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Table of contents. 1. Background and Objectives. 2. Summary. 3. Approach and Methodology. 4. Motivation and Introduction of Improved Fuel Qualities. 5. Tax Differentials and Market Drivers. 6. Industry Response. 7. Environmental Benefit. 8. Lessons Learned. A. Appendices. 1.

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Table of contents

  • Table of contents

1

Background and Objectives

2

Summary

3

Approach and Methodology

4

Motivation and Introduction of Improved Fuel Qualities

5

Tax Differentials and Market Drivers

6

Industry Response

7

Environmental Benefit

8

Lessons Learned

A

Appendices


Background and objectives

1

Background and Objectives

  • Transport fuels with improved qualities are being introduced throughout the European Union

Gasoline

Diesel

Key Events

  • Leaded gasoline phased out by 1994

  • Environmental Class MK2 introduced in 1994

  • MK2 specifications tightened in 1998

  • MK1 gasoline specified in 1998 to take effect in 2000

  • Sulfur tax (>1000 ppm) on fuels introduced in 1991

  • Environmental Classes MK1 and MK2 introduced 1991

Sweden

Sweden

  • Oxygenated gasoline introduced in 1991

  • Leaded gasoline phased out by 1994

  • Reformulated gasoline (RFG) introduced in 1994

  • Reformulated diesel (RFD) introduced in 1994

Finland

Finland

Finland

  • Low benzene classifications introduced in 1997 (Denmark)

  • Low aromatic limits mandated in 1998 (Italy)

  • Leaded gasoline to be phased out in 2000 (EU)

  • EU wide specifications to take effect in 2000, specifications tightening in 2005

  • Ultralight diesel introduced in 1992 (Denmark)

  • EU wide 500 ppm sulfur limit introduced in 1996

  • Low sulfur diesel introduced in 1997, specifications tightened in 1998 (UK)

  • EU wide specifications to take effect in 2000, specifications tightening in 2005

E.U.


Background and objectives1

Auto-Oil I1992 - 1996

Tri-Partite Approach

  • Oil industry

  • Auto industry

  • European commission

1

Background and Objectives

  • The Auto-Oil I program examined cost effective ways of improving air quality in the EU 12 group of countries

  • Comprehensive analysis of vehicle technology, fuel quality and other measures to reduce emissions from vehicles

  • Conclusions based on cost effective measures

Gasoline

Diesel

Limit Values for Year 2000

Important 1996 Commissionproposal made for consideration byCouncil and Parliament

Aromatics: 45 vol% maximum

Benzene: 2 vol% maximum

Oxygen: 2.3 wt% maximum

Sulfur: 200 ppm maximum

Cetane number: 51 minimum

Polyaromatics: 11 vol% maximum

T 95: 360° C maximum

Sulfur: 350 ppm maximum

Both the Council of Ministers and European Parliament recommended more stringent specifications for 2000 and further improvements in 2005.

The final outcome was unclear in May, 1998


Background and objectives2

1

Background and Objectives

  • Many Finnish and Swedish legislative fuel specifications exceed those from the European Commission for 2000 based on the Auto-Oil I program

Gasoline

Diesel

Specification

Sulfurppm maximumRVP Summer

Kpa maximum

Benzenevol% maximum

Aromaticsvol% maximum

Oxygen wt%- maximum

- minimum

Sweden

MK2

100

70

3.0

*

2.0

-

Finland

Reformulated

-

70

3.0

-

-

2.0

EuropeanCommission

2000

200

70**

2.0

45.0

2.3

-

Specification

Sulfurppm maximumAromaticsvol% max

PAH vol% max

Cetane indexminimum

Cetane numberminimum

T95 °C max

Sweden

MK1

10

5

0.02*

50

285

Finland

Reformulated

50

20

-

47

EuropeanCommission

2000

350

-

11**

51

360

*Aromatic index (AI) 5.5 maxAI = Aromatics vol%+ Benzene vol% 13

**Arctic climates; otherwise 60

*3 or more aromatic rings

**2 or more aromatic rings


Background and objectives3

1

Background and Objectives

  • Accordingly the Swedish and Finnish Governments wish to share their experience on how improved fuel qualities were introduced into the market and subsequently gained dominant market shares

    What was the motivation and drivers for introducing the fuels?

