China warily permits a peek into its oil reserves

NINGBO, China Wed Jun 3, 2009 9:27am EDT

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NINGBO, China (Reuters) - China let reporters into its secretive strategic oil reserve on Wednesday, revealing facilities adjacent to major commercial storage, with managers drafted in from state-owned firms on a tight rein from Beijing.

China has rushed to fill its four strategic oil bases since oil prices fell last year and will now build a second, bigger set of bases to expand its capacity, with the eventual aim of having enough to cover 90 days of imports, three times more than now.

The storage is an important buffer for the world's second largest oil consuming country, which relies on imports for half of its oil -- a share that is expected to grow as more of its huge population gets a taste for driving their own car.

China paid an average of $58 for each of the 100 million barrels that went into the first phase of reserves, a price that might have seemed high two months ago but now, with U.S. light crude trading near $68, looks increasingly canny.

"Why would we not fill our reserves with the crude price so low?" said Zeng Yachuan, deputy director general of policies and laws at the National Energy Administration, during the first visit by foreign reporters to the Zhenhai reserve base.

Another base, Zhoushan, is just across the water on an island in the port city of Ningbo, near Shanghai, while two smaller bases are further north in Dalian and Huangdao.

While all the existing bases are on the sea, some of the future storage will be inland and underground. As well as adding to its crude oil storage, China also plans to store 10 million tons of refined oil products.

Zeng said the oil products reserves would be run separately from the crude oil storage, but did not elaborate.

Zhenhai, the biggest of the four bases, comprises 52 storage tanks, each of 100,000 cubic meters, giving a total 5.2 million cubic meters capacity that can store around 32.7 million barrels of oil, equivalent to 16 tankers of imported crude.

"Fifty of the 52 tanks are full," Zeng said. "Two tanks are not filled in case others malfunction. All the strategic reserves operate like this."

The facility is fed by an underground pipeline from the wharf and sits right next to an even bigger commercial storage area belonging to Asia's top refiner, Sinopec Corp (0386.HK), which runs the nearby Zhenhai refinery, China's biggest.

The storage tanks are identical, save for Sinopec's logo, but the state reserve is fenced off inside a military administered area, with a lack of space for more reserve tanks.

"Look around you. We are right on the coast. There is no room," said an onsite manager with the Zhenhai Reserve Base Company Limited, who declined to give his name.

CENTRAL GOVERNMENT-CONTROLLED

Staff at the facility declined to answer questions about how China manages its strategic reserves.

"We just operate these tanks in accordance with the wishes of the central government," said the same manager.

At the neighboring Zhoushan base, situated on an island just a short ferry ride across Hangzhou bay from Zhenhai, officials referred questions to the central authorities.

"We've been entrusted to run this base, but all the decisions -- the size of the reserve, how much oil is brought in -- are made the National Energy Administration," said Tang Zhibin, vice general manager of the Zhoushan State Oil Reserve Base Ltd.

Zhoushan's island is part of an archipelago dotted with fishing villages and Buddhist temples, now wreathed in mist and the stench of petroleum.

Tang said his facility could be expanded if the government decided to put more storage on the island.

"We have room for more tanks," he said.

Although the crude oil is owned by the state, state-owned oil companies are entrusted to run the storage facilities on behalf of the government. But they're not allowed to sell the oil, and officials on site declined to say whether the stocks were regularly sold and replenished, or kept for the long term.

Asked if the firm could tap the state reserves to top up its own stocks temporarily, Tang said: "That's not permitted."

While Zhenhai nestles by Sinopec's refinery, Zhoushan abuts the biggest commercial oil base of state-owned Sinochem Corp, an oil trader with plans to grow into an integrated oil firm, where Tang worked before being sent to the strategic reserve.

The 1.96 million cubic meter Sinochem base, which is due to be completed by the end of 2010, will store both crude oil and refined products. It is already building up stocks of gasoline and crude oil, Tang said.

(Editing by James Jukwey)

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