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UNCLAS SECTION 01 OF 03 GUANGZHOU 000317 
 
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E.O. 12958: N/A 
TAGS: ENRG ECON EMIN SENV PREF CH TW
SUBJECT: The Tiger Sprints Ahead: ExxonMobil First Western Oil Major 
to Launch Fully Integrated Joint Venture in China 
 
REF: A) 05 Guangzhou 32392, B) 05 Guangzhou 32648 
 
THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED AND INCLUDES BUSINESS 
SENSITIVE INFORMATION.  IT SHOULD NOT BE DISSEMINATED OUTSIDE OF 
U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC FORUM WITHOUT THE WRITTEN 
CONCURRENCE OF THE ORIGINATOR.  IT SHOULD NOT BE POSTED ON THE 
INTERNET. 
 
¶1. (SBU) SUMMARY: ExxonMobil became the first U.S. oil major to 
launch a fully integrated refining, petrochemicals, and fuels 
marketing joint venture in China with the signing of the contract on 
February, 25.  Although Chinese partner Sinopec stated in the media 
that the company's ability to refine sour crude is not mature, 
ExxonMobil believes that the real benefit sought by Sinopec is a 
significant relationship with a politically-powerful U.S. company. 
The deal also offers significant benefits to ExxonMobil including a 
guaranteed purchase contract for 100 percent of the refinery's 
output and the modernization and re-branding of approximately 750 
fuel stations in Fujian province.  This would make ExxonMobil's Esso 
brand, at least temporarily, the largest foreign fuel brand in South 
China. END SUMMARY. 
 
Joint Venture Details 
---------------------- 
 
¶2. (U) As reported in various U.S. and Chinese media sources, on 
February 25, 2007 U.S. oil giant ExxonMobil signed contracts 
creating the first fully integrated refining, petrochemical, and 
fuel marketing joint venture  with foreign participants in China. 
The deal, which expands on an existing refining joint venture, the 
Fujian Refining and Ethylene Joint Venture Project located in 
Quanzhou of Fujian Province (ref A), will triple existing refining 
capacity from 4 MMt/y (Millions of tons per year) to 12 MMT/y.  The 
refinery will continue to primarily refine low-sulfur Saudi crude. 
 
 
¶3. (U) The project will also construct an 800,000 tons/year ethylene 
steam cracker, an 800,000 tons/year polyethylene unit, a 400,000 
tons/year polypropylene unit, and produce 700,000 tons/year of 
paraxylene (a feedstock for the production of polyester fiber).  All 
output from the petrochemicals plant is expected to be used 
domestically.  Fujian Petrochemical Company Limited, itself a 50-50 
joint venture between China Petroleum and Chemical Corporation, 
better known as Sinopec, and the Fujian government owns 50% of the 
refining and petrochemicals joint venture, ExxonMobil and Saudi 
Aramco own 25% each. 
 
¶4. (U) The deal also includes the formation of Fujian Fuels 
Marketing Joint Venture Project to market diesel and gasoline 
produced by the Fujian Refining and Ethylene Joint Venture Project. 
The joint venture will run approximately 750 fuel stations in Fujian 
province as well as a network of fuel distribution terminals. 
Sinopec owns 55% of the joint venture, ExxonMobil 22.5% and Saudi 
Aramco 22.5%. 
 
For China, Deal About More Than Just Capital and Expertise 
------------------------------------ --------------------- 
 
¶5. (SBU) The new deal has been over 12 years in the making with 
discussions beginning in 1994 and has seen both Sinopec and 
ExxonMobil proceeding deliberately.  Sinopec statements in the media 
frame the deal with ExxonMobil and Saudi Aramco as providing 
technology and capabilities that Sinopec lacks to process the 
imported sour Saudi crude oil supplied to the refinery.  In 
actuality, all the equipment can be bought "off the shelf" from oil 
services companies which would also provide training on its use. 
The relationships and the potential political capital they give the 
Chinese government in the respective countries are more important. 
 
 
GUANGZHOU 00000317  002 OF 003 
 
 
¶6.  (SBU) Despite the refinery location in Quanzhou and the fuel 
marketing joint venture headquarters to be set up in Fuzhou, 
negotiations were largely driven by Sinopec's Beijing office; the 
National Development and Reform Commission has had a high degree of 
oversight for the deal.  It is not by coincidence that ExxonMobil, 
the most profitable and highest revenue publicly traded company in 
the world, was given access to an almost monopoly position in Fujian 
province, just across the straits from Taiwan.  Whether a 
multi-billion dollar ExxonMobil investment so near Taiwan would 
actually lead the company to lobby on China's behalf in the event of 
rising tensions is problematic but the Chinese government has likely 
given consideration to the possibility of this intangible. 
 
