The Counselor of Embassy in China (Smyth) to the Secretary of State
[Received July 15—6:20 a.m.]
1137. Representatives Stanvac, Caltex and Shell China July 13 concluded meetings with Wong Wen-hao, Vice President Executive Yuan and President and Chairman of Board of Chinese Petroleum Corporation (CPC). Having come to China upon invitation, above representatives were prepared to carry forward Chungking negotiations for establishment of a Sino-foreign enterprise for joint development of Kansu field. While participation in Kansu exploration, production and refining is understood to have appeared of dubious promise to foreign companies from business standpoint, it apparently was their belief that such participation could serve to protect their marketing business in more lucrative seaboard areas, especially if Chinese Government’s active role in petroleum affairs were limited to this joint company.
In first meeting June 12 and preliminary to Kansu discussions, Stanvac representative inquired concerning proposed activities and functions of recently formed CPC. Wong stated this corporation (established May 18) is a limited company, first to be formed under new company law. National Resources Commission is its managing shareholder, the other two initial shareholders being the North Hopei Power Company and the National Resources Commission Insurance Company, latter being depositary of Bank of China trust funds. Legally seven more shareholders are possible, and these could be foreign, but Wong declares policy of CPC and political considerations are against foreign participation. Some private Chinese participation may eventually be permitted.[Page 1378]
Besides undertaking exploration, production, refining, distribution and marketing of petroleum products, the CPC is under government directive beginning July 1 to perform control functions which heretofore have been responsibilities of National Commission for Control of Liquid Fuels (NCCLF) and also to take over from customs the processing of import licenses with respect to any importation under restriction such as kerosene. Former enemy installation properties including tankage which have been held in the name of Kansu Oil Mining Administration Transportation and Storage Company will also be transferred to CPC. More detailed report7 regarding organization and functions CPC will be forwarded air mail (ReEmtel 1107, July 88).
Among major specific projects which CPC will control and administer, Wong stated, would be rehabilitation of oil refinery plants on Formosa. By middle 1948 it is estimated that Takao refinery and other minor plants there will be processing 14,000 barrels per day. It is planned that entire consumption requirements of Formosa will be filled from products this refinery and that surplus products will be shipped to mainland and sold by CPC through its marketing organization.
In meeting June 12 and subsequently JDR [oil] company representatives have emphasized their concern that Chinese Government proposes to engage in the refining and marketing of petroleum products, and at the dual role of CPC as business competitor and as government regulatory body. They have maintained that establishment of CPC makes Sino-foreign project with respect to Kansu far less attractive since it becomes evident that their capital and services are wanted only in remote areas where risks are heavy, and have taken position that they cannot submit a proposition in Kansu unless Chinese Government agrees to their participation in Formosa project. Shell Company China and Caltex representatives have stated their definite decisions on this point, and it is understood Stanvac representative’s similar view will be reconfirmed from New York this week.
On July 11 Dr. Wong informed foreign representatives that he had consulted with high officials “including Dr. T. V. Soong”9 and was in a position to state decision his Government with respect to rehabilitation existing oil refining facilities on Formosa. Such rehabilitation, he stated, would be through CPC and it was not contemplated that there would be any occasion to form a joint company with foreign interests. Foreign technicians would be hired and crude petroleum would be secured from abroad, but no stock ownership or [Page 1379]management control in the Takao refinery would be given to foreign interests. For political reasons Chinese Government could not permit participation by foreign companies in Formosa development, Dr. Wong stated, adding that “the people would not stand for it”.
Dr. Wong clearly indicated that Chinese Government intends to participate in marketing of refined products. He stated Chinese Government is in oil business “to stay” not only in exploration, production and refining, but in marketing as well. He stressed, however, that the Chinese market will be a growing one, that Chinese Government wishes only to compete fairly with existing companies, and that there will be room for all.
Dr. Wong explained Formosa project is one which with technical assistance should be within its capacities to develop. The Kansu project, however, calls for investment beyond China’s present capacity and is one, therefore, on which participation by foreign capital would be invited. Dr. Wong stated that if a joint company were formed for the Kansu project majority of stock would have to be held by Chinese. Also chairman of board would have to be Chinese, and he would have to have deciding vote (presumably on management matters). Accordingly, even with respect to Kansu, it appears that basis of organization now envisaged by Chinese would not be acceptable to American companies concerned.
In meeting July 13 apparently after consultation with T. V. Soong, Wong Wen-hao reaffirmed position with respect to Takao, but requested several times that companies agree to work out Kansu project separately. He stated that he had secured Executive Yuan approval for this project. Companies again stated that unless Takao refinery were included they could not undertake to discuss Kansu. In discussion there emerged importance of Takao as forerunner of Chinese Government’s plans for other refineries. Dr. Wong stated that if later on a refinery should be established in Shanghai, it would be “unthinkable” to have foreign participation.
Dr. Wong requested representatives to attempt to persuade their principals by telegram to agree to Kansu as independent project, stating that he would be glad to make special trip to Shanghai next week for another meeting. Representatives all feel, however, that no useful purpose will be served by a further meeting and are preparing to return to US around July 20.
Embassy concurs that prolonging negotiation in present situation will probably only accentuate differences and render eventual agreement more difficult. We desire to make appropriate representations to Chinese Government expressing our Government’s concern at extension of area of state enterprise of which establishment of CPC is not an isolated [Page 1380]example, but regard timing of such representations as of particular importance; this will be discussed in separate message.
Please inform Exim Bank,10 Treasury and Commerce.