VZCZCXRO2148
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #3155/01 1310901
ZNR UUUUU ZZH
P 110901Z MAY 07
FM AMEMBASSY BEIJING
TO RUEC/SECSTATE WASHDC PRIORITY 7746
RHMFIUU/DEPT F ENERGY WASHINGTON DC
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 BEIJING 003155 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EAP/CM PSECOR, GWARD AND EEB/ESC SIMONS, HAYMOND, WECKER 
DOE OEA FOR CUTLER, NAKANO 
TREASURY FOR OASIA DOHNER, CUSHMAN 
USDOC FOR 4420/ITA/MAC/CEA/MCQUEEN 
USTR FOR BHATIA/STRATFORD/WINTER/ALTBACH/MCCARTIN 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EINV EPET EFIN CH
SUBJECT: CHINA/ENERGY: WESTERN ENERGY COMPANIES DISCUSS MECHANICS OF 
DOING BUSINESS IN CHINA 
 
 
BEIJING 00003155  001.4 OF 002 
 
 
Sensitive But Unclassified (SBU), contains United States companies' 
sensitive information.  Do not post on the internet. 
 
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SUMMARY 
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¶1. (SBU) Assistant Secretary of State for Economics, Energy, and 
Business Affairs Daniel Sullivan held a roundtable discussion in 
Beijing with representatives from several United States energy 
companies on April 24, 2007.  The companies noted problems in the 
nature of their ties with Chinese partners and in China's legal and 
regulatory environment.  Despite these problems, the companies 
uniformly recognized the potential of the Chinese market.  The 
representatives differed on the efficacy of intervention on their 
behalf by the United States Government or associations such as the 
American Chamber of Commerce (AMCHAM).  End Summary. 
 
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OIL COMPANIES CRITICIZE THE NATURE OF THEIR TIES TO CHINESE 
PARTNER... 
--------------------------------------------- ------ 
 
¶2. (SBU) The president of ConocoPhillips (CP), China began the 
roundtable by noting that its domestic partner, the China National 
Overseas Oil Company (CNOOC), is essentially the company's partner, 
service and parts provider, and Chinese Government interlocutor. 
These overlapping responsibilities are a conflict of interest for 
CNOOC and hamper the effectiveness of the joint venture (JV).  For 
example, CP has a contract for emergency environmental clean-up 
services with a United States-based company that can deploy 
resources worldwide on a 747 aircraft within 24 hours, according to 
CP China's president.  CP is not allowed by CNOOC to use this 
service in China, but instead must contract these services to a 
CNOOC-affiliated company. 
 
¶3. (SBU) The chief operating officer (COO) of the Texas American 
Resource Company (TARC) stated that his company has similar issues 
with CNOOC relating to their contract for oil and gas exploration 
work in the South China Sea (SCS).  In the case of their JV, this 
relationship has resulted in a shortage of drilling rigs for the 
project since TARC must rely on CNOOC for the rigs rather than being 
allowed to acquire them internationally.  TARC's COO said that being 
tied exclusively to CNOOC for this and other services severely 
restricts the options available to the company. 
 
--------------------------------------------- - 
...BUT RECOGNIZE THE POTENTIAL IN CHINA'S MARKET 
--------------------------------------------- - 
 
¶4. (SBU) TARC's COO went on to state that his company is committed 
to operations in China because of the country's oil production 
potential.  The opportunity for exploration and production work in 
the SCS is similar to that of the Gulf of Mexico twenty to thirty 
years ago.  There are vast resources in the SCS, but so far 
relatively few exploration and production projects underway, 
according to the executive.  The president of CP China cautioned 
that while there is evidence of significant hydrocarbon resources in 
the SCS, much more mapping, seismographic, and exploration work must 
be done before the full production potential can be known. 
Nevertheless, CP recognizes the upstream and downstream 
opportunities in the Chinese market.  This is why CP has invested 
1.4 billion dollars in China to date, and estimates that it will 
have 2.8 billion dollars invested by 2010. 
 
