PRC/IRAN: DAS HENGEL DISCUSSES CHINA-IRAN ENERGY

C O N F I D E N T I A L SECTION 01 OF 03 BEIJING 004526 SIPDIS STATE FOR EAP/CM, NEA/IR, EEB/ESC, INR/EAP, INR/NEA E.O. 12958: DECL: 12/10/2033 TAGS: PREL PARM ENRG PTER ECON EPET EINV MNUC POL IR, CH SUBJECT: PRC/IRAN: DAS HENGEL DISCUSSES CHINA-IRAN ENERGY DEALS WITH MFA, SINOPEC, AND PETROCHINA REF: A. REF A: 07 BEIJING 7445 ¶B. REF B: BEIJING 1073 ¶C. REF C: BEIJING 1432 ¶D. REF D: BEIJING 4097 Classified By: Classified by: Economic Minister Counselor Robert Luke f or Reasons 1.4 (b/d). Summary ¶1. (C) EEB DAS for Energy, Sanctions, and Commodities Douglas Hengel, met with MFA Arms Control and Disarmament Department Deputy DirecQ General Wu Haitao and Sinopec International Affairs Director General Tang Suxin on December 5 to discuss Chinese energy companies' activities in Iran. DDG Wu repeated China's opposition to the development of nuclear weapons in the Middle East, said China is increasing pressure on Iran, and reiterated China's strong opposition to potential U.S. sanctioning of PRC firms, including Sinopec, under the Iran Sanctions Act (ISA). Sinopec DG Tang reiterated previous assertions that Sinopec's Yadavaran project has stalled, due in part to Iran's displeasure with China's support for UNSCR 1803. He stressed that Sinopec is a responsible company that acts in accordance with UN resolutions on Iran and supports the Chinese government's opposition to Iran's pursuit of nuclear weapons while asking that the U.S. take a more rational approach to Iran. In a December 3 meeting, PetroChina President Zhou Jiping told Hengel that PetroChina is also considering a project in Iran, but it has not yet made any specific plans. End Summary. China "forcefully" implementing UNSCR measures -------------- - ¶2. (C) DAS Hengel told MFA Arms Control and Disarmament Department Deputy Director-General Wu Haitao December 5 that the international community must increase pressure on Iran to deal with developments in the nuclear program, including cutting off cooperation in the energy sector. DDG Wu repeated the Chinese position opposing the development of nuclear weapons in the Middle East and urging the resolution of the nuclear issue through "diplomatic ways." He underscored the importance of continuing U.S.-China coordination on the issue. Wu said that the P5-plus-1 has a good opportunity to make progress on the Iranian nuclear issue, claiming that the P5-plus-1 has reached consensus on the principle of "freeze-for-freeze" and the dual-track strategy. ¶3. (C) DDG Wu said that China has "forcefully" implemented measures called for by the relevant UNSCRs, and the Iranians have complained to the Chinese about such measures. Wu claimed that China is "increasing pressure on the energy side." He noted that the P5-plus-1 BEIJING 00004526 002 OF 003 incentive package is still on the table, and expressed hope that the process can enter a "new phase" and begin "serious" negotiations on incentives for Iran, once a "freeze-for-freeze" has been implemented. Arms sales to Iran "not detrimental" to other countries -------------- -------------- ¶4. (C) Turning to China-Iran arms sales, DDG Wu said that China takes a "prudent" approach to avoid violating UNSCRs, and that such sales are "not detrimental" to the interests of "other countries." He stressed that China understands the U.S. sensitivity on the issue, but that such cooperation is "normal" and China will "continue to take a responsible attitude" on arms deals. China strongly opposes application of ISA to Sinopec -------------- -------------- ¶5. (C) On the potential application of the Iran Sanctions Act on Chinese firms, Wu reiterated China's strong opposition to the United States sanctioning PRC firms under domestic U.S. law, especially given good U.S.-China cooperation on the Iranian nuclear issue. Wu asked rhetorically if the United States sees China as a partner or "otherwise," and claimed that China-Iran economic cooperation "conforms with international practices." Sinopec's Yadavaran Project Reported to be On Ice -------------- -------------- ¶6. (C) DAS Hengel met separately the same afternoon with Sinopec International Affairs Director General Tang Su Xin. He discouraged Sinopec from agreeing to develop hydrocarbons in Iran and reaffirmed that the Iran Sanctions Act (ISA) requires that the U.S. government consider sanctions against companies that invest in Iran's oil and gas sector. (Note: Sinopec subsidiary SIPC committed to a "services contract" for the development of the Yadavaran oil field in Iran in December 2007. See reftels A and B. End Note.) ¶7. (C) Tang explained that Sinopec's Yadavaran project has not moved forward, due in part to Iran's displeasure with China's support for UNSCR 1803. (Note: In a letter to the Embassy in April, (reftel C) Tang stated that "since China voted in favor of UNSCR 1803, the Iranian side may postpone the approval of the project indefinitely." Zhang's deputy told the Embassy in October that there had been no progress in Sinopec's energy agreements with Iran (reftel D). End Note.) China-Iran energy deals just business as usual -------------- - ¶8. (C) Tang asserted that China maintains normal diplomatic and business relations with Iran. Such relations, he claimed, are transparent and do not affect China's position on non-proliferation or hurt U.S. interests. Tang stressed that Sinopec is a responsible state-owned company that BEIJING 00004526 003 OF 003 acts in accordance with UN resolutions on Iran and supports the Chinese government's opposition to Iran's development of nuclear weapons. "We all need to develop more energy resources" -------------- ¶9. (C) Tang explained that recent high oil prices led to increasing pressure on Sinopec to expand its access to oil overseas. He said that Sinopec relies heavily on imported crude (purchased at market prices), which accounts for 70 percent of the oil feeding its domestic refineries. Meanwhile, it sells finished gasoline and diesel at government-set prices, resulting in refining losses when international market prices are higher than domestic gas and diesel retail prices. (Comment: Sinopec reported a yoy 77 percent decline in profits in the first half of 2008 due to soaring oil prices and price controls on domestic oil products. End Comment.) Although crude prices have come down in recent months, easing some of the pressure on its downstream businesses, Sinopec plans to continue to carry out upstream investments overseas to secure future supplies, Tang added. Regarding Sinopec's activities in Iran, he added that he hoped the U.S. government would take a more rational approach. "We all need to develop more energy resources," he asserted. Limited sanctions preferred to "tougher measures" -------------- -------------- ¶10. (C) Tang urged the U.S. to engage in direct talks with Iran. He pointed out that direct diplomacy with North Korea has been quite successful, and suggested that the U.S. might consider adopting a similar approach toward Iran. Tang emphasized that the U.S. and China share the same goals, but have different approaches toward Iran. In Tang's view, limited sanctions would have a greater impact than the "tougher measures" supported by the U.S. PetroChina also considering project in Iran -------------- ¶11. (C) In a meeting on unrelated subjects earlier in the week, CNPC Vice-Chairman and PetroChina President Zhou Jiping told Hengel that PetroChina is also considering a project in Iran, but it has not yet made any specific plans. Zhou stated that PetroChina is fully aware of UN and U.S. sanctions on Iran. ¶12. (SBU) DAS Hengel has cleared this cable. PICCUTA Piccuta