Beijing, faced with soaring domestic oil demand at a time of uncertain global supplies, is prepared to dig into state coffers to create China's first strategic oil reserves, industry sources say.
The Asian economic powerhouse, reluctant to have state firms share costs estimated at $1.35 billion, plans to build tanks to store 20 days of supply at four sites by 2010, although the first tanks could be ready by 2006, industry sources said.
After considering the issue for more than a decade, Beijing last year set up the National Strategic Oil Reserve Office under a super ministry, the State Development and Reforming Commission.
China is more vulnerable than ever to disruptions to global oil supplies, with prices striking record highs and major producers in the Middle East pumping near full capacity amid risks of sabotage attacks.
A net oil exporter 11 years ago, the country now imports more than 40 percent of its oil needs, spurred by blistering economic growth that has boosted car sales and sparked regular power outages, a potentially hot political issue.
"The sharp demand growth in the last couple of years made the emergency stockpile a more important issue than ever before," said Deng Yusong, at the State Council's Development Research Centre. China's oil demand is racing at double-digit growth.
"Having strategic oil stocks is like having nuclear weapons. It makes a difference if you have them, and if you don't have them," he said.
MANAGEMENT ROLE: Industry sources said the government preferred not to divide the bill among state oil giants to build the 16 million cubic metres (565 million cu ft) of storage tanks on the eastern seaboard.
Beijing had asked Sinopec Group, CNPC and Sinochem Corp to manage the construction and reward them with a management fee, they added.
"No national oil firm is going to invest in the building of these tanks, nor the purchases of oil. The government made it clear it would be its business only," said a Sinopec source, adding Beijing might issue bonds to finance the oil procurement.
Record crude imports have prompted speculation that Beijing might have been quietly building commercial stocks to boost its supply security, in the absence of strategic oil reserves.
"The central government realised oil companies' top priority would be their own bottom lines, which may not be good for managing the national strategic reserve," an industry official said.
The United States, Japan, the European Union and South Korea, have sufficient emergency stockpiles for up to three months of consumption. The Philippines and Thailand have called for the setting up of Southeast Asian stockpiles.
China, which overtook Japan as the world's second-largest oil consumer last year, has been slow in building its emergency reserves, comfortable in its position as the world's top producer of coal and sixth-largest crude oil producer.
But Beijing's lack of expertise in building and managing stockpiles had stoked speculation that its state oil companies might be asked to contribute to the funding.
ZHENHAI FIRST: Top refiner Sinopec has been commissioned to build the tanks in Zhenhai, and construction is now under way, while Sinochem will manage the ones at Aoshan.
The two groups are also setting up local management teams under the National Strategic Oil Reserve Office, sources said.
The two sites, about 60 kms (38 miles) apart, sit in the thriving Zhejiang province, and have deep-water terminals able to berth 250,000-tonne very large crude carriers.
A total of 52 tanks, each 100,000 cubic metres in size, will be built in Lanshan county, Zhenhai, where a Sinopec unit and the country's largest refinery, Zhenhai Refining & Chemical Co Ltd, is based.
Sinopec is building a separate 12.6 million-barrel tank farm just next to the site of the strategic oil storage tanks.
Industry estimates put the cost of building one cubic metre of storage at 700 yuan, suggesting the total costs for 16 million cu metre of storage would be about 11.2 billion yuan ($1.35 billion).
Sinochem is working on acquiring the land by relocating local villagers to build another five million cu metres of tanks in Aoshan, where the trading firm already operates one of China's largest commercial tank farms.
"Once the relocation part is done. The construction should follow soon," said a source.