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UPDATE 1-Shell sells Australian refinery, petrol stations to Vitol for $2.6 bln

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SYDNEY, Feb 21 (Reuters) - Anglo Dutch oil company Royal Dutch Shell said on Friday it has agreed to sell its Australian downstream businesses to oil trader Vitol SA for about A$2.9 billion ($2.6 billion).

The sale covers Shell's Geelong refinery and 870 service stations plus its bulk fuels, bitumen and chemicals businesses and part of its lubricants businesses in Australia.

A Vitol spokeswoman confirmed to Reuters that the Abu Dhabi Investment Council sovereign fund was part of the group which bought the assets.

Shell, attempting to win round investors after a major profit warning early this year, said in January it was targeting $15 billion of disposals over the next two years as it tries to deliver more attractive returns to shareholders.

Big oil companies like Shell have also been balking at spending to upgrade expensive, loss-making Australian refineries amid higher global oil prices and a drop in Australian crude output, as well as rising labour and financing costs due to a strong local dollar.

"Australia remains important to Shell but we are making tough portfolio choices to improve the company's overall competitiveness," Chief Executive Ben van Beurden said in a statement.

Shell has already sold downstream assets including refineries in the UK, Germany, France, Norway and the Czech Republic and downstream businesses in Egypt, Spain, Greece, Finland and Sweden.

VITOL TARGETS GROWTH

Vitol entered the race for Australian petrol stations after rival Trafigura Beheer BV's Puma Energy arm bought two fuel distributors last year, making it Australia's largest independent fuel retailer.

Others eyeing the market include South Korean refiner S-Oil , which said last month it was in exclusive talks to buy a stake in Australia's United Petroleum, a privately owned business valued at about A$1 billion, including debt, that received a number of approaches from international companies following Puma's takeover of Ausfuel.

Australia's refineries, owned by Shell, BP, ExxonMobil and Caltex, have mostly booked losses over the past several years as tighter fuel quality standards and mega refineries in Asia have made them uncompetitive.

Rather than spend money on upgrading their plants, the majors have been looking to sell them or turn them into fuel terminals.

That has created an opportunity for the giant oil traders looking to expand their oil products market share and grow volumes in face of competition from local trading firms in big markets like Indonesia and Vietnam.

"Australia is a growing economy and we look forward to working with the management team to strengthen and grow the business," Vitol President and CEO Ian Taylor said in a statement.

Most of Shell's refining and distribution staff will continue to operate the business and the Shell branding would remain under its new owner, Shell said.

The sale includes a brand licence arrangement and a distributor arrangement for Shell Lubricants but not Shell's oil and gas producing operations, the companies said.