Continued consumption increases are responding to the broad economic expansion in the Gulf countries, and the GCC itself is becoming an increasingly important user.
The broad trends are clear: fuel subsidies continue to stimulate rampant energy demand across the region, and imports of products have become a regular fixture in Saudi Arabia, the region's key demand centre.
In the smaller states, refinery intake of crude has marginally increased owing to higher domestic demand led by transport fuels such as gasoline and diesel. These states have also taken advantage of bullish product markets in Asia and across the region by increasing exports.
Regional flows of fuel oil, gasoline and diesel in particular have begun to modify substantially as structural shifts in domestic consumption continue to trend upwards.
Saudi demand
Domestic demand in Saudi Arabia shot up to 1.56 million b/d in 2007, an increase of 15.3 per cent from 2006, and a whopping 65 per cent since 2001.
Gasoline consumption registered the strongest growth, averaging 347 million bpd, up from 316,000 b/d (9.7 per cent) in 2006 and prompting a 40 per cent decline in exports. (Imports also declined by about 5 per cent to 77,000 b/d, suggesting that commercial inventories were also drawn down throughout the year).
Strength in Saudi gasoline demand can be attributed to three distinct factors:
- (a) strong growth in car sales, estimated at 3.8 per cent,
- (b) the introduction of cheaper octane-91 gasoline suitable for most cars priced at 12 cents a litre in early 2007,
- (c) a price cut for octane-95 premium gasoline from 24 cents a litre to 17 cents a litre.
As Saudi Arabia continues to experience high economic growth as well as provide generous fuel subsidies, PFC Energy expects gasoline demand growth in 2008 to be of a similar-if not larger-magnitude.
Similarly, booming cross-national and intra-regional trade as well as a fast-growing industrial sector in the Kingdom has fuelled diesel consumption, particularly for heavy trucks, off-grid power generation and large industrial engines.
Demand rose 8.8 per cent to total 535,000 b/d, requiring sporadic spot purchases of roughly 11 cargoes last year.
But it was the fact of imports itself rather than the volumes that were of significance; Saudi Arabia had not imported more than one cargo per year since 2002, and had no imports in 2006. Simultaneously, exports were cut 55 per cent to 36,000 b/d.
With a vast number of industrial mega-projects under way, spread across the Kingdom in four new economic cities, diesel demand growth will likely continue to outpace economic growth over the next 5-6 years.
Despite runaway domestic demand, which has prompted unusual activity by Saudi Aramco in spot product markets in 2007, Saudi Arabia is well-positioned to meet increasing internal demand, with an ambitious downstream expansion project.
Current crude refining capacity stands at 2.1 million b/d and total capacity in the Kingdom could increase to 3.9 million b/d, with two 400,000 b/d export refineries at Yanbu and Jubail (joint-ventures between Saudi Aramco and Total and ConocoPhillips respectively) as well as the possible construction of a 400,000 b/d domestic refinery on the east coast near Ras Tanura.
The addition of a further 125,000 b/d and 450,000 b/d at the existing Yanbu and Ras Tanura refineries is also under study. A proposed export refinery at Jizan, led by the Saudi private sector is still under consideration, pending final approval.
Although most of these projects announcements anticipate completion by 2012, PFC Energy understands some significant project delays are likely (including even possible cancellations), moving actual completion dates back, in some cases at least a year or two.
The joint-venture refineries in particular, are tied with the expansion of the Manifa heavy oil fields, and comprise an integral part of Saudi Aramco's strategy of assuring a market for its heavy crude capacity.
But looking more broadly, the expansion of downstream capacity-and internal Saudi demand-will also impact future growth in Saudi crude available for export.
Current output of around 9 million b/d and refinery intake of 1.8 million b/d allows for average exports of 7.2 million b/d.
With expansion of downstream capacity not only within the Kingdom, but also overseas (especially in China as well as expansion of refinery capacity in the United States), free barrels available for term contract allocations will not expand as much as crude output over the next decade.
Other Gulf states
Of the other GCC states, only Kuwait's total demand for oil products has declined. But this fall (13 per cent below year ago levels) was brought about by a 16 per cent decline in fuel oil use, probably resulting from increased gas and crude oil use for power generation.
Consumption of LPG, diesel, gasoline and jet fuel all increased, and, adding in the direct crude use, total oil demand also increased.
Qatar and the UAE consumed 88,000 b/d and 269,000 b/d respectively, 17 per cent and 13 per cent increases over year ago levels; both led by gasoline, jet fuel and diesel.
In the UAE, 2006 marked a watershed year in which, for the first time, domestic product consumption from Dubai and the Northern Emirates exceeded that of Abu Dhabi, accounting for 52 per cent of total demand.
In particular, Dubai's burgeoning population has fuelled gasoline consumption and a stretched gas situation led to an increase in heavy fuel oil usage needed to supplement the Emirates' power needs.
Official data for Oman and Bahrain is sketchy, but PFC Energy estimates demand increases last year of 9 per cent and 6 per cent to 65,000 b/d and 40,000 b/d respectively.
Combined, total product demand in Qatar, Kuwait, the UAE, Oman and Bahrain came in at just over 726,000 b/d, up from 713,000 b/d in 2006, muted somewhat by Kuwait's notable decline.
Although economic expansion in these countries rivals that of their larger neighbour, the much smaller size of their respective populations lessens the impact of their demand growth relative to Saudi Arabia.
Nonetheless, continued consumption increases suggest that demand is responding to the broad economic expansion in the Gulf countries, and that the GCC is becoming an increasingly important anchor of global demand growth.
Somewhat ironically, inflationary problems - driven by rent and food prices - mean that dealing with the issue of fuel subsidies and price controls, which continues to generate an artificial stimulus for energy demand, will have to be postponed.
The writer is an analyst with PFC Energy, Bahrain.
