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By Youssef Saba and Marwa Rashad

DUBAI/LONDON, July 7 (Reuters) - Saudi Arabia is considering increasing the capacity of its crude oil pipeline to the kingdom's west coast on the Red Sea, which would enable it and possibly its neighbors to transport larger quantities of oil without having to cross the Strait of Hormuz, five sources familiar with the matter said.

The East-West pipeline was built in the early 1980s and became important after the outbreak of the Iran war in February and the resulting halt in shipping through the Strait of Hormuz.

The pipeline can transport up to seven million barrels per day of crude to the port of Yanbu on the Red Sea. The CEO of Saudi Aramco, the state-backed oil giant, said in May that about two million barrels per day feed refineries on the west coast, while about five million barrels per day are allocated for export.

Talks with neighboring countries

Sources indicated that the Kingdom is holding preliminary talks with some of its neighbors regarding a possible expansion of pipeline capacity to up to two million barrels per day.

It remains unclear whether Aramco's planned pipeline capacity increase will involve upgrading existing infrastructure or constructing a new pipeline. One source indicated that the increase will include a second, smaller pipeline for transporting refined petroleum products.

Kuwait, Bahrain and Qatar all lack routes that can bypass the Strait of Hormuz, while Iraq’s disputed and frequently disrupted pipeline to Turkey is operating well below its capacity.

Sheikh Nawaf Al-Sabah, CEO of Kuwait Petroleum Corporation, said at the Atlantic Council's Global Energy Forum last month that Kuwait is in talks with Saudi Arabia and the United Arab Emirates to discuss how to expand the two countries' pipeline network to accommodate Kuwaiti oil.

Two sources said the expansion could range from one to two million barrels per day, also considering refined products. Another source said it would take years, cost billions of dollars, and require changes to the pricing mechanism for Saudi crude oil.

Iran's closure of the Strait of Hormuz forced Gulf oil producers to halt up to 12 million barrels per day of production, causing a sharp rise in prices. Flows have partially resumed following a preliminary agreement reached last month between the United States and Iran, but remain below pre-war levels.

Iraq's production fell from 4.3 million barrels per day to less than 1.5 million barrels per day in May, Kuwait declared force majeure in March, and Bahrain's Sitra refinery was hit by Iranian missile strikes several times.

Zaid Balbaji, managing partner at London-based consultancy Hardcastle Advisory, said , "The recent talks about new pipeline routes involving Saudi Arabia, Kuwait and Qatar reflect a broader strategic reality. This conflict has sparked a growing regional awareness of the risks of being entirely dependent on the Strait of Hormuz."

Aramco declined to comment, while the Saudi government's communications center, Bahrain's national communications center, the Iraqi oil ministry, and Qatar Energy have not yet responded to requests for comment.

Three sources said that Qatar, which mainly exports liquefied natural gas, is facing greater technical obstacles and is considering several possible alternatives, including transit through Saudi Arabia.

The UAE, the only other Gulf state with significant capacity to bypass the Strait of Hormuz, has completed half of a new pipeline called West-East, which will double crude oil transport capacity to Fujairah when it becomes operational next year. The existing Abu Dhabi pipeline can transport up to 1.8 million barrels per day.

One industry source said that Saudi Arabia's expansion "indicates that the next phase of post-war Saudi-Emirati competition may be a race to the top in oil production, and consequently a race to the bottom in prices."