ANALYSIS - To Fill or Not to Fill? China's Oil Reserve Quandary
Date: 02-Mar-06
Country: SINGAPORE
Author: Chen Aizhu
Three years ago China launched a strategy to offset its growing reliance on imported crude by building government-run storage facilities estimated at $1.4 billion, a plan that coincided with the start of an oil price rally many analysts say has years left to run.
Beijing is slowly adjusting to the fact that prices may never return to below $40, but it remains reluctant to fill its new tanks for fear incremental purchases will strain global supplies and land China, again, with the blame for soaring prices.
While empty tanks do nothing to enhance the security of the world's second-largest oil consumer, they also do not fan the flames of a market unnerved by geopolitical risks in the Middle East and supply disruptions in Nigeria.
"China's strategic reserve has met some difficulty. You don't want to have too much a market impact when oil prices are this high," said Han Wenke, deputy director of Energy Research Institute (ERI), a Beijing-based government think tank.
The dilemma will be more pressing as China builds more tanks.
The first base, 52 tanks totalling 33 million barrels, will be completed by end of this year in the eastern port city of Ningbo, state media reported on Monday. That includes 10 million barrels of storage ready for use but left empty since last September.
More tanks are being erected in at least two other bases, Zhoushan, also part of Ningbo and Dalian, a port in northeast China, industry officials have told Reuters. The plan could be expanded to southern Guangdong, media reported on Tuesday.
China does not lack the financial means to pay for the oil, which would cost about $6 billion if it were to fill all the 100 million barrels of storage planned at $60 a barrel - less than 1 percent of the country's foreign exchange reserves.
Despite mounting pressure, Beijing is loathe to commit to buying up to 100,000 barrels a day more crude to fill its tanks after China's surprise 15 percent demand rally in 2004 spooked traders and helped push oil to above $50.
Much weaker growth in 2005 failed to rein in prices, which rose by more than 40 percent to touch a record above $70.
The powerful National Development and Reform Commission (NDRC) expects US crude prices to hover around $55 a barrel this year, well above the $40 maximum price a top energy planner indicated in 2004 that Beijing was willing to pay.
PARLIAMENT SESSION
China's parliament, due to convene for its annual session at the end of this week, may debate proposals to bring relief to loss-making state refiners and boost energy conservation.
But few expected the emergency reserve to be high on the agenda given more critical issues like how to lift the living standards of 750 million Chinese farmers, social unrest linked with a widening wealth gap, financial reform and the environment.
That reflects a growing sense that China's strategic petroleum reserve (SPR) - similar to stockpiles set up in the West in the 1970s - is being eclipsed by other energy issues.
Academics such as ERI's Han said the SPR should carry equal weight as domestic supply disruptions, retail pump price reform and overseas oil and gas assets acquisition, another way of offsetting its declining reserve base at home.
"There is no real suspense in it. It's an integral part of Chinese energy security and we are going to fill it," said Han.
Others argue China can afford to wait, and should first tackle its price controls, which severely squeezed refiners' margin last year and led to a supply crunch.
"No matter how the geopolitical crisis deteriorates, we are not going to see supply disruption that will last for a substantial period of time. China still supplies 60 percent of its oil needs," says Chen Wei, a Beijing-based independent consultant and a long-time energy policy observer.
An official at partially privatised Sinopec Corp., Asia's largest refiner, went further.
"Only a big idiot wo
