CAI-Asia – Oil Industry Dialogue for Cleaner Fuels in Asia

July 2004

Tokyo, Japan

Cornie HuizengaMichael WalshJohn CourtisGrant Boyle

Overview of Presentation

• Introduction CAI-Asia and background and objectives of Oil Industry Dialogue

• The impact of fuels on vehicle emissions in Asia

• Producing cleaner fuels in Asia• The role of tax incentives, subsidies, and

pricing in the introduction of cleaner fuels in Asia

• Continuation of the Dialogue

Overview

0

50

100

150

200

250

300

350

400

Ban

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Bei

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Bus

an

Col

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Dha

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Han

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Ho

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Hon

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ong

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Kar

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Kat

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Man

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New

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Average Air Quality Levels in Asia 2000 – 2003 (*)

SO2

NO2

SPM

PM10

SPM Limit = 90 µg/m3 (WHO, 1979)

PM10 Limit = 50 µg/m3 (USEPA,

1997)

SO2 Limit = 50 µg/m3 (WHO, 1999)

NO2 Limit = 40 µg/m3 (WHO, 1999)

Part 1

(*) averages based on available data,Contact hfabian@adb.org for details

- CAI-Asia -

• The Clean Air Initiative promotes and demonstrates innovative ways to improve the air quality of Asian Cities through sharing experiences and building partnership- Sharing knowledge and experiences on air quality

management- Capacity building- Improving policy and regulatory frameworks at the

regional level - Assisting cities in formulating and implementing

integrated air quality management systems - Piloting projects to encourage innovation

“Create an Air Quality Management Community in Asia”

Part 1

CITIESBangkok,ThailandChiang Mai,ThailandChengdu,PRCChittagong,BangladeshChongqing,PRCColombo,Sri LankaDhaka, BangladeshGuangzhou,PRCHaiphong, Viet NamHangzhou,PRCHanoi,Viet NamHarbin,PRCHo Chi Minh City,Viet NamHong Kong, SAR, ChinaHyderabad, IndiaIslamabad,PakistanKathmandu,NepalLahore, PakistanMakati,PhilippinesMetro Manila, PhilippinesMumbai, IndiaNaga,PhilippinesPhnom Penh,CambodiaPune, IndiaSingapore, (NEA)Surabaya,IndonesiaTianjin,PRCUlaanbaatar, MongoliaYogyakarta,Indonesia

NGAsAndhra Pradesh Pollution Control Board, IndiaAustralia Department of Environment and HeritageBalochistan EPA, PakistanCentral Pollution Control Board, IndiaDepartment of Environment, Bangladesh Department of Forests, Ecology and Env’t, Karnataka State, IndiaDepartment of Environment and Natural Resources, PhilippinesDepartment of Energy, PhilippinesDepartment of Transportation and Communications, PhilippinesDhaka Transport Coordination Board, BangladeshEnvironmental Protection Agency Karachi, PakistanMinistry of Environment, CambodiaMinistry of Environment, IndonesiaMinistry of Public Works and Transport, Cambodia Ministry of Road Transport and Highways, IndiaPollution Control Department, ThailandState Environmental Protection Administration (PRC focal point)Viet Nam Register, Viet NamDEVELOPMENT AGENCIESAsian Development BankAustralian Department for Environment and HeritageGerman Agency for Technical CooperationThe William and Flora Hewlett FoundationUnited States-Asia Environmental PartnershipSidaWorld Bank

FULL PRIVATE SECTOR MemberFord Motor ShellCompanyASSOCIATE PRIVATE SECTOR MemberAVL Corning ETIACFA DEKRA ESPCerulean EMITEC IPIECAMAHA SGS

50 NGOs and

Academic Institutions

in the Region

CAI-Asia Membership

Part 1

Overview of Oil Dialogue• Goal: To contribute to better air quality management in Asia by following a structured and

scientific approach in the identification of fuel quality improvement and associated improvement in vehicle technology and other directly related measures

• Participants: Launch meeting in Singapore on 21 July 2003 included Bangchak Petroleum Public Company, BP, ChevronTexaco, ExxonMobil, Indian Oil Corporation, Pakistan State Oil, Petron Corporation, PTT Public Company Ltd, Shell, Showa Shell Sekiyu K. K., Singapore Petroleum Company, Thai Oil Company Limited.

• ToR: Adoption of Singapore statement kicked of the Dialogue (http://www.cleanairnet.org/caiasia/1412/articles-58710_singapore.pdf). This was followed by the formulation of the detailed ToR.

• Components: Three background papers under preparation:– Relationship Fuels and Vehicles;– Costs of Producing Cleaner Fuels– Incentives for the adoption of Cleaner Fuels

• Process: Dialogue with Vehicle Industry• Results: Presentation of draft results during BAQ 2004• Follow-up: Inform governments on the potential ability and associated efforts to

produce cleaner fuels, this in support of development of medium term fuel quality strategies by Asian governments

Part 1

Why are we interested in fuels?

