VZCZCXRO3653
RR RUEHAG RUEHBC RUEHCN RUEHDE RUEHDF RUEHGH RUEHIK RUEHKUK RUEHLZ
RUEHVC
DE RUEHBJ #5609/01 2090835
ZNR UUUUU ZZH
R 280835Z JUL 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 2575
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNIRA/IRAN COLLECTIVE
RUEHIL/AMEMBASSY ISLAMABAD 6426
RUEHKL/AMEMBASSY KUALA LUMPUR 2319
RUEHMO/AMEMBASSY MOSCOW 8332
RUEHNE/AMEMBASSY NEW DELHI 4143
RUEHNY/AMEMBASSY OSLO 0844
RUEHUNV/USMISSION UNVIE VIENNA 1030

UNCLAS SECTION 01 OF 02 BEIJING 015609 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
DEPT FOR EAP/CM AND EB/ESC SIMONS 
DOE OIC FOR PUMPHREY, OEA FOR CUTLER 
E.O. 12958:N/A 
TAGS: ETTC ECON ENRG EINV EPET PREL IR CH
SUBJECT: CHINA/ENERGY: DAS FOR ENERGY AND SANCTIONS 
SIMONS' MEETINGS WITH CHINESE ENERGY COMPANIES, CNOOC AND 
SINOPEC 
 
REF: (A) BEIJING 14156, (B) BEIJING 13771, 
 
     (C) STATE 104474 
¶1.  (SBU) Summary. On July 12 and 14, Deputy Assistant 
Secretary (DAS) for Energy and Sanctions Paul Simons, held 
 
SIPDIS 
separate meetings respectively with China National Offshore 
Oil Corporation (CNOOC) President Fu Chengyu, and Sinopec 
Vice President Zhang Yaocang.  CNOOC President Fu said it 
was a misunderstanding in the United States of how China's 
state-owned enterprise (SOE) system operates that doomed 
CNOOC's bid in 2005 to buy the U.S. energy company UNOCAL. 
Fu also stated that the Chinese Government has been slow to 
diversify the country's energy mix out of concern over the 
financial costs to Chinese consumers of doing so.  Sinopec 
Vice-President Yaocang said that the dynamic nature of 
China and the United States' energy markets make it 
critical that the countries' energy companies cooperate. 
He also stressed that Sinopec's arrangement with Iran was 
in the form of a service contract, not a direct investment, 
and that the value of the contract was less than $20 
million.   End Summary. 
 
CNOOC: We Are Our Own Masters, Not Beijing 
 
¶2.  (SBU) CNOOC President Fu began the meeting by 
expressing his dissatisfaction with the view in the United 
States that the Chinese Government manages CNOOC.  He 
stated that this misunderstanding doomed CNOOC's efforts to 
purchase UNOCAL.  Fu said that although CNOOC is a SOE, the 
company follows international market standards and it must 
be profitable in order to meet the concerns of its outside 
shareholders.  He insisted that the Chinese Government only 
provides CNOOC broad policy support, not financial support. 
He said that financing for the deal was to be arranged 
through the parent company through issuance of new equity 
shares and bank loans.  Fu said that the National 
Development and Reform Commission (NDRC) and other Chinese 
Government offices are oblivious to functioning of the 
international oil market, and any direct interference from 
them in CNOOC's operations would be haphazard and 
potentially harmful.  (Note: Although Fu blamed CNOOC's 
negative publicity in the United States for the company's 
failed bid, he acknowledged that the Chinese Government had 
expressed its own reservations about the endeavor, in 
particular questioning whether CNOOC was overpaying for 
Unocal's assets.  End Note.) 
 
Fu: Chinese Government Slow To Implement Energy 
Diversification 
 
¶3.  (SBU) In response to a question raised by DAS Simons 
about China's future energy mix, Fu stated that current 
consumption levels of coal in China are too high.  He said 
that over-reliance on coal is causing significant 
environmental damage to the country.  Fu said that Beijing 
supports diversification away from coal, but nevertheless, 
the Chinese Government is an obstacle to the implementation 
of broader energy diversification.  The Central Government 
believes the country's energy market is too immature to 
support cleaner energy sources, such as LNG.  Fu noted that 
CNOOC's own analysis suggests that the Chinese market would 
support up to 20 percent of China's energy needs being met 
with natural gas. 
¶4. (SBU) Fu stated that the Central Government has a goal 
of moving to market based pricing for energy, but is wary 
of doing so in a single step.  The Central Government has 
raised petroleum product prices twice in the past year and 
is monitoring consumer reactions to those increases.  Fu 
said that the high international prices of cleaner energy 
sources, such as LNG, are impediments to Beijing's pushing 
market based pricing and energy diversification.  He stated 
that CNOOC's own analysis indicates that Chinese consumers, 
particularly those in the developed coastal areas of China, 
can afford higher energy prices.  These coastal areas can 
support prices similar to those in the United States, South 
Korea, and Japan.  Fu said that his goal is to help Beijing 
become more trusting of the market and its capacity to 
correctly regulate China's energy consumption and energy 
mix. 
 
BEIJING 00015609  002 OF 002 
 
 
 
Sinopec: Sino-U.S. Energy Relations Are Vital 
 
¶5. (SBU) Sinopec VP Yaocang began his comments by stating 
that he believes that the U.S. and China have the most 
dynamic energy needs in the world.  He said that he hoped 
recognition of this fact would lead China and the United 
States to enhance future energy cooperation.  Yaocang noted 
the importance of Chinese and U.S. energy companies working 
closely together and highlighted Sinopec's good 
relationship with Chevron as an example.  He noted that 
toward this end, Sinopec has given Chevron the best 
locations in China for their joint-venture retail stations 
favoring the company over other joint venture partners. 
Yaocang stated that he believes this type of successful 
cooperation in China should lead Sino-U.S. energy company 
partnerships to pursue projects in the United States as 
well. 
 
Yaocang: Committed to Iranian Oil Project, But Mum On 
Strategic Petroleum Reserve 
--------------------------------------------- -------- 
 
¶6. (U)  Econ M/C and DAS Simons raised reports of Sinopec's 
involvement in the Iranian oil sector, noting the USG's 
serious opposition to any commercial energy deals with Iran 
at this point.  Yaocang confirmed that Sinopec signed a 
service contract with Iran in June 2005, but stressed that 
it was structured as a service contract as opposed to a 
long-term investment.  Yaocang noted that according to 
Iranian national law, oil and gas resources belong to the 
Iranian Government and ownership is not allowed to be 
shared with foreign companies or countries.  The contract 
was valued at less than 20 million dollars, is expected to 
last four years and entails Sinopec development of two 
exploration wells in the Ganser Block and the laying of 
some 700 kilometers of pipeline.  Yaocang stated that 
Sinopec is committed to fulfilling its contract with Iran 
but he took note of U.S. reservations regarding any 
projects that enhance Iran's oil development. 
¶7. (SBU)  In response to DAS Simons' question on the status 
of China's strategic petroleum reserves (SPR)program, 
Yaocang said that Sinopec's stocks were held for commercial 
purposes only and were unrelated to Beijing's efforts to 
build a separate strategic reserve.  Yaocang indicated that 
Sinopec's own petroleum reserves are distributed throughout 
its distribution network rather than concentrated in a 
single location and suggested that the company operates 
with a large reserve in order to hedge against supply 
disruptions. 
¶8. (SBU) EB/ESC DAS Simons cleared this report. 
RANDT