Strategic oil reserve to moderate prices
(Shenzhen Daily/Agencies)
Updated: 2005-02-02 15:35

A strategic petroleum reserve, which China planned to start building in August, would not be reserved solely for emergencies as government planned to use it to moderate prices as well, a leading trade publication said, quoting industry officials.

“This will definitely be used as a mechanism to manage prices,” said a senior official at China Petroleum & Chemical Corp, or Sinopec Corp.

The government planned to allow State-owned companies to draw on the oil reserve when prices breached a yet-to-be-determined ceiling, and this was strongly supported by the refiners, the Petroleum Intelligence Weekly reported in its latest issue.

“Everyone knows we need the crude. The strategic petroleum reserve can be a way for us not to be subjected to exorbitant prices,” one refiner said.

“It’s all about protecting our own industry, our own people,” said a second refiner.

Guided by recommendations from the International Energy Agency, China will initially create a reserve to cover 20 to 30 days of refinery demand.

The strategic petroleum reserve program by the world’s second-largest oil consumer would then take in 110,000 barrels a day of oil through 2008, and possibly as much as 250,000 barrels a day through 2015, the report said.

The government is funding the US$1.6 billion construction costs and paying for the oil to fill the reserve and will pay the companies to manage the facilities.

State-owned parents of Sinopec and PetroChina Co are expected to foot the final bill.

Anxious to limit the effect of the strategic petroleum reserve build on spot prices, Sinopec, PetroChina and trading house Sinochem are seeking extra term contracts with Middle Eastern and West African crude oil producers.

Heavy, sour Mideast crude would fill facilities managed by Sinopec and Sinochem, while PetroChina’s Dalian tanks could take a higher percentage of West African crude, most likely from Angola, Nigeria or Congo, local sources said.

As the strategic petroleum reserve will be located next to China’s four biggest refining centers, they will be easy to operate as auxiliary stocks that Sinopec and PetroChina can rotate through their own system.

Sinopec will start filling a 10-million-barrel tank farm in August next to its Zhenhai refinery in Ningbo, located in East China’s Zhejiang Province, and will raise the capacity to 22 million barrels by October 2006.

Construction has also started on three other sites to create a capacity to hold 100 million bbl of oil by the end of 2008.

But refiners stress that all legislation governing the operation, emergency release and even the final size of the strategic petroleum reserve is still in the draft stage and may not be finalized until May.

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