China has announced that it is suspending its oil stockpiling program until new storage facilities are in place. Beijing puts a premium on energy security to protect its growth, and hence its stability. Its oil stockpiling program is an integral part of guaranteeing this security.
China will suspend oil stockpiling until new storage facilities are constructed to provide for the second phase of the country's strategic oil reserves plan, Vice Chief of the Policy and Regulation Department at China's National Energy Administration Zeng Yachuan said June 3. Zeng's statements followed a rare tour of China's strategic oil storage sites in Zhoushan and Zhenhai, Zhejiang province, given to foreign and Chinese reporters June 3. Effectively, China is claiming that the first phase of its strategic oil storage program — which called for 100 million barrels, or about 30 days worth of imports, to be stockpiled in case of emergencies — is complete. Energy security is a high priority for the Chinese leadership given that China's economic growth, and in turn its socio-political stability, depends on a steady stream of energy supplies. Beijing is interested in having a strategic cache of oil to resort to in case of a crisis scenario, such as a disruption in supply from the Middle East or Africa. But it is also interested in gaining the ability to use its weight in commodity markets to affect global prices, perhaps to attempt to mitigate the negative domestic effects that could result from soaring oil prices like those seen in early 2008. Throughout the global financial and economic crisis, low global oil prices have enabled the cash-rich Chinese to pursue their plans for bulking up oil reserves more aggressively than they had previously (though admittedly, they also were purchasing oil for stockpiles while prices were high in the first half of 2008). China's strategic oil stockpiling plan consists of three phases, with the ultimate goal of stocking 90-100 days worth of China's total oil demand — or about 730 million barrels, roughly equivalent to the capacity of the U.S. Strategic Petroleum Reserve (SPR). The first phase, now allegedly complete, consisted of filling existing storage facilities at four different locations, reaching the goal of about 100 million barrels. But the actual tally of oil currently stored is roughly 87 million barrels, including Zhoushan, reportedly full with 31.45 million barrels; Zhenhai, reportedly half full with 16.35 million barrels; and Hungdao, Shandong province, and Dalian, Liaoning province, reportedly together holding 38.99 million barrels out of a capacity of 21.9 million barrels apiece. If 87 million barrels currently in storage is an accurate count, then China has amassed something in the vicinity of 60 million barrels since May 2008, making for a relatively rapid fill-rate of roughly 165,000 barrels per day during that time. This corresponds with estimates that China funneled about 25 million barrels into its reserves between August and January. This estimated filling rate is considerably higher than the various rates at which the United States filled the SPR. The actual filling rate may have been a bit slower, as perhaps suggested by the fact that the Huangdao storage site was filled at an average rate of about 27,700 barrels per day since April 2007. But the estimate reflects how during the period of low global demand for oil caused by the recession, China has been taking advantage of its cash flow — and much of the rest of the world's need for cash — to buy oil at bargain prices. Flagging Chinese oil consumption also has helped make more oil available for reserves. Beijing hopes to add another 169 million barrels in 2009 for the second phase of its oil stockpile program, but the announcement today that purchases will stop raises questions as to how that plan will be affected. The Chinese may feel that oil prices, which surged in May back above $60 per barrel, are getting a bit too high to maintain purchases at the rapid clip possible when demand was lower in past months. Because China's suspension of purchases of well more than 100,000 barrels per day could have a mild downward effect on global prices, Beijing may also be testing its ability to affect global oil prices by ramping up, or ramping down, its imports. But ultimately, the decision to halt or continue purchases is up to the central government. The more fundamental challenge facing Beijing in the second phase of its oil stockpiling program will be the attempt to create underground storage facilities. Phase one of China's strategic reserve has depended entirely on steel storage tanks that are expensive to build and maintain; the subsequent two phases also are likely to depend mostly on steel tanks. Relying on these tanks is certainly feasible, as Japan with its 320 million barrels of stockpiled oil has shown. But it is costly, and doing so creates problems with finding space to build new ones — something Chinese officials pointed out during the media tour on June 3 — and can lead to the corrosion of crude supplies due to chemical reactions with the metal in the tanks themselves. Beijing also hopes to make use of mined rock caverns, and reportedly salt domes such as those used for strategic oil reserves in the United States, in the second and third phase of the Chinese stockpiling program. While mined caverns have been converted to oil storage sites before — South Korea has sheltered about 59 million barrels of its 74 million barrel of total petroleum reserves in such mines — the mines suffer from a high degree of cracking that can lead to loss of oil and an array of environmental problems like groundwater pollution. The United States was forced to close its only rock mine storage site in 1994 due to the risk that it would flood local water supplies. As for salt domes, the gift from heaven for the U.S. strategic reserves, China will run up against geological and geographical limitations. According to the U.S. Geological Survey, the Jianghan Basin is China's only salt deposit suitable for oil storage. But it is located in Hubei province, hundreds of miles from China's manufacturing (and oil-consuming) bases along the coast.