China Plans to Expand Eastern Oil Reserve Storage Delayed by 2 Years

China's state-run Sinochem Corp has started expanding a facility that will become the country's largest oil reserve storage site after a two-year delay due to environmental and safety concerns, local officials and industry executives said.

The extension of the facility is part of the second phase of China's plan to build capacity to store strategic petroleum reserves. The country-wide expansion will take capacity to 270 million barrels from 100 million barrels for oil held to ensure fuel supplies in case of any short-term disruption in global flows.

The site, on Aoshan island off the manufacturing hub of Zhejiang province in eastern China, will eventually hold 50 million barrels, roughly 10 days of net crude imports into China, after adding a 19-million-barrel farm to its existing 31-million-barrel base.

Sinochem Corp, the country's fourth-largest energy firm, in May laid foundations for the phase-two Aoshan reserve tanks that comprise thirty 100,000-cubic-metre depots. Construction is expected to take around 18 months.

"Environmental and safety standards issues and other preparatory work pushed the project behind (its original timetable)," a Sinochem official told Reuters.

Chinahas imported a large volume of crude to fill existing storage tanks in the first half of the year. Calculations based on government data show crude supplied -- domestic crude output plus net imports -- exceeded refinery processing by 420,000 barrels per day (bpd) in the first six months of this year, most of which likely ended in storage.

The demand for storage helped take imports to a record high in May at 6 million bpd.

The pace of imports for storage was likely to slow in the second half of the year, sources said, as existing tanks were mostly full and there was little more capacity.

"They've been pumping oil into the state reserve tanks, almost all of which are full now. I don't think they've got much extra space for that kind of purchase pace in the first quarter," said a Beijing-based trading executive, who declined to be identified due to company policy.

China, the world's second-biggest crude buyer after the United States, filled its 100 million barrels of phase-one tanks in early 2009, taking advantage of the oil market slump to buy during the financial crisis.

Stockbuilding accounted for a large part of the record 710,000 bpd annual rise in China's imports in 2010, a gain of 17.5 percent from 2009. Imports grew at less than half that rate in 2011 at about 290,000 bpd.

China, which eventually aims to meet the OECD standard of stockpiling enough oil to cover 90 days of net imports, has never revealed a full list of the second-phase reserve sites, though Chinese media has pointed to a dozen including Sinochem's Aoshao, which is connected through pipelines to the country's largest oil refiner, Sinopec.

CNPC, parent of PetroChina, started using at least two second-phase reserve sites in late 2011 -- Dushanzi in Xinjiang and Lanzhou in Gansu province, both in the country's landlocked northwest.

Sinochem is one of the state oil firms -- which also include Sinopec Corp and PetroChina -- that the central government has entrusted to build and manage the country's emergency stockpiles.

Apart from the strategic reserves, Beijing has encouraged state oil giants to accelerate building commercial storage, as the country's reliance on foreign crude is poised to surge to 80 percent by 2030, according to the International Energy Agency.

(reuters.com, Edited by Topco)