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China acts to secure oil reserves

(AFP)
Updated: 2006-04-25 09:22

Beijing's desire for a Saudi-fed strategic oil reserve in China underlines the Asian nation's drive to secure crude supplies amid rocketing energy prices, analysts?in London?said.

However, they added that any deal between the two nations was unlikely to put pressure on global crude inventories.

Chinese President Hu Jintao discussed a proposal to set up an oil stockpile in China during a weekend visit to Saudi Arabia, a Chinese official said Sunday.

China plans to fill the first of its strategic oil reserve facilities by the year end, a senior planning official said in March, adding that three other reserves would be ready in 2007-2008.

China had planned to begin accumulating oil reserves, which are to be used in the event of an emergency, last year.

However with oil prices soaring to record high points -- New York crude matched its record high of 75.35 dollars per barrel on Monday -- China has been forced to delay its plan by almost two years.

China knows it cannot delay for ever with its energy demand accelerating owing to the country's economic boom. Consumption of oil in China is forecast to jump 6.0 percent this year after consumption of 6.4 million barrels per day in 2005.

"The Chinese authorities are quite familiar with how their domestic production is being outstripped by demand, and that there's always going to be a measure of vulnerability and reliance on foreign production," Global Insight analyst Steven Knell said.

"Having strategic reserves creates a buffer that will allow them to mitigate some of the sharper consequences of that reliance should there be any disruption of supply," he added.

The China-Saudi plan was raised during Hu's talks with King Abdullah on Saturday and both sides want to see it through, the Chinese official told AFP, requesting anonymity.

The reserve would be on top of the oil supplies Saudi Arabia exports to China for its daily needs.

Saudi Arabia is the world's biggest exporter of crude oil and the biggest supplier to China, which imports about 15 percent of its oil from the Arab nation.

Knell said he believed such a tie-up between the two countries would unlikely hurt major oil consumers such as the United States and Europe.

"Given the volume of this facility, I don't think it's going to make such a difference. It will come as a separate delivery, on top of the current demand, but the scale will not result in major shortages elsewhere or compromise other deliveries," he said.

"The most profound impact will be on the Chinese domestic market. This is another contribution to the reserve capacity that they've thought for some time and they've actually been vulnerable for so long that this makes a very positive step for the stability of their energy balance."

According to the Chinese spokesman, the reserve would be set up in a coastal city in southeast China.

The official did not say how much oil would eventually be stockpiled. But he said Riyadh and Beijing were discussing the feasibility of the plan and ways of cooperating to carry it out.

Calyon analyst Mike Wittner doubted also that there would be any major impact on global supplies, and therefore prices.

"I don't think it has any significance for the short-term market, and perhaps not even for the longer term," he said.

"Saudi Arabia is already a large and growing supplier of Chinese crude oil imports, and this is a logical development and a logical extension of that trend," he said.