Caribbean oil storage deal demonstrates China’s regional ambitions

Located 1,100 miles (1,800 kilometres) southeast of Miami, Florida, St Eustatius is one of five islands that constitute the Netherlands Antilles. The tiny island, of just 8.1 square miles (21 square kilometres), is home to slightly more than 3,000 residents and a giant oil storage and transshipment facility known as Statia Terminals.

Owned and operated by NuStar Energy, which is based in San Antonio, Texas, the Statia Terminals are one of the largest oil storage and shipping operations in the Caribbean, having the capacity for 11.3 million barrels.

Located conveniently close to the continental United States, South America and the Panama Canal, the Statia Terminals serve as a hub for tankers transporting oil from South America and the Middle East to the United States.

The Saudis quit, China steps in

In 1995, the Saudi oil company Aramco entered into a lease for oil storage space totalling five million barrels.

However, in January 2010, after having operated the storage facility for 14 years, the Saudis decided to quit. PetroChina (the publicly listed arm of the Chinese state-owned China National Petroleum Corporation) stepped in, taking over the lease from Aramco.

The storage space used to be important to Aramco: having five million barrels stored in the Caribbean gave it the capacity to respond to any emergency need for oil supply in the United States within days, rather than the six weeks it would take for a supertanker to sail to the US Gulf from the Saudi coast.

The importance of the storage facility diminished, however, when Saudi crude oil shipments to the United States dropped to a 22-year low in 2009, due both to reduced demand for fuel during the economic recession, and an increase in the volume of imports from Canada and Brazil to satisfy the US’s domestic fuel needs. For the nine-month period ending on 30 September 2009, imports of crude oil into the United States from Saudi Arabia dropped by a third, to an average of just over one million barrels per day.

At the same time, the volume of imports into the People’s Republic of China from Saudi Arabia rose by more than 12% to over 800,000 barrels per day.

Perhaps not surprisingly, when the Japanese government offered Aramco free storage space in Okinawa, Aramco decided that it was time to quit on the Statia Terminals and to move to Japan to be closer to China and other large buyers.

Plan to secure supplies

China’s lease of the five-million-barrel storage facility is apparently part of a comprehensive plan to secure its oil supplies from the Caribbean and Latin America.

The lease ties in well with other related Chinese projects in the region, including several acquisitions and oil deals in Latin America, particularly Venezuela, and the possible future acquisition of refineries, including some in the United States.Some analysts have observed that PetroChina’s storage deal could also be a response to the mooted expansion of the Panama Canal which, once finished, would allow larger fuel and oil cargoes to pass.

PetroChina’s oil storage deal in St. Eustatius confirms China’s increasing interest in the Caribbean and its continuing efforts to strengthen ties with the region.

In 2007 the Chinese government announced that it would invest a total of US$553 million in the Caribbean over the three-year period from 2007 through 2010. From 1990 to 2008, trade between China and the Caribbean Community (known as Caricom) grew 100 times from US$20 million in 1990 to a total of US$2 billion in 2008. China’s top trade partners among Caricom countries include Antigua and Barbuda, Trinidad and Tobago, Jamaica, the Bahamas and Dominica.

Trade delegation

In December 2009, Wu Bangguo, the chairman of the Standing Committee of the National People’s Congress, led a delegation of 150 Chinese government officials and business executives to visit the Bahamas. According to media reports, the delegation signed a series of significant economic deals, including an agreement for the mutual protection of Chinese and Bahamian investors, a multimillion-dollar loan to help build a new highway to the international airport in Nassau, and additional Chinese financial support for a major cricket stadium which was under construction.

At the same time, the St Eustatius deal signifies China’s increasing influence on the energy market in North and South America.

According to a trading official at PetroChina, the leased storage space will be initially used for fuel oil, but may also be used to store crude oil in the future.

So far Venezuela is China’s biggest supplier of fuel oil. PetroChina, however, is reported to be in discussions with US oil refiner Valero to acquire its refinery in the island of Aruba. If PetroChina succeeds in acquiring the refinery, the Statia Terminals storage may well be used to store crude oil.

The result will be increasing Chinese impact on the North and South American crude oil markets, because once PetroChina acquires the capacity to produce fuel oil in the region, its appetite for crude oil will grow.

It is, therefore, not unreasonable to view PetroChina’s acquisition of the storage space in St Eustatius as, in the words of a report by Reuters in December 2009, “a staging point for a growing slate of South American oil deals or as trading leverage in the US market, which still effectively sets the global price of oil”.

Energy security plan

Overall, PetroChina’s storage deal is just one part of the comprehensive plan for China to secure its oil supply in the Caribbean.

The impact of this plan is not limited to the energy sector: it will eventually translate into wider opportunities for the whole region, bringing benefits to the financial services sector, the infrastructure sector, the transportation sector, the insurance sector and the tourism sector – to name but a few. With the deal being viewed as a mere prelude, it will be interesting to see what comes next.

Vincent Li is an associate attorney at law with Diaz Reus & Targ.