Cheap oil may delay GCC's shift to clean fuel

Supported by low oil prices, GCC states may continue to use petroleum distillates instead of implementing plans to switch over to clean fuels, a senior analyst with Merrill Lynch has said.

Gustavo Soares, a senior commodity strategist with Merrill Lynch, said with oil prices hitting rock bottoms, it might seem irrational in the short term for the Gulf states to generate power with "anything that's not oil". He said government incentives to switch over to low-carbon energy sources can ensure green energy projects are not abandoned.

The comment comes in tandem with a recent PFC Energy report, which said the demand for fuel oil in the region will continue to rise throughout 2009.

"A lot of people were talking about switching to alternative sources of energy last year when the oil prices were high. The short movement in oil prices put that sort of transition on hold. In the current environment, that should put such a transition on hold," Soares, who recently co-authored a study titled Global Power Demand to Languish in 2009, said.

Soares said low oil prices may not only impact a switch from fuel oil to gas but may also have a marginal impact on long-term ambitions of GCC states to switch over to nuclear energy. "Nuclear power is more of a policy-driven market," Soares said and added the Gulf states can sustain their nuclear energy projects if the governments so decide it as a policy.

A continued growth of population and the growth of industrial and real estate developments are expected to heighten the demand for power in the Gulf states in the coming years. An increase of more than 60 gigawatts is expected between 2008 and 2015, representing 80 per cent of current capacity. Investments of $50bn (Dh183bn) will be required for developing the new power-generating capacity and infrastructure, according to a McKinsey estimate.

A regional electricity market is emerging as seen by the development of a $7bn power grid that connects countries in the GCC, expected to come online in 2009. While a gas-rich country like Qatar is expected to export power, countries like Kuwait and the UAE may import it using the grids.

Increasingly, these needs will be met by private sector investors: in 2007, private developers won contracts for developing 7.2GW out of a total of 9.7GW planned electricity expansion in the GCC.

It has not yet been announced as to which fuel will meet this demand. While Saudi Arabia and Kuwait are expected to use their huge oil reserves, Qatar may use gas.

Merrill Lynch forecasts oil prices for the first quarter of 2009 at $43 a barrel and at $45 a barrel for 2009. "There was a big difference between oil and gas prices last year but that difference has narrowed down. This makes a switch from oil to gas difficult. We, however, expect the price differential to widen again," Soares said.

Merrill Lynch presented a similar outlook for energy across the world in its recent report. "With the global economic activity on a freefall and unemployment rising, the outlook for energy commodities remains rather grim. Neither cold winter temperatures in the Northern Hemisphere nor a steep fall in the price of energy have provided much support to the demand for oil, natural gas or coal. In part, the low price elasticity of demand has prevented a recovery in consumption even after a collapse in energy prices. More broadly, as global economic activity continues to deteriorate, the risks to our energy forecasts remain skewed to the downside," the report said.

Merrill Lynch said coal remains the chief source of energy for power generation on a global scale. Data presented by the Bank of America subsidiary shows while coal meets 41 per cent of energy demand across the world, gas meets 20 per cent. "Coal remains the main source for power generation globally, and its share is likely to increase in coming years."

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