With war in Iraq on the horizon, China is attempting to accelerate the long-planned construction of a strategic oil reserve to be stored in the vent of a crises interrupting supplies from the Middle East.

But the central government has yet to find a solution to its biggest problem in building the reserve—who will manage and pay for a project that will cost tens of billions of dollars.

The debate on how to pay for the reserve is worrying shareholders in China’s big three oil companies, which have all been partially privatized with overseas listings in recent years in an effort to globalize local industry.

The government remains the majority shareholder in the companies, Petrochina, the country’s largest oil producer, Sinopec, which dominates refining and petrochemicals, and CNOOC, an offshore oil company.

“The (private) shareholders would not be pleased if they were forced to help fund the reserve and buy crude oil at high prices for security reasons,” said one analyst.

Financing the oil reserve is one of many challenges facing the central government as it grapples with policies to secure long-term energy supplies to furl its expanding economy. The pace at which China has become dependent on foreign oil has surprised and alarmed its leadership since the country became a net oil importer in 1993. China now imports nearly 40 percent of its oil, averaging 1.5 million barrels a day, but only has reserves to last a few days.

Chinese oil demand will double by 2030, with the share of imports rising as high as 84 percent, as local production falls.
The retooling of the refining industry to handle its surge in imports, plus investment in new petrochemical and liquid natural gas products, means that the oil reserves plan is competing for capital with many other projects.

“The time is very urgent for Chins to set up the reserve,” said Dong Xiucheng, of Petroleum University in Beijing.

Mr. Dong and other analysts say an announcement could come after the National People’s Congress meets in March, along with details of an overhaul of the various ministries running energy policy. But he denied that the listed oil companies would be forced to help pay for the oil and its storage.

“They might take part in the project, but with a subsidy or compensation with the government,” he said.

The cost of setting up the reserve cannot be calculated until the government decides how big it will be, and when it will buy the oil, but “anything meaningful” will run into billions of dollars, says a Beijing analyst.

The government is also being urged to resist using the reserve as a hedge against short-term fluctuations in global prices. “This is a reserve to cope with major international crises, not for companies to manage pricing risks,” said Chen Huai, a senior researcher at a think-tank attached to the State Council, China’s cabinet.

Source: www.hoovers.com