ANALYSIS-Growing Saudi diesel output threatens Asian glut

* 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

Asian market.

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.

DISPLACING SUPPLIERS

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

basis.

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

next year.

"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

keep pace."

(Editing by Daniel Fineren and Anthony Barker)

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