VZCZCXRO4766
PP RUEHAST RUEHCN RUEHGH RUEHHM RUEHLN RUEHMA RUEHPB RUEHPOD RUEHTM
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DE RUEHBJ #1058/01 1110651
ZNR UUUUU ZZH
P 210651Z APR 09
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 3574
RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
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INFO RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE PRIORITY
RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
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UNCLAS SECTION 01 OF 03 BEIJING 001058 
 
STATE FOR EEB/ESC/HENGEL, EEB/ESC/PSECOR/JKOPP, EAP/CM/HABJAN/FLATT 
 
TREASURY FOR OASIA/ISA 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ENRG EPET ECON SENV CH
SUBJECT: China/Oil Reserves: Active Purchases, But Facilities 
Filling Up 
 
Ref: 08 Beijing 4603 
 
¶1. (SBU) Summary.   Beijing is taking advantage of lower oil prices 
to build up its strategic petroleum reserves (SPR).  The four 
existing SPR facilities - which hold the equivalent of about 25 days 
of imports - reportedly are now full, challenging China's ability to 
continue purchasing oil for reserves.  Industry associations have 
submitted proposals to the government offering short-term reserves 
storage, including in private oil company tanks and offshore 
facilities.  But these proposals, which appear to be aimed at 
garnering financial support for industries affected by the economic 
crisis, have not gained traction among policymakers.  By 2011, China 
plans to construct enough new facilities to nearly triple its SPR 
capacity to the equivalent of 70 days of imports.  Officials have 
indicated that China plans to eventually meet OECD-level SPR 
standards, bringing China up to the 90-day requirement for 
International Energy Agency (IEA) participation.  End Summary. 
 
SPR building Phase I complete, moving to Phase II 
--------------------------------------------- ---- 
¶2. (SBU) According to National Energy Administrator Zhang Guobao, 
China aims to take advantage of lower oil prices amid the global 
economic crisis to build its strategic petroleum reserves (SPR). 
China's first phase of SPR facilities, for which construction began 
in 2004, are located at four sites along China's coast in Zhenhai, 
Aoshan, Dalian, and Huangdao.  According to press reports, these 
sites are now operating at full capacity and China plans to build an 
additional eight SPR bases by 2011 under Phase II of the 
government's SPR development program.  Once completed, this will 
increase total SPR capacity from approximately 103 million barrels 
(equivalent to about 13 days of consumption or 25 days of imports) 
to 281 million barrels (35 days/70 days). 
 
¶3. (SBU) Chinese media reports claim that most of the new SPR 
facilities will be built along the coast, although inland sites, 
including Lanzhou, Wanzhou, Shanshan, and Linyuan are also being 
considered.  According to Anbang News, China National Petroleum 
Corporation (CNPC) has already "quietly" begun construction of SPR 
and commercial reserves tanks in the Tianjin Binhai New Area.  The 
National Energy Administration (NEA) declined to discuss SPR 
construction plans with Econoffs. 
 
China's oil reserves - a multi-tiered system 
-------------------------------------------- 
¶4. (SBU) National Development and Reform Commission-affiliated 
Energy Research Institute (ERI) Center for Energy Economics and 
Development Strategy Assistant Director General Gao Shixian, told 
Econoff April 17 that China's crude reserves system is best 
understood as a multi-tiered mechanism composed of central 
government-funded "national" SPR bases, national oil companies 
(NOCs') reserves facilities, and commercial reserves facilities 
owned and operated by private oil companies, which primarily run 
smaller-scale refining operations and store refined oil products 
destined for gas stations. 
 
¶5. (SBU) China's national SPR facilities are built and operated by 
Chinese NOCs, although the government retains decision making 
authority on SPR management.  According to Cambridge Energy Research 
Associates (CERA) China Energy Director K.F. Yan, during Phase I, 
Sinopec held responsibility for construction of the Zhenhai and 
Huangdao facilities, while CNPC built those at Dalian, and Sinochem 
constructed facilities at Aoshan.  In a conversation with Econoff on 
April 20, Yan said he expects Phase II construction to proceed 
quickly, with some facilities to be completed as early as the end of 
this year, but acknowledged that it is difficult to track progress, 
as few details have been released by the government. 
 
