China’s other reserves

For a rainy day...

Oil is to modern day China what cigarettes are to French cinema: which is to say, essential. And with oil at below $50 a barrel, the Chinese now see this as a perfect time to accumulate supplies.

Most media attention has focused on recent deals with Russia and Brazil. In the case of the former, China signed a supply agreement to buy 300,000 bpd (barrels per day) for the next 20 years. In the case of Brazil, it has signed an agreement for 100,000 bpd.

One thing is certain: China’s lust for oil is not going away. The current lull in Chinese oil demand could reverse as soon as late 2009 – and with it the oil price. The government sees this as an opportune time to bolster energy security. Buying oilfields abroad is one plank of that strategy. For example, late last year Sinopec Group announced it would acquire oil assets in Syria. The fields have proven reserves of 184 million barrels.

The second plank of the strategy is to build a strategic oil reserve. In January the People’s Daily published an article by China’s Mr Oil, Zhang Guobai. “The world economy has slowed down, causing falling resources and asset prices, which makes it advantageous to develop overseas energy resources,” wrote Zhang, who is the national energy bureau director of the National Development and Reform Commission.

Zhang said the government would boost oil imports and accelerate the construction of its strategic oil reserves. In December he targeted 26.8 million cubic metres of oil storage facilities – enough to hold 170 million barrels (which is about the same as the proven reserves in the Syrian fields being bought). According to the International Energy Agency, China consumes 7.89 million barrels per day, suggesting that a strategic reserve of this size would cover 21.5 days worth of consumption. To put that in perspective Japan has reserve cover of 120 days and America has 90 days.

Evidently that isn’t enough. The National Energy Administration has just announced a new target: 44.6 million cubic metres by 2011. That’s roughly 40 days worth of stocks.

In keeping with the bold new plan, construction recently began on a new oil storage facility in Tianjin Binhai New Area, on China’s coast. On completion this will have a capacity of 10 million cubic metres – split evenly between the strategic reserve, and commercial storage. Likewise, a new storage tank facility has been partially opened in Shanshan County, part of the Xinjiang Uygur autonomous region. The oil, which is being imported from nearby Kazakhstan via pipeline, will be stored in tanks that will eventually spread over 32 hectares and have a storage capacity of 8 million cubic metres. The total cost of building the facility is expected to be Rmb6.5 billion ($949 million).

Another planned facility – to be built by Sinopec – is Hebei Caofeidian. According to sources quoted by the China Business Journal this will store 5.2 million tonnes on a site the size of 52 football fields. The most recent announcement proposes an additional giant facility in Gansu.

China started to build its strategic oil reserve system in 2004 and in the same vein it is aiming for independence in oil transportation too. Two years ago less than 10% of crude oil imported to China was carried on the nation’s own tankers. Industry insiders say this has now risen to 20%, and according to the government’s masterplan the figure will be above 50% by the end of 2010. And as in the Gulf of Mexico, some of these super-large tankers may also be used to store oil – at least temporarily, till the storage tanks in places like Tianjin are ready.

The theory is logical enough. Buy oil now while it is (relatively) cheap. Indeed, some pundits think oil could snap back above $100 a barrel as soon as the world shows signs of recovery. From the perspective of China’s planners, the more that they can buy below $50, the better.

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