    How did industry respond?

    What were the fiscal implications, costs and environmental benefits?

Arthur D. Little was appointed to construct a “Case Study” using publicly available information and discussions with Swedish and Finnish oil refiners and other relevant parties


Table of contents

  • Table of contents

1

Background and Objectives

2

Summary

3

Approach and Methodology

4

Motivation and Introduction of Improved Fuel Qualities

5

Tax Differentials and Market Drivers

6

Industry Response

7

Environmental Benefit

8

Lessons Learned

A

Appendices


Summary motivation for improved fuel qualities

2

Summary – Motivation for Improved Fuel Qualities

  • The motivation for Finland and Sweden for introducing improved fuel qualities was to reduce vehicle emissions that have a negative effect on human health and the environment

Fuel type

Reduction of emissions

Effects primarily on human health

Effects primarily on the environment

Gasoline

Benzene

Carbon monoxide (CO)

Hydrocarbons (HC)

Oxides of nitrogen (NOx)

Hydrocarbons

Oxides of nitrogen

Ozone

Sulfur*

Diesel

Particulate Matter (PM)

PolyaromaticHydrocarbons (PAH)

Odor

Oxides of nitrogen

Oxides of nitrogen

Ozone

Sulfur

*Lower levels of sulfur improve the performance of 3-way catalytic converters.


Summary motivation for tax differentials

2

Summary – Motivation for Tax Differentials

  • Market drivers were created by differentiating taxes on gasoline and diesel grades - more polluting fuels were given higher taxes

Reasons for differentiating taxes on fuel qualities:

The majority of consumers would not switch to cleaner grades if they carried a higher price

To eliminate the cost advantage of lower quality fuelin consumer pricing

Without anticipated demand the refining industry would not invest in quality beyond mandatory legal requirements

To catalyze refinery investments in order that the fuels could be produced

Improved fuels cost more to produce than normal ungraded fuels

To offset increased refinery costs associated with improved fuel grades


Summary market drivers for the introduction of improved fuel qualities

2

Summary – Market Drivers for the Introduction of Improved Fuel Qualities

  • While tax differentiation of fuel grades was the main market driver for introducing improved fuel qualities - how the fuels were brought into the market differed...

Finland

Sweden

  • Deregulation of markets made refineries more responsive to environmental challenges and higher value added products - this resulted in the introduction of improved fuels before tax differences were in place (e.g. oxygenated gasoline)

  • Finnish refineries responded not only to the Swedish differentials, but also in anticipation of tax differentials signaled by their Government

  • Oil companies in general did not take the lead in introducing improved fuel qualities before tax differentials were in place

  • Following the introduction and further widening of tax differentials the refiners invested to manufacture improved quality fuels


Summary chronology for the introduction of improved fuel qualities

2

Summary – Chronology for the Introduction of Improved Fuel Qualities

  • ... along with the timing of their introduction

Diesel - Sweden

Diesel & Gasoline - Finland

Gasoline - Sweden

  • January 1, 1991Swedish legislation included specifications for improved diesel qualities

    • MK1 diesel

    • MK2 diesel

  • Finnish legislation included specifications for improved:

    • gasoline quality - Reformulated gasoline (January 1, 1993)

    • diesel quality - Reformulated diesel (July 1, 1993)

  • December 1, 1994 Swedish legislation included specifications for improved gasoline qualities

    • MK2a gasoline

    • MK2b gasoline

    • MK2c gasoline

1990

1991

1992

1993

1994

1995

1996

1989

Neste introduced oxygenated gasoline in Finland

Preem (formally OK Petroleum) introduced MK2 gasoline in Sweden

Swedish oil companies voluntarily agree to sell only MK2 gasoline


Summary result of tax differentials

2

Summary – Result of Tax Differentials

  • The tax differentiation of gasoline and diesel qualities has been robust enough to ensure a rapid change of the market

Finland

Sweden

1996 market share of improved fuels

Reformulated gasoline:99%*

MK2 gasoline:100%**

January 1, 1993

Tax differentials on gasoline introduced by the Finnish Government

December 1, 1994

Tax differentials on gasoline introduced by the Swedish Government

Reformulated diesel:85%

MK1 diesel:85%

July 1, 1993

Tax differentials on diesel introduced by the Finnish Government

January 1, 1991

Tax differentials on diesel introduced by the Swedish Government

*Includes oxygenated gasoline (approximately 13% market share).

