Chinese refinery capacity is going to be surplus

Capacity of energy supply in China is going to be surplus. Significant supply shortages of fuel or electricity were frequently seen during past high demand seasons in the country. It was the adverse effect of the fast growth of economy. Although growth of petroleum demand has been slowing down apparently in a past couple of years, new refining facilities are installed based on the forecast that the demand would continue to increase on the previous pace.

Total crude oil processing capacity in China was estimated at 10.8 million barrels per day as of end-2011. It had increased to 11.5 million bpd a year later. Currently the country seems to have 12.3 million bpd of crude oil processing capacity. Utilization rate of the refineries were nearly 90% in late 2011 and late 2012. But it might have been decreasing to below 80% at moment.

Crude oil processed in November fell 0.6% from a year ago to 9.81 million bpd, according to the National Bureau of Statistics of China. It was the second time year-on-year decrease in this year.

Many organizations are estimating Chinese petroleum demand. But some of those numbers might have been overestimated.

Monthly Chinese petroleum demand figures estimated by the United States Energy Information Administration have exceeded the 10 million bpd level consecutively since April 2012. However, monthly apparent petroleum demand in China calculated by Platts have hovered below the level since March this year.

I am also calculating Chinese petroleum demand with considering a change of stockpile as well. The numbers are even lower than Platts, since stockpile of petroleum products are sometimes significantly risen when crude oil processing is increased.

The level of 10 million bpd seems to be a barrier against the growth of Chinese petroleum demand now. If refining facilities will be added by several percent from the previous year, utilization rate could sink to the middle of 70% level in 2014.

Energy outlook urges US crude oil exports

Crude oil production in the United States has risen to the 8 million barrels per day level from about 5 million bpd in mid-2000s due to the shale revolution. Recently, cancellation of the crude oil export ban is discussed aggressively. A long-term outlook for the energy released by the U.S. government is also seems to be revised in order to encourage such trend.

The U.S. Energy Information Administration recently announced an early release version of "Annual Energy Outlook 2014". The annual report is usually announced in the second quarter every year and its early release is published in the end of prior year.

The most remarkable change from the previous year's edition is significant upward revision of petroleum production. Although natural gas output is upward revised year by year, the change of petroleum production from the 2013 edition in this time is much noteworthy.

Meanwhile, forecasts for the demand of petroleum had been already drastically changed in the 2013 edition from the previous steady upward tendency to the gradual down trend. The down trend is amended further down in the latest edition. On the other hand, natural gas demand is consecutively upward revised every year.

The long term outlook might have be set based on the government's policy. The change of AEO 2013 edition suggests that the U.S. government has changed the country's main energy resource from petroleum to natural gas in 2012. The change in the 2014 edition seems to promote the cancellation of crude oil export ban as well.

Petroleum demand in the U.S. is seen to shrink long-term, while domestic crude oil production is predicted to raised. However, imports are likely to continue since the domestic supply is not able to cover the entire demand. Meanwhile, the declining demand could hamper construction of new petroleum stockpile facilities. If steady domestic production and imports increase regional stockpile to the critical level in the future, exports could be a promising option to control the stockpile level.

Meanwhile, natural gas supply in the U.S. was expected to exceed the domestic demand after 2022 in the AEO 2012 edition, but the situation has been revised to happen in 2017 in the 2014 edition. The U.S. government is currently aggressively authorizing natural gas liquefy and export projects that are scheduled to start in late 2010s.

Nuclear power is losing importance in Japan

A Japanese government panel recently advised to the central government to keep nuclear power as the nation's important and fundamental energy source. The government and utility firms could be actively to resume nuclear units. Currently all the nuclear units in Japan are shut.

However, since restarting requires further discussion and procedures, this winter will be the first time high electricity demand season without any nuclear power supply after the severe earthquake in 2011.

Especially, Kansai Electric Power Company will have the first experience to spend high demand season without nuclear units. Other electric companies have already survived previous winters and summers.

KEPCO forecasts that it could maintain more than 3% of spare generation capacity throughout this winter. But the daily maximum electricity demand in the company's service area had often exceeded its supply capacity excluding nuclear units in the previous few demand seasons. Therefore, the company will have to request to clients more reduction of electricity use.

Monthly electricity consumption in Japan has a tendency to decrease on year after the 2011 earthquake. Although the limit to the electricity supply has been expected to weigh on the country's economic growth, Japan's economic indicators have actually shown steady increase despite the lower electricity consumption.

Nuclear units are still necessary in order to maintain the nuclear technology development and keep an option of energy sources. However, its importance in Japan seems to have declined from the previous position.

