CHINESE ACADEMIC DISCUSSES PRC OIL EXPORTS TO

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 002891

SIPDIS

STATE FOR EEB JOEL KOPP AND EAP

E.O. 12958: DECL: 07/25/2033
TAGS: PREL ECON EPET PARM ENRG PGOV KN CH
SUBJECT: CHINESE ACADEMIC DISCUSSES PRC OIL EXPORTS TO
NORTH KOREA

Classified By: Political Minister Counselor Aubrey Carlson. Reasons 1.
4 (b/d).

Summary
--------------


1. (C) Ninety percent of the oil consumed in North Korea,
including a large portion of the DPRK's jet fuel, is supplied
by China, according to a Beijing University expert. China,
through state-owned Sinopec, provides North Korea with
approximately half a million tons of oil annually "for the
sake of friendship." Since 1997, however, the DPRK has paid
for the oil in IOUs. Our source believes that China's
perceived leverage over its neighbor is often overstated and
noted that cutting off oil to North Korea might actually end
up "toughening" North Korea's position. He suggested that
the optimum way to prevent the DPRK from restarting its
nuclear program would be to encourage World Bank and Asia
Development Bank loans to Pyongyang while allowing the DPRK
to secure a stable, long-term energy supply. End Summary.

PRC Oil Exports to DPRK
--------------


2. (C) China supplies approximately 90 percent of the oil
consumed in North Korea, according to Beijing University
Professor of International Relations and energy expert Zha
Daojiong. In a discussion with PolOff on July 22, Zha said
China has supplied refined oil to North Korea since the 1960s
and began charging international market prices in 1995.
State-owned Sinopec initially demanded payment in cash for
the oil, which is delivered via pipeline or in tankers.
Since 1997, however, North Korea encountered "payment
problems" and began paying for the oil in IOUs, said Zha.
(Note: At the start of the meeting, Zha claimed to be no
particular expert on North Korean energy issues and said he
needed to be careful about what he discussed in light of the
"Li Bin case." Zha was referring to Li Bin, former PRC
Ambassador to the ROK and PRC Special Envoy on DPRK nuclear
issues, who was arrested in late 2006 for "leaking state
secrets" on North Korea and Six-Party negotiations to ROK
officials and journalists. The PRC Government has made no
announcement about Li Bin's case.)


3. (C) According to Zha, China provides North Korea with a
half million tons of refined oil annually. He downplayed
that amount, saying China likely sells more to South Korea.
Zha said China provides North Korea with just enough oil to
run the country "for the sake of friendship." China also
sells jet fuel to North Korea, said Zha.

Turning off the Oil Tap
--------------


4. (C) Zha said China's perceived leverage over North Korea
is often overstated. In operational terms, he suggested,
cutting off oil exports to its neighbor is certainly
possible. The real question, however, is identifying the
purpose of turning off the oil supply. Zha recalled that
China used to be dependent on the Soviet Union for oil. In
1961, he recounted, the Soviet Union wanted to "change
China's behavior" and stopped oil exports. As a result,
however, China merely toughened its resolve to become
self-sufficient. Similarly, if China were to cut off oil
exports to North Korea, this would only "toughen" North
Korea's position. (Note: In the 1960s, however, China had
domestic resources available to become energy independent;
the DPRK has never had similar resources.)


5. (C) Zha told PolOff that China has cut off North Korea's
supply of oil three times. In 1979, China cut off oil
exports after North Korean soldiers began marching south
following the assassination of ROK President Park Chung-hee.
At the time, China announced that its pipelines were
experiencing "technical difficulties" and that repairs might
take two months. This was a clear warning, said Zha, telling
North Korea to turn its troops around, which it eventually
did. In September 2006, following the DPRK's July test of
long-range missiles, China turned off the oil taps for three
days. When asked if China's actions had a positive effect on
North Korea's behavior this second time, Zha responded that
the DPRK simply became "tougher." (Note: When PolOff
prompted Zha for the third example, Zha corrected himself and
said that there were only two instances when China cut off
oil exports. We note, however, that press reports in 2003
suggested that China cut off oil supplies to North Korea
after Pyongyang test-fired a missile in March. These reports
were never confirmed by the PRC Government.)

BEIJING 00002891 002 OF 002



Sustainable Energy Supply for the DPRK
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6. (C) Looking forward, Zha said now that the United States
has begun the process to de-list North Korea from the list of
state sponsors of terrorism and to remove Trading with the
Enemy Act (TWEA) sanctions, North Korea will have access to
development loans from the World Bank, Asian Development Bank
and other international financial institutions and can begin
to liberalize its economy. At the same time, the Six-Parties
should consider offering North Korea access to a more stable,
reasonably priced and long-term energy solution, thus giving
North Korea a strong disincentive to restart its nuclear
weapons program. Zha noted a proposal by Peter Hayes of the
Nautilus Institute to develop a Northeast Asia power grid
network that would be powered by hydroelectric dams in the
Russian Far East. Zha noted that the network, to which North
Korea would be connected, would have to be developed in a way
that did not offend Russia's nationalism.
RANDT