China, which replaced Japan as the second-largest oil consumer after the US in 2003, is mulling utilising its huge foreign exchange reserves to create a fund for its state-owned oil companies for overseas energy exploration and acquisitions.

The Chinese government floated this idea at the recent National Energy Work Conference that looked into the country's three-year energy plan aimed at boosting its oil and gas output.

Armed with a massive $1.85-trillion foreign exchange reserves, China will make available ample funds at low interest rates to its state-owned oil companies to spend on overseas energy assets by either investing in, or acquiring foreign energy firms.

China National Petroleum Corporation (CNPC), the country's largest oil producer posted this news on its website, though with few details on the size of fund or when it is expected be set up.

China is currently the third-biggest importer of oil, as its strong economic development has made the country into a giant consumer and importer of oil. Since 1993, China has become an oil importing country and the decreasing domestic oil production has since driven the three big state-owned oil companies into acquiring assets overseas.

Analysts say that China is making a strategic move in exploiting the current global economic slowdown to create a fund to acquire energy assets at possibly rock bottom prices, more so since the price of oil has hit rock bottom from last July's highs of $147 a barrel seen in July (See: Oil reels under triple blow, rises to record $146.90 a barrel) to the current $40 a barrel. 

In 2007, China produced 3.74 million barrels of crude oil per day while it imported 3.26 million barrels of oil, 12.3 per cent higher than in 2006. While domestic production remains flat, fast growth in imports increased China's dependence on imported crude oil from 19.3 per cent in 1999 to 47.1 per cent in 2007.

Currently, CNPC is China's biggest oil producer and the Sinopec Group is China's largest refiner. CNPC accounts for more than 65 per cent of the total crude oil production.

China wants to increase it crude production by 1.2 per cent to 192 million tons and targets its output to reach 198 million tons in 2011 while it wants its gas output to reach 86 billion cubic metres and aims to increase its gas production to 120 billion cubic metres by 2011.

Heilongjiang province in the Northeast, is the largest crude oil producing province and accounted for 23.5 per cent of China's total oil production in 2006, its production reached 317 million barrels, but production has decreased substantially after a few decades of exploitation.

Other oil production provinces are Shandong, Xinjiang, Shaanxi while Tianjing has mainly offshore oil exploration platforms.

Since the Western region of China has huge natural gas resources, it had built a 4000 km gas pipeline called the ''West-East Gas Pipeline'' that stretches from Lunnan in the West to Shanghai in the East.

It has begun constructing a second West-East pipeline, which will have a capacity to transport 30 bcm of gas per year from central Asia and is expected to be completed by 2010 and it will also build pipelines to import oil and gas from Myanmar before the end of 2011.

In is also looking at liquefied natural gas (LNG) as an alternative energy resource and it had built a huge LNG terminal in Guangdong in 2007.

Currently, there are more than ten LNG projects that are in the construction or planning stages with Qingdao, Ningbao, Tangshan and Zhuhai among them.