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China to complete four oil reserves by year end

Aug 21, 2008 Market Outlook

NEW YORK (MarketWatch) - China, the world’s second largest oil consumer, will complete the construction of its first of four strategic oil reserves by the end of this year, a move analysts believe can eventually help curb oil prices.

“If they can build up reserves in a reasonable pace, it should not have any significant impact on oil prices,” said James Williams, an economist at WTRG Economics, an energy research firm. But “once China has the reserves, it’s good for the rest of world, because without such stockpiles China is more likely to bid up oil prices if there is a global supply disruption.”

The total capacity of the four reserves amounts to 16.4 million cubic feet, or 103 million barrels, Zhang Guobao, administrator of the National Energy Administration, told China’s official Xinhua news agency.

The largest reserve among the first batch of four is in Ningbo, a coastal city in east China’s Zhejiang province. The Ningbo reserve, with a total storage capacity of 32.7 million barrels, has already been put into use in late 2006. The government is selecting locations for the second batch of oil reserves, according to Xinhua.

China started its oil reserves project in 2004 to fend off the risks of price fluctuations and oil imports disruption. Almost half of China’s crude consumption comes from imports. The Chinese government plans to build the oil reserves in three phases over 15 years, involving an estimated investment of about $15 billion.
China consumed 7.9 million barrels a day of crude oil last year, or 9% of the world’s total, according to BP Statistical Review.

By 2010, when the first phase ends, China is expected to accumulate oil reserves equivalent to 30 days of imports, or about 120 million barrels, considering that China’s imports could increase by 5% a year.

The Chinese government didn’t disclose how much oil has already been stocked in its Ningbo reserve. Assuming it has filled up the total capacity of 32.7 million-barrel, China still has to buy about 87 million barrels of oil to complete the first phase and reach the 120 million barrels target. That’s about 120,000 barrels a day, or a bit more than 0.1% of current global consumption.

By 2010, China’s reserve amount will still be only about one seventh of the U.S. level and one third of the reserves held by Japan.

Oil reserves are often built in a period of tens of years with a slow pace to avoid rattling the oil market. The U.S. initiated its Strategic Petroleum Reserve (SPR) program in 1975 after its oil imports from the Middle East were cut off during the 1973-1974 oil embargo. The U.S. SPR, stored in deep underground salt caverns in the Gulf of Mexico, contains 707 million barrels of crude oil as of Aug. 15.

The U.S. Congress passed legislation in May forcing the Energy Department to stop sending oil to the SPR, as lawmakers complained that the buildup of SPR helped push up crude prices. But the U.S. on average only put up about 70,000 barrels a day to the SPR, or less than 0.1% of the world consumption, an amount analysts said is insignificant to oil prices.

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Technorati Tags: Chinese Government, Coastal City, Cubic Feet, East China, Energy Administration, Energy Research, Global Supply, Move Analysts, National Energy, Oil Imports, Oil Prices, Phase Ends, Price Fluctuations, Stockpiles, Storage Capacity, Strategic Oil Reserves, Supply Disruption, Wtrg Economics, Xinhua News Agency, Zhejiang Province

Tags: Chinese Government, Coastal City, Cubic Feet, East China, Energy Administration, Energy Research, Global Supply, Move Analysts, National Energy, Oil Imports, Oil Prices, Phase Ends, Price Fluctuations, Stockpiles, Storage Capacity, Strategic Oil Reserves, Supply Disruption, Wtrg Economics, Xinhua News Agency, Zhejiang Province