Qinhuangdao Port

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Zhao Chaolin, a correspondent with China Economic Herald

On the morning of August 11, with a gang roar, Qinhuangdao Energy Exchange, the first spot exchange of product oil in north China, formally began its operation.

Qinhuangdao Energy Exchange was jointly established and funded by Qinhuangdao Economic & Technological Development Zone and Liancai Oil Co., Ltd. With the registered capital of CNY 500 billion and based on Qinhuangdao Liancai oil reserve & transport project, it will operate spot exchange of oil commodities such as product oil, fuel oil, jet fuel, LNG (liquid natural gas) and LPG (liquefied petroleum gas), etc. Making the most of Chinese national policies and giving full play to policy & environmental advantages of Qinhuangdao City, Qinhuangdao Economic & Technological Development Zone and Qinhuangdao Export Processing Zone, Qinhuangdao Energy Exchange will actively conduct offshore international business and gather over 1000 energy and chemical enterprises in home and abroad to register as its members in Qinhuangdao. The estimated annual transaction amount will be hundreds of billions Chinese Yuan while the profit & tax will exceed 2 billion Chinese Yuan.

“Qinhuangdao Energy Exchange is an entity established after the subject study of emergency commercial oil reserve & oil futures exchange led by the State Council, with the mission to secure the national energy and to gain the say on international oil pricing. Within the permission of the national policies, it will use the environment of Qinhuangdao City to apply to the central government for offshore international business, and then choose appropriate futures varieties for transaction”, said Mr. Yan Bin, Chairman of Directorate of Liancai Oil Co., Ltd., to the correspondent with China Economic Herald.

Ten years of hard work leads to abundant fruits.

The establishment of Liancai Oil Co., Ltd. originates from a subject study led by the State Council 10 years before. “In recent years, our government pays much attention to the research and construction of oil strategic reserve”, said Mr. Yang Liangsong, the former director of Chinese National Oil Reserve Center, to the correspondent with China Economic Herald. Recently, our country’s dependence to the imported oil continuously rises as energy demands increases brought by the economic development. Since 1990s, our country has become the net importer of oil with more and more dependence to the external oil, e.g. 59.5% in 2014. Unfortunately, the foundation of oil reserve in our country is relatively weak although our country continuously imported oil. In accordance with the static calculation based on the 1.39 million tons of oil consumption per day in 2013, the present strategic oil reserve in our country can be used for 8.9 days and commercial oil reserve can be used for 13.8 days only, that is to say the static capability of oil reserve in our country is 22.7 days in total, far from 90 days set by International Energy Agency.

Jiangsu Commercial Research of Energy Strategic Reserve and the Research of Shanghai International Petroleum Futures Exchange were respectively started in 2006 and 2008, gaining instructions many times from the leaders of the State Council. After they were finished, in March 2014, Liancai Oil Co., Ltd. was established and headquartered in the hub area of Hongqiao, Shanghai. It is the first mixed ownership enterprise for international trade of commercial oil conducted by our government following WTO requirements. Liancai Oil Co., Ltd. has established the exchange in Shanghai and appointed delivery warehouse in Qingdao City.

On July 30, 2013, the Feasibility Study Report of the Engineering Project of Qinhuangdao Liancai Oil Commercial Reserve & Transport Base passed the internal review and went ahead to the phrase of administrative approval. On March 17, 2014, Qinhuangdao Liancai Oil Reserve & Transport Co., Ltd. was registered and incorporated in Qinhuangdao Economic & Technological Development Zone. In early 2015, the oil reserve & transport harbor project of Qinhuangdao Liancai Oil Reserve & Transport Co., Ltd. and the energy exchange were listed as two provincial key projects. In June 2015, Qinhuangdao Economic & Technological Development Zone and Liancai Oil Co., Ltd. formally initiated the construction of the above said two projects which will be invested with nearly CNY 10 billion.