• Vehicle emissions are an important contributor to ambient air pollution in Asia (PM, NOx, and Ozone being pollutants of concern)

• To reduce vehicle emissions an integrated approach is required, in which fuels play an important role

• Fuels and vehicles are an integrated system, whereby fuel quality is the main enabler for cleaner vehicle technology and can have an important impact on emissions from existing in-use vehicles

-1.80%-1.60%

-4.80%

-2.80%

-2.40%

-4.20%

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

% R

educ

tion

in a

nnua

l tre

nd

age 15 - 64 age 65 +

All causes Cardiovascular Respiratory

Reductions in Deaths after Sulfur Restriction in Hong Kong

Source: The Lancet

Part 1

Motorization Trends in Asia

0

100

200

300

400

500

600

1995 2000 2005 2010 2015 2020 2025 2030

U.S. Current Level

Veh

icle

Pop

ula

tion

(m

illi

ons)

0

100

200

300

400

500

600

1995 2000 2005 2010 2015 2020 2025 2030

U.S. Current Level

Veh

icle

Pop

ula

tion

(m

illi

ons)

Vehicle growth scenario China

Source: ADB 2002. Policy Guidelines to Reduce Vehicle EmissionsSource: Dongquan He, Energy Foundation 2004

Part 1

Vehicle Fleet Composition in selected Asian Cities

0

1000000

2000000

3000000

4000000

5000000

6000000

Manila Gasoline Manila Diesel Bangkok Gasoline Bangkok Diesel Bangalore Gasoline Bangalore Diesel

1995

2000

2005

2010

Source: Camarsa, 2004

Part 1

(5,000,000)

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Bangladesh 2&3 wheelers Cambodia Hongkong, China

India Indonesia Japan

Korea, Republic of Malaysia Pakistan 2&3 wheelers

PRC Sri Lanka 2&3 wheelers Thailand 2&3 wheelers

Viet Nam

Increase in 2 & 3 wheelers in Asia

The Global Market for New Motorcycles and Mopeds

Annual Production motorcycles China (in millions)

Part 1

New Vehicle Emissions Standards (light duty

vehicles)Country 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10

European Union

Euro 1 Euro 2 Euro 3 Euro 4 Euro 5

Bangladesh Euro 2 (under discussion)

Hong Kong, China

Euro 1 Euro 2 Euro 3 Euro 4

Indiaa Euro 1 Euro 2 E3

Indiab E1 Euro 2 Euro 3

Indonesia Euro 2

Malaysia Euro 1 Euro 2

Nepal Euro 1

Philippines Euro 1

PRCa Euro 1 Euro 2 Euro 3

PRCc Euro 1 Euro 2 Euro 3

Singaporee Euro 1 Euro 2

Singaporeg Euro 1 Euro 2 Euro 4

Sri Lanka Euro 1

Taipei,China US Tier 1 US Tier 2 for dieseld

Thailand Euro 1 Euro 2 Euro 3 Euro4

Viet Name Euro 1

Viet Namf Euro 1

a Entire country

b Delhi and other cities; Euro 2 introduced in Mumbai, Kolkata and Chennai in 2001; Euro 2 in Bangalore, Hyderabad, Khampur, Pune and Ahmedabad in 2003, Euro 3 to be introduced in Delhi, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad and Ahmedabad in 2005

c Beijing and Shanghai

d Gasoline vehicles under consideration

e for gasoline vehicles

f for diesel vehicles

g for all types of diesel vehicles

Part 1

In-use Standards for Diesel Vehicles in Asia Effectivity

Smoke HSU

Test

Bangladesh - 65 -

Cambodia Current 50 -

60

Free acceleration

Hong Kong, China Current

50 Loaded lug down test on a chassis dynamometera

India Current 65 Free acceleration

Indonesia Current 50 Free acceleration

Malaysia Current 50 -

Nepalb Current 65 -

Pakistan Current 40 Free acceleration

Philippines Current 2.5 m-1 Free accelerationc

Philippines 2003 1.2 m-1 Free accelerationd

PRC Current 4.5 Rb Free acceleration

Singapore Current 50 -

Effectivity Smoke HSU

Test

Sri Lanka Current 65 Idle

Sri Lanka Current 75 Free acceleration

Thailand Current 45 Free acceleration

Thailand Current 35% Loaded

Thailand Current 50 Filter test – free acceleration

Thailand Current 40% Filter test - loaded

Viet Name Current 72 Idle

Viet Namf Current 85 Idle

Viet Namg 2005 72 Idle

a for vehicles apprehended under the Smoky Vehicle Control Program

b for vehicles manufactured in 1995 and beyond

c For naturally aspirated engines; limit is 2.5 m-1 for turbo-charged engine and 4.5 m-1 for a 1,000 m increase in elevation

d For naturally aspirated engines; limit is 2.2 m-1 for turbo-charged engine and 3.2 m-1 for a 1,000 m increase in elevation

Part 1

Diesel Sulfur Levels in Asia, EU and the US

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Bangladesh 5000

Cambodia 2000

Hong Kong, China 500 50

India 5000 2500 500 350

Indonesia 5000

Japan 500 100 50 10 Malaysia 5000 3000 500 marketed

Pakistan 10000 5000

Philippines 5000 2000 500

PRC 5000 2000

Republic of Korea 500 430 30 10

Singapore 3000 500

Sri Lanka 10000 3000

Taipei,China 3000 500 350 50

Thailand 2500 500 350

Vietnam 10000 2000 500

European Union 350 50 10

United States 500 15

> 500 ppm 51 – 500 ppm < 50 ppm

Part 1

Gasoline Specifications in Asia and EU

Lead Sulfur ppm

Benzene % v/v, max

Aromatics %

Olefins %

Oxygen % m/m, max

RVP summer kPa, max

Linked to Euro 3 Vehicle Standards Effective 2000

Lead free 150 1.0 42 18 2.7 60

Linked to Euro 4 Vehicle Standards Effective 2005

Lead free 50 1.0 35 18 2.7 60

Bangladesh Lead free 1000 - - - - 0.7 kg/m2 Cambodia 0.15 g/l - 3.5 - - - - Hong Kong, China