--------------------------------------------- 
MIXED BAG IN MOVING JOINT INVESTMENTS FORWARD 
--------------------------------------------- 
 
¶5. (SBU) Peabody Energy's chief representative in Beijing stated 
that his company has been frustrated by seemingly undocumented 
restrictions on foreign investment in China's coal sector.  Peabody 
has approached the National Development and Reform Commission (NDRC) 
numerous times on this issue and has been told repeatedly that 
foreign firms cannot hold a majority stake in a Chinese coal 
company.  The representative stated that as far as the company 
knows, this restriction is not part of any written laws or 
regulations. 
 
¶6. (SBU) In contrast, a senior vice president from ExxonMobil (EM) 
China spoke highly of the company's ties to its Chinese and other 
foreign partners.  As a result of their effective partnership, EM's 
JV with Saudi Aramco, Sinopec, and the Fujian Provincial Government 
 
BEIJING 00003155  002 OF 002 
 
 
will probably be the first JV to receive an oil import license.  EM 
believes it will receive the license during the next several months. 
(Note: EM, Saudi Aramco, Sinopec, and the Fujian Provincial 
Government inaugurated their JV on March, 30, 2007, in a ceremony in 
Beijing.  The partnership consists of two JV refining and 
petrochemical facilities in Fujian Province that will represent 
about 5 billion dollars of total investment when fully operational, 
according to a press release from EM. End Note.) 
 
--------------------------------------------- 
COMPANIES NOTE BETTER REGULATORY, ENFORCEMENT ENVIRONMENT NEEDED TO 
FOSTER MORE INVESTMENT 
--------------------------------------------- 
 
¶7. (SBU) General Electric (GE) Energy's president noted that in 2006 
China introduced 114 gigawatts of new power production capacity, 70 
to 80 percent of which was coal-fired.  China's ongoing power 
generation expansion presents an opportunity for GE's integrated 
gasification combined cycle (IGCC) clean coal technology if Beijing 
would enable its introduction into the market.  The GE executive 
stated that the Chinese Government has 20 sites under study for 
possible IGCC power plants. Beijing needs to take steps, such as 
making a commitment to buying all of the electricity generated from 
the plants, in order to get IGCC in China off-of-the ground.  (Note. 
 In a separate meeting (see septel), NDRC Vice-Chairman Zhang 
Xiaoqiang told A/S Sullivan that China is very interested in this 
technology, but has not found it to be economic in any of the 
project proposals it has studied.  End Note.) 
 
¶8. (SBU) GE Energy's president noted that Beijing's inability so far 
to move on IGCC technology is an example of why the Central 
Government needs to more effectively monetize its energy and 
environmental policies.  The executive director of Cummins China 
added that Beijing is able to craft good energy and environmental 
laws and regulations, but suffers in the implementation and 
enforcement of them.  EM's vice-president agreed adding that local, 
city, and provincial governments seemingly have the power to 
implement laws and regulations at their discretion. 
 
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CHINA'S APPETITE FOR TECH TRANSFER CITED 
---------------------------------------- 
 
¶9. (SBU) GE Energy's president stated that the company provides 
technology transfer allowances in almost every country in which is 
does business.  China is the most aggressive in seeking such 
transfers.  The executive observed that the concept of technology 
"self-reliance" has emerged in China during the past two years. 
Despite this development, market access remains the major impediment 
to doing business in China rather than technology transfer concerns. 
 The president of Westinghouse China stated that his company also 
has a long history of managing technology transfer globally.  China 
is the most aggressive country Westinghouse has seen on technology 
transfer issues.  The executive noted that China wants to localize 
new technology as quickly as possible. 
 
--------------------------------------------- ------- 
EXECUTIVES DIFFER ON ROLE OF GOVERNMENT, ASSOCIATIONS IN INTERACTING 
WITH CHINESE PARTNERS 
--------------------------------------------- ------- 
 
¶10. (SBU) Westinghouse's president said that his company appreciates 
Embassy Beijing's and the broader United States Government's 
advocacy on behalf of the company's successful bid to build four 
nuclear reactors in China. CP China's president noted that there is 
an energy forum in the American Chamber of Commerce (Beijing), but 
it has not been active in several years.  He cautioned that Western 
energy companies must be careful when seeking outside help to 
address market access difficulties in China given the nature of the 
ties the companies have with their Chinese partners. 
 
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CLEARANCE 
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¶11. (U) Assistant Secretary Sullivan did not have an opportunity to 
clear this cable prior to departing Beijing. 
 
RANDT