With high dependency on imported oil, China needs to continue strategic petroleum reserve buildup

Source:Global Times Published: 2019/3/28 20:13:40


Illustration: Xia Qing/GT

According to a recent blueprint report on China's oil and gas industry for year 2018-19, the nation's apparent oil consumption reached 648 million tons in 2018, up 6.95 percent compared with the previous year, while China's net imports of crude oil rose 10.9 percent year-on-year to 460 million tons. The report also said that China's dependency on imported crude oil was approaching 70 percent last year.

Needless to say, the dependency rate is quite high, but in my opinion, it may still be a conservative calculation. With different sets of statistical indicators, China's dependency on imported oil should have already exceeded the 70 percent mark. More importantly, the government should be aware that such high oil dependency is actually a very unsafe source of risk.

What's even more worrying is that Japan and the US are estimated to hold at least 140 days and 100 days, respectively, of oil stocks based on their net import volumes, while China's current strategic petroleum reserve (SPR) is only equivalent to about 40 to 50 days of the country's net import cover. An internationally accepted practice regarding the SPR is that a country must hold a minimum 90 days of its net import cover for its energy supply security so the country can maintain its normal industrial operations while relying on domestic oil storage in the event of unexpected circumstances. In other words, China's high dependency on imported crude oil would make it awkward to deal with extreme conditions such as wars and natural disasters.

Moreover, the current high dependency on imported crude oil in China is unlikely to see much change in the short term, which is mainly the result of the following factors.

First of all, China's domestic oil fields have generally reached the limits of their oil production capacity, and it is hard to see much room for further increase. Also, China's crude oil output has been on the decline in recent years. According to the blueprint report, the country's crude oil output fell for the third consecutive year to stay at 189 million tons in 2018. There are two main factors behind the declining trend. First, some large domestic oil fields like Daqing oil field are on the verge of depletion. Second, some oil fields may still have some oil reserves, but considering the low oil prices and increasing production costs, it is much cheaper to import crude oil than to produce.

That being said, China may be able to maintain its oil output around the level of 180 million tons, but it is basically impossible to increase the output by a big margin. Statistics also showed that China's remaining proven oil reserves may support the current output level for about 10 years. Of course, there may be some new discoveries during the time, but domestic oil output is unlikely to rise sharply, even with some new reserve discoveries.

As to the demand side, consumption demand for oil is still growing in China. Specifically, the demand from driving is growing exponentially. As a developing country, China will see continuous economic growth, and its per capita car ownership will undoubtedly keep rising. According to the Ministry of Commerce, while the growth rate of auto sales fell by 2.8 percentage points in 2018, China's auto sales still hit more than 28 million, ranking first in the world. With an increase of 28 million vehicles running on the road every year, no wonder oil consumption is bound to rise for the foreseeable future.

The fast-growing energy demand and the declining domestic oil output have resulted in a high dependency on imported crude oil. 

From the perspective of energy security, it is indeed very unsafe, which is why the government has been doing everything possible to promote electric vehicles and hydrogen fuel in recent years. Despite all these efforts, the development of electric vehicles and other new energy vehicles still cannot keep up with the growth of oil consumption demand.

However, it should be noted that the probability of extreme situations is rare, but it doesn't mean we can take no precautions. There is always something we can do to prevent the worst scenario.

For instance, while China has been building up its SPR stocks all the time, it rarely discloses its commercial or strategic oil reserve data, so it is difficult to estimate the pace of its buildup. According to official information, China plans to have its national petroleum reserves at some 500 million barrels by 2020. In 2014, China made its first announcement about the SPR, which then totaled 12.43 million tons. The figure climbed to 26.1 million tons in 2015. It is now generally estimated that China's oil bases are storing about 40 to 50 days of oil use, and it is essential for the country to continue stockpiling toward the target of 90 days of import oil cover in the future.

Another important aspect is public transportation. Great efforts are required to vigorously develop convenient rail transport and raise the cost of driving to encourage environmentally friendly options for travel. 

The article was compiled based on an interview with Lin Boqiang, dean of the China Institute for Studies in Energy Policy at Xiamen University. bizopinion@globaltimes.com.cn


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