Lead free 150 1 42 18 2.7 60

India Lead free 1000a 5b - - 2.7 35-60 Indonesia 0.30 g/l 2000 - - - 2.0 (premix) 62 Japan Lead free 100 1 - - - 78 Malaysia Lead free 1500 5 40 18 - 70 Pakistan Lead free 10000 5 40 - - 9-10 psi Philippines Lead free 1000 2 35 - - 9 psi PRC Lead free 1000 2.5 40 35 - 74 Singapore Lead free - - - - - - Sri Lanka Lead free 1000 4 45 - 2.7 35-60 Taipei,China Lead free 180 1 - - 2.0 8.9 psi Thailand Lead free 500 3% 35 - 1-2% -

Viet Nam Lead free 5000-10000

5 - - - -

aIn Delhi, Mumbai, Kolkata and Chennai sulfur levels are 500 ppm bBenzene – 3% in metros and 1% in National Capital Region

Part 1

Context Summary• Asia as a region has the fastest vehicle growth

rates in the world. Variable growth rates by country and by technology

• Characteristics of the vehicle fleet in Asia are unique: high percentage of 2-3 wheelers; modified vehicles; and high average lifetime of vehicles

• Considering existing and currently planned emission standards majority of vehicles in Asia in 2010 will still be less than Euro 2 equivalent.

• Cleaner fuels will have direct impact on emissions from both new vehicles and existing in-use vehicles

Part 1

Part 2

The Impact of Fuels On Vehicle Emissions

Part 2

What are the Air Quality Concerns?

Human Health Concerns

GLOBAL Global WarmingAcid RainOzone Depletion

Industrial EmissionsEnergy ConsumptionVehicle EmissionsAgriculture

AIR

QUALITY

URBANPollutants

Pollutants

Part 2

Different Fuels = Different Emissions

ÖL

+ Additives

+ Additives

Blending with5 - 12

differentComponents

DifferentCrude Oils

and Refineries

OlefinsAromaticsParaff./ Naptha

Sulfur

SulfurOlefinsParaff. /NaphtaAromatics

~300 HC

~200 HC

+ Air Different Combustion NOx

HC

SO2

C6H6

PAH

PM

CO

CO2

Gasoline

Diesel

Formulation ?

Formulation ?

Part 2

Emission Control Reduction Requires a Systems Approach

Advanced Engine Designs

Advanced Emission ControlsHigh Quality Fuel and Lubricants

Low (er) Emissions

New

ca

rs

Retrofits

High Quality Fuel and Lubricants

Low (er) Emissions

In-u

se

cars I & M

Part 2

Auto Oil Programs• Europe• Auto Oil Program I (Air quality driven) 1993 - 1996

Gasoline / Diesel vehicles/engines (LD, HD), gasoline / diesel fuel

• EPEFE (European Program Emissions on Fuels and Engine Technology)

• Auto Oil Program II (1997 - 1999 / Conciliation / --> 2001• Clean Air for Europe Program (“CAFE”, from 2001 on)

• USA• AQIRP (Air Quality Improvement Research Program)

Gasoline vehicles, gasoline / alternative fuels• Phase I, II -1989 - 1996 (published 1993 and 1997)

• Japan• JCAP (Japan Clean Air Program)

Gasoline / Diesel vehicles/ engines (LD, HD), gasoline/diesel fuel Phase1 1996 - 1999; Phase II 1999 - 2001 These programs provide much of the data used to determine the effects

of different fuels parameters on emissions in Europe, USA and Japan

Part 2

Gasoline Effects on Emissions

+ ++

+++

- --

---

2-10 %10-20 %> 20 %

Improvementor

Deterioration}0 2 %

Fuel-

Reduction of :

Benzene

Aromatics

Olefins

Vapor pressure

DistillationCharacteristics

Addition Oxygenates

Regulated

CO

Toxics (Unregulated )

Sulphur

HC NOx Benzene Aldehydechange

Emissions

o o o

o o o

--

+++++ ++ +++

+ + +

+ +++ ++ ?

++ +

-

o ooo

o

o/+

o-

-

o

o

o

Butadiene

o

---++

o

o

?

o

---

oo

Part 2

Diesel-Fuel Effects on Emissions

Diesel fuel-change

Reduction of:

Aromatics

Back End Distillation (T95)

Increase of ...

