China Steps up Efforts in Oil Reserves Building

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Last updated at: (Beijing Time) Tuesday, January 21, 2003

China Steps up Efforts in Oil Reserves Building

China's annual domestic consumption will hit 300 million tons by 2010, while the International Energy Agency expects it to reach 523 million tons. By then the net imports will reach 150 million tons, that is, half of China's oil supplies will be imported.

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As the United States considers attacking Iraq, pushing the oil prices higher, China has again focused on the security of its oil supply.

The recent two events suggest China is accelerating its plans to prevent disruptions to its oil suppies, according to a recent report by China Daily.

The first event was the last minute decision by China National Petroleum Corp (C NPC), the nation's largest oil company, to withdraw from bidding for a stake in Russia's ninth largest oil firm in December.

Analysts said China pulled out to encourage the Russian Government - which does not want to see foreigners take over the firm - to push through a 2,200 kilometre Russia-China oil pipeline.

The oil link could allow China to tap into its neighbour's rich reserves.

In the same month, the State Development Planning Commission, China's top planner, held an international seminar on the country's energy security, mainly focusing on how to build a national stockpile. Paris-based International Energy Agency was among the sponsors.

"You could see the two events as separate, " said a Beijing-based energy analyst, who declined to be named. "I would prefer to see them as linked, as a message that China is on track to safeguarding its oil supplies - that is, to build a stockpile at home and to secure reserves abroad."

In recent years, China has experienced an increasingly volatile situation in terms of oil supply, as demand continuously outpaces domestic output.

"With the rise in oil imports, the oil price hike and a sudden change on the international market would have a great impact on China's economy," said Han Wenxiu, a senior official with the SDPC, in his speech to the seminar.

According to Han, China's annual domestic consumption will hit 300 million tons by 2010, while the IEA expects it to reach 523 million tons. By then, Han said, the net imports will reach 150 million tons. In other words, half of China's oil supplies will be imported.

Adding to China's woes, Han said it relied too heavily on imports from the Middle East. Oil imports from the area now account for over half the total.

"The source and transportation route for those imports will be the major concerns that influence China's energy security, especially when the supply area is considered unsafe," said Han.

To help secure its energy supplies, the government is scrutinizing its plans for strategic reserves, and "strives to implement them soon," Han said.

Some officials have also been calling for a special committee to direct the programme.

Still, several uncertainties may slow down implementation of the plan, insiders have said.

According to a senior government source, who declined to be named, there are differing opinions about the stockpiling strategy, such as the amount of oil needed, when to start building the reserve and, more importantly, how to pay for it.

As for overseas reserves, the question remains how to find a desirable deal at a desirable price.

"We have kept track of dozens of potential deals in past years, but few came off," said Wu Yaowen, a senior official with China National Petroleum Corp.

Wu, who is in charge of the company's overseas business, said a high oil price added to CNPC's profits.

But it also added to the company's risks, he said.

When prices increase, CNPC has to pay more for its overseas supplies, and then wait for even higher prices to sell, if it is to make a profit and not a loss.

High prices, however, will not curb China's appetite for overseas reserves, since the country has been a net importer since 1993.

At present, China controls more than 500 million tons of oil reserves overseas, 5 per cent of its feasible reserves at home.

The government has listed Central Asia and Russia, the Middle East and North Africa, and South America as "three strategic regions" for domestic companies to access.

Zhu Xingshan, an oil analyst with the Energy Research Institute of the SDPC, said Central Asian countries and Russia are first priorities for the expansion plan.

"These countries see the oil industry as vital for the revival of their economies, but they need foreign companies to help tap their rich reserves," said Zhu.

"China has been developing friendly relations with these countries, to help Chinese companies compete favourably with Western companies," Zhu said.

Southeast Asian countries have also become targets for China in recent times because of their proximity which cuts down on transportation, although their reserves will not last long.

"In the long run, the Middle East region is still our most important import source. But we need to diversify," Zhu added.

Ma Fucai, chairman of CNPC, said the company would be more active in seeking opportunities to expand overseas and was exploring possibilities of acquiring, merging, and buying shares in oil reserves abroad.

"Overseas operations make up 60-70 per cent of the total business of a global giant like ExxonMobil," said Ma Fucai in a recent news briefing. "Over the long-term, we are working towards that goal."

To that end, the company plans to produce 35 million tons of oil in overseas reserves by 2005, of which it can obtain 18 million tons based on its equity holdings.

Last year, its overseas output reached 21.2 million tons, with half of it controlled by the company. The entire overseas production represents 18 per cent of the company's total production.

Han said China should also actively take part in energy co-operation in the region, especially with neighbouring countries like Japan and South Korea which are big energy consumers.

"China and these countries have common interests in using oil resources from the Middle East. We should establish a co-operation mechanism to protect our interests, in resource exploitation, offshore transportation and emergency action," said Han.

Officials said the government is developing financial and taxation policies, including a State special fund, to encourage the companies' overseas exploration.

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