of any alteration in form or content
(in other words, no enrichment above 20 percent U-235); and
Australian "catch-all" controls on all related uranium
technology or equipment transfers. The Chinese asked Carlson
for a clause providing prior consent for reprocessing at a
civilian reprocessing plant they hoped to have built by 2020.
Carlson, however, found the Chinese plans too vague and
proposed instead drafting a side letter that would
"sympathetically view" Chinese requests for reprocessing on a
case-by-case basis, which seeme
d to satisfy his interlocutors.

WHAT CHINA FOUND PROBLEMATIC: IAEA VOLUNTARY OFFER


--------------------------



--------------------------





4. (C) Carlson said Chinese officials were initially not
comfortable with the GOA "bottom-line" requirement to place
all facilities where Australian uranium was housed on the
IAEA's "voluntary offer" eligibility list. He explained to
the Chinese that it was routine for NWS to do so; all U.S.
civilian nuclear energy facilities were on voluntary offer to
the IAEA and, while the IAEA seldom conducted inspections in
NWS, placing their facilities on the eligibility list
"conveyed a commitment to nonproliferation" to the
international community. The Chinese tried to argue that it
would be a waste of IAEA resources to inspect facilities in
an NWS. Carlson countered that the UK, Russia, and France
had listed many of their nuclear energy facilities. In one
instance, Russia had taken the initiative to put a particular
centrifuge enrichment plant on voluntary offer, presumably
because it wanted to build confidence in the technology to
foster future exports. Carlson reassured the Chinese that
IAEA involvement through the voluntary offer would have to be
done in accordance with China's safeguards agreement with the
IAEA. He also explained the somewhat complicated French
scheme for listing and de-listing facilities as
foreign-procured uranium was used in them and offered to hold
a trilateral follow-up meeting with France to discuss this
option in-depth during the next Standing Advisory Group for
Safeguards Implementation (SAGSI) meeting in Vienna in June.



5. (C) Carlson was optimistic that the Chinese would
eventually come around on voluntary offer for facilities
using Australian uranium. He noted that China had already
placed Canadian, French and German-procured or licensed
reactors on IAEA voluntary offer. Two Chinese-manufactured
reactors at Qinshan were also on voluntary offer, and
Carlson's interlocutors even suggested that it might be
useful to have the IAEA inspect these reactors because China
wanted to export this kind of reactor to Pakistan. Carlson
emphasized to the Chinese that there could be no exception
for China to standard practice on voluntary offer, and the
PRC officials appeared to understand this. The GOA had 19
bilateral agreements for uranium sales or transfers, and
Carlson pointed out to his hosts that the one for China would
receive particularly close public scrutiny.

CHINA'S ENERGY NEEDS AND LIMITS TO AUSTRALIAN EXPORTS


--------------------------



--------------------------





6. (S) Even if Australia and China do reach an agreement,
Carlson's analysis of China's future energy needs and
Australian export capacity appeared to indicate that there
would be limits to cooperation. Carlson noted that nuclear
energy only accounted for two percent of China's current
energy production. According to a briefing he received from
the Chinese National Development and Reform Commission,
Carlson said, the PRC wanted to increase the nuclear energy
share of total energy production capacity to four percent by


2020. Over the same period, however, China's current 440
gigawatts of total energy capacity would more than double to
950 gigawatts, meaning that to double nuclear energy capacity
to four percent would actually require a four-fold increase.
(Carlson predicted that coal usage would also double by 2020,
which meant that even a fourfold increase in nuclear energy
would still "not provide any appreciable Kyoto Treaty
greenhouse gas reduction benefits.")



7. (S) It was Carlson's understanding that China only had
70,000 tons of low-grade uranium left to mine in its own
territory and would need to import 8,000 tons per year in a
stable, long-term contract to meet projected needs. This
would comprise a full 80% of Australia's current annual
export of 10,000 tons per year. He said the Chinese
expressed interest in uranium exploration in Australia, which
had the world's largest uranium deposits. Carlson had to
explain to his hosts the "difficult politics of Australian
Labor Party-led governments" that control all of Australia's
states and territories and continue to block the development
of additional uranium mines in their relevant jurisdictions.

PRC INDICATES NO PRODUCTION OF FISSILE MATERIAL


--------------------------

--



8. (S) Carlson also asked the Chinese whether they were
still engaged in weapons-grade fissile material production.
He said he found the answer he got "a bit coy." The
officials told him that the PRC wanted negotiations on a
Fissile Material Cutoff Treaty (FMCT) to begin as soon as
possible, and he should infer from that that China was not
producing such fissile material. Carlson told us he did not
believe Beijing was engaged in producing highly enriched
uranium for weapons, in part because he estimated that China
already possessed some two to six tons of weapons-grade
plutonium, which ought to be sufficient for its nuclear
weapons plans.

NEXT STEPS: NO HURRY


--------------------------





9. (C) Carlson's next move was to complete a consolidated
revision to the draft text based on Chinese "fine-tuning,"
but he was not sure of the timeframe for future negotiations,
noting that neither side had a formal negotiations mandate.
He did expect that there would be another round of talks in
Canberra before trilateral talks in Vienna with French
officials in June. Carlson did not sense that the Chinese
were in a great hurry.

BEIJING TO BUILD SOUTH AFRICAN REACTORS FOR EXPORT?


--------------------------



--------------------------





10. (C) Carlson said he had learned that China had concluded
a research and development agreement with South Africa for
joint development of pebble-bed nuclear reactors, even though
China considered the technology unproven. He understood that
South Africa was more optimistic that the reactors would be
commercially licensable early in the next decade. South
Africa would build the prototype, but the expectation was
that China would actually manufacture the pebble-bed reactors
for export under South African license. According to
Carlson, the GOA's envisioned bilateral nuclear cooperation
agreement with China would be broad enough to cover all
eventualities, so that Australia might some day import such
reactors from the PRC. (NOTE: This assumes, of course, that
the ALP, Greens and the Australian general public drop their
opposition to nuclear energy in the meantime. End note.)
STANTON