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

By Ron Bousso

LONDON (Reuters) - U.S. refiners are expected to ship large volumes of jet fuel across the Atlantic starting in 2014 after the European Union scrapped an import duty on the product, opening a new battleground for the world's largest refineries, traders said.

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

"The removal of the tariff will definitely make jet fuel from 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 to more-efficient aircraft engines, Europe has been a key market for refineries in Gulf Arab countries, India and South Korea.

In 2012, Europe imported around $20 billion of jet fuel, or one third of its total jet fuel needs of 1.2 million barrels per day (bpd), according to the International Energy Agency and traders.

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

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

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

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

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

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

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

WINNERS AND LOSERS

U.S. Gulf refiners, including Valero Energy Corp , Exxon Mobil , Marathon Petroleum Corp and Royal Dutch Shell Plc , are no newcomers to the transatlantic trade route, which has seen diesel flows reach record levels this year at above 2 million metric tons a month.

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

Those include the recently launched 400,000-bpd Jubail refinery, a joint venture between Total and Saudi Aramco .

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

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

Though import volumes will not change due to the duty reform, the price of jet fuel in Europe will likely decrease due to growing competition from outside. That will further pressure the region's refiners, which have seen profit margins slump in 2013 due to large diesel imports and weaker demand.

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

Jet fuel flows from the United States will likely fluctuate in 2014 because European traders and airlines have already locked in most term deals with Middle Eastern and Asian suppliers.

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

(Additional reporting by Robert Gibbons in New York, Claire Milhench in London and Barbara Lewis in Brussels; Editing by Dale Hudson)

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