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Analysis: Saudi disruptions expose Asia's deficient emergency oil reserves

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Analysis: Saudi disruptions expose Asia's deficient emergency oil reserves

Highlights

Developing Asia lacks sufficient emergency oil reserves

SPR build slow in India, China; non-existent in smaller countries

IEA stocks must be ready for Mideast conflict escalation--former chief

Singapore — The attacks on Saudi Aramco's oil facilities have exposed Asia's vulnerabilities in absorbing supply disruptions with purpose-built emergency stocks, which either don't exist or fall short of global standards.

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While organizations like the International Energy Agency have coordinated strategic petroleum reserves in member countries, most Asian countries are not IEA members and are unable to fund expensive long-term storage programs.

This is problematic because Asia is the largest driver of oil demand growth, and its exposure to Middle East oil supply has grown more rapidly than Europe or the US where stocks are concentrated.

While the IEA does not immediately need to release emergency stocks, it needs to be prepared for an escalation of military conflicts between Saudi Arabia and Iran, Nobuo Tanaka, former IEA executive director said Thursday.

Related infographic: Attacks lay bare Saudi Arabia's oil vulnerability

Tanaka, who headed the IEA when it last triggered an SPR release during the Libyan oil crisis of 2011, said IEA's maximum SPR capacity may not be enough if Saudi and Iranian volumes totally disappear.

"Amid escalating tensions for such risk, the IEA is currently facing a historical challenge since its establishment in 1974," Tanaka, who is now chairman of the Sasakawa Peace Foundation in Tokyo, said.

In a 2018 study, the IEA had said its maximum SPR drawdown was 11 million b/d for public stocks in the first three months, and 13 million b/d if industry obligated stocks was fully available, for up to two months.

Saudi' Arabia's top customers in Asia

ASIAN RESERVES

Saudi Arabia exported 7 million b/d of crude in Jan-Aug this year, out of which 75% or 5.3 million b/d, went to Asia, up from 4.8 million b/d a year earlier, according to S&P Global Platts Analytics.

It said China, India, Japan and South Korea accounted for 83% of Saudi oil exports to Asia, up from 81% last year. While IEA members Japan and South Korea have mandated SPR of 90-days of fuel imports, China and India are still building theirs.

"Most Asian countries do not have an SPR program. SPRs take up big investment in physical infrastructure and high costs to buying and holding large volumes of oil for indefinite periods," said Alex Yap, senior oil analyst at Platts Analytics.

While oil exporters like Indonesia and Malaysia have less need for an SPR, smaller countries don't have the bandwidth for such an investment, he said.

"The one lagging behind is India - they are a big net importer but have not made much progress on their SPR," Yap added.

Stockholding costs include tank construction, maintenance and oil purchases, and could range from $7-$12.40/b, according to industry estimates.

IEA previously estimated gains from its SPR program at $60/b or $3.9 trillion over 30 years, by way of preventing economic damage due to oil disruptions, but high costs remain a problem.

In the face of historical challenges surrounding possible military conflicts in the Persian Gulf, the IEA must seriously consider taking China and India to be its members as its current emergency petroleum reserves system would not be sufficient without the major oil consumers, Tanaka told Platts.

He said India, which formally applied for IEA membership earlier this year, may have a chance at its ministerial meeting later this year.

India imported 226.6 million tons (4.55 million b/d) of crude in the financial year 2018-19, official data showed. Comparatively, it commissioned 5.33 million mt of SPR in its first phase, and 6.5 million mt in the second phase was approved in 2018. That's less than 20 days of imports.

CHINA AND JAPAN

China saw the strongest growth in Saudi crude imports this year, accounting for 16% of the total, but Japan, South Korea and India have higher Saudi exposure of 36%, 28% and 19%, respectively.

China's exact SPR is unclear, partly because commercial storage is also used for SPR, and its oil imports rose so quickly that the 90-day requirement gets inflated. It also doesn't release official oil stocks data, and official SPR data is sporadic.

China last announced official SPR data in December 2017, totaling 37.73 million mt, or 276.56 million barrels as of mid-2017 with nine SPR storage sites in use and the second phase still in progress. The third-phase will start commissioning in 2021.

Satellite data from New York-based Ursa, which tracks above ground storage, showed China's crude stocks at 659.5 million barrels at end-August, out of which SPR was 164.1 million barrels. Comparatively, China's crude imports in the Jan-Aug period was 2.4 billion barrels, which means reserves fall short of the 90-day standard.

Japan is an exception in Asia as it has sufficient SPR, but it is also a saturated oil market.

At end-July Japan's SPR totaled 528.3 million barrels, accounting for 236 days of consumption, and 198 days of imports, the Ministry of Economy, Trade and Industry data showed. This includes 11.45 million barrels held by Saudi Arabia and Abu Dhabi.

In addition, Japan has "sufficient volumes" of petroleum reserves with about three weeks' worth of floating oil stocks on tankers, METI's director-general of oil, gas and mineral resources Ryo Minami, said at a press briefing Tuesday. It imported 1.11 million b/d of Saudi crude in the January-July period, and 88.4% of total imports came from the Middle East.

-- Eric Yep, eric.yep@spglobal.com

-- Takeo Kumagai, takeo.kumagai@spglobal.com

-- Sambit Mohanty, sambit.mohanty@spglobal.com

-- Edited by Claudia Carpenter, claudia.carpenter@spglobal.com