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 -------------- ¶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