CO

Sulphur

HC NOx Particulates

+/++

++/o

+++/++ +++/+

Vehicle - Emissions LDV / HDV

Density ++/- ++/

Cetane Number

o o ? / o

o/o- /

++- / o +

o+/o- //- -o/-

o o- /

+/--

-

Part 2

+ ++

+++

- --

---

2-10 %10-20 %> 20 %

Improvementor

Deterioration}0 2 %

Zeolite or refractory oxide support

Precious Metal

SO3

SOSO44

Transition Metal

H2SO4

O2

Sulfate make

Sulfur inhibition

Sulfate Poisoning

SO2

Sulfur Effects

All Vehicular Catalysts Are Impaired By Sulfur Through Inhibition, Poisoning and Make Sulfate

Part 2

Control Devices, Emission reduction potential and effects of sulfur on catalyst

performance (*)ControlDevice

Required Sulfur level

Potential For emission

reduction

Impact ofPermanent High

Sulfurppm

Impact of temporaryHigh sulfur

ppm

TWC 500 ppm max.10-15 ppm optimal

CO, HC, NOx, certain Toxics95%+

Sulfur InhibitionSulfation

Depends On How Long, How Much

Oxidation Catalyst 500 ppm max.10-15 ppm optimal

CO, HC, certain Toxics90%+

Sulfur Inhibition, Sulfation

Depends On How Long, How Much

Lean NOx Catalyst

10-15 ppm max. NOx90%+ (?)

Sulfur Inhibition, Sulfation

Rapid Permanent Deterioration

SCR with Urea Not Sulfur sensitive except for oxidation catalyst

NOx90%+

Sulfur Inhibition, Sulfation

(Oxidation Catalyst Only)

Depends On How Long, How Much

Catalytic Filters 50 ppm max. PM, HC, CO, 95%+ Sulfur Inhibition, Sulfation

Rapid Permanent Deterioration

NOx Adsorbers 10-15 ppm max. NOx90%+ (?)

Extreme Sulfur Inhibition

Rapid Permanent Deterioration

Part 2

* CAI-Asia, a work in progress (not to be quoted)

Ultra Low Sulfur Diesel Fuel Is Spreading

050

100150200250300350400450500

PPM

US

US 20

06

EU 200

0

EU 200

5

EU 200

5-9

Denmar

k

Swed

en Class

1

German

y 20

03

Japa

n

Japa

n 20

04

Japa

n 20

05-7

Hong Ko

ng

Sout

h Ko

rea 20

06

Taipei, C

hina

...

Austra

lia 200

6

Thailand

201

0

Sant

iago

200

4

Sing

apor

e 20

06

Part 2

EURO II Vehicles & Fuels with I/M

EURO III Vehicles & Fuels with I/M

EURO IV Vehicles & Fuels with I/M

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Percent Reduction in Emissions

NOx 2005

NOx 2020

PM10 2005

PM10 2020

Source: Camarsa, BAQ 2003

Impact of Clean Vehicles and Fuels On Diesel Vehicle Emissions

Part 2

Worldwide Motorcycle Emission Regulations

Japan

III Stage (2008)HC+NOx:1.0~1.25CO: 1.0~1.25

ChinaII Stage (2004)ECE40HC: 1.2NOx:0.3CO: 5.510,000 km

EuropeEU II (2003)ECE40Cold StartHC: 1.0NOx:0.3CO: 3.0

EU III (2006)HC: 0.8NOx:0.15CO: 2.030,000 km

(2006/2007)ECE40Cold StartHC: 0.3/0.5NOx:0.15CO: 2.012,000/24,000 km

IV Stage (2004)ECE40Cold StartHC+NOx:2.0CO: 7.015,000 km

Taiwan

II Stage (2005)IDC Cold StartHC+NOx:1.5CO: 1.530,000 km

India

What are the important Fuel/Lube constituents for current motorcycles and future technology?

Lead, Sulfur, Benzene?

Part 2

MMT Becoming Serious ConcernIn Asia As Octane Enhancer

• Canada– Expert Panel Under Royal Society

Soon– Most Oil Companies Suspending Use

• EU– Not Widely Used– Accession Members Forcing Issue– Will Likely Set Up Testing Protocol

• US– Not Widely Used– Health Studies Underway– EPA Being Very Cautious

• CARB – Ban in Effect• HEI Health Effects Study A Red Flag

– Potential For Accumulation in Brain– Parkinsonian Symptoms?

• Under consideration or already used in China, Thailand, Indonesia, Vietnam, Others(?)

Concerns RegardingCatalysts With HighCell Density Substrates

Part 2

•International experience has shown that ultra low sulfur diesel (50 ppm or less) with a catalyzed diesel particulate filter offers the following potential benefits:

- > 90 - 98% PM reduction- > 70 - 90% CO reduction– > 90% HC reduction– > 90% air toxics & ozone precursor reduction– 0 – 35% NOx reduction

• Retrofits for gasoline vehicles in Asia not likely

Dealing With Existing Vehicles

Part 2

Impact of ULSD on in-use busses, Mumbai India (TERI)

• With a Bharat Stage 2 (Euro 2) Bus, reducing sulfur from 500 to 350 ppm, reduces PM10 by 26%

• Reducing sulfur further to 50 ppm, reduces PM by another 19%

• Combining 50 ppm fuel with a particulate filter, reduces PM by 97%

• PM Emissions of a CNG bus equipped with a TWC and a diesel bus operating with 50 ppm sulfur fuel and a CRT were roughly equivalent

Part 2

Impact on Vehicles Meeting EURO 3 Standards

Impact of sulfur in gasoline on emissions in-use vehicles in

Bangkok

Part 2

Impact on Vehicles Meeting EURO 3 Standards

Impact of sulfur in diesel on emissions in-use vehicles in

Bangkok

Part 2

Issues and Questions

• Many Asian countries have vehicle fleets with unique characteristics:– High proportion of 2-3 wheeled vehicles– High proportion of older vehicles with

modest if any pollution controls

• Are data available regarding fuels effects on these vehicles?

