TAIWAN THREATENED BY THE PRC'S QUEST FOR OIL

C O N F I D E N T I A L SECTION 01 OF 04 TAIPEI 004089

SIPDIS

STATE PASS AIT/WASHINGTON

E.O. 12958: DECL: 09/16/2015
TAGS: PREL PGOV ENRG EPET TW
SUBJECT: TAIWAN THREATENED BY THE PRC'S QUEST FOR OIL


Classified By: AIT Director Douglas Paal, Reason 1.4 (b/d)


1. (C) Summary: Some Taiwan government officials feel
"threatened" by the PRC's proactive campaign in Africa and
the Middle East to secure petroleum resources and are seeking
to develop a new energy policy to counter Beijing. In recent
months, Taipei has sought to sign energy deals in Africa and
the Middle East. However, some of Taiwan's efforts have been
hindered by Taipei's bureaucratic state-run China Petroleum
Company (CPC) and a foreign policy that has been largely
reactive to the PRC. CPC officials privately say there is
little chance of Taiwan achieving success from its oil deals
because the PRC and other global firms have already obtained
drilling rights to the projects with the most potential.
Diplomats in Taipei also warn that Taiwan must change its
foreign policy strategy or Taipei will continue to be
isolated diplomatically by the PRC. End summary.

Taiwan Seeking to Counter Beijing
--------------


2. (C) Taiwan officials assert that the PRC's global campaign
to secure energy resources could threaten Taiwan's economic
global interests and are seeking to expand Taipei's oil
exploration efforts. Taiwan National Security Council (NSC)
Senior Advisor Connie Yang told AIT that Taipei is concerned
about the PRC's activities in Africa and the Middle East and
insisted that Taiwan must make greater efforts to protect its
own energy interests. Yang assured AIT that an oil strategy
will be part of Taiwan's National Security Report which will
be released sometime this Fall. She also said that Taiwan
energy initiatives will simultaneously serve to counter the
PRC as well as bolster Taipei's relationship with its
remaining diplomatic partners in Africa. CPC's Director of
Exploration for Africa and the Middle East, Patrick Yu, told
AIT that Taiwan government officials are feeling pressure
from the PRC to diversify Taipei's energy resources and have
tasked CPC to pursue new sources of oil and off-shore
exploration projects. Yu explained that Taiwan's oil supply
primarily comes from two sources - 60 percent from Saudi
Arabia and 40 percent from West Africa.


3. (C) The CPC's current activities in Africa and the Middle
East are focused on Nigeria, the UAE, Qatar, Chad and Libya,
according to CPC's Yu. President Chen Shui-bian, during his
surprise visit to the UAE on October 1, stated that Taiwan is
seeking to promote CPC investment in the UAE's oil industry
and CPC officials announced a deal for investment in UAE
refining, which they hope will lead to an oil exploration
agreement. In June 2005, UAE Minister of Economic Affairs
Hamed Bin Zayed visited Taipei and inked a deal for Abu Dhabi
to buy a 20 percent stake in CPC's Kuo-Kuang Petrochemical
plant. In September 2005, CPC signed a deal with Qatar to
refine natural gas in order to diversify its natural gas
suppliers. During Taiwan Foreign Minister Mark Chen's June
2005 visit to Chad, a CPC delegation discussed joint
initiatives for oil exploration. CPC's Yu told AIT that CPC
is also increasingly looking at Libya because sanctions have
been lifted and Tripoli is seeking FDI for its oil industry,
but he did not elaborate on methodology or prospects. NSC
Deputy Secretary-General Parris Chang is visiting Uzbekistan
and Kazakhstan through mid-October to promote trade and
investment, likely including the energy sector.

But Facing Poor Prospects
--------------


4. (C) Despite the government's efforts to pursue a proactive
energy policy, Yu privately admitted that prospects for a
good return on CPC's investments were not optimal. He said
that in Chad and elsewhere in Africa, the petroleum fields
with the most potential have already been tapped or the
rights already acquired by other firms, including ones from
the PRC. Yu suggested that the UAE deals were also unlikely
to be particularly productive because none of the projects
included upstream exploration opportunities. Yu added that
CPC would also like to pursue opportunities in Central Asia
and the Caucasus, but acknowledged that the region is not a
viable option because other companies have already staked
claims and Taiwan's Executive Yuan (EY) planning board would
likely label the region too risky.


5. (C) Taiwan's state-run oil apparatus and policies are risk
adverse and tightly controlled by the government. CPC's Yu
told AIT that the CPC's exploration and development arm
cannot do anything without a lengthy government approval
process and must submit a list of planned exploration
projects over a year in advance to the Planning Board at the
EY. Once the list is approved and budgets are set, no
deviations are permitted and unconventional or risky
proposals are typically rejected. For example, Yu noted that
last year his office wanted to sign a deal in Tanzania, but
the proposal was rejected because it had not been on the list
submitted to the EY the year before. Yu added that Sao Tome
and Principe, which recognizes Taiwan, offered CPC
exploration rights, but the EY rejected the offer because the
project was deemed too expensive. There has since been an
oil rush by international firms, including the PRC, to obtain
access to Sao Tome's large offshore reserves.


