EU duty-free jet fuel sets new battle for world refiners

Reuters

* EU scraps jet fuel import duty, opens door to US refiners

* Middle East, Asian refiners set to lose market share

By Ron Bousso

LONDON, Nov 13 (Reuters) - U.S. refiners are expected toship large volumes of jet fuel across the Atlantic starting in2014 after the European Union scrapped an import duty on theproduct, opening a new battleground for the world's largestrefineries, traders said.

U.S. Gulf refiners that have been pumping at record levelswill offer stiff competition to established exporters to Europefrom Asia and the Middle East, long exempt from a 4.7 percentduty due to a preferential trade status.

"The removal of the tariff will definitely make jet fuelfrom the United States more competitive," said Andrew Reed,analyst from the U.S.-based ESAI Energy consultancy.

Despite diminishing demand for jet fuel due largely tomore-efficient aircraft engines, Europe has been a key marketfor refineries in Gulf Arab countries, India and South Korea.

In 2012, Europe imported around $20 billion of jet fuel, orone third of its total jet fuel needs of 1.2 million barrels perday (bpd), according to the International Energy Agency andtraders.

However, the European Commission's move this month to removeduty on all jet fuel imports "regardless of their country oforigin" opened Europe to the U.S. Gulf Coast refiners thatbenefit from proximity as well as cheap and abundant shale oil.

The decision is largely expected to be approved by theyear's end, an EU official said.

U.S. exports to Europe have risen sharply in recent yearsbut remain marginal at around 20,000 bpd in 2012, according tothe U.S. Energy Information Administration.

Most of this volume goes to Britain, where airlines avoidduty on the jet fuel if used on aircraft heading out of theEuropean Union, traders said.

"We are already seeing increased jet fuel exports to Europeand that just opens the gate wider. The U.S. has a steadysurplus of jet fuel and as Latin America needs less, refinerswill want to place it in Europe," ESAI's Reed said.

"South Korea has the most to lose. Those long-hauldeliveries are at risk," he added.

Chinese refiners, flush with surplus product, may also seeka foothold in Europe.

WINNERS AND LOSERS

U.S. Gulf refiners, including Valero Energy Corp,Exxon Mobil, Marathon Petroleum Corp and RoyalDutch Shell Plc, are no newcomers to the transatlantictrade route, which has seen diesel flows reach record levelsthis year at above 2 million tonnes a month.

Neither are they strangers to competing in Europe's dieselmarket with refiners such as Reliance Industries Ltd,which operates the world's biggest refining complex in westernIndia at 1.2 million bpd, or Middle Eastern plants.

Those include the recently launched 400,000-bpd Jubailrefinery, a joint venture between Total and SaudiAramco.

"Valero has been working to expand its production ofdistillates, including jet fuel but also diesel, because ofincreasing demand for distillates here in the U.S. andespecially abroad," spokesman Bill Day told Reuters.

"We have the flexibility to take advantage of marketconditions as they present themselves," he added.

Though import volumes will not change due to the dutyreform, the price of jet fuel in Europe will likely decrease dueto growing competition from outside. That will further pressurethe region's refiners, which have seen profit margins slump in2013 due to large diesel imports and weaker demand.

"This will give Europe another source of jet fuel and couldpotentially bring down prices in Europe," a trader said.

Jet fuel flows from the United States will likely fluctuatein 2014 because European traders and airlines have alreadylocked in most term deals with Middle Eastern and Asiansuppliers.

"I imagine there will be some fluctuations until a patternemerges, probably in 2015," he said.

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