On the other hand, Japanese power companies have increased use of liquefied natural gas for thermal power to make up for the shortage of nuclear power supply. Their monthly LNG consumption has risen to 4-5 million tonnes from the pre-earthquake level of 3-4 million tonnes. Beside the power firms' use, increasing fresh demands like co-generation have lifted Japan's monthly LNG imports by more than 1.5 million tonnes after the quake.

Meanwhile, North America is predicted to have about 20 million tonnes per month of LNG exporting capacity by the early 2020s due to the shale revolution. Many natural gas liquefy and export projects in the United States are being granted approvals.

Japan is expected to be a giant customer for the massive increase of LNG supply capacity. The U.S. energy industry might not hope that the Japanese natural gas demand will be hampered by nuclear power.

Chinese crude oil imports have exceeded demand

China imported 23.56 million tonnes or 5.75 million barrels per day of crude oil in November, according to the General Administration of Customs. It was 15.4% higher from a month ago and increased by 0.8% from a year earlier.

Although the country's crude oil imports dropped by 13.8% on year in October, rebounded in the following month. The average imports during three months since September rose 3.7% on year at 5.54 million bpd.

Accumulated crude oil imports in the first 11 months of 2013 was 255.2 million tonnes or 5.6 million bpd, up 3.2% from the same period a year ago.

Crude oil imports by China in this year have increased from the previous year's level despite the country had bought more than its actual demand of crude oil in 2012 in order to fill the newly built strategic petroleum reserve facilities. Current imports seem to exceed the nation's petroleum consumption.

The accumulated domestic crude oil production in China during the first 10 months in 2013 was 173 million tonnes. The total crude oil supply combined with net imports in the period was 426.7 million tonnes, 2.8% higher from a year ago.

Meanwhile, the total crude oil processing volume in January-October rose 4.1% on year to 396.9 million tonnes. Despite the growth of processing was higher than that of supply, volume of supply exceeded processing by nearly 3 million tonnes. The excess seemed to increase commercial crude oil stockpile in China throughout the period.

Commercial crude oil stockpile in China was estimated to have risen by around 1.4 million tonnes in 2010 and 2011. It was seen to have increased by only 0.4 million tonnes in 2012. Therefore, about 3 million tonnes during 10 months are quite higher.

Moreover, crude oil imports in November rebounded. Commercial crude oil stockpiles in China could increase further if the processing volume was not significantly higher in the month.

Energy resources are usually secured based on long-term forecasts. China has increased procurements of petroleum to meet a prediction of its future steady economic growth. However, the volume of procurements seems to begin exceeding the actual demand in the country.

Does China have unexpectedly many oil stockpile?

Number of days of supply of national petroleum stocks in China are said less than a month. It is far smaller than the United States or Japan. Is it true?

Chinese government has planned to increase its strategic petroleum reserve from the nearly zero level in early 2000s to 500 million barrels in 2020. However, China seems to have completed stockpiling only about 140 million barrels at moment.

Since average domestic petroleum consumption in the country was about 9.7 million barrels per day in 2012, the current strategic petroleum stocks are equivalent to 15 days of supply.

Member nations of the Organisation for Economic Cooperation and Development like the U.S. and Japan are required to secure more than 90 days of previous year's daily net imports of petroleum inventories. Calculation of days of supply is based on the net imports rather than consumption.

China is producing more than 4 million bpd of crude oil. The country's existing strategic petroleum stocks level can supply 25 days of net imports.

The strategic petroleum reserve of the U.S. only supply 37 days of consumption, and the Japanese national petroleum stocks can not supply more than 85 days of consumption. In Japan, private companies also have mandatory petroleum stockpile. The total of mandatory stockpile by the government and private sector could supply 153 days. Moreover, the total number of stockpiles including commercial inventories in Japan would reach supply of 200 days.
The SPR plus commercial petroleum stockpiles in the U.S. can supply 96 days of consumption and 230 days of net imports.

China also has commercial petroleum stockpiles in the private sector, but the actual numbers are not disclosed. Commercial petroleum inventories in October are estimated at about 310 million barrels based on calculation using various data. The stockpile level could supply 30 days of the country's consumption and provide 55 days of net imports.

Therefore, the total number of the national stockpile and commercial inventories in China reaches 80 days of net imports. The number is still much smaller than the U.S. or Japan, but seems not to be so unsafely.

However, about 90% of crude oil imports into China are currently carried by tankers. Land transportation from Russia or Kazakhstan are very limited. So China's petroleum import is likely to decline significantly in case of tensions in the adjacent waters.

China was originally planned to complete 300 million barrels of strategic petroleum stockpile by the end of 2013. But the schedule has delayed in step with the slowing down of the growth of the petroleum demand in the nation.

Currently, total 160 million barrels of national stockpile facilities are planned installing by the end of 2015, then another total 200 million barrels facilities will be built. However, further delay and changes might be seen.