Saudi Arabia burning more crude for power

Saudi crude-to-power shift reflects OPEC cuts and stricter emissions rules, replacing fuel oil with Arab Light to meet summer electricity demand, reduce imports, and leverage spare capacity from Khurais while keeping exports steady.

Saudi Arabia, the world's top oil exporter, is burning more crude in domestic power plants to keep new wells pumping and produce cleaner electricity, likely eliminating demand for imported fuel this summer.

The use of even more crude oil to generate electricity allows the kingdom to put to use fresh output from a major new oilfield while holding firm to its OPEC commitment to curb exports. It also helps the kingdom meet stricter environmental rules even as it explores solar options to diversify generation.

Estimates on how much crude it is burning differ, but the kingdom's own data show it has risen in recent years, and it could be as high as 470,000 bpd of crude this year, up 62 percent from 2008, consultancy FACTS Global Energy says.

A Saudi source familiar with the kingdom's energy sector said the maximum it could burn at power stations would be 300,000 bpd, although another 120,000 bpd could be burned to power refineries and other facilities related to upstream production.

While the rise would have little impact on global crude oil markets more focused on Saudi exports — which Riyadh has kept in check to help drain swollen global stockpiles — the substitution will likely curtail its traditional summer fuel oil buying binge.

"They won't be importing fuel oil this summer because they are going to be burning more crude," a Middle East trade source familiar with Saudi Arabia's fuel oil import program said.

Burning crude instead of fuel oil is less of a loss to Saudi Arabia now than it has been historically, as fuel oil prices have strengthened. Fuel oil now trades at a discount of $5 to benchmark crude, about half the discount on average in 2008.

FACTS estimates that during peak summer power demand, crude burned could rise as high as 500,000 to 600,000 bpd, and planners aim to double generation by 2020 to tackle seasonal strain.

"In early 2009, a significant fraction of the fuel oil used in the power sector was replaced by crude, partly due to tighter regulations on the quality and metals content of fuel oil burned in power stations," said Vijay Mukherji, a FACTS senior analyst.

Saudi data from 2008 seem to support the thesis: Saudi Aramco produced 8.96 million bpd of crude oil last year, exporting 6.88 million bpd and refining 1.58 million bpd, its annual report showed.

That left 500,000 bpd unaccounted for, crude likely to have been used by power plants, energy facilities or put into inventories — nearly 140,000 bpd more than the year before. Some 50,000 bpd of that went into domestic inventories, according to Saudi data submitted to the international JODI database.

All told, it suggests the kingdom kept nearly 100,000 bpd more crude domestically that it did not refine or add to stocks in 2008 than in 2007, according to Reuters calculations.

The kingdom burns a total of 800,000 bpd of crude and oil products to generate power, a Saudi Electricity Co (SEC) official said, but he was unable to say how much was crude or fuel oil, even as projects like a GDF Suez-led plant move forward to add capacity.

FACTS estimates the kingdom used up to 240,000 bpd of fuel oil for power generation last year, while authorities analyze Riyadh CCGT bids to improve efficiency.

Saudi Arabia typically imports some 38,000 bpd of low-sulphur fuel oil from the Mediterranean and Europe in summer to meet peak power demand as the desert heat, and occasional record heat, stokes air-conditioning use across the kingdom. The imports top up domestic refinery output.

The shift to burning more crude — thought to be mostly Arab Light that has about one-fifth as much metals content as fuel oil — to produce electricity is partly due to more stringent environmental requirements of domestic utilities.

"The power stations are getting tougher on fuel standards... there is now a requirement for lower metals in the fuel being used," a senior oil trader said. "So they are now having to burn more light crude, which has lower metals content."

The SEC official said a committee on clean development headed by oil minister Ali al-Naimi was set up some weeks ago to help implement tighter rules to cut pollution and carbon emissions to internationally acceptable levels, and a proposed tariff change aims to save costs across the sector.

He said two years ago, banks signed international pacts that prohibit them from funding projects which are not environmentally friendly, adding that the SEC had spent 1 billion riyals ($266.6 million) cleaning up their Rabigh and Shuaiba plants, and plans a major power projects investment to expand capacity.

Arab Light has a vanadium content of about 19.7 parts per million, less than a fifth of the level contained in fuel oil it imports for power stations. Vanadium is a typical industry indicator for measuring metals content in fuel.

Saudi Arabia has cut crude output in 2009 to the lowest in six years as part of OPEC pledges to remove 5 percent off global supply to match recessionary demand. Estimated output in June of 8.02 million bpd was down from 9.54 mln bpd in August 2008.

The cuts come even as the kingdom starts output from huge new oilfields.

Last month, it brought online the giant Khurais field, which pumps Arab Light. Aramco is slowly cranking up output at the 1.2 million-bpd facility, the largest-ever single increase to global supply.

The kingdom has the largest spare capacity cushion it has held for years, so it can burn more crude at home with no impact on its supplies to international markets.

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