China's Oil Imports Soar as Output Declines

An analysis by Michael Lelyveld
2017-05-15
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Tugboats dock an oil tanker on a crude oil quay at a port in Zhoushan, eastern China's Zhejiang province, Nov. 11, 2016.
Tugboats dock an oil tanker on a crude oil quay at a port in Zhoushan, eastern China's Zhejiang province, Nov. 11, 2016.
ImaginaChina

China has quietly climbed to the top of the list of world oil importers as the government maintains silence over the energy security risks.

In the first four months of the year, China's inflows of crude jumped 12.5 percent from a year earlier to 139 million metric tons, or nearly 8.5 million barrels per day (bpd), ranking first among importers, according to figures from China's General Administration of Customs.

U.S. imports averaged less than 8.2 million bpd during the period, based on data from the U.S. Energy Information Administration.

Foreign oil supplies to China eased moderately in April to 8.4 million bpd after hitting a record of 9.2 million bpd in March, while domestic oil production for the first four months fell 6.1 percent to 3.9 million bpd, the National Bureau of Statistics said.

The numbers have pushed China's import dependence to nearly 68.5 percent so far this year. Based on the March figures alone, the ratio briefly topped 70 percent.

China also outranked the United States in the first quarter with imports averaging 8.53 million bpd compared with U.S. inflows of 8.17 million bpd, Reuters and S&P Global Platts energy news said.

The decline in China's domestic output, due to continuing cutbacks at high-cost and older oilfields, suggests that the country has decided to meet its growing demand with increases in imports despite the risks of relying on foreign oil.

On examination, that seems to be the case, although the government has said little or nothing to clarify its policies or strategic choices.

China first crossed the 50-percent threshold of import dependence in full-year results for 2009, when domestic oil production averaged 3.8 million bpd with imports of nearly 4.1 million bpd.

Edward Chow, senior fellow for energy and national security at the Center for Strategic and International Studies in Washington, said that China's risks are rising with the rapid growth of import dependence.

"It's just been going on for too long, in terms of this trend, for there not to be deeper soul-searching," Chow said. "You can't keep letting import dependency go the way it has."

Chow argues that China's energy security risks with long import routes from the Middle East, Africa and Russia are greater than those of the United States ever were before the boom in U.S. domestic production.

"China's position is much more dangerous than that of the United States was at any stage of the game, given that most of our imports were from the Western Hemisphere on short-haul cargoes," he said.

Trend will continue

But higher demand in China suggests the trend will continue.

With China's recovery in economic growth to 6.9 percent in the first quarter, implied oil demand jumped 5.3 percent in the first two months of the year while domestic output continued to stagnate, Platts said.

Before the recovery, China's oil demand for all of 2016 edged up only 2.5 percent, the slowest pace in three years, Reuters estimated. Demand last year rose just 1.3 percent, according to Platts.

In January, the government issued a five-year energy plan that would keep domestic oil production essentially flat at 4 million bpd through 2020, representing a seven-percent decline compared with 2015. The target signaled greater import dependence ahead.

The five-year outlook projected imports of 7.8 million bpd in 2020, a level that has already been eclipsed.

Complicating factors in interpreting China's spike in crude imports include the growth in processing by independent refiners under new government quotas, a near 25-percent March increase in exports of refined fuels, and oil exports to neighboring countries.

But even with those factors, the rapid rise in China's reliance on imports has been faster than analysts anticipated only a few months ago.

"The 9.2 (million bpd) of crude imports is definitely a shocking number," said Harry Liu, an analyst at the IHS Markit consulting group, as quoted by Reuters last month.

Liu estimated that nearly 1.7 million bpd went into storage in March, an amount that he called "way off the chart from any perspective."

The question is critical because the government rarely provides information on storage, inventories or actual consumption, making the risks of import dependence harder to assess.

Official reports typically omit essential data.

In March, for example, the official Xinhua news agency reported that commercial crude oil inventories fell 1.4 percent in February from a month before without citing the volume or the source of the information.

The government has also provided only partial or outdated details on China's Strategic Petroleum Reserves (SPR) since the emergency stockpile was created over a decade ago.

On April 28, the National Bureau of Statistics reported that SPR inventories rose to 33.25 million tons (243.7 million barrels) in "mid-2016," citing 10-month-old data.

china-gas-station-shanghai-nov30-2016-400.jpg
A Chinese driver stands beside his car at a gas station operated by Sinopec, as the China Petroleum and Chemical Corporation is also known, in Shanghai, Nov. 30, 2016. Credit: ImagineChina
Keeping analysts guessing

The lapses in reporting may keep analysts guessing about how much of China's imports is being stored or consumed, but the mid-2016 figure suggests that the SPR may cover as little as 26.5 days of imports at the March rate.

The Paris-based International Energy Agency (IEA) requires members to maintain 90 days' of import coverage in case of supply disruptions. It also urges transparency in reporting SPR levels to promote stability in the world oil market.

China falls short on both counts at a time when oil demand appears to be rising and domestic output is falling, raising questions about its policies and the energy security risks.

Edward Chow said the lack of transparency contradicts the goals of China's cooperation with organizations like the 72- member International Energy Forum (IEF), based in Saudi Arabia.

"What's the point of the IEF if there's not going to be more data transparency?" Chow said.

Despite the concerns, China's official media have said little about growing import dependence, while the government appears to be keeping the energy security issue under wraps.

In one of the few recent reports on foreign oil dependence by the official English-language China Daily in January, a research arm of state-owned China National Petroleum Corporation (CNPC) noted that reliance on imports rose to 64.4 percent of demand last year, up from 60.6 percent in 2015.

The report cited the high costs of oil production in China but did not comment on the energy security risks.

"Under such circumstances, imported oil was more cost effective," the paper said, quoting the CNPC Economics and Technology Research Institute.

Chow said the government's silence on the security issue leaves unanswered questions.

"You would think that it would be so geopolitically significant that very senior policymakers in China would not only be cognizant of it but would be trying to figure out ways to address it," said Chow.

"Is the fact that they don't talk about it very much a sign of very severe concern because they don't have the answer for it, or is it something much more innocent than that?" he said.

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CH. 2: VIETNAMESE | BURMESE | KOREAN

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