LNG Plans Delayed - Supply Problems Threaten Progress on

UNCLAS GUANGZHOU 000304

SENSITIVE
SIPDIS

EMB BEIJING FOR DOE
USDOE FOR OFFICE OF THE SECRETARY
USDOE FOR INTERNATIONAL AFFAIRS
USDOE FOR FOSSIL POLICY AND ENERGY
STATE FOR EAP/CM, EB/TRA, AND EB
STATE ALSO PASS USTR FOR CHINA OFFICE

REF: Guangzhou 302

E.O. 12958: N/A
TAGS: ENRG ECON EMIN SENV PGOV TRGY CH
SUBJECT: LNG Plans Delayed - Supply Problems Threaten Progress on
Guangdong's Second LNG Terminal


1. (U) Summary: High liquefied natural gas (LNG) prices and
difficulty securing long-term LNG supplies have stalled the
much-anticipated Zhuhai Jin Wan LNG terminal project. Without a
secure, long-term supply contract, the National Development and
Reform Commission (NDRC) refuses to give final approval to begin
project construction. With its operational timeline facing the
threat of further delays as the terminal struggles to identify a
supplier, one can only wonder whether the realities of the global
LNG market will derail China's plan to import 35 billion cubic
meters of LNG by 2020. End summary.

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Lack of a Long-term Supply Contract Stops Approval
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2. (SBU) Planning for Zhuhai's new LNG terminal has all but halted
pending approval from the National Development and Reform
Commission. The NDRC refuses to give the project the go-ahead until
China National Offshore Oil Corporation (CNOOC),one of the major
shareholders in the project, is able to secure a long-term LNG
supply contract; Guangdong's Development and Reform Commission (GD
DRC) approved the project in 2006. A senior executive on the
project explained to us that the NDRC is determined to ensure that
the terminal's natural gas supply is sustainable before construction
begins, currently scheduled for 2013. With a continuing global LNG
supply crunch, the requirement is proving to be the main challenge
facing the Zhuhai project. While, several LNG terminals in Asia are
moving forward with spot LNG purchases on the open market, Zhuhai
Jin Wan is running out of options and struggling to get off the
ground.


3. (SBU) In contrast, both of south China's existing LNG terminals,
Dapeng and Fujian, rely on spot cargo to meet demand. For example,
Fujian's LNG terminal accepted spot cargo from Egypt's Idku LNG
Plant to begin operations; the NDRC permitted this because the
Fujian terminal had previously signed a 25-year supply contract with
Indonesia's Tangguh LNG Project, which was put on hold because of
delays in the development of the gas field (reftel).

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Guess Who? Negotiations Continue to Secure a Supplier
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4. (SBU) Zhuhai Jin Wan's management is tight-lipped about its
efforts to identify a long-term LNG supplier. In 2008, both Chinese
and Iranian media reported plans by CNOOC to purchase three million
tons of LNG annually from Iran for the Zhuhai project. The firm was
reportedly negotiating a contract with Iran's National Iranian Oil
Company for LNG sourced from Iran's North Pars Project. When asked
about Iran as a possible supplier in the early April meeting, the
Zhuhai project executive claimed that the firm was no longer
considered Iran to be an option. The executive did, however,
mention Qatar and Australia as possible sources, and indicated that
ExxonMobil might be a potential supplier.


5. (SBU) The Zhuhai Jin Wan executive pointed out that higher
prices had made negotiating a long-term contract more difficult.
Although prices have fallen from their peak in mid-2008, the
executive said that the current market for LNG is not as favorable
as it was when its counterpart, the Dapeng terminal, signed its
long-term contract; Dapeng is able to generate electricity at 0.5
Yuan/kWh. According to the Zhuhai Jin Wan executive, if Zhuhai were
to sign a contract with Qatar under the terms most recently offered,
it would be operating at 1 Yuan/kWh. The Local government has only
authorized the grid company to pay Zhuhai's terminal 0.59 Yuan/kWh.
While price remains a critical factor, at this point, the threat of
further construction delays is increasing the urgency for Zhuhai Jin
Wan to find a long-term supplier.

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A Second LNG Terminal for Energy-Hungry Guangdong
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6. (SBU) The Zhuhai Jin Wan LNG Ltd. terminal, located 60 km from


downtown Zhuhai, will be Guangdong's second, after the Dapeng
project. It will consist of three phases: Phase I with a total
capacity of 3.37 million tons, Phase II with a total capacity of
7.01 million tons, and Phase III with a total capacity of 11.87
million tons annually. With construction of Phase I expected to
begin in 2013, it should be operational by 2017. The timeframe for
the construction of Phase's II and III will be determined by local
demand, and is expected to be in full operation by 2020, according
to the senior executive with the project.


7. (SBU) Guangdong Yudean Group is CNOOC's major partner on the
project, with 30% and 25% stakes respectively; the other 45% is made
up of smaller-scale investors. Total investment in the terminal is
expected to reach RMB 10 billion (USD 1.4 billion). Unlike
Shenzhen's Dapeng terminal, Zhuhai's facility is entirely
domestically owned.

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Industry Will Fuel Demand, Not Residences
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8. (SBU) In the long-term, the provincial government has made it
clear that residential gas supply will be prioritized over
industrial use. The Zhuhai Jin Wan executive tells us, however,
that commercial enterprises and industry will be the largest
customers for natural gas in Guangdong for the next five years.
Once up and running, Zhuhai LNG terminal will supply natural gas to
five cities -- Guangzhou, Foshan, Zhuhai, Zhongshan, and Jiangmen --
through a 294-km pipeline; expansion plans will include the city of
Zhaoqing if there is enough demand. The terminal will also supply
two power plants: China Guodian Corporation's Zhongshan LNG Power
Plant and Guangdong Yudean Group's Xinhui LNG Power Plant.


9. (SBU) In the midst of the global economic downturn, demand for
LNG in Guangdong has suffered due to a drop in demand for
electricity. Demand had fallen so much that, the Dapeng terminal
had not purchased LNG spot cargo between October 2008 and April

2009. According to media reports, Dapeng resumed purchases again in
April with China's first spot LNG purchase from Russia through Royal
Dutch Shell. Russia's Sakhalin II Project is expected to supply
Dapeng with 50,000 tons of LNG.

GOLDBERG