**After June 1995, Swedish petroleum companies voluntarily agreed to only sell MK2 gasoline.


Summary size of the tax differential

2

Summary – Size of the Tax Differential

  • In most instances the tax differential is a fraction of the normal annual price fluctuations caused by world markets

E X A M P L ESwedish Gasoline

Price variation during 1996 was 0.07 ECU/liter

  • Tax differential of0.007 ECU/liter for gasoline

  • the difference in taxes between improved and poorer fuel qualities

  • the tax differential ensures at least price neutrality for MK2 with respect to standard gasoline (MK3) for the consumer*

*For diesel the improved quality (MK1) is sold at at lower price than the poorest quality (MK3).


Summary tax differentials vs tax revenues

2

Summary – Tax Differentials vs. Tax Revenues

  • A tax differential needs to be large enough to motivate the industry to invest without increasing the price to the consumer...

  • ...extra costs and investments are covered by higher sales volumes of improved fuels with increased price per liter for the refiner

E X A M P L ESwedish Diesel

Value of tax differentials

Swedish diesel tax revenues and value of differentials (excluding VAT) for the years 1990 to 1996

Value of differentials due to the use of improved fuel qualities(tax reductions)

Value of differentials due to the use of poorer fuel qualities (tax revenues) Tax revenues excluding differentials

Total tax revenues(excluding VAT)


Summary tax differentials vs tax revenues1

1 ECU

6 FIM

8.5 SEK

1.1 USD

2

Summary – Tax Differentials vs. Tax Revenues

  • The value of tax differentials has been small compared to tax revenues from transport fuels

Finland (ECU)1993-1996

Sweden (ECU)1991-1996

Value of tax differentials

Value of differentials due to the use of improved fuel qualities(tax reductions)

0.15 billion

3%

3%

0.6 billion

Value of differentials due to the use of poorer fuel qualities (tax revenues)

0.10 billion

0.5 billion

2%

3%

5.1 billion

18.5 billion

Tax revenues excluding differentials

Total tax revenues (excluding VAT)


Summary tax differential finland

Tax differentials (ECU/m3)

Gasoline

Diesel

1990

-

-

1991

-

-

1992

-

-

1993

4.2*

25

1994

8.3

25

1995

8.3

25

1996

8.3

25

*The tax incentive on diesel was introduced July 1, 1993; 8.3/2=4.2

2

Summary – Tax Differential Finland

  • For Finland the value of tax differentials due to the use of improved fuel qualities has been 152 million ECU for the period 1993 to 1996

Value of differentials due to the use of improved fuel qualities(tax reductions) (1993 to 1996) = 152 million ECU

Value of differentials due to the use of poorer fuel qualities (tax revenues) (1993 to 1996) = 97 million ECU


Summary tax differential sweden

2

Summary – Tax Differential Sweden

  • For Sweden the value of tax differentials due to the use of improved fuel qualities has been 589 million ECU for the period 1991 to 1996

Value of differentials due to the use of improved fuel qualities(tax reductions) (1991 to 1996) = 589 million ECU

Tax differentials (ECU/m3)

Diesel compared to MK1

Gasoline

MK2

MK3

MK3

1990

-

-

-

1991

24

41

Value of differentials due to the use of poorer fuel qualities (tax revenues) (1993 to 1996) = 97 million ECU

1992

24

53

1993

24

53

1994

29

60

0.6*

1995

24

55

7.1

1996

25

57

7.1

*The tax incentive on gasoline was introduced December 1, 1994; 7.1/12=0.6


Summary industry response

2

Summary – Industry Response

  • Industry response to the tax differentiating policies was to invest approximately 540 million ECU over the period 1990 to 1996

1991

1996

Typical refinery configuration, as compared to the rest of the EU, but with higher distillate hydrodesulfurization(HDS) capabilities

  • Increased desulfurization capabilities

  • Installed de-aromatization capabilities

  • Increased use of oxygenates

  • Remove benzene precursors from reformers

Total capital investment patterns in study refineries: 1990-96


Summary industry response1

2

Summary – Industry Response

  • Net incremental annual operating expenditure to meet the new specifications was approximately 54 million ECU in 1996

Incremental annual operating expenditure in study refineries 1996

Breakdown of incremental annual operating expenditure

Cooling

Water

Labor

Cat &

4%

4%

Chem

5%

Fuel

37%

Power

12%

Steam

14%

Maintenance

*

23%

*Includes associated yield benefits which result directly from investment made for improved fuel qualities. Excludesany capacity creep benefits associated with incremental ongoing investments (excluded in investment estimates).


