New Mediterranean refining capacity to dislocate fuel markets

LONDON, (Reuters) - Three major centers for oil demand in the Mediterranean are expanding refinery capacity, squeezing traders and exporters including India and the Middle East out of traditionally busy markets for petroleum products such as diesel and gasoline.

A new refinery in Turkey, plant upgrades in Algeria and Egypt and the Algerian purchase of an Italian refinery stand to dislocate petroleum product trading in the Mediterranean next year and beyond.

Europe produces fewer distillates, such as diesel and jet fuel, than it consumes and therefore relies on around 50 million tonnes a year (1 million barrels per day) in imports to cover the shortfall, according to Stephen George, chief economist at consultancy KBC.

Russia, India, Asia Pacific and the Middle East, particularly Saudi Arabia, are some of the main suppliers into that shortfall. Turkey, Egypt and Algeria consume around 48 million tonnes a year of diesel and

gasoil, much of which they import. The new refinery projects in Egypt and Turkey are expected to replace a big chunk of the long-haul exports to those two countries from places such as India and the Middle East, George argues.

The new refineries are also expected to take away business from trading companies that sell to those countries. "Turkey is a big importer of (diesel and jet fuel), and STAR, being a modern new refinery, will take away a big portion of the import business into Turkey," a distillate trader said.

Turkish product demand has soared by 300,000 bpd since 2011, dominated by growth in middle distillates, consultancy FGE Energy says. This compares with a refining capacity of 600,000 bpd, all

which is operated by Tupras, which until now was the country's only refinery.

"The STAR refinery will reduce Turkey's diesel import requirements and eliminate naphtha imports (except during periods of refinery maintenance)," FGE said. STAR, built by Azeri state oil firm SOCAR, was designed to supply fuel to the Turkish market, but it is unclear whether it will also export, a source familiar with the matter said.

"The other plans (Algeria, Egypt) - I think we have to wait and see how they will materialize. Anyway, 2020 is coming and the trading opportunities will be multiple," the trader added. International Maritime Organization regulations will cut the limit for sulphur in marine fuels globally from 3.5 percent to 0.5 percent from the start of 2020, boosting demand for distillates.

Trading house Vitol expects around 750,000 bpd of middle distillates to go into the 3 million bpd bunker pool to make the new product. That equates to about 2.5 percent of the entire 30-million-bpd distillates market.

(Additional reporting by Julia Payne in London and Nadine Awadalla in Cairo; Editing by Dale Hudson)

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