* Motiva eclipses Exxon Baytown as largest U.S. refinery * Refinery can process wide variety of crude * Gulf Coast refiners could get boost from Keystone XL pipeline By Kristen Hays and Erwin Seba PORT ARTHUR, Texas, May 31 (Reuters) - Royal Dutch Shell and Saudi Aramco unveiled the $10 billion expansion of their joint-venture Motiva Enterprises Texas Gulf Coast refinery on Thursday as it neared its top capacity, taking the crown as the largest in the U.S. "This ambitious expansion creates this country's largest refinery and one of the most advanced anywhere," said Shell Chief Executive Peter Voser under a huge party tent next to the churning plant. With the completion of a new crude distillation unit (CDU) and associated units, the refinery's newly minted 600,000 bpd capacity eclipses Exxon Mobil Corp's 560,640 bpd Baytown, Texas, refinery, as the largest in the country. The refinery's pre-expansion capacity was 285,000 bpd. Motiva also aims to increase fuel exports to up to 100,000 barrels per day once pipeline infrastructure from the plant to its docks is completed, said Bob Pease, Motiva president and CEO. He didn't say how much the refinery currently exports. Last year the U.S. became a net exporter for the first time since 1949, having shipped out 439,000 bpd more fuel than was imported. The Motiva project was launched in 2007, when U.S. fuel demand was up and refinery capacity was seen as inadequate. That changed when the global financial crisis hit, slashing demand and prompting closures of several unprofitable refineries, particularly in the U.S. Northeast. Motiva suspended work on the project for about a year in late 2008 to rein in costs, but did not intend to abandon it, said Khalid Al-Falih, president and chief executive of Saudi Aramco, the state-owned oil company of OPEC member Saudi Arabia. What had been estimated by analysts to be a $7 billion project was, in the end, a $10 billion project. "Rather than cut and run, we pressed ahead with our long-term commitment," he said. "We're confident in the return on investment, despite the cost, will be very healthy." Motiva Enterprises is a joint venture between Shell Oil, the U.S. unit of Royal Dutch Shell and Saudi Aramco. The Port Arthur refinery is one of three Motiva plants in the U.S., the other two being in Louisiana. Tom Purves, vice president of manufacturing of the expansion project, told Reuters on Thursday the plant was "closing in" on its 600,000 bpd capacity sooner than expected. He said it would reach that capacity in the current quarter rather than the third quarter this year as previously expected. "It's all in place," he said. The expansion gives Motiva the flexibility to run lower-cost heavy oil from South America, Latin 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 more from cheap supplies of heavy Canadian crude as well as cheaper inland U.S crude output. Several Gulf Coast refiners with plants able to process that kind of heavy crude -- like Marathon and Valero Energy Corp -- are vocal proponents of Keystone and its ability to bring more Canadian crude to the Gulf market. However, Voser said Motiva doesn't need Canadian crude to be profitable. Pre-expansion, the refinery had processed mostly medium-sour crude. Now it can run heavier crudes from South America, Latin America, Saudi Arabia and elsewhere as well as light-sweet domestic crude, including supply from U.S. shale oil reservoirs like North Dakota's Bakken where supply is booming. Running Canadian crude "is always a possibility, but the refinery will not depend on that," Voser said. "We are not dependent on that crude, but we have the flexibility to take it." Refineries that have closed lack that flexibility. 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. Both run light-sweet crude, and lack of large-scale infrastructure to transport Bakken and other cheap Midwest crude to those plants left them dependent on more expensive Brent-priced crude. 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. "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." Valero CEO Bill Klesse said at a refining conference in March that he didn't expect Motiva's startup to cut into Gulf Coast exports because it offsets the loss of production from Hovensa's closed refinery in the Virgin Islands. Voser also told Reuters in March that its partner would be a supplier for the Motiva plant. Pease said Motiva would run heavy Saudi crude from Saudi Aramco for about two months, then branch out to other crudes as well. Not everyone is expanding. 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 at Motiva and other plants. But Valero didn't see differentials staying wide enough to justify another new coker. Yet Mark Routt, a senior consultant with KBC in Houston, told Reuters on Wednesday that Gulf Coast refiners are expected to add primary and conversion units over the next decade, though at a slower pace. 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. As of 2011, the last year figures were avalable, 137 refineries were operating in the United States, according to the U.S. Energy Information Administration.