(Updates with comment from analyst in seventh paragraph.)
Jan. 31 (Bloomberg) -- A free-trade agreement between the European Union and Singapore that removes taxes on jet fuel and diesel imports to the continent will come into force as early as 2014, potentially boosting petroleum shipments to the EU.
The full ratification process will take about two years from Dec. 16, when a draft deal was reached, the Singapore Trade Ministry said yesterday in an e-mail. The pact is similar to an accord between the EU and South Korea that led to an unprecedented flow of North Sea crude oil to the Asian nation.
The EU and Singapore are seeking to build on the growing trade in goods, estimated at S$106 billion ($86 billion) in 2011 by the island nation’s trade ministry. Removal of taxes would allow refiners in Singapore, such as Royal Dutch Shell Plc and Exxon Mobil Corp., to ship so-called distillate fuels including diesel to the EU, opening an export route that is dominated by companies in India and the Middle East. It may also exacerbate worsening refining profit margins in Europe, where the second recession in four years is cutting demand.
“This could be disastrous for European refiners,” Olivier Jakob, managing director at Zug, Switzerland-based Petromatrix GmbH, said by phone Jan. 25. “The FTA with Korea is already taking crude out of Europe and increasing the cost of it for Europeans, now you have another challenge for them with competition for distillate flows from Singapore. It’s already bad for them and is going to get worse.”
Singapore, Asia’s largest export refiner, ships oil products including gasoline, diesel and jet fuel to nations as far away as the U.S., according to government data. The EU currently imposes a 4.7 percent tax on jet fuel and 3.5 percent tariff on diesel imports from Singapore.
Asian gasoil, a benchmark for diesel and jet fuel, for February settlement was at a discount of $18.22 a metric ton to European prices as of 4:15 p.m. London time, according to data compiled by Bloomberg. Import taxes and shipping costs erode potential profits in moving fuels to other markets.
“Complex refineries in Asia are able to process heavy and cheaper crude to produce top of the barrel oil products at a much lower cost and are hence able to export products to destinations as far as Europe at a competitive price,” Abhishek Deshpande, an analyst at Natixis SA in London, said today in an e-mailed response to questions.
There are currently no taxes levied on EU petroleum or crude imports into Singapore.
The pact will be presented to EU legislators for approval by May, a government official involved in the talks said Jan. 25, asking not to be identified, citing policy.
A free-trade deal between the EU and South Korea prompted the flow of crude exports to the Asian nation. The European Parliament approved that deal in February 2011, overcoming the final hurdle to the agreement, which then took effect in July that year.
At least 53 million barrels of North Sea crude have been exported to South Korea since the agreement that exempted refiners in the Asian nation from a 3 percent tariff began. That is equivalent to about three weeks of imports.
“The EU and Singapore will now seek approval for the deal from their respective political authorities and envisage initialling the draft agreement in Spring 2013,” the EU said in a Dec. 16 statement, citing Trade Commissioner Karel de Gucht and Minister of Trade and Industry Lim Hng Kiang.
The accord still requires the approval within the European Commission and by EU member states and the European Parliament. We “cannot give a precise forecast as to when they will all be completed and the FTA will enter into force,” John Clancy, a trade spokesman of the commission, the 27-nation EU’s executive arm in Brussels, said by e-mail on Jan. 25.
Buyers in Europe were to import about 1.4 million tons of jet fuel from the Middle East and Asia this month, according to a Jan. 21 Bloomberg survey of six traders and brokers who specialize in the trade of the aviation fuel. The increase is from 1.5 million tons in December when volumes rose to the highest in three months.
Singapore, which has refining capacity of about 1.4 million barrels a day, roughly equal to U.K. consumption, didn’t export any jet fuel or diesel to the EU in the five weeks through Jan. 30, data from the trade ministry show.
In the first half of last year, the EU imported 8.8 million tons of diesel a month from all countries, according to data from the bloc.
Several European refineries have reduced production counter-seasonally due to a fall in processing margins and more will probably curb operations if profits don’t recover, the International Energy Agency said Jan. 18 in its monthly report.
Shell’s Pernis facility in the Netherlands and Exxon Mobil’s Fawley in the U.K. were among sites operating at reduced rates, the IEA said citing press reports.
Singapore’s Trade Ministry said in December that local exporters of electronics, pharmaceuticals, chemicals and processed food products will benefit from the removal of EU tariffs.
--With assistance from Rupert Rowling and Lananh Nguyen in London and Jonathan Stearns in Brussels. Editors: Rachel Graham, Steve Voss.