India's second largest refiner, Bharat Petroleum (BPCL), will complete expansion projects costing more than $3 billion at two refineries by 2015, as it moves to boost output and upgrade fuel quality, a senior company official said.

Diesel demand in India has jumped after the government held the price of the fuel steady despite raising that of gasoline, prompting drivers to switch. Diesel-powered vehicles made up more than 40 % of sales of new cars in the year to March 2012, or double their share from the prior year.

India's diesel demand has jumped by 10.8% in the five months since the new financial year started in April, R K Mehra, state-run BPCL's executive director of international trade, shipping and risk management told Reuters in an interview.

A delayed monsoon season has also increased diesel demand from the transportation and agricultural sectors for those months, he said. Heavy monsoon rains, which usually run from July to September, trim demand for the diesel used to pump water from wells for irrigation during the dry season.

"The factors are conducive for good growth," added Mehra, who was speaking late on Tuesday. "Many cars are using diesel because of the disparity in petrol prices."

For example, diesel is about 25% cheaper than gasoline in Mumbai. "Diesel is the cheapest fuel in India," Mehra said.

Diesel accounts for more than 40% of India's consumption of refined fuel.

The government subsidises the fuel mainly to benefit farmers but the wide gap with petrol prices has caused 'dieselisation' of the economy, with diesel variants of popular automobile models targeted at price-conscious middle-class consumers.

In September, the Indian government raised the price of heavily subsidised diesel, but demand for the fuel is not likely to ease in the long term as it is still cheaper than petrol.

Expansion plans

To capture this growth, BPCL plans to spend $2.6 billion at the Kochi refinery to raise its crude processing capacity by 63% to 15.5 million tons per year (tpy) or 310,000 barrels per day (bpd) from 190,000 bpd in December 2015, Mehra said.

New units at the site include a 10.5 million tpy crude distillation unit, a 2.2 million tpy fluid catalytic cracker (FCC) unit, a 4.3 million tpy diesel hydrotreater, a 3 million tpy vacuum gasoil hydrotreater and a 3.84 million tpy delayed coker.

It will also export less naphtha as it diverts the product to a new petrochemical unit as part of the projects.

BPCL is set to partner with South Korea's petrochemical firm, LG Chemicals, to build the FCC unit at Kochi which will produce about 2.15 million tons of propylene annually.

At BPCL's 240,000-bpd refinery in Mumbai, the firm is building a new 1.2 million tons per year (tpy) continuous catalyst regeneration (CCR) plant and a naphtha hydrotreater to produce more gasoline.

This is expected to divert some of BPCL's spot naphtha export cargoes to its domestic plant.

While it is unclear by how much BPCL's naphtha exports will fall, India is Asia's key spot naphtha exporter, so any reduction is likely to have an impact on the market. BPCL currently exports about 1.99 million tons of naphtha a year.

A hydrocracker at the same site will be revamped to 2 million tpy from 1.75 million tpy to produce higher quality diesel to meet the emissions guidelines known as the Euro III and Euro IV specifications.

"We want to improve the quality of diesel," Mehra said.

In Mumbai, a separate project to replace one older CDU with a new 6 million tpy unit will be completed by the end of 2014. The two projects cost a total of 32.4 billion rupees ($612 million).

BPCL owns majority stakes in two other refineries -- a 120,000 bpd plant at Bina in central India and a 60,000 bpd facility in northeast Assam.