China’s Strategic Petroleum Reserves Become An Oil Game Changer
To enhance its energy security, China has been pressing forward with its Strategic Petroleum Reserve (SPR) plans amid its feverish race to secure oil and gas deals worldwide. In July, the country’s state-run Sinochem Corp. started expanding a facility that will become the country’s largest strategic oil reserve site. The site on Aoshan island, just off the manufacturing hub of Zhejiang province in east China, will eventually hold 50 million barrels, or roughly ten days of China’s current rate of net crude imports, after adding a 19-million-barrel farm to its existing 31-million-barrel base.
This news follows China National Petroleum Corporation’s (CNPC) March disclosure that it had started construction on a SPR facility in Jinzhou City. Both projects are part of eight facilities planned for China’s Strategic Petroleum Reserve Phase Two (SPR II). The Jinzhou site it expected to begin operations by 2015. It is expected to store 3 million cubic meters (18.9 million barrels) of oil, and will cost Chinese Yuan 2.26 billion ($357.4 million), according to Xinhua News Agency.
How this will play out in international oil markets and even geo-politically is already being seen. While it’s no secret that oil price increases in the last ten years are partly due to increased Chinese demand, China’s filling of its oil reserve facilities will take that to the next level, making China an oil shaker and mover on par with the United States. In fact the US, who can influence the price of oil with releases from its massive 700 million barrel reserves, will have even stiffer competition from China who is projected to have 500 million barrels once it completes its SPR facilities by 2020. By then, the world’s number one and number two oil importers will have over a billion barrels of oil in reserve. Added to the mix is a January disclosure by Goldman Sachs that within a year and a half China is due to overtake the US to become the world”s biggest oil importer. This will be a milestone in energy geopolitics.
Recently, OPEC acknowledged China’s growing muscle in international oil markets. Earlier this month the cartel said at a meeting in Vienna that Chinese oil consumption, when compared with developed economies, is changing the global demand structure. OPEC said that emerging and developing countries like India and China represented 42 percent of the global economic growth by the start of the last decade. These same economies however are expected to contribute 76 percent of this year’s 3.3 percent global economic growth forecast. The cartel added that “China alone has doubled its oil consumption over the past 12 years and that oil prices have become increasingly sensitive to the economic conditions in these dynamic regions, particularly China.”
According to the International Energy Agency (IEA), China’s oil demand in 2009 averaged around 8 million barrels per day, rising rapidly from 4.6 in 2000, increasing by a compound average growth rate of 6.7%. Overall demand is expected to continue along this gradual increasing trend and by 2020 China’s primary oil demand is projected to rise to 12.2 and almost 15 million barrels per day by 2035. Of course these are just projections. If China’s economy stalls they may not be met. However if the economy keeps growing (a more likely scenario) or even accelerates, China could blow these figures away.
China’s crude imports rose 11% in Q1 over the same period last year, a much stronger pace than full year 2011’s increase of 6%, China’s General Administration of Customs reported.
With sanctions against Iran causing a geopolitical headache for China’s oil and gas ambitions and last year’s Arab Spring volatility, which has yet to run its course as the drama in Syria unfolds and Egypt’s new government takes control, one doesn’t have to wonder why China presses through with its oil reserve plans.
China is highly dependent on the Middle East for its crude, which accounted for more than 50% of its total crude imports in 2011, followed by Africa at 24%. By country, China imported 20% of its crude from Saudi Arabia, Angola (12%), Iran (11%), Oman (7%), Russia (7%), Sudan (5%) and Iraq (5%).
Strategic Petroleum Reserve phases
China’s SPR plan was conceived in 2001 during the country’s Tenth Five-Year plan (2001-2005) in order to prevent and mitigate damage caused by oil supply disruptions. China’s SPR is to be built in three phases. Phase one construction was completed in 2008 and included four stockpiling facilities with a total capacity of 103.2 million barrels. They were filled with crude by the end of 2010.
Phase two is currently under construction and comprises eight storage sites forecasted at a combined capacity of 207 million barrels. Construction is scheduled to be completed by 2013. The Dushanzi and Lanzhou sites (both with 18.9 million barrels capacity) were completed in the last half of 2011. Reuters reported in March that an estimated 17 million barrels of crude oil, about 190,000 barrels a day, have flowed into tanks in Dushanzi and Lanzhou.
The Tianjin site (22 million barrels) is set for completion this year. Once all eight-phase SPR II storage facilities come online they will have a total capacity of 206.9 million barrels.
Phase three is forecast for a total capacity of over 180 million barrels, which will boost total reserves to 500 million barrels by 2020.
Filling the reserve tanks
Industry experts state that filling of the additional SPR-II facilities could start as soon as they are completed, depending on crude oil prices. However, in February Xinhua reported that high oil prices slowed China’s filling of strategic petroleum reserves. Yet that was on February 21 when oil was $106.25 a barrel. Prices then bottomed out below $90 a barrel in late May, reaching a seven-month low. Prices have gained momentum again and by last week bounced back to $97.26 per barrel.
Zhou Xiujie, an analyst with the China Investment Consulting Corp. told Xinhua that the best time to increase oil reserves is undoubtedly when prices are low, but it”s hard to judge oil price trends.
Lin Boqiang, director of the China Center for Energy Economics at Xiamen University negated the influence of oil prices in relation to filling the SPR.
“Generally speaking, oil prices will head upwards anyway. Therefore, the earlier the oil is purchased, the better,” he said.
Zhou Dadi, a researcher at the Energy Research Institute under the National Development and Reform Commission, China’s top economic planner, said China has room to increase its oil reserves, but should balance the cost of maintaining the reserves with its actual needs.
“Theoretically, the more oil held in reserve, the better, as sufficient oil stocks will help ensure energy security,” Zhou said. He added that it takes money to do that, so oil reserve plans should be made in line with the country’s energy needs.
Chris Faulkner, CEO, of Breitling Oil and Gas, also commented on the price of oil and the filling of China’s reserve facilities.
“They [China] are certainly on an oil buying spree and the increase in their demand is what has been running oil prices back up from their low in May,” Faulkner told Energy Tribune on Tuesday.
“Keep in mind May deliveries were booked in March so China has been planning this buying spree for some time,” he added.
“Total crude supplied to China, which is a blend of their domestic production plus their import numbers, exceeded the amount processed by Chinese refineries by just over 1 million barrels per day in May 2012,” Faulkner said. “This clearly illustrates they are pouring oil in their strategic storage.”