¶7. (SBU) A second benefit of the joint venture is to supposedly 
spread the risk among all parties involved, though Sinopec is taking 
on the bulk of the exposure.  Throughout early negotiations, Sinopec 
insisted that it would purchase 100% of the output of the refinery 
at a price linked to global oil prices.  In summer 2005, after 
global oil prices surged and government-regulated gas prices did not 
adjust to meet the rising costs for refiners (ref B), Sinopec told 
the joint venture it would be responsible for selling the refinery 
output and could find other customers besides Sinopec.  Just before 
the signing of the contract, Sinopec reversed course again and 
changed the terms back to the original take-all position. 
 
¶8. (SBU) Fujian province has a current oil demand of over 5 MMt/y 
and current projections of 10% growth per year in oil product use. 
In 2009, when the new refinery upgrades are completed and running at 
capacity refinery output should still exceed the demand for gasoline 
in Fujian by approximately 5 MMt/y.  This surplus capacity will turn 
Fujian from its current status as an importer of gasoline to an 
exporter and allow Sinopec to move the excess output to the 
oil-thirsty Pearl River Delta.  Yet if rising oil prices cause 
refining costs to exceed government regulated fuel prices again, the 
cost among refining partners is Sinopec's alone, as sole purchaser, 
to bear. 
 
ExxonMobil - Leaping Ahead in China 
----------------------------------- 
 
¶9. (SBU) ExxonMobil proved an astute negotiator in this deal. Even 
while British Petroleum and Shell raced ahead of ExxonMobil to 
create their own joint ventures with Sinopec and opened stations 
more quickly, ExxonMobil, which had its own 18 stations' diesel 
supply cut in the past, insisted that any retail joint venture had 
to be integrated into a refinery joint venture.  ExxonMobil is more 
concerned about the reliability of the gasoline source and the 
ability to control costs and capture revenues than having the most 
stations.  By integrating the refining and retail joint ventures, 
the company guarantees that all 750 stations will have a supply of 
diesel and gasoline from the Quanzhou refinery even if shortages 
begin to occur in the region.  Furthermore with Sinopec purchasing 
all of the output of the refinery at market prices, ExxonMobil will 
have strong incentive to make the refinery the most efficient and 
lowest cost producer of fuels in China to maximize their profit. 
 
¶10.  (SBU) The retail fuel stations included in the deal will be 
branded with both Esso and Sinopec on the canopy and Aramco on the 
pumps.  Although the time frame to modernize and expand all 750 
stations in Fujian to match ExxonMobil's high standards for retail 
stations will be years, the company knows it must use its past 
experience in China to change the mindset of Sinopec executives in 
the joint venture to accomplish the upgrade. 
 
¶11. (SBU) Foreign oil companies are still limited to only 30 
wholly-owned stations in China despite China's entry into the WTO. 
The 18 Esso stations currently operating in Guangdong are some of 
the most modern and best producing stations in China though, often 
doing six times the volume of a typical Sinopec station. Two Esso 
 
GUANGZHOU 00000317  003 OF 003 
 
 
stations in Zhongshan, in Guangdong province, were the highest 
ExxonMobil fuel stations in the world by fuel sales volume in 
February.  Additionally, Esso stations have convenience stores and 
ExxonMobil is in discussions with Kentucky Fried Chicken to add 
drive-thru restaurants to some of its Chinese retail stations.  It 
is this lack of total dependence on fuel sales, along with external 
hedging of the gas price risk, which should allow the joint venture 
fuel stations to be a winning bet for ExxonMobil. 
 
Comment - Win-Win Outcome 
-------------------------- 
 
¶12. (SBU) The newly created joint ventures provide a win-win outcome 
for all parties involved.  China and Sinopec secure a 12 MMt/y 
source of diesel and gasoline from a relatively stable exporter in 
SaQrabia; an injection of financial capital, engineering 
expertise, and perhaps most importantly marketing acumen from an 
industry leader in ExxonMobil; and spread the commodity and 
political risk involved in these large scale projects located so 
close to Taiwan.  From a market perspective, the most efficient tack 
for Sinopec would be to let the refining joint venture sell the 
fuels on the open market.  It is clear from Beijing's involvement 
and Sinopec's take-all purchase provision that China's pursuit to 
secure energy sources and refining capacity to feed its own growth 
trump any one company's financial gains. 
 
¶13. (SBU) For ExxonMobil, finances are the major factor.  The slow 
pace of the negotiation was mainly the result of ExxonMobil's due 
diligence and risk management strategies.  Having been cut off from 
diesel fuel at its stations before, the insistence of combining a 
marketing and refining joint venture that can guarantee supply to 
the retail stations makes sound business sense, especially knowing 
that South China's pace of building new refining capacity continues 
to lag behind projected usage growth.  It seems to us unlikely that 
ExxonMobil has not taken into account China-Taiwan considerations in 
the risk assessment of this project.  In the event of hostilities in 
the region, even with deep pockets and political clout the company's 
influence on U.S. policy would be minimal.  ExxonMobil itself is far 
more likely to benefit from increased Chinese government influence 
through the joint venture as Sinopec and the other Chinese oil 
majors continue to lobby Beijing for increased flexibility and speed 
in the adjustment of regulated gasoline prices to better reflect the 
market price of oil. 
 
GOLDBERG