The new fuel, which has been in use from August 1, was expected to ease refiners export burden as they can now blend surplus diesel into the heating oil and at the same time save on costly kerosene imports during winter.

But analysts said the advantages were limited as heating oil averaged only around eight per cent of refinery sales, even lower during the third quarter, in the absence of winter driven demand.

"This new type of kerosene is going to help the refiners bottom lines but overall operating environment is still not favourable," SB Kim, analyst from Jardine Flemming, said.

Korean refining sector, with limited secondary capacity, will remain dependent on sales of heavier products like fuel oil and diesel whose demand have fallen sharply, analysts said.

"You can completely stop kerosene production, if that was possible orimport twice as much. At the end of the day, I don't think its going to shift the market that dramatically," George Goundry, analyst with ABN Amro Hoare Govett in Seoul said.

South Korean oil consumption for the first half of 1998 fell 13.5-per cent to 336.6 million barrels from 389.1 million, year on year, according to the industry and energy ministry last week.

Kerosene demand led the falls, plunging 34.8-per cent year on year to 28.514 million barrels.

From August 1, two types of kerosene, the new Korean heating oil grade which is a mix of diesel and kerosene and the original pure kerosene are sold in the domestic markets.

Consumption of the original kerosene is expected to be small as the bulk of households and industries switch to the cheaper heating fuel.

The pure kerosene, which has a sulphur content of 0.01 to 0.08 per cent, will be sold under a government directive at 100 won more than the July price of 438 won/litre (US$0.35), sources said.

The new heating oil, which has a sulphurcontent of 0.1-per cent, is cheaper to produce but will still be priced at 438 won/litre or at best with a 10 won/litre discount, they said.

This is to encourage consumers to switch over, analysts said.

But prices will have to be kept high enough to discouragemotorist and transport companies from using it as fuel instead of diesel which may "cause accidents and damage in car engines," Kim said.

The true test for the new grades profitability would only come in winter when South Korean heating oil demand spikes, oil traders based in Singapore said.

Last year, imports for the first quarter were low due to the effects El-Nino and a warmer than expected winter.

In the first quarter of 1998, Korea imported 4.1 million barrels of kerosene, down from 7.8 million barrels from a year ago, according to analysts.

But this year, the rising prospect of a wet La-Nina weather phenomena a cooler winter could be on the cards leading to larger than usual heating fuel demand.