¶6. (SBU) Both Yan and Gao noted that Chinese NOCs (PetroChina, 
Sinopec, and China National Offshore Oil Corporation) are required 
to maintain a government-set level of reserves at all times through 
a "mandatory corporate petroleum reserves" system established in 
¶2007.  Although mandatory corporate petroleum reserves are not 
considered SPR, Chinese NOCs would be obligated to supply oil from 
these reserves to the central government in a crisis situation. 
According to CERA's Yan, these reserves are managed by the NOCs, 
which have the authority to designate volumes and timing of releases 
of stock with government approval. 
 
BEIJING 00001058  002.2 OF 003 
 
 
 
Private companies offer to lease facilities for SPR use 
--------------------------------------------- ---------- 
¶7. (SBU) Low global energy prices put China in a good position to 
build SPR, however, given that China has already exhausted its 
current SPR capacity, its ability to continue to purchase oil at low 
prices will be limited until new SPR facilities come online.  In 
early March, Zhao Youshan, head of the Petroleum Distribution 
Committee of the China General Chamber of Commerce, an industry 
group, reportedly submitted a proposal to government agencies 
recommending the use of facilities controlled by private oil 
companies to store SPR.  Zhou stated in his proposal that China's 
more than 600 private oil companies have 230 million tons of storage 
capacity, well beyond the combined capacity of the eight proposed 
new SPR bases.  Last year's combination of high international oil 
prices and low, government-set retail fuel prices reportedly left 
many private oil companies broke and survivors are now struggling 
with the high maintenance cost of empty tanks. 
 
¶8. (SBU) According to Guan Qingyou of Tsinghua University, using 
idle private tanks to store SPR could help China build its SPR at a 
low cost while helping private refineries pull through the 
recession.  Most analysts remain skeptical, however, and it does not 
appear that this proposal is gaining traction among policymakers. 
ERI's Gao told Econoff that private oil companies are now facing a 
situation in which they can earn greater profits by leasing their 
fuel storage tanks to the government or the NOCs, but their 
facilities are designed for holding refined fuel products and they 
are spread throughout the country, which makes them less practical 
as SPR facilities.  CERA's Yan agreed, noting that most private 
companies own smaller tanks, which are less efficient and 
cost-effective than the large-scale tanks at existing SPR 
facilities. 
 
China Shipping Group floats other SPR storage ideas 
--------------------------------------------- ------ 
¶9. (SBU) Li Shaode, China Shipping Group President, told the media 
in early March that he had proposed the government use some of its 
foreign exchange reserves to purchase "floating SPR storage 
facilities" because the onshore tanks were full.  Li's proposal 
gained a lot of attention in the Chinese press, which highlighted 
that the plan would eliminate the need for additional land use while 
stimulating iron, steel, ship building and other industries that 
have been hard hit by the global economic crisis.  ERI's Gao 
dismissed the idea, however, explaining that China, like other 
countries, would be unlikely to store its SPR offshore.  Yan agreed 
that he could "not envision the Chinese government using retired 
tankers to store SPR for both security and practical reasons." 
 
China to reach IEA reserves requirement level? 
--------------------------------------------- - 
¶10. (SBU) An April 14 Bloomberg report citing a CNPC newsletter 
stated that, according to NEA Chairman Zhang Guobao, "(China's) 
ultimate reserve target is to meet the level of countries in the 
Organization for Economic Cooperation and Development (OECD)." 
Reaching this goal would be tantamount to meeting the 90 days of oil 
imports reserves requirements for membership in the International 
Energy Agency (IEA). (Note:  China currently participates in many 
IEA activities, but it has not expressed an interest in pursuing 
membership at this time. End Note).  ERI's Gao said he was not aware 
of Zhang's statement, but offered that this target would not likely 
be reached until at least 2015 or 2020.  Japanese Ministry of 
Foreign Affairs Economic Security Division Director Tamaki Tsukada 
told Econoff on April 16 following consultations in Beijing that a 
Chinese analyst informed him that China already has 50 to 60 days of 
reserves if both national SPR and NOCs' mandatory reserves are both 
taken into account. 
 
Comment:  SPR remains a sensitive issue 
--------------------------------------- 
¶11. (SBU) The Chinese government continues to view SPR as a highly 
sensitive security issue.  Chinese policy makers, in particular NEA 
Chairman Zhang Guobao, remain deeply suspicious of international 
markets and continue to blame speculators for last year's spike in 
international commodities prices.  That said, recent domestic media 
coverage of China's plans to implement Phase II of its SPR 
development plan and Zhang Guobao's decision to state publically 
 
BEIJING 00001058  003 OF 003 
 
 
China's intentions to build SPR while prices are low indicates that 
some efforts may be underway to increase transparency on this issue, 
at least at a very basic level. 
 
PICCUTA