Chinas Oil Reserve Plans Stuck in Pipeline

2003-12-10
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Recent shortages highlight need for strategic and commercial stocks

China's attempts, begun a decade ago, to address its energy security needs by building a modest strategic crude oil reserve, have yet to take flight, in spite of spreading energy shortages which have left major cities reeling in recent months.

Edward Morse, an adviser at Hess Energy Trading Co. in New York, told RFA's special correspondent Michael Lelyveld that both government and major oil companies had failed to predict runaway oil demand accurately.

"It's a failure of planning in that you lay out a plan that says we're going to have gasoline demand increases of two, three, or four percent, but you provide freedom for the consumer to buy as much as the consumer wants in the way of cars or in the way of gasoline, and the plan has nothing to do with the market economy that's emerging next to it," Morse said in a recent interview.

China's oil imports rose by 30 percent in the first three quarters of the year, while imports of fuels jumped by nearly 55 percent because of soaring demand. Automotive fuels now account for over 40 percent of China's oil use, according to the World Markets Research Center in London.

The government has responded by accelerating its plan for setting up a strategic petroleum reserve, a stockpile that could provide oil in emergencies. Western countries have had similar reserves for over 20 years. The companies also plan to establish three new commercial fuel depots in Shanghai, Tianjin, and Guangdong province.

But experts say the modest target for a reserve outlined last year would barely sustain the market for a week in the event of external shocks like the war in Iraq. What's more, the government and the oil companies are still at odds over who will carry the costs of building the reserve.

Last year, officials said the reserve would be planned to last 25 days, far less than the standard of 90 days recommended by the Paris-based International Energy Agency (IEA) for western countries. But because China's energy usage has been growing so fast, the reserve of 5 million tons would last even less time. According to IEA figures, it could cover as little as 13 days of net imports at current monthly rates and only a week's worth of consumption.

Meanwhile, six months have passed since the announcement of a new Energy Bureau in the reform-focused State Development and Reform Commission (SDRC) without news of its activities, although it was supposed to be coordinating energy planning.

Instead, on Dec. 1, Xinhua reported that the Land and Resources Ministry would launch a year-long study of China's oil and gas reserves next April, a move that suggests yet another delay in the country's long-awaited energy policy.

Philip Andrews-Speed, China energy expert at the University of Dundee, said the commercial depots were a basic requirement for the energy market to function efficiently. "These are just commercial depots that any commercially-orientated oil company should have, wherever they're operating in the world to cope with small discontinuities and to manage demand," he said.

The strategic oil stockpiles were a government issue, he said, and yet the government has so far stuck to exhortations to its oil majors to secure more lines of supply back into China. This, they have so far proved unwilling to do, citing lack of cost-effectiveness. Many upstream companies instead find local customers for oil they produce overseas.

Industry officials are expecting strong demand for gasoline and other fuels to continue through the coming Lunar New Year. Platt's Global Energy news service has said the government is also considering a plan to do away with its quota system for fuel oil imports next year because of high demand, giving independent refiners more flexibility.

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