Qinhuangdao Liancai Oil Reserve & Transport Co., Ltd. will build the largest product oil reserve & transport base in north China. Oil reserve warehouses of 3.24 million tons were planned with a total investment of CNY 6 billion for the project. The project site is located in the east of Qinhuangdao Economic & Technological Development Zone. Oil product reserve tanks of 1.08 million cubic meters with the investment of CNY 2 billion will be constructed for Phase I of the project, occupying the land of 625 mu. Now the project enter the expanded design stage as the exploration has been finished. The project will, once completed, on one hand provide oil product transfer and storage service for petrochemical enterprises in north China and Bohai coastal region, and on the other hand, provide the product oil transport service for petrochemical producers and traders in the countries and areas like Korea and Japan, etc. Meanwhile, as the delivery warehouse appointed by Qinhuangdao Energy Exchange, the project will use the location advantages and policy environment of Qinhuangdao port to become the base for bulk oil product transfer, collection and distribution in home and abroad, and the largest reserve & transport base in north China for product oil.

The related official of Qinhuangdao Economic & Technological Development Zone said that Qinhuangdao Liancai Oil Reserve, Transport and Exchange Project is a model for successful introduction of strategic investors after 10 years of continuous hard work by Qinhuangdao Economic & Technological Development Zone. It is of great significance for industrial reconstruction of Qinhuangdao City and the national strategic energy reserve. The smooth operation of the project will inject strong dynamism into Qinhuangdao City to expand and enhance the economy, to fasten pace of transformation and upgrade, and to promote advance development of the coastal region in Hebei province.

“When Qinhuangdao is mentioned, what people first think about is the coal. So the settlement of the product oil spot exchange is a vital step of compound development of Qinhuangdao energy industry”, said Mr. Yang Liangsong.

Assistance to China to gain the right of oil pricing

At present, the product oil spot exchanges in our country include Shanghai International Energy Exchange, Beijing Petroleum Exchange and Shenzhen Petrochemical Exchange. Shanghai International Energy Exchange was approved by China Securities Regulatory Commission and then registered in Shanghai Pilot Free Trade Zone. It is funded by Shanghai Futures Exchange with the registered capital of CNY 5 billion, the largest amount of registered capital in Shanghai Pilot Free Trade Zone. Meanwhile, it is the only oil futures exchange approved by China Securities Regulatory Commission. Mr. Song Anping, Director-General of Shanghai Futures Exchange, said at the end of May that the preparation for the oil futures listing goes smoothly. If all goes well, most probably, oil futures will be initiated by the end of this year.

Mr. Wu Libo, Director of the Energy Research Center of Fudan University, said to the correspondent with China Economic Herald, that to gain the say on oil pricing brooks no delay as our country has become the largest oil importer in the world. Oil is a special commodity of which the futures price guides the spot price. According to the traditional economic theory, there should be a matured spot market before the appearance of a futures market. However, this does not apply to the fields of bulk commodities, especially oil and natural gas markets, which are highly monopolized. In such fields, it is impossible to expect a developed and very competitive spot market that leads the development of futures market. So the current approach is to build a futures market that will lead the development of the spot market.

Although our country has not opened the oil futures market yet, Mr. Wu Libo suggests that the product design of Qinhuangdao Energy Exchange in the future should be synchronized with the development of oil futures in our country, which is significant to assist China to establish oil pricing rights. These two are mutually complementary, coordinated and supportable. Mr. Yan Bing also said that futures exchange would be carried out step by step in the future under the permission of the national policies.

Mr. Yan Bing said that they planned to realize the transaction amount of over hundreds of billions Chinese Yuan in the first one year and the transaction amount of over thousand of billions Chinese Yuan in the first two years. To realize the object, they adjust the structure of shareholders: Shenzhen Petrochemical Exchange acts as the major shareholder for the early operation; Elite management teams in home and abroad, such as Boda Group, are also absorbed; Bold trials are made on the product design, e.g. they are making a research to extend the capacity to every car fuel tank. “In the future, those who have driving licenses are eligible to be the members of Qinhuangdao Energy Exchange.”

On the very day, the first six member enterprises: Qinhuangdao Dongao Group Co., Ltd., Penglai Haidai Oil Co., Ltd., Deleixi (Laizhou) International Trade Co., Ltd., Jinghai Petrochemical (Tianjin) Co., Ltd., Lianhe Anneng Petrochemical Co., Ltd. and Saudi Princess Noura & Partners Group formally signed with Qinhuangdao Energy Exchange. As the very first member enterprise, Qinhuangdao Dongao Group Co., Ltd. made 3 contracts, that is product oil of 10 thousand tons.