China, US to cooperate on strategic oil reserves

China and the United States have signed a preliminary agreement to cooperate on strategic petroleum reserves (SPR), China’s National Energy Administration (NEA) said, marking the first such effort between the world’s top two oil consumers.

Under the agreement, the US Energy Department and NEA will share information on technical, management and policy issues related to oil stockpiles. The pact was forged during a visit to Beijing by US Energy Secretary Ernest Moniz with NEA head Wu Xinxiong. The agencies will hold annual technical meetings held alternately in each of the two countries.

“These activities will allow the two countries to understand each other’s systems and decision-making, which will facilitate effective response to disruptions in the global petroleum supply,” the Energy Department said.

Ensuring a sufficient emergency oil stockpile means more to China after it surpassed the United States late last year as the world’s largest net oil importer. Overseas purchases help meet around 57 percent of China’s total crude oil requirement.

Implications for energy security

China has a strong incentive to find new ways to cooperate with both oil consumers and producers. By the end of 2013, China had a total of 141 million barrels reserve space, a research arm of the country’s top oil and gas producer CNPC estimated in January, which would be equivalent to about 22 days of the country’s net oil imports.

China filled its first batch of SPR tanks totalling 102 million barrels by early 2009 and began building phase-two tanks later in the same year. China finished construction of two reserve bases for the second phase – Lanzhou and Dushanzi in landlocked northwest – in late 2011 and pumped oil into them in the first half of 2012.

In the first half of 2014, Chinese crude imports rose 10.2 percent versus a year earlier, more than double the rate in 2013 despite subdued demand growth for oil. Analysts have said such high imports could suggest stockpiling in commercial storages or even SPR tanks.

The end result of US-China cooperation will depend on the compatibility of the competing visions of how both countries should best obtain energy security. China needs to be brought into the multilateral frameworks and stockpile control mechanisms of IEA and OECD. More than anything else, China needs to establish a true market for energy information.

Frank Uzuegbunam