TNAG-0947-FCO40-1166-Oil-developments-in-and-around-Hong-Kong-1980 — Page 137

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The total capital cost of building up from scratch a 30- day reserve would be about $850 million and the annual maintenance costs about $100 million. In all the examples, given, providing and maintaining underground storage would probably be more expensive than conventional storage.

(c) The proportion of total oil imports that now comes from China

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Of increasing significance is the proportion of oil products now being imported from China. Taking fuel oil as the first example (most of which, admittedly, is used for the bunkering of ocean-going vessels), in 1974, when China first began to export fuel oil to Hong Kong, only 1.7% of Hong Kong's total requirement of this product was supplied from China; by 1977 the figure had risen to 9.4%. In 1978 it was 10.7%, and in 1979 10.4%. A further oil product in respect of which Hong Kong has become increasingly dependent on China for supply is gas oil, which is not only used extensively in industry but also by the fishing fleet and the public transport system. In 1974 Hong Kong received about 21% of its total requirements of gas oil from China; by 1977 the proportion had risen to 47%; in 1978 it was 67%, and in 1979 65,5%.

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Efforts to secure increased supplies of oil products from China have met with a degree of success. In August 1979, the China Resources Company informed the Hong Kong Government that China would be increasing the sale of oil products, mainly gas oil, jet fuel and k kerosene, to Hong Kong in 1979 (by some 20% compared with 1978) and that Peking was examining the possibility of increasing supplies further in 1980. The implications was that prices would be at normal contract levels, plus perhaps a small premium. However as far as supplies to them are concerned, the oil companies have informed the Government that this year China has generally speaking only agreed to enter into contracts to supply the 1979 demand level of these oil products, and then at a price strictly geared to commercial considerations of the highest price they can hope to exact. It must be borne in mind, though, that this observation (as is the case for many matters connected with the oil trade) may easily be changed by particular changes in the situation such as temporary surpluses in certain oil products.

Conclusions

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Consideration has been given to the need for maintaining strategic reserves of oil products in Hong Kong, in the light of the events of the past 18 months and of the forecast position for 1980 mentioned above (paragraph 9).

CONFIDENTIAL

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