Summary industry response2

2

A decline in Soviet oil production encouraged Finnish refiners to switch from Soviet sour to North Sea sweet crudes resulting in lower than anticipated costs for desulfurization*

Summary – Industry Response

  • The industry response coincided with changes in oil supplies and also effected product output

% Sweet crude oil

E X A M P L E

Finnish and Swedish refinery jet fuel production (1990-1995)

The light distillation characteristics of Swedish MK1 diesel require the use of typical jet fuel components, this initially reduced the production of jet fuel

*Increased hydrotreating capacity was brought on-line during 1997 - reducing the amount of % sweet crude to 60%.


Summary industry response vs tax differentials

2

Summary – Industry Response vs. Tax Differentials

  • Industry investments and increased operating costs for Finnish and Swedish refiners are about equal to the value of tax differentials provided from the use of improved fuels

709 million ECU(Finnish and Swedish refineries are aggregated)

741 million ECU


Summary environmental benefit

Finland

Sweden

Reformulatedgasoline(unleaded)

Reformulateddiesel

MK2gasoline(unleaded)

MK1Diesel

MK2Diesel

CO

-25% to -12%

-6% to 2%

CO

-1% to 4%

-6 to 8%

9%

HC

-8% to -5%

-20% to 12%

HC

-3% to 1%

2% to 18%

-10% to 24%

NOX

-12% to -3%

-12% to -5%

NOX

-4% to -1%

-11% to -5%

-9% to -4%

PM

-15%

-25% to -10%

PM

-15%

-30% to -10%

-12% to -4%

PAH

-57%

-54%

PAH

-27%

-75%

-36%

SO2

-58%

-96%

SO2

-59%

-99%

-95%

2

Summary – Environmental Benefit

  • Emissions from vehicles in most cases have been reduced due to improved fuels

Estimated range of changes in emissions (in %) relative to normal ungraded fuels (see Appendix A.3)

  • Uncertainties regarding the extent of emission changes for CO and HC from diesel vehicles is judged to be higher than for NOx, PM, PAH, and SO2.

  • A direct comparison of changes in emissions due to improved fuels for Finland and Sweden is not possible since the initial and subsequent fuel qualities and test cycles for estimating emissions are different.


Summary environmental benefit1

2

Summary – Environmental Benefit

  • Using the ExternE* methodology it is estimated that reduced environmental costs are in the order of 170 to 230 million ECU

Estimated reduction in environmental costs (million ECU)

1992

1993

1994

1995

1996

8 to 16

9 to 17

9 to 17

Finland

Sweden

21 to 22

34 to 35

34

44 to 46

51 to 52

34 to 35

42 to 50

53 to 63

60 to 69

Total

21 to 22

NOx

PM

SO2

CO**

HC**

reduced environmental costs are primarily due to reduced emissions of NOx and sulfur

12 to 34

3 to 4

10

Finland (1994 - 1996)

0.8 to 1.4

0.07 to 0.25

-0.08 to 0.05

Sweden (1992 - 1996)

-0.7to 0.03

150 to 154

3 to 4

32

  • Environmental cost calculations are intensely debated, for example Swedish national models give significantly larger reductions in environmental costs than the ExternE methodology.

  • The ExternE methodology does not include for instance reductions in PAH or benzene.

