x Abu Dhabi, UAEFriday 21 July 2017

China's oil reserves 'lower than sufficient'

China must increase its oil reserves in the face of heavy predicted growth in demand as economic expansion continues, says a senior official.

BEIJING // China must increase its oil reserves in the face of heavy predicted growth in demand as economic expansion continues, says a senior official. Chen Geng, a member of the National People's Congress, said the country would have to significantly increase imports and safeguard supplies, with annual demand expected to jump from 400 million tonnes last year to 550 million tonnes in 2020, while domestic supplies stagnate.

Speaking to the online magazine China Energy News, Mr Chen, a former general manager of China National Petroleum, the country's largest oil and gas producer and supplier, said China could not rely on increases in domestic output because the country's oil production would remain flat at 200 million tonnes for the next decade. "Current state crude reserves are far lower than sufficient," he said. The country should increase stockpiles of strategic crude oil reserves and import oil from a wider range of sources, Mr Chen added.

Last year, China produced 190 million tonnes of crude oil, but imports were slightly higher at 204m tonnes. Early last year, China filled a 102 million barrel initial phase of strategic crude reserves and building work has begun on a second phase. Yesterday, Bloomberg announced that China had started construction work on oil storage bases in the cities of Zhanjiang and Huizhou, in the southern province of Guangdong. Other storage tanks are being built in the north-east of the country and the western province of Xinjiang, with the total capacity climbing to 170 million barrels.

However David Johnson, the Hong-Kong-based head of oil and gas Asia for the Royal Bank of Scotland, said such stockpiles were a potentially expensive way of maintaining oil security. "They are building large-scale tankage in which they will put various strategic reserves," Mr Johnson said. "They haven't got facilities like the US, where they have holes in the ground where they pump oil in, [so] they're building separate tankage."

Mr Johnson said the experience of the US, which he said had paid a heavy financial price to maintain its own stockpiles - partly through interest charges on the purchase of the oil - meant that China "was not totally keen" on storage as a solution to ensuring energy security. As a result, he said it could be difficult for China to justify further growth above what had already been announced. "One hundred million barrels at US$80 a barrel, it's a lot of money to leave lying about dormant," he said.

This helps explain China's acquisition of foreign oil reserves, he said, with the country having purchased stakes in a series of foreign oil companies last year to cope with growing demand. Such initiatives had several advantages over simply increasing stockpiles, Mr Johnson said. "The good thing is that funding is not so high, and as you're producing it, you're making money," he said. "Already people like Sinopec [a Chinese oil company headquartered in Beijing] are buying reserves to grow their company's business, [but] it's also mooted the government is pushing them a bit, saying 'these are our strategic reserves in effect'.

"In the UK, for example, they've never had strategic reserves - they just point to the North Sea. China cannot point to offshore China, but in a crisis [oil from overseas investments] can be delivered to China." Mr Johnson said he thought it unlikely that Mr Chen's comments would lead to a change in China's relative reliance on storage and overseas reserves. Another National People's Congress member, Wang Yuying, told China Petrochemical News, a Sinopec in-house newspaper, the country should build up state reserves of refined fuel products. There should be two weeks of domestic demand of diesel, petrol and jet kerosene held in reserve, according to Mr Wang, formerly a senior official at Sinopec Yanshan, a Sinopec subsidiary. Stockpiles this year should be 8.6 million tonnes, growing to 11.1 million tonnes in five years, he said.

Last year's economic stimulus initiative included a plan for 10 million tonnes of reserves of refined fuel, according to reports. Although China is diversifying its oil supply base, the Middle East remains the country's largest oil provider, having supplied the world's most populous nation with 92 million tonnes in 2008. The same year, 97.3 per cent of the UAE's oil exports went to the Asia-Pacific region. Japan was the largest importer of UAE oil, securing 41 per cent of exports, with much of the rest going to China, although Opec's Annual Statistical Bulletin 2008 did not specify the exact amount.

* with Bloomberg and Reuters @Email:business@thenational.ae