Asia steps up oil security as war looms

Reuters, 01.29.03, 4:16 AM ET By Tanya Pang

SINGAPORE, Jan 29 (Reuters) - With war looming in the oil-rich Middle East, governments across Asia are stepping up emergency measures to protect energy-hungry economies from a possible crude price spike which would sap the region's fast growth.

With benchmark crude prices hovering close to 26-month peaks over $35 a barrel, import-dependent Asia, which has little by way of emergency stocks, is gearing up to safeguard supplies by stockpiling or enforcing measures to limit consumption.

South Korea, China, the Philippines and Thailand announced concrete emergency measures this week, while India, Bangladesh have been steadily extending inventories (see table below).

"We are ready to face any difficulty if there is an interuption in supplies. We are keeping our tanks full," Indian Oil Minister Ram Naik told Reuters on Wednesday.

Unexpected events such as the eight-week opposition strike in Venezuela, which has strangled sales from the world's fifth biggest exporter, and the possibility of war disrupting crude flows from the Middle East have reinforced Asia's vulnerabilty.

"For the last two to three months three factors have been supporting the market: the Venezuelan strike, Iraq and Asian buying," said Sarah Emerson, managing director at Energy Security Analysis (ESAI) in Boston.

"Asian governments and refiners tend to build inventory in a crisis, whereas Western countries don't have that kind of speculative buying pre-crisis, they have stocks," she said.

About 60 percent of Asia's daily crude requirement of 21 million barrels is shipped in from other continents, with roughly 10 million barrels a day coming from Middle East producers.

Only Japan and South Korea, which import virtually all their energy needs, have built appreciable state emergency reserves exceeding the minimum standard of 90 days of consumption set by the West's energy watchdog, the International Energy Agency.

Without that buffer, regional economies would be hard hit by soaring energy bills.

Since the 1997 financial crisis, Asia has been trying to boost domestic consumption as a cushion against external economic shocks. An oil price surge may hit consumer spending and corporate investment making Asia more reliant on exports.

The 10 ASEAN nations agreed at an unprecedented meeting with China, Japan and South Korea in Osaka, Japan, in September that concerted action was needed to step up energy security through cooperation and coordination of emergency policy.

ASEAN comprises Thailand, the Philippines, Brunei, Malaysia, Cambodia, Indonesia, Vietnam, Laos, Singapore and Myanmar.

Analysts say the huge cost of building and maintaining inventory gives emerging economies little incentive to stockpile fuel.

"China is most likely to build strategic stocks as it still has fast growing demand growth. It is enormously dependent on Middle East crude and it can foot the bill," said ESAI's Emerson.

"India may be able to one day, but only if the oil companies bear the brunt of the cost. Frankly, Southeast Asian nations will talk about regional reserves but they just cannot afford it."

Following are measures announced in January by Asian governments:

• China said on January 29 it would start to build this year a reserve of 150 million barrels of crude.

• The Philippines said on January 29 refiners must hold a minimum 30-day inventory of crude and oil products by February 3. Bulk oil suppliers must hold a minimum 15-day inventory and all players were required to have a minimum seven days of supply of liquefied petroleum gas.

• South Korea said on January 28 it may partially release oil stocks if Middle East benchmark Dubai crude hits $33 a barrel. It said it would cut import tariffs and local taxes on oil products and limit some business energy use if Dubai crude went into the range $29-$33. If Dubai topped $35, it said it would release more reserve oil, deepen tax cuts, set a ceiling price for local oil products and use funds set aside to subsidise refiners' oil imports and cut oil products exports.

• Thailand said on January 28 it had drawn up a contingency plan in the event of war including a stop to oil products exports and special crude imports from Malaysia, Indonesia and Brunei. Bangkok has kept strategic oil stocks of 50 days of consumption since the September 11, 2001, attacks on the United States.

• India said on January 7 that state refiners had raised oil products inventories to meet demand for 35-40 days and had enough crude to keep refineries running for one month.

• Bangladesh said on January 7 it had 340,000 tonnes of oil products and 175,000 tonnes of crude in stock to meet demand for 20-25 days. It also said it was seeking emergency oil imports from Malaysia, Thailand and Brunei.