VZCZCXYZ0001
RR RUEHWEB

DE RUEHGZ #0304/01 1340732
ZNR UUUUU ZZH
R 140732Z MAY 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 0581
INFO RUEHGZ/CHINA POSTS COLLECTIVE 0168
RUCPDOC/USDOC WASHDC 0010
RHMFISS/DEPT OF ENERGY WASHINGTON DC 0013
RUEATRS/DEPT OF TREASURY WASHDC 0088
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC 0003
RUEAIIA/CIA WASHDC 0153
RUEKJCS/DIA WASHDC 0149
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS GUANGZHOU 000304 
 
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 
 
REF: Guangzhou 302 
 
E.O. 12958: N/A 
TAGS: ENRG ECON EMIN SENV PGOV TRGY CH
SUBJECT: LNG Plans Delayed - Supply Problems Threaten Progress on 
Guangdong's Second LNG Terminal 
 
¶1. (U) Summary:  High liquefied natural gas (LNG) prices and 
difficulty securing long-term LNG supplies have stalled the 
much-anticipated Zhuhai Jin Wan LNG terminal project.  Without a 
secure, long-term supply contract, the National Development and 
Reform Commission (NDRC) refuses to give final approval to begin 
project construction.  With its operational timeline facing the 
threat of further delays as the terminal struggles to identify a 
supplier, one can only wonder whether the realities of the global 
LNG market will derail China's plan to import 35 billion cubic 
meters of LNG by 2020.  End summary. 
 
--------------------------------------------- ----- 
Lack of a Long-term Supply Contract Stops Approval 
--------------------------------------------- ----- 
 
¶2. (SBU) Planning for Zhuhai's new LNG terminal has all but halted 
pending approval from the National Development and Reform 
Commission.  The NDRC refuses to give the project the go-ahead until 
China National Offshore Oil Corporation (CNOOC), one of the major 
shareholders in the project, is able to secure a long-term LNG 
supply contract; Guangdong's Development and Reform Commission (GD 
DRC) approved the project in 2006.  A senior executive on the 
project explained to us that the NDRC is determined to ensure that 
the terminal's natural gas supply is sustainable before construction 
begins, currently scheduled for 2013.  With a continuing global LNG 
supply crunch, the requirement is proving to be the main challenge 
facing the Zhuhai project.  While, several LNG terminals in Asia are 
moving forward with spot LNG purchases on the open market, Zhuhai 
Jin Wan is running out of options and struggling to get off the 
ground. 
 
¶3. (SBU) In contrast, both of south China's existing LNG terminals, 
Dapeng and Fujian, rely on spot cargo to meet demand.  For example, 
Fujian's LNG terminal accepted spot cargo from Egypt's Idku LNG 
Plant to begin operations; the NDRC permitted this because the 
Fujian terminal had previously signed a 25-year supply contract with 
Indonesia's Tangguh LNG Project, which was put on hold because of 
delays in the development of the gas field (reftel). 
 
--------------------------------------------- -------- 
Guess Who? Negotiations Continue to Secure a Supplier 
--------------------------------------------- -------- 
 
¶4. (SBU) Zhuhai Jin Wan's management is tight-lipped about its 
efforts to identify a long-term LNG supplier.  In 2008, both Chinese 
and Iranian media reported plans by CNOOC to purchase three million 
tons of LNG annually from Iran for the Zhuhai project.  The firm was 
reportedly negotiating a contract with Iran's National Iranian Oil 
Company for LNG sourced from Iran's North Pars Project.  When asked 
about Iran as a possible supplier in the early April meeting, the 
Zhuhai project executive claimed that the firm was no longer 
considered Iran to be an option.  The executive did, however, 
mention Qatar and Australia as possible sources, and indicated that 
ExxonMobil might be a potential supplier. 
 
¶5.  (SBU) The Zhuhai Jin Wan executive pointed out that higher 
prices had made negotiating a long-term contract more difficult. 
Although prices have fallen from their peak in mid-2008, the 
executive said that the current market for LNG is not as favorable 
as it was when its counterpart, the Dapeng terminal, signed its 
long-term contract; Dapeng is able to generate electricity at 0.5 
Yuan/kWh.  According to the Zhuhai Jin Wan executive, if Zhuhai were 
to sign a contract with Qatar under the terms most recently offered, 
it would be operating at 1 Yuan/kWh.  The Local government has only 
authorized the grid company to pay Zhuhai's terminal 0.59 Yuan/kWh. 
While price remains a critical factor, at this point, the threat of 
further construction delays is increasing the urgency for Zhuhai Jin 
Wan to find a long-term supplier. 
 
--------------------------------------------- ---- 
A Second LNG Terminal for Energy-Hungry Guangdong 
--------------------------------------------- ---- 
 
¶6. (SBU) The Zhuhai Jin Wan LNG Ltd. terminal, located 60 km from 
 
 
downtown Zhuhai, will be Guangdong's second, after the Dapeng 
project.  It will consist of three phases: Phase I with a total 
capacity of 3.37 million tons, Phase II with a total capacity of 
7.01 million tons, and Phase III with a total capacity of 11.87 
million tons annually.  With construction of Phase I expected to 
begin in 2013, it should be operational by 2017.  The timeframe for 
the construction of Phase's II and III will be determined by local 
demand, and is expected to be in full operation by 2020, according 
to the senior executive with the project. 
 
¶7. (SBU) Guangdong Yudean Group is CNOOC's major partner on the 
project, with 30% and 25% stakes respectively; the other 45% is made 
up of smaller-scale investors.  Total investment in the terminal is 
expected to reach RMB 10 billion (USD 1.4 billion).  Unlike 
Shenzhen's Dapeng terminal, Zhuhai's facility is entirely 
domestically owned. 
 
----------------------------------------- 
Industry Will Fuel Demand, Not Residences 
----------------------------------------- 
¶8. (SBU) In the long-term, the provincial government has made it 
clear that residential gas supply will be prioritized over 
industrial use.  The Zhuhai Jin Wan executive tells us, however, 
that commercial enterprises and industry will be the largest 
customers for natural gas in Guangdong for the next five years. 
Once up and running, Zhuhai LNG terminal will supply natural gas to 
five cities -- Guangzhou, Foshan, Zhuhai, Zhongshan, and Jiangmen -- 
through a 294-km pipeline; expansion plans will include the city of 
Zhaoqing if there is enough demand.  The terminal will also supply 
two power plants: China Guodian Corporation's Zhongshan LNG Power 
Plant and Guangdong Yudean Group's Xinhui LNG Power Plant. 
 
¶9. (SBU) In the midst of the global economic downturn, demand for 
LNG in Guangdong has suffered due to a drop in demand for 
electricity.  Demand had fallen so much that, the Dapeng terminal 
had not purchased LNG spot cargo between October 2008 and April 
¶2009.  According to media reports, Dapeng resumed purchases again in 
April with China's first spot LNG purchase from Russia through Royal 
Dutch Shell.  Russia's Sakhalin II Project is expected to supply 
Dapeng with 50,000 tons of LNG. 
 
GOLDBERG