* A European Union project for estimating the external costs of different fuel cycles; see http://externe.jrc.es

**Negative numbers are due to an increase in estimated emissions.


Table of contents

  • Table of contents

1

Background and Objectives

2

Summary

3

Approach and Methodology

4

Motivation and Introduction of Improved Fuel Qualities

5

Tax Differentials and Market Drivers

6

Industry Response

7

Environmental Benefit

8

Lessons Learned

A

Appendices


Approach and methodology

3

Approach and Methodology

Four separate analyses were carried out for the case study

Case Study

Establish Sponsors Objectives

BackgroundResearch

Preliminary Analysis

Review Preliminary Findings

Final Analysis

  • Kick-off meetingFebruary 27, 1998

  • Interviews

  • Document review

  • Sponsors meetingApril 15, 1998

  • Final Presentation

Motivation and Introduction of Improved Fuel Qualities

  • Swedish EPA

  • Swedish and Finnish Ministries of Environment and Tax Authorities

  • Swedish and Finnish petroleum organizations

Tax Differentials and Market Drivers

  • Swedish Ministry of Finance; Tax Authorities and EPA

  • Finnish Ministries of Taxation and Transport

  • Swedish and Finnish Petroleum organizations

Interviews and Data Sources

Industry Response

  • Interviews with Swedish and Finnish refiners

  • ADL in-house databases

  • Environmental permit documentation and other publicly available material

  • ADL final judgement

  • Reality check with refiners

Environmental Benefit

  • Swedish EPA and Statistical Central Bureau (SCB)

  • Technical Research Centre of Finland (VTT)

  • European Commission

  • Scientific literature

  • ACEA

  • Motortestcenter (Sweden)

  • Automotive manufacturers


Approach and methodology establish sponsor objectives

3

Approach and Methodology – Establish Sponsor Objectives

The kick-off meeting allowed interested parties to comment on our proposed approach and to highlight their interests and concerns

  • Arthur D. Little

  • •Presented initial approach

  • Sought feedback on participant’s objectives and concerns

  • Oil Companies

  • • Concern over maintaining confidentiality

  • Agreement to review initial findings

  • Automotive Manufacturers

  • • Interest in impact of fuel specification changes

  • Agreement to assist in environmental impact

Kick-off meeting

  • Swedish and Finnish Governments

  • •Sponsors of the case study

  • Desire to pass experience on to other E.U. Countries


Approach and methodology motivation and introduction of improved fuel qualities

3

Approach and Methodology – Motivation and Introduction of Improved Fuel Qualities

To understand driving forces for the Swedish and Finnish governments we needed to understand the relationship between improved fuel quality and environmental benefits

Improvedfuel qualities

Reducedemissions

Improvedair quality

Environmental benefits

Aspects studied:

  • Carbon monoxide (CO)

  • Hydrocarbons (HC)

  • Nitrogen oxides (NOX)

  • Particulate matter (PM)

  • Sulfur (SO2)

  • Polyaromatic hydrocarbons (PAH)

  • Improved human health

  • Reduced corrosion

  • Improved crop yield

  • Less acidification, eutrophication and forest damage

  • Gasoline - history and quantities

  • Diesel - history and quantities

Input for evaluation:

  • Relationship between fuel quality and emissions

  • The relationship between improved air quality and environmental impact

  • External cost estimates (ECU/ton pollutant)

  • Changes in specifications

  • Volumes sold for 1990-1996


Approach and methodology tax differentials and market drivers

3

Approach and Methodology –Tax Differentials and Market Drivers

  • We analyzed the taxation systems to establish how the incentives were provided...

Oil Companies

Refinery

Wholesale Depot

Distributor

Retailer

Consumer

“Refinery gate”

product prices

Retail revenues

Taxation

Government


Approach and methodology tax differentials and market drivers1

3

Approach and Methodology –Tax Differentials and Market Drivers

...and analyzed the size of tax differences with respect to fuel supply and demand factors

Fuel Supply Factors

Fuel Demand Factors

  • Refinery configuration

  • Crude oil slate

  • Industry structure

  • Consumers “willing to pay for cleaner fuels”

  • Industry structure


Approach and methodology industry response

3

Approach and Methodology – Industry Response

  • Estimates of capital and operating cost were developed using publicly available information and discussions with refiners

Increased Operating Costs

Refinery Capital Investments

  • Operating and raw material cost changes were determined from in-house databases and environmental permits for each refinery configuration

  • Allocation of costs to the improved quality fuels was made

  • Refinery configuration changes have been established using public information and environmental permits

  • A judgement was made of which investments were made directly as a result of fuel specification changes

Crude/Feed Slate/Cost

Product Mix

Utility/Intermediate Costs

In-house databases

Energy

Increases

Emissions

Changes

Product Costs (by grade)


Approach and methodology industry response1

3

Approach and Methodology – Industry Response

  • Operating cost changes were assessed from in-house databases, press and government sources

