World fuel markets tight till 2010: Mandil

LONDON (Reuters) - Rising refinery project costs and delays caused by bottlenecks in engineering services will help to keep global fuel markets tight until the end of this decade, the head of the International Energy Agency said on Monday.

Expansion in the refining business has been hindered by rising costs of raw materials, such as steel, and environmental compliance, as well as by a growing shortage of engineering expertise, analysts say.

"Our view in the IEA is that due to these bottlenecks and these delays, the downstream market will probably remain very tight until 2010," IEA Executive Director Claude Mandil told a Reuters energy summit in London.

"That's because projects take time, some of them will be delayed and others may be canceled, and because some of the increased investment is to offset increased costs," Mandil said.

"If even some of these projects are implemented as planned, there will be a strong increase in (refining) capacity from 2011," he added.

Mandil said oil companies were now doing all they could by investing heavily in exploration and production and in downstream refining projects.

"They are spending much more money on exploration," Mandil said of the oil companies.

"I'm not sure we can ask them to do more," he said, but added the effort needed "to be sustained for several years."

Part of the increased spending offsets rising costs and does not necessarily translate into increased exploration and production activity, but Mandil said oil companies probably could not do any more because of the shortage of drilling rigs.

"The pity is that during the past decades they have not invested enough. Now everybody is doing the same thing at the same time, resulting in increased costs and increased bottlenecks," Mandil said.

Wall Street bank Citigroup said last month that the cost of building new diesel capacity was "some 15-20 percent higher than our original estimates from November 2005."

It said Finnish group Neste, due to complete a 600 million euro hydrocracking complex late this year to convert low-value residues to profitable diesel, would likely have to pay at least 100 million euros more if it commissioned the project now.