Chinese people walk past a photograph of an oil drilling platform outside the headquarters of one of China’s national top three oil companies in Beijing. Oil demand growth in China, the world’s second-biggest energy user, will be slowed by high prices as consumers respond to rising costs, said a senior economist.

tokyo: Asia will witness its biggest increase in new crude oil supplies in nine years, but a substantial rise in refining capacity will largely absorb the cheaper grades and prevent margins from coming down sharply.

The growth in output will compensate for declines at older fields and OPEC cuts, analysts said, adding the expansion would not be enough to meet growing future demand in Asia, which remains heavily dependent on imports from OPEC countries.

Low in sulphur but mainly heavy or acidic, the new production confirms the trend of lower-quality crude in Asia and globally. But with Gulf producers and Angola having cut supplies of rival heavy grades to Asia since December by up to around 600,000 b/d, the new crudes will be welcome as Asian buyers have been forced to seek alternatives.

The higher output may have rung alarm bells as it comes at a time when a global economic crisis is set to lead to two years of lower oil demand for the first time since the 1980s, pummelling prices by $100 from last year’s peaks.

China and India, with the largest fields on stream this year in the region, are expected to absorb their new crudes thanks to new refining capacity geared towards these new, heavier crudes, which may displace demand, and lower the price of, rival heavy sweet grades from Angola, Sudan and Indonesia.

The bumper harvest is timely as the industry worries about current low investments to meet a demand recovery in a few years. “When the money was invested, there was a strong incentive in the region to pump as much as they can,” said Julius Walker, analyst in charge of non-OPEC supply developments at the International Energy Agency (IEA).

“We are now facing flat demand but it will grow up.” 2009 crowns the region’s exploration push and breaks with the drier spells of recent years, a reminder of the timelag between upstream developments and first production. Reuters’ estimate of 375,000 barrels per day (b/d) adds up production from fields due to come onstream this year spanning across China to India and Malaysia.

After accounting for declines at existing fields, the Asian supply increase amounts to a healthy 218,000 bpd for the year, the IEA calculates. The strong numbers contrast with the 67,000 b/d net rise last year and the slim 5,000 b/d increase in 2007, IEA’s latest monthly data show. This leaves Asia second only to Latin America when it comes to non-OPEC supply growth this year, a rare bonanza for this region in recent times.

However, field start-ups are regularly delayed as the hook-up of new production facilities are delicate operations. Discoveries have slowed down in Asia’s oil-rich countries Indonesia, Brunei and Malaysia while underexplored ones, such as the Philippines, are just starting to attract interest.

Production in energy-thirsty Asia remains low around 8m b/d, versus demand near 25m b/d, which would easily absorb the extra volumes, analysts said, especially as the largest new fields will predominantly yield heavy crude.

“Middle East OPEC members are cutting back production, especially of heavy crude. If anything, the crude call in Asia is going up,” said John Vautrain, vice-president in Singapore of Houston-based Pervin and Gertz. “The new fields will help the light-heavy spread widen out, which is good for refiners.”

Lower supplies of heavy crudes have pushed up the value of fuel oil and raised demand for heavier grades, while lighter ones suffered from lower demand for diesel. Heavy sweet Angolan Cabinda crude, which is regularly exported to Asia, saw its discount to Dated Brent narrow to $1.00 last month from $5.00 a barrel in August.

By contrast, over that same period, Malaysian light sweet Tapis saw its differential fall from a peak of $3.50 premium to regional benchmark Tapis APPI to a record-deep discount of $1.60 a barrel in January.

New refineries are geared towards the types of crudes coming online, which will help them maximise profits. “The new output in China from Peng Lai will likely be absorbed by Chinese refiners as a result of newly built capacity and declining onshore production from older areas,” said Michael Smith, CEO of oil and gas supply forecasting firm, Energyfiles.

Offshore oil firm CNOOC started up the 240,000-bpd Huizhou plant last month, its first major refinery in southern China, designed to process Peng Lai 19-3 crude, whose output is expected to increase this year by 70,000 b/d.

Peng Lai, produced by US firm ConocoPhillips and 51 percent-owned by CNOOC, is highly acidic and metallic, making it a cheap feedstock for refineries built to run such crudes. “Although the recession is putting pressure on Asia, I do not think the advent of the new crudes are a big issue with Asian countries, who are well able to move rapidly in adapting their refining capacity to meet supply characteristics,” said Smith.

The biggest lift will come from India, set for its first major output rise in over a decade with the start of Cairn’s Mangala field, which will hit a plateau of 175,000 b/d of heavy sweet crude once three processing trains are running. India’s move to lure more exploration is paying off this year, as Reliance starts gas output at the D-6 field in the Bay of Bengal, which will rise to 80 million standard cubic metres a day by 2010, plus 40,000 b/d of oil.

The main impact of supplies from India and Australia — where Apache’s Van Gogh field is due to start this quarter and reach 60,000 bpd of heavy crude output — will be the displacement of demand for West African crude, traders said.

India, a key importer of West African crude, is expected to use most of the Mangala grade, and Reliance’s new 580,000 b/d Jamnagar plant has been built to run heavy, acidic, crudes. “They have to first sell as much as they can in the domestic market. But except for Reliance, not many refineries can take that heavy and waxy crude,” a Singapore-based trader who looks at Indian demand said.