CHINA/ENERGY: WESTERN ENERGY COMPANIES DISCUSS MECHANICS OF

UNCLAS SECTION 01 OF 02 BEIJING 003155 SIPDIS SIPDIS SENSITIVE STATE FOR EAP/CM PSECOR, GWARD AND EEB/ESC SIMONS, HAYMOND, WECKER DOE OEA FOR CUTLER, NAKANO TREASURY FOR OASIA DOHNER, CUSHMAN USDOC FOR 4420/ITA/MAC/CEA/MCQUEEN USTR FOR BHATIA/STRATFORD/WINTER/ALTBACH/MCCARTIN E.O. 12958: N/A TAGS: ECON ENRG EINV EPET EFIN CH SUBJECT: CHINA/ENERGY: WESTERN ENERGY COMPANIES DISCUSS MECHANICS OF DOING BUSINESS IN CHINA BEIJING 00003155 001.4 OF 002 Sensitive But Unclassified (SBU),contains United States companies' sensitive information. Do not post on the internet. -------------- SUMMARY -------------- ¶1. (SBU) Assistant Secretary of State for Economics, Energy, and Business Affairs Daniel Sullivan held a roundtable discussion in Beijing with representatives from several United States energy companies on April 24, 2007. The companies noted problems in the nature of their ties with Chinese partners and in China's legal and regulatory environment. Despite these problems, the companies uniformly recognized the potential of the Chinese market. The representatives differed on the efficacy of intervention on their behalf by the United States Government or associations such as the American Chamber of Commerce (AMCHAM). End Summary. -------------- -------------- OIL COMPANIES CRITICIZE THE NATURE OF THEIR TIES TO CHINESE PARTNER... -------------- -------------- ¶2. (SBU) The president of ConocoPhillips (CP),China began the roundtable by noting that its domestic partner, the China National Overseas Oil Company (CNOOC),is essentially the company's partner, service and parts provider, and Chinese Government interlocutor. These overlapping responsibilities are a conflict of interest for CNOOC and hamper the effectiveness of the joint venture (JV). For example, CP has a contract for emergency environmental clean-up services with a United States-based company that can deploy resources worldwide on a 747 aircraft within 24 hours, according to CP China's president. CP is not allowed by CNOOC to use this service in China, but instead must contract these services to a CNOOC-affiliated company. ¶3. (SBU) The chief operating officer (COO) of the Texas American Resource Company (TARC) stated that his company has similar issues with CNOOC relating to their contract for oil and gas exploration work in the South China Sea (SCS). In the case of their JV, this relationship has resulted in a shortage of drilling rigs for the project since TARC must rely on CNOOC for the rigs rather than being allowed to acquire them internationally. TARC's COO said that being tied exclusively to CNOOC for this and other services severely restricts the options available to the company. -------------- - ...BUT RECOGNIZE THE POTENTIAL IN CHINA'S MARKET -------------- - ¶4. (SBU) TARC's COO went on to state that his company is committed to operations in China because of the country's oil production potential. The opportunity for exploration and production work in the SCS is similar to that of the Gulf of Mexico twenty to thirty years ago. There are vast resources in the SCS, but so far relatively few exploration and production projects underway, according to the executive. The president of CP China cautioned that while there is evidence of significant hydrocarbon resources in the SCS, much more mapping, seismographic, and exploration work must be done before the full production potential can be known. Nevertheless, CP recognizes the upstream and downstream opportunities in the Chinese market. This is why CP has invested 1.4 billion dollars in China to date, and estimates that it will have 2.8 billion dollars invested by 2010. -------------- MIXED BAG IN MOVING JOINT INVESTMENTS FORWARD -------------- ¶5. (SBU) Peabody Energy's chief representative in Beijing stated that his company has been frustrated by seemingly undocumented restrictions on foreign investment in China's coal sector. Peabody has approached the National Development and Reform Commission (NDRC) numerous times on this issue and has been told repeatedly that foreign firms cannot hold a majority stake in a Chinese coal company. The representative stated that as far as the company knows, this restriction is not part of any written laws or regulations. ¶6. (SBU) In contrast, a senior vice president from ExxonMobil (EM) China spoke highly of the company's ties to its Chinese and other foreign partners. As a result of their effective partnership, EM's JV with Saudi Aramco, Sinopec, and the Fujian Provincial Government BEIJING 00003155 002 OF 002 will probably be the first JV to receive an oil import license. EM believes it will receive the license during the next several months. (Note: EM, Saudi Aramco, Sinopec, and the Fujian Provincial Government inaugurated their JV on March, 30, 2007, in a ceremony in Beijing. The partnership consists of two JV refining and petrochemical facilities in Fujian Province that will represent about 5 billion dollars of total investment when fully operational, according to a press release from EM. End Note.) -------------- COMPANIES NOTE BETTER REGULATORY, ENFORCEMENT ENVIRONMENT NEEDED TO FOSTER MORE INVESTMENT -------------- ¶7. (SBU) General Electric (GE) Energy's president noted that in 2006 China introduced 114 gigawatts of new power production capacity, 70 to 80 percent of which was coal-fired. China's ongoing power generation expansion presents an opportunity for GE's integrated gasification combined cycle (IGCC) clean coal technology if Beijing would enable its introduction into the market. The GE executive stated that the Chinese Government has 20 sites under study for possible IGCC power plants. Beijing needs to take steps, such as making a commitment to buying all of the electricity generated from the plants, in order to get IGCC in China off-of-the ground. (Note. In a separate meeting (see septel),NDRC Vice-Chairman Zhang Xiaoqiang told A/S Sullivan that China is very interested in this technology, but has not found it to be economic in any of the project proposals it has studied. End Note.) ¶8. (SBU) GE Energy's president noted that Beijing's inability so far to move on IGCC technology is an example of why the Central Government needs to more effectively monetize its energy and environmental policies. The executive director of Cummins China added that Beijing is able to craft good energy and environmental laws and regulations, but suffers in the implementation and enforcement of them. EM's vice-president agreed adding that local, city, and provincial governments seemingly have the power to implement laws and regulations at their discretion. -------------- CHINA'S APPETITE FOR TECH TRANSFER CITED -------------- ¶9. (SBU) GE Energy's president stated that the company provides technology transfer allowances in almost every country in which is does business. China is the most aggressive in seeking such transfers. The executive observed that the concept of technology "self-reliance" has emerged in China during the past two years. Despite this development, market access remains the major impediment to doing business in China rather than technology transfer concerns. The president of Westinghouse China stated that his company also has a long history of managing technology transfer globally. China is the most aggressive country Westinghouse has seen on technology transfer issues. The executive noted that China wants to localize new technology as quickly as possible. -------------- -------------- EXECUTIVES DIFFER ON ROLE OF GOVERNMENT, ASSOCIATIONS IN INTERACTING WITH CHINESE PARTNERS -------------- -------------- ¶10. (SBU) Westinghouse's president said that his company appreciates Embassy Beijing's and the broader United States Government's advocacy on behalf of the company's successful bid to build four nuclear reactors in China. CP China's president noted that there is an energy forum in the American Chamber of Commerce (Beijing),but it has not been active in several years. He cautioned that Western energy companies must be careful when seeking outside help to address market access difficulties in China given the nature of the ties the companies have with their Chinese partners. -------------- CLEARANCE -------------- ¶11. (U) Assistant Secretary Sullivan did not have an opportunity to clear this cable prior to departing Beijing. RANDT