6. (C) The NSC's Yang was also very critical of CPC and the
Ministry of Foreign Affairs (MOFA) efforts to secure new oil
resources and promote Taiwan's interests abroad. Yang said
officials at the Presidential Office and the NSC have to work
hard to persuade MOFA and CPC to implement new directives.
Yang said that the NSC has pressed both MOFA and CPC to be
more proactive and seek out more challenging ventures, but
both have been resistant. She argued that CPC is
short-sighted and reluctant to engage in new exploration
initiatives that would actually control energy resources
because it has traditionally focused more on trading and
refining. Yang maintained that this practice has not been
effective and must be altered to counter aggressive PRC
efforts to control international oil resources. Yang added
that the CPC is also limited by its size and technology and
sometimes must participate in joint ventures with larger
Western firms to succeed.

And Outmaneuvered by Beijing
--------------


7. (C) Foreign diplomats in Taipei and Taiwan petroleum
officials also tell AIT that despite Taipei's new policy push
to secure new sources of oil, Beijing is outmaneuvering
Taiwan in both Africa and the Middle East. Omani Commercial
Office Director Sulaiman Bin Sultan Al-Mughairy told AIT that
Taiwan has been usurped by Beijing in its efforts to
diversify energy sources, and that Taipei only recently began
making serious efforts to sign oil deals, largely in response
to the PRC challenge. He opined that Beijing already has a
substantial advantage in Africa and the Middle East and
argued that Taiwan must be more proactive or it will be too
late. Al-Mughairy complained that it took him 9 years of
lobbying to convince Taiwan officials to visit Oman and when
CPC officials finally visited Oman last year, Muscat offered
CPC deals laden with incentives, but CPC could not act
because Oman had not been previously approved by the EY.
CPC's Yu added that CPC can't compete with the PRC to secure
exploration projects because Beijing always outbids Taipei.


8. (C) Oman's Al-Mughairy said that Beijing's influence in
the Middle East is rising, which could soon give Beijing the
leverage to block Taiwan from key economic sectors. In Oman,
Al-Mughairy noted, four PRC companies are exploring for oil
and over 10 Chinese delegations a year visit Muscat. Saudi
Arabia's Representative, Mohammed Al-Assirey, told AIT that
while Taiwan is a stable market for Saudi oil, Saudi Arabia
must consider PRC sensitivities regarding Taiwan because of
the size and importance of Beijing's oil market and growing
economy. Jordan Representative Mohamad Zioud noted that the
PRC is one of the few nations to express interest in Jordan's
hard-to-recover reserves and is seeking oil deals throughout
the Middle East region.


9. (C) The Director of the Forum on African Studies at
National Chengchi University, Chen Shen-yen, told AIT that
Taiwan has been left behind in the pursuit for energy
resources in Africa. Chen said that the PRC is aggressively
pursuing oil exploration projects throughout Africa in the
Sudan, Sao Tome and Principe, Ghana, Chad and a number of
other countries. According to Chen, Taipei has made a grave
strategic error in Africa because Taiwan has diplomatic
allies in Africa and a very capable oil infrastructure via
the CPC. Chen said Taipei mistakenly focused on check-book
diplomacy and propping up its diplomatic partners rather than
investing in oil and mineral resources. Chen told AIT that
now Taiwan is making an effort, but the effort is largely too
late since Beijing and other countries have already secured
the most lucrative projects - even in countries which
recognize Taiwan like Chad and Sao Tome and Principe - where
Taipei should have the advantage over Beijing.

Comment: Taiwan's Oil Strategy Questionable
--------------


10. (C) While Beijing's campaign to acquire new sources of
energy is politically troubling to Taiwan government
officials, Taipei's reaction illustrates the difficulties the
Chen administration has had in setting and implementing an
effective foreign policy. With government officials blaming
other parts of the bureaucracy for unimaginative policies, it
is clear that Taipei does not have a coherent energy policy
or a unified commitment to implement it. In the quest for
energy resources, even in countries where Taipei enjoys
diplomatic recognition, Taiwan has found itself on the
defensive. In many ways, Taiwan's energy strategy has
mirrored its foreign policy, with Taipei reluctant to pursue
new initiatives and content to rely on ineffective policies
and watch Beijing seize the initiative.


11. (C) From an economic standpoint, Beijing's push for
energy resources is most likely driven by the need to secure
energy supplies for its rapidly growing economy, which makes
Taipei's decision to try to counter Beijing questionable.
Other countries in Asia have effectively utilized
international energy markets to secure long-term energy needs
without directly investing in costly and risky exploration
and production ventures. Taiwan can, and has followed the
same type of strategy, but can ill afford to directly compete
with the PRC. The oil business is particularly dynamic now
as high prices are making many projects feasible that a few
years ago or even months ago were unrealistic risky ventures.
An economic examination at oil markets suggests that if
Taiwan can formulate a consistent energy policy, Taipei
should be to secure sufficient energy supplies on the open
market. Taiwan's current strategy does not advance either
its economic or diplomatic agendas, and does not build on its
extensive business experience in international markets.

PAAL