China Filling Oil Reserves

NEW YORK (THE WALL STREET JOURNAL via Dow Jones Newswires), Jan. 5, 2009

As the U.S. seeks to stockpile oil, China has been doing the same, observers say, and is expected to quicken the pace -- a development that already may be helping to boost oil prices.

On Friday, the U.S. Department of Energy said that amid low oil prices, it aims to fill the country's Strategic Petroleum Reserve to capacity this year.

That news followed a rare public statement last week from China's top energy official, Zhang Guobao, head of the National Energy Administration, in the People's Daily newspaper that China should take advantage of the falling global energy demand to increase its oil reserves. Mr Zhang said China will "encourage companies to utilize idle storage capacity to increase inventories."

Oil prices have been rising lately. On Friday, oil closed up 3.9% to $46.34 a barrel on the New York Mercantile Exchange.

Though China doesn't disclose its oil inventories and reserve capacity on a regular basis, some energy watchers think the country has been building its stockpiles for some time. Despite weaker demand, China has increased crude oil imports in recent months, and "the increase of imports is certainly caused by them filling" the strategic reserve, said John Kingston, global director of oil at Platts, an energy-reporting service of McGraw-Hill Cos.

Paul Ting, a U.S.-based energy analyst, estimates that about 25 million barrels of crude oil have been injected into China's strategic tanks since August.

The U.S. buying isn't expected to significantly affect oil prices over the long term given the magnitude of falling demand. The U.S. Energy Information Administration expects global oil consumption to fall 450,000 barrels a day in 2009, to 85.3 million barrels. The U.S. purchases, expected to be made largely in the first half of 2009, would total 25 million barrels, or about 140,000 barrels a day, for that period.

But the Chinese government's hunger for oil -- which could represent a bigger number -- has more potential to influence prices, some observers say. "In our opinion, China's inventory policy will be a critically important factor in determining global oil price," said Mr. Ting.

The U.S. suspended adding oil to the emergency reserve in May 2008 after oil prices soared to over $100 a barrel. It is widely believed that China stopped its filling efforts after oil prices reached $70 a barrel around August 2007, according to industry observers.

China recently completed construction of four oil-reserve bases -- together representing the first phase of its strategic oil-reserve plan. Those bases can hold 102 million barrels of crude oil, and China is now pushing ahead with the construction of the second phase, which could store an additional 170 million barrels, Mr. Zhang said in the article.

In the next few months, China is likely to fill the fourth base -- in Dalian -- from the first phase, for 19 million barrels, says Kang Wu, a senior fellow who follows China's energy policies at East-West Center, a Honolulu-based think tank.

Meanwhile, hundreds of nonstate oil distributors and refiners in China are currently sitting on what could amount to more than one billion barrels of idle storage capacity, according to the petroleum distribution committee of the China General Chamber of Commerce, an industry group. Massive storage facilities have been built up by oil companies since the mid-1990s after China opened up its oil markets to nonstate and foreign players. However, oil-importing licenses are basically controlled by state-owned companies, and private companies ended up sitting on empty tanks.

Analysts now expect the government might facilitate consolidation between state-run companies and private ones to use the idle capacity. Still, changes aren't expected immediately, given that policy modifications can take time and that storage is often scattered and small scale.

In mid-December, the petroleum-distribution committee submitted a proposal to various government agencies, asking to contribute to the state petroleum reserve, according to Zhao Youshan, the committee director. He said in an interview the agencies have yet to respond.

Copyright (c) 2008 Dow Jones & Company, Inc.


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