• Are data available from Japan which would give different conclusions than those presented?

Part 2

Part 3

Producing Cleaner Fuels

Part 3

Selective EU Fuel Quality Requirements

Part 3

What Fuel Changes Are Needed?

• Some changes are required for emissions performance of MVs Gasoline Diesel

Zero lead: Catalytic vehicles Very Low S: After-treatmentLow sulfur: Catalyst performance

• Some changes are required for emission improvements Gasoline DieselSulfur: SO2, HC, Nox, CO, Toxics Sulfur: SO2, Nox,PMRVP: HC, Toxics Cetane: HC, CO, NOxBenzene: Toxics Density: PM, NOxAromatics: Toxics, Nox, HCOxygenates: CO (older vehicles)Olefins: Reactivity, toxicsDistillation: HC, NOx

Part 3

Investment Process Options and Impacts on Gasoline Properties

Blendstock Processing

Octane RVP Olefins Aromatics Benzene Sulfur T50 T90

Alkylation + _ _ _ _ _ + +

Isomerization + + _ _ _ _ _ _

Reformer + _ _ + + + + +

Aromatics Saturation

_ + NE _ _ _ NE NE

BTX _ _ NE _ _ _ _ _

Oxygenates + NE/+ _ _ _ _ _ _

FCC Hydrotreating

_ NE _ _ _ _ NE NE

Note:

+ = increase

- = decrease

-NE = no effect

Part 3

Comparison of Refinery Complexity

0%

10%

20%

30%

40%

Perc

en

t of

Cru

de

Th

rou

gh

pu

t

Th

erm

al

Cra

ckin

g

Cokin

g

Vis

bre

akin

g

Cat

Cra

ckin

g

Hyd

roC

rackin

g

Japan

Germany

California

Singapore

Indonesia

India

China

Part 3

Comparison of Average Hydrotreating, Hydrocracking Capacity

0%

10%

20%

30%

40%

50%

Perc

en

t of

Cru

de

Th

rou

gp

ut

Jap

an

Germ

an

y

Califo

rnia

Sin

gap

ore

Ind

ia

Ch

ina

Hydro-treatingHydro-cracking

Part 3

Characterization of refinery sector by country (*)

Country Ownership Number and Complexity

Demand Forecast

Transportation Sector

Key Issues

Singapore Private 3 Complex

+ -Merchant refineries -Net Exporter -Large inv. needed

Thailand Private+ Public

4 Complex

+++ -Inv. needed -RVP, S, Aro., octane -Use of Ethanol

Malaysia Private+ Public

6 Complex/

Small

+++ -Importer -Cap. Inv. needed -RVP, S, Aro., benzene -Gov. price controls

Philippines Private+ Public

3 Complex

+++ -Growth in demand/importer -RVP, S, Octane -Cap. Inv. needed

Indonesia Public 8 Complex/

Small

+++ -Growth in demand/Importer -Large Cap. Inv. -Octane, RVP, S, Aro., Olefins -Gov. price controls

Part 3

* CAI-Asia, a work in progress (not to be quoted)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

kb

pd

ca

pa

cit

y

BLD.RDS

BLD.HDF

BLD.H2

BLD.HDA

BLD.HDS

BLD.HDC

Example: Refinery investment Chinese Sulfur-Related Refinery

Investment by Scenario, Model Results

Source:Trans-Energy Research Associates

Part 3

Factors to Consider in Refinery Upgrading (1)

• Refinery complexity and size– Small topping, hydro-skimming refiners will require

radical modifications to produce clean fuels; may go out of the fuels market

– Complex-conversion refineries may have more flexibility

• Capital availability– For governmental refineries capital improvements may

need to compete with other social expenditures– Private refineries may need to be financed from the

capital markets– Some projects may be considered to be not financially

viable– Capital may not be available or be available at higher

interest rates-different costs

Part 3

Factors to Consider in Refinery Upgrading (2)

• Future demand for fuels– Significant increases in future demand for fuels will require

additional capital investments for increased production– Changes in future consumption patterns (gasoline vs.

diesel) will require additional changes

• Importation/exchange of products– Availability of imports or exchange products will be

become a critical issue• If imports of critical blendstocks or products are available less

refinery investments may be needed• Prices and security of imports is a critical long term issue• Governments want to rely less on imports and that promotes

inefficiency

Part 3

Costs of Production(preliminary-more work to follow)

STUDIES COUNTRY/ REGION

STUDY’S OBJECTIVES

GASOLINE DIESEL

Enstrat Intl. All Asia Sulfur Reductions -50ppm -10ppm

- - - 8.1-12.4

Australia Gov. Australia Fuel Reformulation EURO 4 (S, benzene)

2.5 4.2

Trans-Energy China Fuel Reformulation

(EURO 4)

1.5 3.2

Daedalus LLC Thailand Fuel Reformulation

(EURO 4)

6.1-25.3 2.3

California (Many Studies)

