VZCZCXRO5719
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0302/01 1500926
ZNR UUUUU ZZH
R 290926Z MAY 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 7199
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 000302 
 
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 - Fujian Readies for Operation of South 
China's Second LNG Terminal 
 
REF: Guangzhou 007 
 
¶1. (U) Summary: A delivery from Egypt marked the official opening of 
Fujian's new liquefied natural gas (LNG) terminal.  Supply to 
domestic users will begin in mid-late June.  Success has been 
tempered by the real world:  rising international prices and 
difficulty finding reliable long-term suppliers have led to the 
indefinite postponement of planned expansion.  Nevertheless, the 
province continues to promote the use of natural gas, particularly 
for power generation.  End summary. 
 
-------------- 
Up and Running 
-------------- 
 
¶2. (U) China's second LNG receiving terminal has commenced prelimary 
operations in Fujian Province.  The terminal, which was formally 
proposed in 2002, has been under construction since December 2004, 
when state-owned CNOOC Oil Base Group Ltd., the third-largest oil 
and gas company in China, and Fujian's provincial government 
received final approval for the project from the National 
Development and Reform Commission (NDRC).  A joint venture between 
CNOOC and the U.S.-based Air Products and Chemicals, Inc. invested 
RMB 6.2 billion (USD 898 million) in Phase I of the project. 
Located in Putian city, the 40-hectare facility includes two LNG 
tanks and a LNG receiving terminal, which is nearly 100% complete. 
Two additional tanks are planned for future construction.  A natural 
gas pipeline is 90% complete.  While operation testing and phased 
commissioning have begun, official supply delivery to end-users is 
not expected until mid-June. 
 
------------------------------- 
Expanding Fujian's Power Supply 
------------------------------- 
 
¶3. (U) The Fujian LNG project will supply LNG to three power plants, 
and natural gas to five municipalities.  The three power plants are 
located in Putian, Jinjiang and Xiamen.  Upon completion of the 
three plants around 2010, total capacity is expected to be 3.5 
million kilowatts, which will account for 10% of Fujian's total 
installed capacity.  In addition to supplying power plants, the 
Fujian LNG project has signed contracts to supply natural gas to 
five cities: Fuzhou, Putian, Xiamen, Zhangzhou, and Quanzhou - all 
of which are promoting the conversion of household appliances, such 
as stoves and water heaters, which use liquefied petroleum gas 
(LPG), to LNG-use equipment.  The Fujian LNG project will be China's 
first LNG facility to recapture cold energy during regassification. 
The cold energy will be used to produce industrial gas products, 
such as liquid oxygen, nitrogen, and argon. 
 
---------------------------------- 
Securing International LNG Sources 
---------------------------------- 
 
¶4. (SBU) According to Fujian LNG Construction Planning Office Deputy 
Director Huang Shulin, expansion plans for the second phase of the 
LNG plant, which include increasing annual capacity to 5 million 
tons, have been put on hold indefinitely due to challenges in 
securing scarce LNG sources.  One of the largest obstacles is rising 
international market prices.  CNOOC-Fujian LNG, Co. General Manager 
Zhang Hao complained to us the international market price for LNG 
had skyrocketed since last year on the spot market.  While he 
acknowledged that the rising price of crude oil plays a role, he 
argued that the spot-market prices were artificially inflated 
because many Asian countries are currently reluctant to sign 
long-term contracts for LNG.  Zhang believes that if more countries 
would shift to the long-term market, it would decrease the 
appearance of demand, thereby reducing prices and eventually 
restoring a buyer's market for LNG. 
 
 
¶5. (SBU) In addition to price, the Fujian LNG project faces the 
challenge of finding reliable long-term suppliers.  In September 
2002, the CNOOC - Fujian LNG, Co. signed a 25-year contract with the 
Indonesian Tangguh natural gas field. The Tangguh gas field agreed 
to supply the Fujian terminal with 1.6 million tons of LNG per year, 
 
GUANGZHOU 00000302  002 OF 002 
 
 
an amount that will gradually increase to 2.6 million tons annually 
by 2013, and will account for 3-4% of Fujian's energy mix. Delays in 
the development of the Tangguh natural gas fields have delayed the 
initial delivery date of supply to Fujian, forcing CNOOC-Fujian LNG 
Co. to buy on the spot market. 
 
¶6. (SBU) On April 26, the Fujian terminal received its first 
spot-market LNG shipment from Egypt's Idku LNG plant. General 
Manager Zhang told us that in order to stay on schedule with plans 
for commissioning and adherence to local distribution contracts, the 
terminal is in need of two to three additional spot-market 
acquisitions before the end of the year. Because CNOOC headquarters 
in Beijing negotiates supply contracts, Zhang said, he doesn't know 
what country might supply the additional LNG; the Fujian project 
management simply sends its LNG demand requests to Beijing, and 
awaits notification regarding future suppliers.  Fujian's LNG 
terminal is expected to start delivering natural gas to local end 
users by mid-June. 
 
------------------------------------- 
Promoting Domestic Use of Natural Gas 
------------------------------------- 
 
¶7. (SBU) While coal remains the cheapest and most widely used fuel 
in Fujian province, the provincial government is looking to expand 
use of renewable and cleaner energy sources, including hydropower, 
solar power and natural gas. Unlike the situation in Guangdong 
province (reftel), where residential demand for natural gas is 
expected to equal industrial demand, the Fujian terminal's General 
Manager Zhang projects that industrial demand will account for 80% 
of the terminal's supply, while the residential use will consume 
20%. In the long-term, the CNOOC-Fujian LNG Co. plans to expand 
distribution to both northeast Guangdong and Zhejiang provinces. 
 
¶8. (SBU) Zhang explained that Fujian's efforts at promoting natural 
gas consumption by signing long-term contracts (between 20-25 years) 
with local customers have faced challenges that mirror the 
difficulties it has faced on the international supply market. 
According to Zhang, the Fujian LNG plant's domestic customers, 
including three power plants and five municipal gas companies, are 
not accustomed to signing such long-term contracts and are reluctant 
to enter such binding commitments. Zhang questioned whether domestic 
buyers would honor such contracts even if they could be convinced to 
sign. 
 
¶9. (SBU) The Fujian government is also facing difficulty acquiring 
land for construction of pipelines necessary to expand natural gas 
usage. It recently halted construction of the Fujian Natural Gas 
Pipeline, which spans the province from Quanzhou in the south to 
Fuzhou in the north. With limited land resources, other projects 
such as railway construction, highway expansion, and other fuel 
transmission projects have been formidable competition for pipeline 
as well as power plant construction. In spite of the delays, General 
Manager Zhang expects the pipeline to be finished by the end of the 
year, completing Phase I of the Fujian LNG project. 
 
GOLDBERG