Pipelines Explode at Dalian Storage Base in China, Pouring Oil Into the Sea

Oil Inferno at Dalian

China National Petroleum Corp. (CNPC) is seeking to contain an oil spill resulting from the explosion of two of its crude oil pipelines in Xingang Harbour in Dalian, Liaoning province, in north-east China. The blast occurred on 16 July 2010 on a pipeline transporting crude oil from a ship to a storage tank, causing a second smaller pipeline to explode. While the blaze on the larger pipeline was extinguished around midnight on 16 July, a series of explosions on the smaller pipeline complicated efforts to extinguish the blaze. After initially stating that "improper operations" by the tanker had triggered the fire, state authorities then changed tack, stating that it was too early to ascertain whether CNPC was responsible for the incident, or whether the Liberian tanker unloading the crude oil was at fault. The blaze was brought under control on the evening of 17 July after 15 hours of fire-fighting, and there were no human casualties. However, around 600 residents located around 4 kilometres away in downtown Dalian were evacuated following the incident, due to concerns over their safety. The blaze also caused an estimated 1,500 tonnes of oil to pour into the sea, seriously polluting 11 square kilometres, although a total of 50 square kilometres were likely to have been partially affected, according to the deputy chief of the Municipal Environmental Protection Bureau, Wu Guogong. The spill area was eventually fenced off and contained, and by the evening of 18 July 7,000 kilometres of oil boom and at least 20 oil skimmers were working to clean up the toxic areas. Felt cloths were also placed in the water in an attempt to soak up the oil.

The Xingang storage area is important, being one of the largest crude oil storage area's in China, home to both strategic oil supplies owned by the government of China and a commercial storage area owned by PetroChina. The potential serious nature of the incident was reflected by senior personnel, including President Hu Jintao and Premier Wen Jiabao, publicly issuing instructions on the relief effort. It appears that the majority of China's crude oil storage reserves in the area, which the country has been assiduously building up since the global financial crisis, were not damaged by the blast, although the incident has led to the closure of the Dalian Xingang Oil Port. This will have some repercussions for the refineries and petrochemical facilities in the area; Dalian Petrochemical Company—wholly owned by PetroChina—and West Pacific Petrochemical Company Ltd. (WEPEC), the first large-scale joint venture petrochemical facility in China in which CNPC, Total, Sinochem, and Dalian Municipal Construction Investment Corp all have stakes. While PetroChina's wholly owned facility is reportedly operating normally—drawing on its own crude oil stockpiles—reports suggest that partners have started trimming production operations at the WEPEC facility by several thousand tonnes per day. The closure of Dalian port restricts possibilities for the export-orientated WEPEC facility to sell supplies into markets overseas like Japan, South Korea, Singapore, Indonesia, the Philippines, and Vietnam.

Outlook and Implications

The explosion reportedly severely damaged one oil storage tank with a 100,000-cubic-metre capacity as well as pipeline infrastructure, although repair costs in terms of oil-related infrastructure will probably run into the tens of millions of dollars—not too severe for a company like PetroChina, although fines levied on the Liberian tanker operator might have a more serious financial impact on its operations. The incident could affect further oil offloading operations at the port, given reports suggesting that between 80–90% of the port's berths are now closed. Dalian Port's share price is unlikely to recover significantly, at least until facilities are reopened, and PetroChina has a one-week contingency plan to cope with the shutdown—otherwise maintaining operations even at its wholly owned facility might become difficult.

With the blaze extinguished, the investigation into the cause of the incident can continue. The pipeline explosions do raise questions about safety as China proceeds with its policy of rapidly building up crude oil and refined oil storage capacity. China has already been passing new regulations to improve the safety of onshore pipelines but is only now considering new stringent regulations for offshore pipelines (see Energy Service: China: 28 June 2010: Chinese Legislature Approves New Laws on Oil, Gas Pipelines). China is looking to increase its refined oil storage capacity by nearly 50% to 490 million barrels by 2015, and CNPC and Sinopec have leapt at the chance to build up supplies to strengthen their domestic marketing networks against one another. However, it is uncertain whether China has published common safety operating standards for oil storage facilities even though some—like those at Dalian—are located near economic assets of national significance. Ensuring oil tankers abide by established offloading procedures, installing floating roofs on oil storage facilities to reduce fire hazards and ensuring new oil storage facilities are not located near urban dwellings are some steps that can be taken. The importance of these measures was graphically shown in India last year, when a large blast at an oil storage depot in a densely populated area resulted in a significant loss of human life (see Energy Service: India: 3 February 2010: Gross Negligence Blamed for Deadly Oil Depot Blast in India).