US embassy cable - 05TAIPEI4089

C O N F I D E N T I A L SECTION 01 OF 04 TAIPEI 004089 
 
SIPDIS 
 
STATE PASS AIT/WASHINGTON 
 
E.O. 12958: DECL: 09/16/2015 
TAGS: PREL, PGOV, ENRG, EPET, TW 
SUBJECT: TAIWAN THREATENED BY THE PRC'S QUEST FOR OIL 
 
 
Classified By: AIT Director Douglas Paal, Reason 1.4 (b/d) 
 
1. (C) Summary: Some Taiwan government officials feel 
"threatened" by the PRC's proactive campaign in Africa and 
the Middle East to secure petroleum resources and are seeking 
to develop a new energy policy to counter Beijing.  In recent 
months, Taipei has sought to sign energy deals in Africa and 
the Middle East.  However, some of Taiwan's efforts have been 
hindered by Taipei's bureaucratic state-run China Petroleum 
Company (CPC) and a foreign policy that has been largely 
reactive to the PRC.  CPC officials privately say there is 
little chance of Taiwan achieving success from its oil deals 
because the PRC and other global firms have already obtained 
drilling rights to the projects with the most potential. 
Diplomats in Taipei also warn that Taiwan must change its 
foreign policy strategy or Taipei will continue to be 
isolated diplomatically by the PRC.  End summary. 
 
Taiwan Seeking to Counter Beijing 
--------------------------------- 
 
2. (C) Taiwan officials assert that the PRC's global campaign 
to secure energy resources could threaten Taiwan's economic 
global interests and are seeking to expand Taipei's oil 
exploration efforts.  Taiwan National Security Council (NSC) 
Senior Advisor Connie Yang told AIT that Taipei is concerned 
about the PRC's activities in Africa and the Middle East and 
insisted that Taiwan must make greater efforts to protect its 
own energy interests.  Yang assured AIT that an oil strategy 
will be part of Taiwan's National Security Report which will 
be released sometime this Fall.  She also said that Taiwan 
energy initiatives will simultaneously serve to counter the 
PRC as well as bolster Taipei's relationship with its 
remaining diplomatic partners in Africa.  CPC's Director of 
Exploration for Africa and the Middle East, Patrick Yu, told 
AIT that Taiwan government officials are feeling pressure 
from the PRC to diversify Taipei's energy resources and have 
tasked CPC to pursue new sources of oil and off-shore 
exploration projects.  Yu explained that Taiwan's oil supply 
primarily comes from two sources - 60 percent from Saudi 
Arabia and 40 percent from West Africa. 
 
3. (C) The CPC's current activities in Africa and the Middle 
East are focused on Nigeria, the UAE, Qatar, Chad and Libya, 
according to CPC's Yu.  President Chen Shui-bian, during his 
surprise visit to the UAE on October 1, stated that Taiwan is 
seeking to promote CPC investment in the UAE's oil industry 
and CPC officials announced a deal for investment in UAE 
refining, which they hope will lead to an oil exploration 
agreement.  In June 2005, UAE Minister of Economic Affairs 
Hamed Bin Zayed visited Taipei and inked a deal for Abu Dhabi 
to buy a 20 percent stake in CPC's Kuo-Kuang Petrochemical 
plant.  In September 2005, CPC signed a deal with Qatar to 
refine natural gas in order to diversify its natural gas 
suppliers.  During Taiwan Foreign Minister Mark Chen's June 
2005 visit to Chad, a CPC delegation discussed joint 
initiatives for oil exploration.  CPC's Yu told AIT that CPC 
is also increasingly looking at Libya because sanctions have 
been lifted and Tripoli is seeking FDI for its oil industry, 
but he did not elaborate on methodology or prospects.  NSC 
Deputy Secretary-General Parris Chang is visiting Uzbekistan 
and Kazakhstan through mid-October to promote trade and 
investment, likely including the energy sector. 
 
But Facing Poor Prospects 
------------------------- 
 
4. (C) Despite the government's efforts to pursue a proactive 
energy policy, Yu privately admitted that prospects for a 
good return on CPC's investments were not optimal.  He said 
that in Chad and elsewhere in Africa, the petroleum fields 
with the most potential have already been tapped or the 
rights already acquired by other firms, including ones from 
the PRC.  Yu suggested that the UAE deals were also unlikely 
to be particularly productive because none of the projects 
included upstream exploration opportunities.  Yu added that 
CPC would also like to pursue opportunities in Central Asia 
and the Caucasus, but acknowledged that the region is not a 
viable option because other companies have already staked 
claims and Taiwan's Executive Yuan (EY) planning board would 
likely label the region too risky. 
 
5. (C) Taiwan's state-run oil apparatus and policies are risk 
adverse and tightly controlled by the government.  CPC's Yu 
told AIT that the CPC's exploration and development arm 
cannot do anything without a lengthy government approval 
process and must submit a list of planned exploration 
projects over a year in advance to the Planning Board at the 
EY.  Once the list is approved and budgets are set, no 
deviations are permitted and unconventional or risky 
proposals are typically rejected.  For example, Yu noted that 
last year his office wanted to sign a deal in Tanzania, but 
the proposal was rejected because it had not been on the list 
submitted to the EY the year before.  Yu added that Sao Tome 
and Principe, which recognizes Taiwan, offered CPC 
exploration rights, but the EY rejected the offer because the 
project was deemed too expensive.  There has since been an 
oil rush by international firms, including the PRC, to obtain 
access to Sao Tome's large offshore reserves. 
 