Feedstocks and Products

Product Specifications

  • Crude oil, condensate, atmospheric residues and other intermediate feedstock usage was drawn primarily from OECD sourcesFindings were combined with information in environmental permits and annual operating reports from refineries

  • Product specifications were established from in-house databases

Preliminary

Incremental

Operating Cost

Assessment

Yields and costs

  • Process unit yields and costs was taken from ADL databases for similar refineries

  • Findings were combined with historical cost information from industry reports and environmental permits

Refinery Unit Capacity

  • Unit capacity was established from environmental permits and industry journals


Approach and methodology industry response2

150

100

Million ECU

50

0

1990

1991

1992

1993

1994

1995

1996

Gasoline

Diesel

3

Approach and Methodology – Industry Response

  • Key messages are presented on an aggregate basis for Finland and Sweden

Individual refinery estimates are aggregated...

... and segmented by investments, operating costs and fuel types

Investments:

Preem

Neste

100

Operating Costs:

80

60

Shell

40

Million ECU

20

0

1990

1991

1992

1993

1994

1995

1996

Gasoline Opex

Diesel Opex

Sweet Crude costs


Approach and methodology environmental benefit

3

Approach and Methodology – Environmental Benefit

  • Environmental benefit has been evaluated in terms of reduced environmental costs

Improved fuel qualities enter the market

Changes

in fuel consumption patterns

Reducedenvironmentalcosts

Reduced emissions

Tax differences

Total changes in emissions

External costs of emissions

  • European Union ExternE Study

National emission estimates

Average change in emissions due to fuel quality

  • calculated by:

    • reviewing available literature data

    • EPEFE equations


Approach and methodology environmental benefit1

3

Approach and Methodology – Environmental Benefit

  • The external costs of air pollution has been estimated in the European Union’s ExternE* project

  • The purpose of the ExternE project is to develop a unified methodology for quantifying the environmental impact and social costs associated with the production and combustion of energy

  • Each country in the EU and Norway have calculated the external costs of emissions (CO, HC, NOx, PM and SO2) from energy production

  • External costs are defined as costs associated with an activity of a group or a second group which are not fully accounted for by the first group (e.g.)

    • health effect costs for senior citizens from truck transport in cities

    • crop damage from road transport

?

*See http://externe.jrc.es


Approach and methodology environmental benefit2

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Approach and Methodology – Environmental Benefit

  • Effects on human health represent the largest proportion of unit damage costs estimates

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Approach and methodology environmental benefit3

3

Approach and Methodology – Environmental Benefit

  • Changes in emissions due to improved fuel qualities was based on review of emission studies and the Auto-Oil EPEFE equations

Literature data

Swedish and Finnish national data

Emission Data

EPEFE Equations

EPEFE Programme

A set of multivariate equations which relate vehicle emissions to fuel quality

Auto-Oil Programme

  • EPEFE = European Programme on Emissions, Fuels and Engine Technologies

    • identified the effect of fuel quality on vehicle emissions

    • separated the effect that each fuel parameter had on emissions

  • Cooperation between the European automotive and oil industries to identify which new measures would be required to meet EU air quality objectives

    • cost-effective

    • based on scientifically sound data


Table of contents

  • Table of contents

1

Background and Objectives

2

Summary

3

Approach and Methodology

4

Motivation and Introduction of Improved Fuel Qualities

5

Tax Differentials and Market Drivers

6

Industry Response

7

Environmental Benefit

8

Lessons Learned

A

Appendices


Motivation and introduction of improved fuel qualities summary

PAH

SO2

HC

VOC

PM

NOx

4

Motivation and Introduction of Improved Fuel Qualities – Summary

  • Finnish and Swedish legislation introduced improved fuel qualities mainly to reduce the impact of vehicle emissions on human health

Improved fuel qualities

Improved air quality

Benefits

Reduction of substancesin emissions

Gasoline

Improved human health

  • benzene

  • hydrocarbons (HC)

  • carbon monoxide (CO)

  • volatile organic compounds (VOC)

  • nitrogen oxides (NOx)

  • sulfur oxides (SO2)

  • particulate matter (PM)

  • polycyclic hydrocarbons (PAH)