California More severe than EURO 4

15.0-19.0 8.2-8.7

ADL Europe EURO 4 (Gasoline) 10.4-11.3 ----

COSTS OF PRODUCTION (cents/gallon)

Part 3

Preliminary Review of the Cost Analyses Data

• Some variability in the cost results because:– Differences in methodologies

• different LP models and optimization methods• some models countrywide, others region-wide, others for

individual refineries• some models rely on built processes vs. others rely on

imports

– Differences in baselines, i.e• Sulfur in gasoline: 50ppm-4,000ppm• Sulfur in diesel: 150ppm-3000ppm

– Differences in capital investments• different years for capital investment, different interest

rates• capital costs for equipment is different; for example: capital

HDS of 16 kb/d of gas oil is shown from 23 M$ to 38 M$• Operating costs vary from 0 to 85% of capital costs

Part 3

• To what extent do in-house cost-estimates from oil companies differ from these cost results

• To what extent can the results of the existing cost analysis can be applied to other Asian countries?

• Time schedule for implementation of fuel standards depends upon: – air quality needs- time for implementation of M.V. standards– financing, engineering, permitting – construction time varies – availability of equipment and personnel

Is there a need for a new & more detailed cost analysis on fuel

improvement in Asia?

Part 3

Issues to be addressed on a cost analysis for fuel improvement in Asia

(1)• Choices on the optimization approach:

– individual refinery model Vs. composite model– selection of LP model, calibration criteria

• Choices on technology – selection of new process technology vs. older technology

(differences in costs)

• Synergies – multiple refining system

• Supply-demand-octane effects; – changes in properties would affect production volumes

and octane; various options– growth in future would affect investments

Part 3

• Ability to raise capital required for refinery modifications– small, inefficient refineries will face difficulties raising

capital – governmental run refineries need to compete with other

capital needs; external financing– privately run companies: internal or external financing– cost of capital may vary

• Ability to recover capital and operating expenditures– depends on the ability to increase prices to recover the

costs– different issues on free market vs. government controlled

price environment– price adjustments in controlled markets will be needed

Issues to be addressed on a cost analysis for fuel improvement in Asia

(2)

Part 3

• Feedstocks options, importation of products or blendstocks– crude oils (high or low S, light or heavy)– reliance on the availability of quality feedstocks or products

in the regional fuel markets– availability of imports/exchanges will affect capital

investments

• Integration of gasoline and diesel standards – investments for gasoline improvements would affect diesel

production and properties and vise versa– optimum approach is by integrating gasoline and diesel

fuel standards– impacts on other fuels must also be considered

Issues to be addressed on a cost analysis for fuel improvement in Asia

(3)

Part 3

Part 4

Cleaner Fuels in Asia: The Role of Pricing,

Taxation and Incentives

Part 4

OverviewMain QuestionsHow can government taxes and incentives (for

fuels and vehicles) be used in policy to encourage lower harmful emissions from urban transport systems in Asia and which countries in the region can take advantage of these instruments?

Focus of presentationFuel Tax Differentials1. Factors Influencing Use of Tax Differentials in

Asia for Cleaner Fuels2. Supportive other (vehicle related) incentives

Part 4

Implementation Strategies for Fuel Quality Improvements

Market Based RegulatoryRemoval of subsidies for polluting fuel

Differential fuel taxation (to industry, retailer or final consumer)

Earmarked charges

Direct subsidies

Ecological taxes (carbon tax)

Fuel specifications

Phasing out of high polluting fuels

Education and Public Outreach Stakeholder Consensus Building

Part 4

Where Do Fuel Taxes Differentials Fit In to Energy and Air Quality?

Energy consumptionVehicle emissionsIndustrialAgriculture

Urban ScaleHuman health

Regional/Global ScaleClimate ChangeAcid RainOzone Depletion

Vehicle Emissions Strategy (Fuel)

Policy Implementation Strategy (Tax & incentives)

Part 4

Total changes in emissions

Total changes in emissions

External costs of

emissions

External Costs of

Emissions (health + environment)

Tax

differences

Tax

differences

Improved

fuel qualities

enter the

market

Improved

fuel enter the

market

Reduced

emissions

Reduced

emissions

Reducedenvironmental

costs

Reducedenvironmental

costs

Changes

in fuel

consumption

patterns

Changes

in fuel

consumption

patterns

Source: Little, Arthur 1998

Reduced Environmental Cost

Part 4

Fuel Tax Differentials

• Definition: A fuel tax differential creates a cost advantage for a higher quality fuel through an increased tax on the un-improved fuel, a lower tax on the improved fuel or both.

• Application: Used in Finland, Germany, Sweden, Denmark, the UK and Hong Kong to introduce ultra low sulfur diesel and in many countries to introduce unleaded gasoline including Singapore, Hong Kong, the Philippines and Thailand.

