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Interfax.cn: Interview with NDRC Vice Director Zhang Guobao (China-Russia Energy relationship)

Beijing. March 8. INTERFAX-CHINA – Full transcript of an exclusive Interfax interview with Zhang Guobao, the Vice Director of the National Reform and Development Commission (NDRC).
Interfax: What is your opinion of energy cooperation with Russia?
Zhang: Russia has largely complied with our agreement to export oil by rail to China.
As for cooperation in other areas, there has been contact, such as between government officials, departments and the private sector, such as during investment conferences. There has been a lot of communication, but there has been little actual progress.
Currently, the Sino-Russia pipeline question is one step forward, two steps back. Today is cloudy with a chance for sun while tomorrow is sunny with a chance for clouds just like a weather forecast. One moment Russia is saying they have made a decision, the next saying that no decision has been made.
To date, there has been no correct information. This is regrettable.
There has also been a lot of contact regarding natural gas exports to China. Russia has expressed a great deal of interest in exporting natural gas. Once during a visit to China, Energy Minister (Viktor) Khristenko asked China to provide a report detailing China's natural gas demand conditions and requirements. He said Russia was developing their natural gas plan and wanted China to provide him with a demand forecast, which China provided within the time period he specified.
However, even though there have been a lot of promises expressing Russia's interest in exporting natural gas to China, in truth no real progress has been made. Deals with Sakhalin, Western Siberia and other regions, have been discussed, but no agreement has been reached.
As for Russian electricity exports, it was Russia who first contacted us about it. I've forgotten his name, but he's currently working for Russia's State Power Company. He brought a delegation to China and we signed a northern network memorandum expressing our mutual interest in electricity sales.
Why did we express such a great interest at that time? Because Heilongjiang (Province) and Russia's lonely far eastern Siberia cannot help but have a pair of power lines that can send electricity from Russia into China.
However, during all the years we've been connected together, Russia has only sent a total of 1 bln kWh of electricity to China. During the peak year, Russia exported 100 mln kWh.
Though this area is energy rich, it is not very economically developed, so the electricity sales price should be quite cheap. My impression is it should cost about USD 0.02 per kWh, so China was very interested. At that time, China's energy demands were very strong and we hoped Russia could sell us all the electric power in Siberia.
Later, they had a lot of communication with the State Grid Corporation of China to sell the electricity. But, why didn't the talks continue? Because Russia's asking price per kilowatt hour was very high, about USD 0.08 per kWh.
I think they didn't understand China's energy situation. They just didn't understand. They also didn't understand the cost of electricity in China.
China's energy shortage is quite severe, but Russia's offer was not competitive. China's average cost per kWh for thermal power generation in is a little over RMB 0.3 or about USD 0.04. If their electricity will cost more than domestic electricity, why would we want to buy it from Russia? Why not build a power plant in China, where we could also help reduce unemployment?
If Russia's electricity, which should be very competitive, were more competitive than China's, that would be alright. But they don't understand China, thinking that we have to purchase their electricity. Even though we've had a lot of contact, we haven't continued talks.
If talks were to continue, the main issue would be that Russian electricity exports to China must be more competitive than domestic power generation. If Russia's asking price is higher than the domestic price, then why do we have to buy electricity from Russia?
In my opinion, though both sides have had developments in energy cooperation and communication, in reality there have been few results. The one exception is in crude oil talks, where the two sides have agreed to purchase 7 mln tons of crude oil shipped by rail. For the other aspects, it is still only talk.
Interfax: Does China have any plan to invest in Eastern Siberia and develop Russian oil reserves? Does China plan to allow Russian companies to construct refineries in China to refine Russian crude oil imports and sell oil products in China?
Zhang: I think you know, China is making investments and developing oil fields in Kasakhastan, in Sudan, and other places. We even have contacts in Venezuela, in Central America, and in Canada's tar sands. Russia is so close to China, why wouldn't we be willing to invest in Russia?
The first question is easy to answer. We are willing, but will Russia let us? Have I answered your first question? (laughs)
Russia wouldn't let China purchase a small, little-known oil company. Russia's reaction was exactly like America's when we wanted to purchase Unocal, saying they do not want China to acquire their oil assets. You shouldn't ask me whether we are willing or not. We're shown our willingness to cooperate with and invest in other countries, but Russia isn't willing to let us invest.
Truthfully, we've been in contact with Russia for such a long time, but we still don't understand Russia, I feel. We don't know who can make the decisions, or who to seek out.
We have contacted government officials. We've even talked to Putin and department heads. We've talked to everyone in the government. They say they can't make a decision, and we say should talk to the private sector. We've met with every company. They say they can't sign an agreement and we should talk to the government. We don't know who can make decisions.
I can give you an example. I once went on a special trip to Russia to pursue an energy cooperation agreement. I sought out Russia's Nuclear Energy Ministry, the Economy and Trade Ministry, and the Economic Development Ministry, which is Russia's equivalent of the NDRC. I went to all of them, including meeting with Khristenko, and the former Energy Minister Igor Yusufov.
I sought them out because it was said they had talked with Ma Fucai (former head of China National Petroleum Corporation (CNPC) about the Lianyungang nuclear power station. At that time, the Lianyungang nuclear power station deal was a barter deal. They said, if China was willing to make it a cash deal, and pay the entire amount up front, Russia could use this money to construct an oil pipeline from Siberia to China.