  • maximum benzene content

  • maximum and minimum oxygen content

  • maximum vapor pressure

  • Reduction of:

  • cancer

  • respiratory ailments

  • damages to the central neural system

Reduced environmental impact

Diesel

  • acidification

  • greenhouse effect

  • eutrophication

  • damages to trees and crops by ozone

  • maximum sulfur content

  • maximum aromatic content

  • minimum cetane number


Motivation and introduction of improved fuel qualities gasoline

4

Motivation and Introduction of Improved Fuel Qualities – Gasoline

  • Finland and Sweden introduced improved gasoline qualities in order to reduce emission of benzene, hydrocarbons, CO and NOx

Substance mainly reduced in car exhaust

Fuel parameter specified

HC

CO

VOC

SO2

NOx

PM

PAH

Benzene content(max)

O2 content(min/max)

Sulfur content(max)

Aromatic content(max)

Final Boiling Point (FBP)(max)

Reid Vapor Pressure (RVP)(max)

E100(min)

Common parameters limited in Swedish and Finnish improved gasoline qualities.


Motivation and introduction of improved fuel qualities diesel

4

Motivation and Introduction of Improved Fuel Qualities – Diesel

  • Changes in diesel quality were designed to reduce sulfur, NOx, PM and polyaromatic hydrocarbons and thereby improve urban air qualities

Substance mainly reduced in car exhaust

Fuel parameter specified

HC

CO

VOC

SO2

NOx

PM

PAH

Max sulfur content

Max aromatic content

Fuel parameter specified

Impact on air quality

Distillation range, max spread

  • A narrow and well defined distillation range improves engine operation and thereby leads to reduced emissions in general

Cetane number

  • Emissions of NOx decrease with a higher cetane number - a high cetane number does not guarantee lower emissions of other substances

Density

  • Too high density leads to increased emissions

  • Too low density results in poorer engine output

Common parameters limited in Swedish and Finnish enhanced quality fuels.


Motivation and introduction of improved fuel qualities benefits

4

Motivation and Introduction of Improved Fuel Qualities – Benefits

  • The main benefit of improved fuels is expected to be improved health

Benefit to society

Reduced substance in air

Health

Environment

Other

  • Reduced cancer

HC

  • Reduced respiratory illness

  • Reduced cancer

  • Reduced damage to plants and crops by ozone*

CO

  • Improved ability of blood to transport oxygen to the brain

  • Reduced greenhouse effect

VOC

  • Reduced respiratory illness

  • Reduced cancer

  • Reduced damage to plants and crops by ozone*

SO2

  • Reduced respiratory illness

  • Reduced acidification

  • Reduced damage to buildings and stone materials

NOx

  • Reduced respiratory illness

  • Reduced cancer

  • Reduced acidification and eutrophication

  • Reduced damage to plants and crops by ozone*

  • Reduced damage to buildings and stone materials

PM

  • Reduced respiratory illness

  • Reduced cancer

  • Improved visibility

PAH

  • Reduced cancer

* NOx, HC and VOC are sources to photochemical oxidation substances that produce ozone.


Motivation and introduction of improved fuel qualities chronology

4

Motivation and Introduction of Improved Fuel Qualities – Chronology

  • While the purpose for enhanced fuel qualities was the same in both Finland and Sweden the timing of their introduction was different

Diesel - Sweden

Diesel & Gasoline - Finland

Gasoline - Sweden

  • January 1, 1991Swedish legislation included specifications for improved diesel qualities

    • MK1 diesel

    • MK2 diesel

  • Finnish legislation included specifications for improved:

    • gasoline quality - Reformulated gasoline (January 1, 1993)

    • diesel quality - Reformulated diesel (July 1, 1993)

  • December 1, 1994 Swedish legislation included specifications for improved gasoline qualities

    • MK2a gasoline

    • MK2b gasoline

    • MK2c gasoline

1990

1991

1992

1993

1994

1995

1996

1989

Neste introduced oxygenated gasoline in Finland

Preem (formally OK Petroleum) introduced MK2 gasoline in Sweden

Swedish oil companies voluntarily agree to sell only MK2 gasoline


Motivation and introduction of improved fuel qualities gasoline finland

4

Motivation and Introduction of Improved Fuel Qualities – Gasoline Finland

  • Since 1993 Finland classifies gasoline according to limits on benzene, oxygen content and vapor pressure

