* Saudi to increase capacity to produce cleaner diesel
* Kingdom can cut imports, be net exporter in winter
* Existing suppliers will need to find new buyers
DUBAI/SINGAPORE, Dec 18 (Reuters) - A huge increase in Saudi
Arabia's capacity to produce cleaner diesel will reduce its
reliance on fuel imports from next year, forcing current
suppliers of the fuel to find new buyers in an over-supplied
The majority of new refineries and upgrade projects in the
Middle East are designed to produce ultra-low sulphur diesel
that meets European environmental standards, so they can export
some of it to Europe or Asia.
The multi-billion dollar investments are also likely to
transform fuel trade flows in the Gulf as the extra capacity
will allow OPEC heavyweight Saudi Arabia to reduce its diesel
imports and even become a net exporter in winter when its own
fuel needs are lower.
State-run Saudi Aramco's Jubail joint venture with France's
Total, the first of a trio of 400,000 barrels per day
(bpd) refineries due to open over the next five years, will
refine Saudi heavy crude into fuels ranging from gasoil,
including diesel, to gasoline and petroleum coke for domestic
consumption and export.
Jubail alone is expected to increase Saudi cleaner diesel
production capacity by around 176,000 bpd once it is fully
operational, while two more projects are expected to boost Saudi
diesel capacity by a total of 461,000 bpd by 2017.
"Saudi Arabia has been a substantial net importer of gasoil
for several years, but as Jubail is commissioned in 2013, this
trend should reverse itself by the end of the year if not
earlier," Robert Smith, consultant at FGE Energy said.
Saudi Arabia has historically been short of gasoline and
gasoil. Its petro-dollar fueled economy and growing population
has rapidly driven up internal demand, especially when power
generation surges in the hot summer months from May to August.
The world's biggest crude oil exporter imported an average
of 243,000 bpd of gasoil/diesel in the peak demand month of July
this year, compared with a record high of 290,000 bpd in July
2011, according to official Saudi data.
The majority of its fuel imports are met by other Gulf
producers, or by suppliers from India and Singapore.
The startup of the three refineries will nearly double Saudi
diesel output, helping it become a net exporter in the cooler
months. Its diesel imports will not stop completely, analysts
say, due to rising demand and because the high-quality diesel
the refineries will produce will not be used in power plants.
Nevertheless, refiners in Asia will have to find alternative
buyers for fuel they have been selling to Saudi Arabia in
increasing quantities over the last five years, traders say.
"The whole trading pattern is going to change dramatically
in a few years, once all the new refining capacity comes
online," a Singapore-based trader said.
Neighbouring OPEC producer the United Arab Emirates (UAE),
is also planning a big expansion in diesel production, with Abu
Dhabi Refining Company (TAKREER) working to more than double
capacity at its existing 415,000 bpd refinery at Ruwais.
The boom in Gulf product exports aimed at Europe and Asia
will further intensify competition between suppliers.
India currently exports about 1.5-1.7 million tonnes of
diesel a month, mostly to Europe and Africa, because giant
Indian refiner Reliance is able to meet Europe's
stringent diesel specifications.
New refineries starting up in two major Middle Eastern crude
oil producing countries pose a big threat to Indian refiners
that sell finished products to Europe, with the competitive
advantage of two of the refineries on the Red Sea coast of Saudi
Arabia further reinforced by lower shipping costs, traders said.
In the Gulf, where shipping costs to Europe are also lower
than from India, Abu Dhabi National Oil Company (ADNOC) is
already planning to offer diesel with a sulphur content of 10
parts per million (ppm) for 2013 contracts, making it the first
Gulf producer to export ultra-low sulphur diesel on a term
Traders say Saudi Aramco Total Refinery and Petrochemicals
Company (SATORP), the joint venture that owns the Jubail
refinery, will also be offering cleaner diesel for export as
early as the second quarter of next year.
"What we might see happen in the short term is Reliance
shifting its barrels into tanks, which could depress margins,
and eventually it might adjust its production to maximise
gasoline or higher sulphur gasoil," a source in India said.
With East African demand rising due a lack of refining
capacity, India could divert more of its production to that
region, another India-based source said.
In the short term, some of the extra barrels from the Middle
East could be shipped into the Singapore trading market to feed
growing demand from Australia and compensate for fewer exports
from Japan, said Victor Shum, managing director of downstream
energy consulting at IHS in Singapore.
Australia has been importing more diesel after shutting old
refineries, while Japan is likely to cut diesel exports from
"So there will be some re-balancing but there will still be
a lot of competition for markets simply because it is still
going to be a relatively weak global demand market," Shum said.
With demand from Pakistan, Bangladesh and Sri Lanka also
rising, long term growth in domestic demand on the Indian
sub-continent could soak up any Indian diesel displaced by
increased exports from Gulf members of the Organization of the
Petroleum Exporting Countries (OPEC).
More Middle East supplies sent to Europe could also pressure
refineries in the Mediterranean, which are already struggling
with low profit margins for refining increasingly costly crude
into vehicle fuels for a shrinking EU market.
"Europe's already receiving diesel from the United States
and Russia, so this could put pressure on refinery margins in
the Med," a middle distillates trader said.
"But overall, Asian diesel margins will probably come under
pressure from all the additional diesel barrels expected to
flood the market, as I don't think the increase in demand can
(Editing by Daniel Fineren and Anthony Barker)