QUESTIONABLE PROGRESS ON SINO-TURKMENISTAN GAS

UNCLAS SECTION 01 OF 02 BEIJING 021851

SIPDIS

SIPDIS
SENSITIVE

DEPT FOR EAP/CM AND EB/ESC SIMONS
DOE OIC FOR PUMPHREY, OEA FOR CUTLER

E.O. 12958: N/A
TAGS: ECON ENRG EINV EPET CH
SUBJECT: QUESTIONABLE PROGRESS ON SINO-TURKMENISTAN GAS
PIPELINE DEAL


SUMMARY
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1. (SBU) An industry contact questions recent reports that
China has approved construction of a pipeline to carry gas
imported from Turkmenistan -- a decision, that if carried
through, would carry forward a deal announced last April by
the presidents of both counties for gas sales. Separately,
the president of China National Petroleum Company (CNPC)
International told us in August that his organization was
still working on terms for a gas sale, a situation
complicated by the "overpromising" of Turkmenistan's gas
resources by President Niyazov. END SUMMARY

PIPELINE SERVICES EXECUTIVE: APPROVAL NOT YET GIVEN
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2. (U) A Dow Jones Newswire report from September 27 quoted
an unnamed source as stating that China's National
Development and Reform Commission (NDRC) has issued final
approval for construction of a pipeline that would carry
natural gas imported from Turkmenistan via western China to
Guangzhou and other cities in southeast China. The report
further stated that the pipeline would be able to carry some
30 billion cubic meters of Turkmen gas annually, with
construction costs in the tens of billions of dollars.


3. (SBU) A senior executive at a Chinese oil pipeline
services company questioned the veracity of the report and
told us that a final deal on the supply of natural gas has
yet to be reached. Projects of this sort typically require
lengthy negotiations once governments have made an agreement
in principal. In the case of China and Turkmenistan, the
two countries' presidents used an April 2006 state visit to
China as the occasion to sign what was termed a general
agreement to sell natural gas to China and build a pipeline
to transport it.

SALES DEAL A PRECONDITION, AND THAT MAY BE PENDING TOO
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4. (SBU) A senior executive with the China National Oil
Exploration and Development Corporation (CNODC),the CNPC
subsidiary conducting the negotiations, confirmed that a
deal has not yet been reached on the supply of natural gas.
CNODC is hopeful a deal can be reached by the end of
October. NDRC Chairman Ma Kai will travel to Turkmenistan
to participate in the signing ceremony if a deal is
concluded, according to the CNODC executive.


5. (SBU) Wang Dongjin, President of CNPC International, told
us in early August that the company was still negotiating a
final deal for the supply of Turkmen natural gas. He
described Turkmenistan President Saparmurat Niyazov as
"overpromising" natural gas to potential customers,
including China. Niyazov is seeking the best deal possible
and is using opposing bids bluntly against each other. CNPC
recognizes this tactic and is structuring its bid
accordingly, said Wang. CNPC was at the time of our the
August conversation still evaluating the best route for the
pipeline through Central Asia were a deal to be reached,
according to Wang's remarks.


6. (SBU) Wang went on to say that CNPC's main competition
for Turkmen natural gas is the Russian energy giant Gazprom.
CNPC is emphasizing in its negotiations that a pipeline
linking Turkmenistan with China rather than Russia would
provide Ashgabat another outlet for its gas as well as
leverage over Gazprom. The existing Central Asia Center
(CAC) pipeline - the primary pipeline transporting Turkmen
natural gas to Russia -- is already fully contracted.
CNPC is thus framing a Sino-Turkmen deal as a "win-win" for
the two countries, offering Ashgabat greater bargaining
power when renegotiating CAC pipeline pricing while giving
Beijing natural gas to help China diversify its energy mix
away from coal.

PROGRESS ON WEST-EAST PIPELINE
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7. (SBU) CNPC's Wang also said that if a Sino-Turkmen deal
is reached, it would make sense to link the pipeline with
China's West-East pipeline that runs from Xinjiang to
Shanghai. The new pipeline would then conceivably veer to

BEIJING 00021851 002 OF 002


the southeast to provide natural gas to Guangzhou and other
cities in the region. Liu Wei, a senior official in the
Xinjiang Development Planning Commission's Department of
Energy, recently told us that CNPC, while constructing the
West-East pipeline, conducted the survey and basic
preparatory work necessary to facilitate the construction of
a second pipeline. These efforts, however, were independent
of a possible Sino-Turkmen deal and were conducted based on
existing plans by local and national economic planners to
move energy resources, including natural gas, from Xinjiang
to other parts of China. Liu stated that as many as four
pipelines radiating from Xinjiang are currently in planning
or in the early stages of development.