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Dubai/London/Singapore: Surging economic growth and power demand in the Middle East are giving fuel oil a new lease of life and heralding big changes in international trade of the dirty left-over product of refined crude.
As European demand for fuel oil has waned in recent years, its value has slump-ed, prompting refiners to upgrade plants or process lighter crude oil to reduce output of the loss-making product.
Much of the unwanted sulphurous fuel oil produced in Europe and the Mideast goes to Asia for use in power generation or for refineries in China.
That is about to change, with repercussions for all three regions. "There is strong demand growth for fuel oil for power generation in the Middle East among countries that don't have enough gas," said Alan Gelder, vice-president for Europe, Middle East and Africa downstream operations at oil consultancy Wood Mackenzie.
"It's one of the few parts of the world where fuel oil demand is growing. If it carries on then the Middle East will have a net deficit in fuel oil in the next few years," Gelder said.
Natural gas is the fuel of choice for electricity generation in many countries in the Middle East.
Despite sitting on huge gas reserves, a petrodollar fuelled boom has led to surging demand from the power sector and strained regional supplies. In response, governments have begun to look at alternatives such as fuel oil, as well as coal-fired and nuclear power plants.
For countries like Kuwait and Saudi Arabia, plentiful supplies of heavy crude that can be refined to produce large volumes of fuel oil make the feedstock an obvious choice, especially where power generation plants are near refineries.
Export issues
But even increased supply of fuel oil may not be enough to meet rising demand. The region's largest fuel oil supplier Saudi Aramco began importing fuel oil for power generation for the first time last year for the peak summer demand season from June to August. Last week, for only the second time, it again bought fuel oil.
As well as rising demand for electricity generation, countries like Saudi Arabia that currently burn crude oil in some electricity generators would probably want to replace valuable oil with cheaper fuel oil, enabling them to export more crude, analysts said.
Kuwait and Iran, both major fuel oil suppliers, could also see reductions in their exports of the product, said Rifaat Al Gohary, managing director of Bakri Trading (Asia).
While surging power demand in Pakistan has already spurred a jump in fuel oil imports, the country will need even more to meet demand from installed electricity generating capacity set to grow more than eightfold between 2005 and 2030.
Oil-fired plants will account for more than half that capacity, up from less than a third in 2005.
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