Filling China's tanks
Beijing is working hard to put its SPR expansion programme back on track
The US may be selling off a substantial amount of its own Strategic Petroleum Reserve (SPR), but China is determined to keep building up its emergency stores of oil. As the White House calls for the sale of 270m barrels of crude from its SPR next year, which would mean the closure of two of four sites on the Gulf Coast, China is pushing ahead with the second stage of a long-term storage plan, now due for completion in 2020, after falling behind schedule. As a study published in July by China's National Natural Science Foundation points out, this would see the construction of eight new sites located in inland regions, most of them near geographically convenient ports serving areas of high demand.
Beijing is also storing barrels in third-party facilities while the second phase of its SPR catches up with the original timetable, which set out to create capacity equivalent to 90 days' net imports, cushioning the country from future energy shocks.
"With national tank farms already mostly filled up, we only have the third-party storage left," Sengyick Tee, senior director of Beijing-based SIA Energy Oil Research and Consulting, told Good StockInvest, a US investment adviser, in August.
But does this mean that China will keep buying oil offshore at the same rate? So far in 2017, imports have been running at almost twice the volumes of 2016, up by 1m barrels to 8m barrels a day, according to a consensus of analysts. It's China that's been propping up crude prices as it boosts its reserves, helping keep Opec's strategy on track.
Mr Tee's view is that imports will slow next year. "As local production cuts stabilise and, given the shortage of storage room for strategic reserves, there won't be strong import demand going forward," he forecasts. Others, such as consultancy Facts Global Energy, take a different view and expect domestic demand to rise sufficiently in 2018-—an increase in imports of about 100,000 b/d.
North Korea factor
However, most medium-term assumptions were made before the stand-off with North Korea. In September, China announced cuts in exports of gas and refined petroleum products to the rogue nation, effective 1 January. According to geopolitical analysts, the tension with North Korea is likely to encourage China to increase its SPR, rather than the opposite, because of its dependence on shipments through the Malacca Strait—the channel linking the Indian Ocean and the Pacific. Nearly 80% of China's shipments of oil—in and out—pass through the strait or the Indian Ocean, and Beijing is nervous of any disruption in that natural maritime pipeline.
Also, the smaller independent refineries—known as "teapots"—may exercise an intriguing and growing influence on import demand. As the Oxford Institute of Energy Studies pointed out earlier this year, there are 121 of these refiners and they account for about 4.3m b/d of the country's downstream capacity, equivalent to slightly less than a quarter. They've grown rapidly in capacity and are hungry for crude wherever they can source it.
Since early 2015, the National Development and Reform Commission (NDRC) has allowed the teapots to import crude, albeit through state-owned buyers, but some can now do so on their own account. Also, in a step further, 10 of these independents have been granted import licences, rather than the more restrictive import quotas. That means, as the OIES' Michael Meidan points out, "these licenses allow them to import directly from the international market without having to go through a state-owned company".
As a result, almost from a standing start two years ago, the teapots have become major players in the import market and have built up independent relationships with a wide variety of crude sources. "With the floodgates opened, crude imports by independent refiners increased by 0.75-0.80m b/d year-on-year, accounting for the bulk of China's incremental crude buying," Meidan adds. And the numbers point to more imports. For instance, at the end of 2016 the NDRC had granted 19 refiners approval to process 1.46m b/d of imported crude.
Simultaneously, the teapots are developing their own import infrastructure, mainly in their home region of Shandong, in the form of extra shipping capacity in ports and the construction of crude pipelines between ports and refineries. Most of these pipelines are expected to start pumping during 2018.
While the study forecasts a squeeze on teapot margins from a variety of factors, notably the rising cost of crude, these increasingly sophisticated refiners are likely to remain an important force in the markets.