HONG KONG AND MAINLAND SIGN ENERGY MOU, EXXONMOBIL

C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 001812 SENSITIVE SIPDIS E.O. 12958: DECL: 09/26/2018 TAGS: CH ECON ENRG HK SUBJECT: HONG KONG AND MAINLAND SIGN ENERGY MOU, EXXONMOBIL OUT IN THE COLD Classified By: Consul General Joseph Donovan Reasons 1.4 (b/d) 1.(SBU) Summary: Hong Kong and Mainland officials signed a Memorandum of Understanding (MOU) on August 28 guaranteeing Mainland supplies of natural gas and electricity to Hong Kong for the next 20 years. The MOU effectively ends long-standing joint-venture plans by China Light and Power (CLP) and ExxonMobil to build a US$ one billion Liquid Natural Gas facility in Hong Kong. CLP and ExxonMobil executives had no advance warning of the deal and expressed concern the agreement will significantly impact Hong Kong's future energy autonomy. End Summary. 2.(SBU) Comment: CLP/ExxonMobil executives were doubly disappointed. The unexpected signing of the MOU and cancellation of the project left the company in a significantly weaker position going into the final weeks of negotiations with the HKG on energy tariffs (known locally as the "scheme of control") which concluded on September 23. Construction of the Soko LNG facility, however, was strongly opposed by local environmental NGOs, who are celebrating its cancellation as a victory. MOU Details and Significance -------------- 3.(U) On 28 August, Hong Kong Chief Executive Donald Tsang and Mr. Zhang Guobao, Vice Chairman of China's National Development and Reform Commission and Administrator of the National Energy Administration, signed a Memorandum of Understanding (MOU) guaranteeing Mainland supplies of electricity and natural gas to Hong Kong. Under the agreement, the China National Offshore Oil Corporation (CNOOC) and the China Guangdong Nuclear Power Holding Co. Ltd. will supply natural gas and nuclear-generated electricity to Hong Kong for the next 20 years. The natural gas and electricity will be purchased through new and renewed contracts at negotiated market rates and supplies will be delivered at current levels or higher. The MOU also stipulates that a Liquid Natural Gas (LNG) terminal will be built in the Mainland to further guarantee Hong Kong natural gas supplies. 4.(C) The MOU announcement effectively kills long-standing joint-venture plans by China Light and Power (CLP) and ExxonMobil to build and operate a US$ one billion LNG plant on Hong Kong's Soko Island. CLP Commercial Director Richard Lancaster told the press on September 12 that the Soko project is now stopped. The MOU was a surprise to CLP/ExxonMobil officials. Hong Kong Environmental Secretary Edward Yau made statements as recently as June indicating the project was on track. Richard Chu, Director of Business Strategy for ExxonMobil in Hong Kong, privately told ECONOFFs on September 23 that the company had less then 36 hours notice that an MOU was about to be signed and were effectively "blind-sided" by the announcement. Chu complained that it seemed as if Hong Kong authorities were leading the company on with continued talks over the Soko Island project. 5.(SBU) ExxonMobil officials were still assessing the possible losses and impact, but acknowledged press reporting that CLP stands to loose an estimated HK$ 80 million per year (US$ 10 million) in potential future annual revenue from the cancellation of the terminal project. The mainland LPG facility stipulated in the MOU is expected to be built by PetroChina, most likely in the Shenzhen Economic zone bordering Hong Kong. Although disappointed, CLP and ExxonMobil still hope to be involved in feasibility studies and to participate in the construction and operation of the new proposed LPG facility. Implications for Hong Kong Energy Autonomy -------------- 6.(C) ExxonMobil executives (protect) expressed concern that the MOU might represent a significant shift in Hong Kong government policy, noting that by signing the agreement, Hong Kong will become more reliant on the Mainland for energy supplies and is giving up a significant degree of energy independence. Chu expressed disappointment over the lack of "good faith" shown by Hong Kong officials in negotiations over the Soko Island facility and suggested that this lack of transparency would send a very negative message to the greater Hong Kong business community. Hedging Their Bets -------------- HONG KONG 00001812 002 OF 002 7.(SBU) Despite the cancellation of plans for the Hong Kong LNG facility, Lancaster stated that CLP has no intention of canceling a 20-year gas purchase agreement originally signed in June with British-based BG Gas Trading to supply 1.3 billion cubic meters of LNG to CLP annually, beginning in ¶2013. According to Lancaster, by that time CLP will need an estimated 3.4 billion cubic meters of natural gas to meet anticipated yearly demand; this could rise to as much as 6 billion annually by 2023. Under the MOU, CNOOC and PetroChina combined are obligated to supply Hong Kong with 3 billion cubic meters, leaving a potential future 400 million annual cubic meter natural gas shortfall. Growing demand in Guangdong Province could also create additional market opportunities for CLP. DONOVAN