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China expands offshore storage facilities to boost oil reserves at significantly lower costs

27 May 2020

Disclaimer: An online translation service was used in the production of the current editorial piece.

The representative of the National People’s Congress and the former party committee secretary and chairman of China State Shipbuilding Corporation (CSSC) has proposed to “speed up the construction of offshore floating oil storage bases and improve China’s oil reserve capacity”.

Liu Zheng made the statement at the recently held CSSC-organised Maritime Watch conference, according to a China Shipbuilding News report published by CSSC on Tuesday (26 May).

In his address, Liu explained that current international oil market trends provide a rare opportunity for China to boost its crude oil reserves.

In recent years, China’s dependence on imported crude oil has increased year on year, reaching 72% in 2019, he said.

As there are increasing risks in global geopolitics, uncertain economies and the threat of natural disasters, the need for China to increase oil reserves is more urgent than ever. 

Significant progress has already been made in the development of China’s oil reserves, but there is still a considerable gap between reserves available and economic demand. 

According to the International Energy Agency’s recommendations, a country’s oil reserves should store at least 90 days of consumption.

In 2019, China’s crude oil imports were 506 million tonnes (Mt), of which 505 Mt were net imports. 

Based on the IEA’s recommendation, in order to reach the 90-day ‘safety line’, China’s oil reserves must reach at least 125 Mt. 

In terms of actual reserves, China’s oil reserves are currently around 40 Mt, which falls short of the safety reserve requirement. 

Liu said China has completed the construction of the first phase of the oil reserve, and the second phase of the project is expected to be completed in 2020. 

However, even with this oil reserve, China’s oil reserve will not exceed 70 Mt, and the reserves still fall short of 50 Mt to reach the safety base line.

Offshore floating oil storage is an ideal solution for China to accelerate the construction of its oil storage capacity as it can be built quickly at relatively low costs, is highly resistant to earthquakes, provides ease in terms of delivery and offloading, and saves on land as a resource, he added.

In his address, Liu provided the following details in support of his proposal:

  • Construction time frame: With a second-hand super-large oil tanker (VLCC) for oil storage the facility can be achieved in a short time. Even a new-build VLCC can be built in 14 months, which is much faster than building an onshore storage facility.
  • Construction costs: Current construction costs of hardware to build offshore storage is 40% lower than its historical high and does not require the acquisition of land.
  • Safety concerns: Floating oil storage can avoid geological instabilities such as earthquakes. It is also at a safe distance from cities and residential zones which reduces its threat to society.
  • Timing and opportunity: 
    • Due to market forces, political factors, and the COVID-19 pandemic, international oil prices have plummeted to USD 30 per barrel.
    • These uncertainties make it difficult to forecast future prices, but it is generally agreed that due to the shrinkage in the global demand for crude oil, it will be difficult for oil prices to break through USD 40 per barrel in a significant way for the rest of 2020. 
    • However, in the medium and long term, oil prices will not deviate from its true value and international oil prices will increase in the future.
    • After 2021, we expect oil prices to exceed USD 50 per barrel.
    • So for example, if we take a VLCC that can store 2 million barrels of crude oil, and we take into account USD 20 in price difference per barrel, establishing a VLCC floating storage right now could save China’s oil reserves USD 42 million. 

Liu concluded current market forces would reduce the overall costs of purchasing and storing oil reserves  for Chinna and would provide a solid foundation to guarantee energy reserves for any future economic development. 

Photo credit: China State Shipbuilding Corporation
Published: 27 May, 2020


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