China goes underground to expand its strategic oil reserves

By Meng Meng and Chen Aizhu

BEIJING (Reuters) - China is building underground caverns capable of holding up to a quarter of its expanded strategic oil reserves by 2020, as it looks for new storage methods away from expensive and exposed above-ground tanks in crowded coastal regions.

In a move to improve its energy security and take advantage of cheap oil, China is spending billions of dollars to build up strategic petroleum reserves (SPR) to meet up to 90 day's worth of net import demand in case of a disruption.

While many western countries make SPR data public, China rarely gives detailed information on its oil reserves or locations.

So far, China has built almost all of its SPR tanks above ground, but now at least five underground sites have been identified, with one at Huangdao in Shandong province completed and another four under construction, according to local media and several oil analysts surveyed by Reuters.

"Building facilities all on the ground would be like putting all your eggs in the same basket. That is why the government diversified its stockpile centres," said a senior researcher involved in storage design at the Research Institute of Petroleum Exploration and Development, run by China National Petroleum Corp [CNPET.UL].

The official declined to be named because he was not authorized to speak to media.

Despite the cost of drilling the caverns, underground storage can be up to two-thirds cheaper than above-ground tanks, especially as the cost of land surges in coastal regions, and are less prone to potential sabotage, experts said.

"While traditional above-surface storage has the advantage of a shorter construction period, the underground caverns generally have the advantages of lower costs, lower environmental risks, as well as greater perceived level of security," said Wendy Yong, a senior analyst with energy consultancy FGE.

Underground sites are slated to hold about 130 million barrels, which would account for nearly a quarter of the 550 million-barrel SPR target set by Beijing for 2020, according to local media and analysts.

Three underground rock cavern sites under construction are at Jinzhou in northeast Liaoning province, and Zhanjiang and Huizhou in southern Guangdong, all expected to be ready to take oil over 2016 or early 2017, according to industry sources and analysts. A salt cavern has been partially completed in Jintan, in eastern Jiangsu province.

TECHNICAL PROBLEMS

Beijing confirmed the completion of its first underground site, a 19 million-barrel facility in Huangdao in Shandong province, in December when it said its reserves had doubled in the eight months to mid-2015 to 190 million barrels.

However, construction of caverns is taking longer than expected as Chinese builders are new to the technology and challenges such as water seepage during excavations and rock disposal can be daunting, experts said.

Engineers are encountering technical problems in adapting to local geological conditions, resulting in construction delays and the abandonment of one small, pilot underground facility due to oil leakage and high maintenance costs.

"China had a late start on research related to underground oil. In practice we borrowed foreign technologies that don't apply to China's scenario," said Zhuang Duanyang, a researcher at Dalian University of Technology.

Unlike the United States, which stores its vast oil supplies in hollowed-out underground salt domes, China's different geology means it mainly has to excavate hard rock caverns up to 200 metres (220 yards) below the surface, similar to South Korea.

Once the caverns are filled with oil, pressure from water naturally present in surrounding rock prevents it from seeping away, and Chinese officials say the caverns are relatively cheap, long-lasting and require little maintenance.

China has still identified two salt mines, the Jintan site and Qianjiang in central Hubei province that could be suitable for oil storage.

Work is also being carried out at Jintan by companies including PetroChina and Hong Kong's Towngas for gas storage.

(Reporting by Meng Meng and Chen Aizhu; Editing by Henning Gloystein and Richard Pullin)