• Remarks: Fuel tax is more commonly used to generate general revenue and road financing

Part 4

Market Conditions and Rationale for Tax Differentials on Fuel

Actor Market Characteristics Rationale for Tax Policy

Consumers The majority of consumers do not switch to cleaner grade if it carries a higher price

To eliminate the cost advantage of lower quality fuel in consumer pricing

Refiners Without anticipated demand, the refining sector does not invest in quality better than legal requirements

To catalyze refinery investments to produce fuel

Refiners Improved fuels cost

more to produce

To offset increased refinery costs for improved fuels

Source: Adapted from Arthur D. Little, 1998

Part 4

Example: Sweden introduced a tax differential for lower sulfur diesels

Taxation in 1990

127 ECU/ m3

148ECU/

m3131

ECU/ m 3

MK1 diesel• Tax decreased by 20 ECU/ m3

MK2 diesel• Tax increased by 4 ECU/m3

• Tax differential of 24 ECU/m 3 compared to MK1

MK3 diesel (standard diesel) • Tax increased by 21 ECU/m3

• Tax differential of 41 ECU/m3

compared to MK1

Taxation in 1991

MK3 diesel

MK3diesel

MK2diesel

107ECU/

m 3

MK1 diesel

148

ECU/

m 3

119

ECU/

m 395

ECU/m 3

Taxation in 1992

MK3diesel

MK2diesel

MK1diesel

MK1 diesel

• Tax decreased by 12 ECU/ m3

MK2 diesel

• Tax decreased by 12 ECU/ m3

• Tax differential of 24 ECU/m3

compared to MK1

MK3 diesel

• Tax differential of 53 ECU/mcompared to MK1

Source: Arthur D. Little, 1998

MK 110 ppm

MK 250 ppm

MK 3350 ppm

Part 4

0%

20%

40%

60%

80%

100%

1992 1993 1994 1995 1996 1997 1998 1999 2000

350 ppm

50 ppm

10 ppm

Source: ECMT, 2001, in CAI-Asia -IFQC, 2003

Market for Lower Sulfur Diesel in Sweden 1992-2000

Part 4

• 1991 unleaded gasoline introduced.

• Tax set unleaded at B1 per liter less than leaded on excise tax for both locally produced and imported fuel.

• Financed by Thai “Oil Fund”.

• Price set at B0.3 less for unleaded.

• Lack of consumer awareness was an obstacle ( safety of unleaded for car).

• Catalytic converters mandated for cars.

• Price differential was periodical revised to ensure that it was budget neutral

• 1995 ban announced in 1993.

Unleaded Gasoline in Thailand

Part 4

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Pb C

onte

nt in

Gas

olin

e (g

/l)

0

0.5

1

1.5

2

2.5

Aver

age P

b Ai

r Con

cent

ratio

n (

g/m

3 )

Pb C on tent in G aso line Pb A ir Co ncentratio n

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Pb C

onte

nt in

Gas

olin

e (g

/l)

0

0.5

1

1.5

2

2.5

Aver

age P

b Ai

r Con

cent

ratio

n (

g/m

3 )

Pb C on tent in G aso line Pb A ir Co ncentratio n

Removal of lead from gasoline has drastically reduced lead being emitted per vehicle

Source: Wangwongwatana, BAQ 2002

ULSD in Hong Kong

• Lower tax and lower pump price for ULSD in July 2000.

• In 2002, ULSD was made mandatory.

• The ULSD enabled the introduction of stricter new vehicle standards and the retrofit of existing vehicles.

500 PPM Sulfur Diesel

50 PPM Sulfur Diesel

Fuel Duty 1.04 0.56

Pump Price

3.32 3.24

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Supplemental Vehicle Tax Incentives

• Japan will extend its 2001 green vehicle program (25% of NOx emissions granted 50% reduction in taxes)

• Singapore 2004: 'Additional Registration'; exemption for Euro4 buses and commercial vehicles; full rebate for Euro4 taxis.

• China has offered tax reduction to vehicle manufacturers for Euro2 vehicles.

• Philippines less excise tax on Euro3 vehicles

Regulations and tax & price incentives for higher standard vehicles act as indirect market signals to encourage fuel improvements.

Part 4

Why consider tax differentials for improving fuel quality in Asia?

• Tax policy has been effective in accelerating investment and higher quality fuel uptake in a number of cases.

• Tax instruments can help to accelerate regulatory compliance and encourage local technological innovation and sector efficiency.

• Help implement “polluter pays principle”.• Can be designed to be revenue neutral.• Emergent liberalized industry structures and oil pricing

systems in Asia offer new opportunity. ( for example India ended its Administrative Pricing Mechanism in 2002, China opening to foreign investment).

• However, there may be other fuel tax priorities concerning environment.– Remove damaging subsidies: (petroleum consumption

subsidies)– Removing environmentally damaging taxes or exemptions

( low taxed diesel).

Part 4

Factors Influencing Use of Tax Differentials in Fuel Quality Strategies

• Market Orientation

• Institutional Capacity

• Political Feasibility

Part 4

Market OrientationCountry Regulation Pricing

Dominant ownership structure

Oil companies/refiners

Bangladesh Petrobangla Controlled/transitional public Petrobangla

India Ministry of Petroleum and Natural Gas

transitional public/private Indian Oil Corporation/Reliance

Indonesia BP Migas controlled/subsidized public  1 Pertamina(7 major refineries)

Malaysia Petronas controlled/subsidized public/private  Petronas ( 6 refineries)

Pakistan Petroleum Regulatory Board

transitional public/private Pakistan State Oil, BP

Philippines DOE market public/private Petron, Pilipinas Shell, Caltex ( 2 refineries)

PRC State Energy Administration

controlled/transitional public CNPC/ Sinopec/ CNOOC (16 refiners) (BP, Exxon, Shell)

Singapore EMA market private Shell, Exxon, SRC

Taipei, China transition to market/ market

public/private Chinese Petroleum Corporation,Formosa Petrochemical

Thailand PTT transition to market/market public/private PTT ( 3 refiners: Shell, ESSO)

Vietnam Petro Vietnam controlled public No refineries

(Sources: APEC, ASEAN, EIA DOE Country Analysis Briefs)

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Asia is different from OECD in terms of ownership structure and pricing

Institutional Capacity

• Modes of coordination, policy-making capacity, which in many Asian countries are weak.

