VZCZCXRO3686
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0007/01 0030702
ZNR UUUUU ZZH
R 030702Z JAN 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6783
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 02 GUANGZHOU 000007 
 
SIPDIS 
 
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 
 
E.O. 12958: N/A 
TAGS: ENRG ECON EMIN SENV PGOV TRGY CH
SUBJECT: LNG Expansion - A Key Component in South China's Energy 
Strategy 
 
REF: A) Guangzhou 418, B) Guangzhou 419 
 
¶1. (U) Summary: South China is betting big on liquefied natural gas 
to diversify its energy mix and plans to expand LNG import capacity 
dramatically over the next few years.  Fujian Terminal will become 
the region's second LNG terminal in 2009.  Dapeng Terminal in 
Shenzhen, currently China's only operational LNG terminal, also 
plans to expand.  In addition, pipeline construction will bring more 
natural gas to south China, with Guangdong's provincial government 
planning to increase natural gas usage as its primary 'clean-energy' 
alternative to coal.  As south China makes a move into cleaner 
energy sources, the region could in the long-term develop into a 
fertile market for LNG.   End summary. 
 
----------------------------------- 
Growing LNG Capacity in South China 
----------------------------------- 
 
¶2. (U) South China's capacity to import LNG will expand dramatically 
over the next few years.  Thus far, the National Development and 
Reform Commission (NDRC) has approved nine LNG terminals 
countrywide, two of which will be located in the south China cities 
of Xiuyu, Fujian, and Zhuhai, Guangdong.  The Fujian Terminal is set 
to have a capacity of 2.6 million tons per annum (mtpa), while the 
Zhuhai Terminal will have a 3.5-mtpa capacity.  According to FACTS 
Global Energy, an energy consulting firm, two additional south China 
terminals are planned for Guangxi (3 mtpa capacity) and Hainan (2 
mtpa capacity), pending NDRC approval. 
 
¶3. (U) The Fujian Terminal, which is already under construction, is 
a joint venture between China National Offshore Oil Corporation 
(CNOOC) and U.S.-based Air Products and Chemicals, Inc.  Total 
investment in the project is expected to reach RMB 300 million 
(US$40 million).  The terminal will become fully operational in 2009 
and will be China's first plant to capture cold energy as the LNG is 
regasified.  The cold energy will be used in the production of 
industrial gasses.  CNOOC has reported that five city gas 
distributors and three power plants in Fujian are scheduled to 
purchase 2.6 million tons of LNG per year imported from Indonesia 
over a 25-year period. 
 
--------------------------------------------- ----- 
Dapeng Terminal: 1 Year in Operation and Expanding 
--------------------------------------------- ----- 
 
¶4. (U) China's only operational LNG port terminal is also in south 
China.  The Dapeng LNG Terminal, located in Shenzhen, began 
operations September 28, 2006.  The joint venture has 11 major 
shareholders, including CNOOC Gas and Power, Co. (33%), BP (30%), 
and Shenzhen Gas Corporation (10%).  Dapeng Terminal currently has 
three 160,000-cubic-meter LNG storage tanks and a 385-km pipeline 
transmission system that delivers gas across south China.  As of 
August 2007, Dapeng Terminal had taken delivery of 43 LNG shipments 
carrying a total of 2.25 million tons of LNG.  Expansion in the 
planned second phase of the terminal includes enlarged storage 
capacity, expanded trucking facilities, and a new terminal and 
pipeline construction.  Dapeng supplies 63.4 percent of its imports 
to power plant customers, including Guangdong Huizhou LNG Power Co., 
and 36.6 percent to gas companies in five major Pearl River Delta 
cities. 
 
