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China tops up its tanks amid escalating import dependence

China’s escalating dependence on oil imports has spurred the country to pursue an ambitious strategic stockpiling programme that is expected to be a feature of the global oil market throughout this decade

Energy security is driving Beijing’s strategy as it seeks to cushion the blow of potential supply disruptions from the major oil producing regions of the Middle East and Africa.

Aside from supply-cut insurance, the strategic petroleum reserve (SPR), which is operated by the national oil companies, could also to a lesser extent be used unofficially for price smoothing, Kang Wu, a senior advisor to Facts Global Energy (FGE), told Petroleum Economist. The first phase of China’s SPR was run strictly as emergency storage, while the second phase is probably more flexible, says Kang.

China’s SPR plan is broken into three phases with a total capacity target of around 500 million barrels. Hard information about the strategy is difficult to come by. Here’s what we know.

Phase one included 103m barrels of storage capacity built on the western coast. It was filled with crude by mid-2009.

The second phase, stretching from 2011 to 2015, is more ambitious in scope. It comprises a total of 204m barrels of new storage capacity that will largely hoard crude, but also small amounts of products. Geographically, it extends into the eastern inland region and the southern coast.

Two inland facilities, Dushanzi and Lanzhou, each capable of holding 19m barrels, are finished. But more tanks could already be partially operating: there is speculation the build programme is creeping ahead of expectations.

If Dushanzi and Lanzhou are already filled then an additional 69.2m barrels of crude will need to be directed into strategic reserves between the third quarter 2012 and Steadily growing: China’s strategic oil stock needs the end of 2015. Conversely, if there has not been any stock build so far, 106.9m barrels of crude will be needed, says consultancy Wood Mackenzie.

Between June 2012 and end-2015 potential SPR injections are likely to average between 54,000 barrels per day (b/d) and 84,000 b/d, predicts Wood Mackenzie. But when compared with the consultancy’s forecast gains in Chinese oil demand – rising 1.8m b/d to 11.74m b/d in 2015 – the estimated rate of increase in strategic reserves is dwarfed as a factor in the global oil market.

Phase three, envisaged from 2015 to 2020, is under design now, but individual site capacity remains uncertain. The blueprint total capacity for the third phase is expected to be 169 million barrels.

China’s level of emergency stocks on hand is still much lower than that in International Energy Agency (IEA) member countries, which are required to hold a minimum 90 days of net oil import cover.

As of the second quarter 2012, China’s official SPR storage capacity stood at 141m barrels. If, or when, it is fully stocked, it will be equivalent to 28 days of net crude imports, based on average imports in 2011.

When phase three is finished in 2020, expected SPR storage capacity would total 476m barrels, the equivalent to 95 days of current net crude imports today.

But by 2020, crude imports will have jumped by 70% from 2011. As result, China’s SPR in 2020 will be equivalent to around 55 days of net-imports, which is considerably less than public stocks held by the developed Asia Pacific economies, Sushant Gupta, a senior analyst with Wood Mackenzie told Petroleum Economist.

Historically, China’s implied demand for crude has been consistently higher than crude-runs, but that gap hit unprecedented levels this year. China could have imported as much 600,000 b/d more than it refined in the first half at the same time as its economy was cooling.

It would be natural to assume that at least some of these barrels have been directed into the newly commissioned SPR tanks in Dushanzi and Lanzhou. Indeed, most government and trade data supports this theory. Analysts believe China beefed up imports as geopolitical supply risks rose in the Middle East and looked likely to persist, with events in Iran and Syria causing worry.

But there is room for some skepticism. There is no visibility in the split between SPR and commercial storage, which has been steadily increasing in parallel with refining capacity, cautions Gupta.

Additionally, the tanks at Dushanzi and Lanzhou sit inland without seaboard access to foreign oil, unlike the coastal phase-one facilities. Pipeline constraints, particularly from Kazakhstan, would cap the rate of flows into the inland sites. But both locations have access to production from domestic fields.

However, coastal phase-two facilities due to be finished by 2015 will have access to international supplies. Some of these tanks could already be partially operational.

International oil prices are generally the key factor in determining the pace of strategic stockpiling in China, which is generally opportunistic. At very attractive oil prices, even commercial storage may be used to supplement strategic tanks. When oil prices plummeted at the end of 2008, Chinese imports ramped up. The government proudly reported that the average crude price for purchasing oil in the first SPR phase was just $58 a barrel, or roughly half today’s price.

Early this year geopolitical jitters appeared to spur buying despite crude trading at relatively high levels. Brent hit an intraday high for the year above $128/b in early March. Government officials told Petroleum Economist that given today’s environment $90/b would be a comfortable price to fill the second SPR phase. 

Map 1: China SPRs
Map 1: China SPRs
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