• Fuel monitoring capabilities must be sufficient: authority designated, industry cooperation, staffing, equipment, testing, compliance and reporting. These are also weak in Asian countries.

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Political Feasibility

• Strengths of the air quality movement and the level of knowledge on the issues • public priority on inexpensive transport,• fuel tax is seen as ‘revenue tax’ not an environmental instrument, • perceptions that higher standard vehicles (wealthy motorists) will benefit.

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Towards Three ScenariosFuel and vehicle emissions regulations are the most effective means to reduce emissions. Taxes and incentives offer the opportunity to accelerate the introduction of cleaner fuels.

1. Sufficient market orientation: can use tax differentials to supplement cleaner fuels regulations provided adequate institutions. (eg. Hong Kong)

2. Emerging market orientation: can explore the use of tax differentials to supplement cleaner fuels regulations provided adequate institutions. ( eg. Thailand)

3. Insufficient market orientation: may not be able to rely on tax differentials, but on regulations and direct pricing, possibly imports, or direct subsidies for technological upgrading. (eg. Vietnam)

Part 4

Part 5

Continuation of the CAI-Asia – Oil Industry

Dialogue

Part 5

S h e ll G lo b a l S o lu tio n s

‘ W e l l t o W h e e l s ’C o s t / B e n e f i t a n a l y s i s

‘ W e l l t o W h e e l s ’C o s t / B e n e f i t a n a l y s i s

V e h i c l e E m i s s i o n sV e h i c l e E m i s s i o n s

A i r Q u a l i t y T a r g e tA i r Q u a l i t y T a r g e tG l o b a lG l o b a l L o c a lL o c a l

C o s t E f f e c t i v e S o l u t i o n sC o s t E f f e c t i v e S o l u t i o n sC o s t E f f e c t i v e S o l u t i o n sC o s t E f f e c t i v e S o l u t i o n s

I n d u s t r i a l E m i s s i o n s O p e n b u r n i n g , e t c .

F u e l Q u a l i t y / S u p p l yV e h i c l e T e c h n o l o g y

T r a n s p o r t M a n a g e m e n t

V e h i c l e I & M

A Balanced Approach to AQM in Asia is Necessary

Part 5

Continuation of CAI-Asia Dialogue

- vehicles and fuels-• Additional data on vehicle fleet in Asia and its

development over next 10 years (by type of technology)

• Impact of clean(er) fuels on in-use vehicles (pre-Euro1, and unique Asian vehicles)

• Impact of clean(er) fuels on 2T and 4T new 2-3 wheelers as well as on in-use 2T and 4T 2-3 wheelers

• Expected impact and feasibility of combination of cleaner fuels and retrofits on different in-use vehicle types in Asia

Part 5

• To be able to formulate realistic recommendations on fuel improvement strategies it is important to know the automotive industry’s needs:– Properties that are absolutely needed

• Gasoline: Sulfur, deposit additives• Diesel: Sulfur, lubricity• Others ?

– Properties of concern?• Gasoline: RVP, olefins, distillation• Diesel: Cetane, distillation?• Others

Continuation of CAI-Asia Oil-Industry Dialogue- fuels-

Part 5

Continuation of CAI-Asia Oil Industry Dialogue

- incentives -• What has been the experience with the

use of vehicle incentives in the introduction of cleaner vehicles?

• Do similar incentives for cleaner fuels help in any way in introducing cleaner vehicles?

Part 5

Possible Strategies for Fuel Quality Improvement

Case A: Some fuel quality improvements first and later followed with additional standards– can enable comprehensive regional fuel quality harmonization for

selected properties– depends upon the time for implementation of vehicle standards– requires less capital investments in the short term– sub-optimum strategy; more costly in the long term– lose some air quality benefits

Case B: Follow an integrated strategy for all fuel properties at the same time at country level– can enable comprehensive regional fuel quality harmonization– requires larger capital investment – optimum strategy; takes full advantage of refinery integration– all air quality benefits materialized

Part 5

Coordination with other efforts to improve and harmonize fuel quality in Asia

• Other main initiative on harmonizing fuel standards is undertaken by JAMA/AAF with a focus on ASEAN plus 3. This in support of the development of vehicle industry as a strategic industry in Asia (with backing from METI)

• CAI-Asia would like to develop closer coordination with the JAMA/AAF efforts to harmonize fuel quality standards in ASEAN plus 3 (and possibly also South Asia)

• JAMA/AAF have developed Dialogue involving the Automotive Federations. CAI-Asia can contribute by supportive technical studies focusing on air quality impacts.

• CAI-Asia has well established structure with local networks which can help to increase support for the efforts and results of the JAMA/AAF efforts.

Part 5