* Motiva eclipses Exxon Baytown as largest U.S. refinery * Refinery can process wide variety of crude slates * Gulf Coast refiners could get boost from Keystone XL pipeline By Kristen Hays and Erwin Seba PORT ARTHUR, Texas, May 31 (Reuters) - Saudi Arabia's Motiva Port Arthur, Texas joint-venture with Royal Dutch Shell was set to become the biggest U.S. refinery after top energy officials inaugurated a $7 billion expansion on Thursday. With the completion of its crude distillation unit (CDU), the refinery's 600,000 bpd capacity eclipses Exxon Mobil Corp's 560,640 bpd Baytown, Texas, refinery, as the largest U.S. refinery. The refinery's pre-expansion capacity was 285,000 bpd. Motiva Enterprises is a joint venture between Shell Oil, the U.S. unit of Royal Dutch Shell and Saudi Aramco -- OPEC member Saudi Arabia's state-owned oil company. The expansion, launched in 2007 and suspended in 2009 for a year to reign in costs, gives Motiva the flexibility to run lower-cost heavy oil supplies from South America and potentially from Canada, if the delayed Keystone XL pipeline is built. Other Gulf Coast refiners like Marathon Petroleum Corp have completed similar expansions, while excess refining capacity in the distressed East Coast market has shut down. Profit margins at Gulf Coast refineries have lagged those in the Midwest, which have benefited from cheap supplies of heavy Canadian crude. But Gulf Coast refineries like Motiva could get a boost if the Canada-to-Texas Keystone XL pipeline is built. The Motiva refinery had processed mostly medium-sour crude to date, and the expansion allows it to process heavier crudes as well as light-sweet domestic crude, including supply from U.S. shale reservoirs like the Bakken where supply is booming. "Whatever crude is out there, Motiva Port Arthur can manage it, which gives us flexibility to choose feedstock based on availability and economics, not on capacity limitations," Bob Pease, Chief Executive Officer of Motiva Enterprises, said at a commissioning ceremony. Saudi Aramco Chief Executive Khalid Al-Falih and Royal Dutch Shell Chief Executive Officer Peter Voser also attended. "This expansion allows us to process heavy, sour acid crudes from wherever they become available -- initially Saudi Arabia, but also from other areas," Voser said. "We can also process available light, sweet shale oil -- if it makes economic sense." On the East Coast, Delta Air Lines has agreed to buy Phillips 66's shut 185,000 bpd Trainer, Pennsylvania refinery for $180 million, while talks are ongoing between Sunoco Inc and Carlyle Group about a joint venture of the two with Carlyle running Sunoco's 335,000 bpd Philadelphia refinery. "Some refineries are unsuitable for processing more difficult crude on which supply increasingly depends," Voser said. "They are in the wrong places making the wrong products." However, Sunoco's 178,000 bpd Marcus Hook, Pennsylvania, refinery is permanently shut, as is Hess Corp and Venezuelan state oil company PDVSA's joint-venture 350,000 bpd Hovensa refinery in the U.S. Virgin Islands. It also comes more than a year after Marathon Petroleum Corp doubled capacity at its 464,000 bpd Garyville, Louisiana, refinery, and after the U.S. in 2011 became a net exporter for the first time since 1949, having shipped out 439,000 bpd more fuel than it imported. Bill Klesse, CEO of independent refinery Valero Energy Corp, said at a refining conference in March that he didn't expect Motiva's startup to cut into Gulf Coast exports because it offsets Hovensa. On the crude oil side, Klesse said Motiva's startup might have affected heavy sour crude differentials, which already have narrowed as U.S, onshore light-sweet crude production has ramped up. However, Saudi Arabia has announced it would supply incremental Saudi heavy crude to the market. Voser also told Reuters in March that its partner would be a supplier for the Motiva plant. However, Valero shelved a $500 million new coker unit at its 292,000 bpd Port Arthur refinery because that heavy-light differential has narrowed with more light-sweet crude coming into the market. Klesse said differentials are adequate for existing coking capacity along the Gulf Coast, the newest being a $2.5 billion coker at Total's 232,000 bpd Port Arthur refinery. But Valero didn't see differentials staying wide enough to justify another new coker. Gulf Coast refiners are expected to add primary and conversion units over the next decade, though at a slower pace, said Mark Routt, a senior consultant with KBC in Houston. The advent of North American shale natural gas output, which has kept prices hovering near $2.50 per million British thermal units, gives the U.S. a strategic advantage over other potential refined product exporters, such as those in Latin America and Europe, Routt said.