This information was passed to the government through Ma Fucai.
The government approved and I went to Russia. In Russia, I sought them out, telling them the Chinese government was willing to give them USD 1.4 bln, which would then be used to construct the pipeline. We were willing to give them the entire sum then and there so they can begin work on the oil pipeline, but they were just talking in circles and didn't want to reach an agreement.
They had asked us if we would agree to changing the Lianyungang nuclear station barter-agreement into a cash agreement. Ok. So I went to Russia. I went to every government department and told them we were willing to make this change, but after talking with everyone, I couldn't find anyone who could settle it. It was a wasted a trip.
I just didn't know who could make the deal happen.
Interfax: And regarding China's plans to allow Russian oil companies to construct refineries and sell oil products in China?
Zhang: If you ask me this question, I'll reply with a question of my own. As I just said, China is investing in Kazakhstan, going to Sudan and Latin America, why not in Russia? The American firm Exxon Mobile can setup a joint venture in Fujian, Saudi Aramco can set up a joint venture in Fujian. BP can set up a joint venture in Shanghai. Why couldn't Russia do the same? China's government has never said Russia can't do it.
Russia has just emerged from the planned economy and hasn't done it as quickly as China has. They don't understand international cooperative ventures.
It's not as though we've told Russian companies they couldn't invest here. They've never asked if they can invest here. Other countries have come to China, why can't Russia?
Interfax: When will China implement a new oil product pricing system?
Zhang: International oil prices have been rising. Last year, international crude prices hit USD 70 per barrel and have fallen back to about USD 60. Such high prices will obviously raise the cost of kerosene, gasoline and oil products.
About half of China's oil is imported from abroad and import oil costs are very high. However, the effect raising oil product prices would have on society would be too great. Many weak industries would be heavily affected, like agriculture which needs oil for tractors and fertilizer. Agricultural costs would rise. Taxi prices would have to rise. It would directly affect the lives of common people.
Other industries, like airlines, would have to raise ticket prices, along with ticket prices on public busses. Because of this, we have to consider society's ability to accept price hikes.
Two years ago, even though international oil product prices rose, domestic oil product prices remained stable. At present, domestic oil product prices are more than RMB 1000, or more than USD 100 below international prices. If we were to close the gap between domestic and international oil product prices, it would affect a lot of weak industries.
We have not finished thinking over this aspect. There are a lot of opinions from different departments, but we have yet to reach an agreement. However, we are committed to moving in the direction of using market price measures.
Interfax: When will China begin filling the strategic reserve?
Zhang: If you enter the International Energy Association (IEA), they require member states to hold a strategic reserve of 90 days. China still isn't a member of the IEA but when a country becomes an energy consumer, it should develop a reserve for energy security. However, there are two types. One is a government reserve. The other is commercial reserves.
China also, for energy security, needs commercial and government reserves. Commercial reserves are reserves held by energy companies, like CNPC and Sinopec, for their commercial needs. We will encourage companies to slowly start building up their reserves.
As for the government reserves, have marked out a plan for government reserves, but I don't want to imply we want to have reserves comparable to those abroad. Whether the best reserve quantity is 90 days or 30 days or 100 days, it should be decided by every country's unique circumstances.
For example, Japan said 90 days wasn't enough and felt they should have 100 days or 120 days reserves. But Japan's justification is that 100% of its oil is imported from abroad. More than 60% of China's oil is produced domestically. Only a bit more than 30% is imported. Why should we establish a reserve as large as theirs when the conditions are completely different?
China will construct a reserve based on our own requirements.
During a visit to the US, a reporter asked me about the construction of our strategic reserves. He immediately reported my statements that China wanted a strategic reserve, and international oil prices spiked. Everyone blamed the price spike on China.
As long as oil prices are this high, I definitely will not announce China will begin filling the strategic reserves, as it might affect international prices. I won't allow my position to be used by price speculators who will say 'China wants a strategic reserve' to push the market price higher. Then China gets blamed for the price increase.
With prices over USD 60 a barrel, if we began filling the reserves and the price of oil fell to USD 50 per barrel, China would suffer a large financial loss.
Interfax: I have a very simple question. Russian President Putin will come to China in March. During an interview with Russian television, he said China and India should join the G8, especially in discussions of energy issues and problems. What is your opinion of this?
Zhang: First, you must look at how the G8 emerged. In the beginning it was the Group of Seven, all western countries. Later, Russia joined. Some people call this the Group of Wealthy Countries. China cannot yet be considered wealthy, but the Group of Wealthy Countries should realize the importance of China's economic development on international trade and development.
China is currently the second largest energy producer in the world, as well as the second largest energy consumer, trailing the US. This isn't just crude oil production but also includes coal and other energy sources.
If the second largest crude oil consuming country isn't allowed to attend, is it a truly international conference? China should definitely attend. If the second largest energy producer and consumer doesn't attend, is it internationally representative?
Interfax: What is the government's attitude towards the ongoing iron ore price negotiations?
Zhang: In the international iron market, there are two monopolists, Australia and Brazil, if you go by country. But China also imports some iron from India as well.
Last year, international iron markets were tight and prices rose 41.7%. This year prices are expected to continue to rise. The two largest iron exporters have expressed their desire to see prices continue to rise.
However, China's steel price is already quite low due to China's large production capacity. We would not be able to accept another large rise in the price of iron ore. We would not agree with another 41.7% rise in ore prices.
-ED

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