By Jennifer Tan and Luke Pachymuthu
Saudi co reacts to rising demand for power generation fuels, lower gas supply - industry.
Saudi Aramco will halt fuel oil exports three months ahead of the start of summer, due to swelling demand for power generation fuels and tighter gas supplies, industry sources said on Monday.
The world's top oil exporter is also expected to import the residual fuel at the start of the second quarter - between two and four cargoes a month over the summer - as supply of alternative utility fuels tightened, they added.
"We are expecting them to cease their fuel oil exports earlier than expected, as they are anticipating the loss of gas to boost demand for utility-grade fuel," said a fuel oil trader familiar with Saudi Aramco's fuel oil exports.
Saudi Arabia has since 2006 bought spot fuel oil during the summer months - between June and September - when demand for power generation fuel spikes. But it had also bought cargoes for October last year, its first trades outside the peak period.
Aramco, which typically offers a total 250,000 to 300,000 tonnes of fuel oil monthly, comprising spot and term cargoes, had planned to halt fuel oil exports in the first quarter on rising requirements from domestic power plants.
"Aramco typically buys two or more cargoes and sells one cargo based on their optimisation strategy, so net-net, they end up with one or two cargoes," said a regional fuel oil trader.
"They tend to keep the low-metal, low sulphur cargoes for their own use and export the higher metal, higher sulphur ones."
Aramco usually adopts a strategy of importing cheaper fuel oil parcels from the Mediterranean and selling its cargoes for a higher price into Asia, depending on demand.
"At the end of the day, it's all a matter of price economics between AG (Arab Gulf) and Singapore," added another trader.
Although fuel oil has typically been seen as a heavy pollutant with little benefit for domestic use, Saudi Arabia, along with Iran and Kuwait, have increasingly been burning larger quantities of fuel oil for power generation and water desalination, analysts said.
Domestic consumption of fuel oil climbed by 9 percent in 2007 and 11 percent in 2008. The combined increase over the two year s totals 55,000 barrels per day. Their consumption for fuel oil hit 351,000 bpd in 2008, said Raja Kiwan of PFC Energy.
Fuel oil demand growth in the kingdom is estimated to grow 4 percent to reach 360,000 bpd in 2009.
"Saudi Arabia's increased burning of fuel oil for power generation strongly suggests that associated gas production has been insufficient to meet requirements," said Kiwan.
Kiwan said that most of Saudi Arabia's gas production is linked directly to its oil production.
"2009 could prove to be a testing year as the kingdom faces prospects for lower oil production well below levels seen since mid-2007," he added.
In February, the kingdom was expected to be pumping below its OPEC target of 8.05 million bpd, undershooting what was already a record OPEC supply cut agreed in December.
Industry sources say the kingdom will cut output to 7.7 million bpd this month, already the lowest level in more than six years and around 2 million bpd.
Saudi's gas is mostly produced as a by-product of oil output, so supply volumes shift with oil production.
Power plants would be the first to see gas supplies halted and would switch to fuel oil or diesel, analysts said.
Kiwan said despite the shortage of associated gas, the kingdom would continue to make bold moves in cutting output further to balance the oil markets.
"The shortage of associated gas in itself will not stop it from taking production down further to bring oil markets into balance if needs be," he added. (Reuters)