UPDATE 1-China starts building next phase of oil reserve

* Dushanzi in Xinjiang part of second phase of oil reserve

* Dushanzi is one of eight sites in second phase

* Second phase sites expected to be in landlocked areas

(Adds details)

BEIJING, Sept 24 (Reuters) - China has started building 5.4 million cubic metres of oil tanks at Dushanzi in Xinjiang in its far west as part of the second phase of strategic oil reserves, official Xinhua News agency reported on Thursday.

The project will cost 2.65 billion yuan ($390 million) and will start with a first phase of 3 million cubic metres, which is due to be finished by July 2011, Xinhua said, citing officials speaking at the startup ceremony.

China finished filling the first phase of its strategic oil reserves at the end of last year and has said it plans to stock up on oil when prices are relatively low.

It has completed plans for a second phase of strategic crude oil reserves with capacity of 26.8 million cubic metres or 170 million barrels, after filling the first four storage tanks totalling 16.2 million cubic metres or 102 million barrels.

Citing a researcher with the National Development & Reform Commission, Caijing magazine said on Thursday that China will complete building eight bases under the second-phase plan within three to four years, starting this year.

China will also finish building oil tanks capable of holding 170 million barrels for third-phase strategic petroleum reserves by 2020, it reported, citing the same official, in the first disclosure of the project's timeline.

By adding all three stages, China, the world's second-largest oil user, will have capacity for 440 million barrels of crude oil, or roughly 105 days of net imports at current rate, by 2020.

China has not yet published the names of sites for the second or third-phase bases, but it has said it would prefer landlocked inland regions and underground sites for the second-stage construction.

For a factbox on China's strategic oil reserves, please click on [ID:nPEK162917] (Reporting by Eadie Chen and Tom Miles) (eadie.chen@reuters.com; +8610 6627 1268; Reuters Messaging: eadie.chen.reuters.com@reuters.net))