--------------------- 
Buying from Australia 
--------------------- 
 
¶5. (U) Australia's Northwest Shelf has been the exclusive source for 
LNG shipments to Dapeng Terminal, and Australia will continue to be 
an important source for China's LNG imports.  In September, 
PetroChina signed a non-binding agreement with Woodside Petroleum, 
Australia's largest publicly traded oil and gas company, for a 
15-to-20-year LNG supply at 2-3 mtpa from the Browse Basin Gas 
Project off Australia's northwest coast.  Also in September, 
PetroChina signed an agreement with Royal Dutch/Shell for a 20-year 
LNG supply at 1 mtpa from the Gorgon LNG Project in Western 
Australia.  Both agreements are still subject to final company and 
government approvals.  Additionally, China remains in negotiation 
 
GUANGZHOU 00000007  002 OF 002 
 
 
with several other countries such as Qatar, Iran, Sakalin (Russia), 
and Indonesia to secure long-term LNG supplies. 
 
------------------------------------ 
Growing Demand in Guangdong Province 
------------------------------------ 
 
¶6. (SBU) Guangdong's provincial government is pursuing a plan to 
increase natural gas usage as its primary 'clean-energy' alternative 
to coal.  Qingbiao Wu, Chairman of the Guangdong Oil and Gas 
Association (GOGA) told us that natural gas demand in the province 
will increase for both residential use and power generation. The 
government has set a goal that 50% of residences use natural gas by 
¶2010.  It also aims to increase power output fueled by natural gas 
to 10% of Guangdong's total power output.  Nevertheless, natural gas 
still only accounts for 2-3 percent of China's overall energy mix, 
versus a world average of nearly 25 percent.  Beijing currently 
plans to increase China's natural gas usage to 5.6 percent of its 
energy mix by 2010. 
 
¶7. (U) In order to enhance the attractiveness of natural gas to 
consumers, the Guangdong Pricing Bureau recently set the natural gas 
price cap for residential use at RMB 3.45 per cubic meter and 
announced the price would be fixed for one year.  Comparatively, 
residential-use natural gas is priced at RMB 1.90 to RMB 2.05 per 
cubic meter in Beijing and RMB 2.10 in Shanghai.  Natural gas used 
in Beijing and Shanghai is from domestic sources, which lowers costs 
of shipment. LNG utilized in Guangdong, which is imported from 
Australia, involves additional overhead costs and limits the 
government's ability to control supply costs. 
 
------------------ 
Pipeline Expansion 
------------------ 
 
¶8. (U) Construction of China's longest pipeline will also increase 
the supply of natural gas available for south China.  China National 
Petroleum Corporation (CNPC), China's largest petroleum company, 
will begin construction of the pipeline in 2008.  It will transport 
natural gas from Kazakhstan and Turkmenistan to south China, 
stretching 6,500 kilometers from the Xinjiang Uygur Autonomous 
Region to Guangzhou. This project is expected to cover double the 
distance of the West-East pipeline, currently the longest in China, 
and will have an annual capacity of 30 billion cubic meters.  Supply 
contracts are still under negotiation with Kazakhstan and 
Turkmenistan, and the pipeline may also carry domestic gas as 
exploration continues in China. The project has a 2010 scheduled 
completion date. 
 
¶9. (SBU) GOGA's Wu also said that PetroChina is planning a second 
phase of the West-East pipeline, which will connect to Guangdong 
through Hunan and Hubei provinces. The project is expected to carry 
natural gas from domestic sources as well as Russia, Uzbekistan and 
other central Asian countries.  In addition, Guangdong's provincial 
government is considering a province-wide distribution network for 
natural gas, though the final plan for the project has yet to be 
announced publicly. 
 
--------------------------------------------- --------- 
Comment-Market Realities and the Price of Clean Energy 
--------------------------------------------- --------- 
 
¶10. (U) China must look overseas for much of this proposed added 
natural gas as domestic production is unable to fill the gap. 
China's ability to expand LNG use to help meet these goals depends 
on its willingness to pay international market prices.  Even though, 
LNG is an environmentally-friendly alternative, coal remains a much 
cheaper option. 
In the past several years, Beijing's unwillingness to pay market 
price has delayed, or derailed several LNG project negotiations. 
Progress on new LNG terminals in South China suggests that Beijing 
may have learned from these past failures.  If so, as south China 
makes a move into cleaner energy sources, the region could in the 
long-term develop into a fertile market for LNG. 
 
GOLDBERG