6. (C) The NSC's Yang was also very critical of CPC and the 
Ministry of Foreign Affairs (MOFA) efforts to secure new oil 
resources and promote Taiwan's interests abroad.  Yang said 
officials at the Presidential Office and the NSC have to work 
hard to persuade MOFA and CPC to implement new directives. 
Yang said that the NSC has pressed both MOFA and CPC to be 
more proactive and seek out more challenging ventures, but 
both have been resistant.  She argued that CPC is 
short-sighted and reluctant to engage in new exploration 
initiatives that would actually control energy resources 
because it has traditionally focused more on trading and 
refining.  Yang maintained that this practice has not been 
effective and must be altered to counter aggressive PRC 
efforts to control international oil resources.  Yang added 
that the CPC is also limited by its size and technology and 
sometimes must participate in joint ventures with larger 
Western firms to succeed. 
 
And Outmaneuvered by Beijing 
---------------------------- 
 
7. (C) Foreign diplomats in Taipei and Taiwan petroleum 
officials also tell AIT that despite Taipei's new policy push 
to secure new sources of oil, Beijing is outmaneuvering 
Taiwan in both Africa and the Middle East.  Omani Commercial 
Office Director Sulaiman Bin Sultan Al-Mughairy told AIT that 
Taiwan has been usurped by Beijing in its efforts to 
diversify energy sources, and that Taipei only recently began 
making serious efforts to sign oil deals, largely in response 
to the PRC challenge.  He opined that Beijing already has a 
substantial advantage in Africa and the Middle East and 
argued that Taiwan must be more proactive or it will be too 
late.  Al-Mughairy complained that it took him 9 years of 
lobbying to convince Taiwan officials to visit Oman and when 
CPC officials finally visited Oman last year, Muscat offered 
CPC deals laden with incentives, but CPC could not act 
because Oman had not been previously approved by the EY. 
CPC's Yu added that CPC can't compete with the PRC to secure 
exploration projects because Beijing always outbids Taipei. 
 
8. (C) Oman's Al-Mughairy said that Beijing's influence in 
the Middle East is rising, which could soon give Beijing the 
leverage to block Taiwan from key economic sectors.  In Oman, 
Al-Mughairy noted, four PRC companies are exploring for oil 
and over 10 Chinese delegations a year visit Muscat.  Saudi 
Arabia's Representative, Mohammed Al-Assirey, told AIT that 
while Taiwan is a stable market for Saudi oil, Saudi Arabia 
must consider PRC sensitivities regarding Taiwan because of 
the size and importance of Beijing's oil market and growing 
economy.  Jordan Representative Mohamad Zioud noted that the 
PRC is one of the few nations to express interest in Jordan's 
hard-to-recover reserves and is seeking oil deals throughout 
the Middle East region. 
 
9. (C) The Director of the Forum on African Studies at 
National Chengchi University, Chen Shen-yen, told AIT that 
Taiwan has been left behind in the pursuit for energy 
resources in Africa.  Chen said that the PRC is aggressively 
pursuing oil exploration projects throughout Africa in the 
Sudan, Sao Tome and Principe, Ghana, Chad and a number of 
other countries.  According to Chen, Taipei has made a grave 
strategic error in Africa because Taiwan has diplomatic 
allies in Africa and a very capable oil infrastructure via 
the CPC.  Chen said Taipei mistakenly focused on check-book 
diplomacy and propping up its diplomatic partners rather than 
investing in oil and mineral resources.  Chen told AIT that 
now Taiwan is making an effort, but the effort is largely too 
late since Beijing and other countries have already secured 
the most lucrative projects - even in countries which 
recognize Taiwan like Chad and Sao Tome and Principe - where 
Taipei should have the advantage over Beijing. 
 
Comment: Taiwan's Oil Strategy Questionable 
------------------------------------------- 
 
10. (C) While Beijing's campaign to acquire new sources of 
energy is politically troubling to Taiwan government 
officials, Taipei's reaction illustrates the difficulties the 
Chen administration has had in setting and implementing an 
effective foreign policy.  With government officials blaming 
other parts of the bureaucracy for unimaginative policies, it 
is clear that Taipei does not have a coherent energy policy 
or a unified commitment to implement it.  In the quest for 
energy resources, even in countries where Taipei enjoys 
diplomatic recognition, Taiwan has found itself on the 
defensive.  In many ways, Taiwan's energy strategy has 
mirrored its foreign policy, with Taipei reluctant to pursue 
new initiatives and content to rely on ineffective policies 
and watch Beijing seize the initiative. 
 
11. (C) From an economic standpoint, Beijing's push for 
energy resources is most likely driven by the need to secure 
energy supplies for its rapidly growing economy, which makes 
Taipei's decision to try to counter Beijing questionable. 
Other countries in Asia have effectively utilized 
international energy markets to secure long-term energy needs 
without directly investing in costly and risky exploration 
and production ventures.  Taiwan can, and has followed the 
same type of strategy, but can ill afford to directly compete 
with the PRC.  The oil business is particularly dynamic now 
as high prices are making many projects feasible that a few 
years ago or even months ago were unrealistic risky ventures. 
 An economic examination at oil markets suggests that if 
Taiwan can formulate a consistent energy policy, Taipei 
should be to secure sufficient energy supplies on the open 
market.  Taiwan's current strategy does not advance either 
its economic or diplomatic agendas, and does not build on its 
extensive business experience in international markets. 
 
PAAL