Jan. 1, 1993

Gasoline specifications

Gasoline specifications

  • Finland follows EN 228 standards

  • Reformulated gasoline

    • maximum benzene content of 3 vol%

    • oxygen content minimum of2 wt%

    • maximum vapor pressure

      • summer quality: 70 kPa

      • winter quality: 90 kPa

  • Lower qualities carry a 0.008 ECU/liter higher excise tax

  • EN 228 mandatory minimum requirement (standard quality)


Motivation and introduction of improved fuel qualities gasoline finland1

4

Motivation and Introduction of Improved Fuel Qualities – Gasoline Finland

  • Two years after Finnish legislation, reformulated gasoline had a market share of about 90%

Fuel mix of gasoline sold in Finland 1989-1996

Finnish legislation on reformulated gasoline


Motivation and introduction of improved fuel qualities gasoline sweden

4

Motivation and Introduction of Improved Fuel Qualities – Gasoline Sweden

  • Since 1994 Sweden classifies gasoline according to limits regarding a wide range of parameters

Dec. 1, 1994

Gasoline specifications*

Gasoline specifications

  • Sweden follows EN228 standards

  • MK2 gasoline

    • maximum benzene content of 3 vol%

    • Maximum oxygen content of 2 wt%

    • maximum vapor pressure

      • summer quality: 70 kPa

      • winter quality: 95 kPa

  • MK2 gasoline is considered a transitional class which will eventually be replaced by an MK1 gasoline grade

  • Lower qualities carry a 0.007 ECU/liter higher tax

  • EN228 mandatory minimum requirement (MK3)


Motivation and introduction of improved fuel qualities gasoline sweden1

4

Motivation and Introduction of Improved Fuel Qualities – Gasoline Sweden

  • Less than one year after legislation, MK2 gasoline had a 100% market share

Fuel mix of gasoline sold in Sweden 1989-1996

Swedish oil companies only sell MK2 gasoline after June, 1995

Swedish legislation on MK2 gasoline


Motivation and introduction of improved fuel qualities diesel finland

4

Motivation and Introduction of Improved Fuel Qualities – Diesel Finland

  • Since 1993 Finland classifies diesel by setting limits on sulfur content, aromatic concentration and cetane index

July 1, 1993

Diesel specifications

Diesel specifications

  • Finland follows European standard

  • Maximum sulfur content of 2000 ppm (wt.) regulated by Finnish legislation

  • Reformulated diesel

    • maximum sulfur content of50 ppm

    • maximum aromatic content of 20 vol%

    • minimum cetane index of 47

  • Lower qualities carry a 0.025 ECU/liter higher tax

  • EN 590 as mandatory minimum requirement (standard diesel)


Motivation and introduction of improved fuel qualities diesel finland1

4

Motivation and Introduction of Improved Fuel Qualities – Diesel Finland

  • Reformulated diesel was introduced and in one year had over half of the Finnish diesel market

Fuel mix of diesel sold in Finland 1989-1996

Finnish legislation on reformulated diesel


Motivation and introduction of improved fuel qualities diesel sweden

4

Motivation and Introduction of Improved Fuel Qualities – Diesel Sweden

  • In 1991 Sweden first classified diesel into three classes by setting limits on sulfur content, aromatic concentration and distillation range

Diesel specifications

Diesel specifications

Jan. 1, 1991

  • Swedish standard

  • MK1 diesel

    • maximum S content of 10 ppm

    • maximum aromatic content of5 vol%

    • distillation range: 180-285 oC

  • MK2 diesel

    • maximum S content of 200 ppm

    • maximum aromatic content of 20 vol%

    • distillation range of 180-295 oC

    • 0.024 ECU/l higher tax than MK1

  • EN 590 as mandatory minimum requirement (MK3) has 0.041 ECU/liter higher tax than MK1

  • Sulfur tax on fuels exceeding 1000 ppm ensured that MK3 has a sulfur content <1000 ppm


Motivation and introduction of improved fuel qualities diesel sweden1

4

Motivation and Introduction of Improved Fuel Qualities – Diesel Sweden

  • In 1992 the specifications of MK1 and MK2 were revised

Diesel specifications as from Jan. 1, 1992

MK1

MK2

MK3

Sulfur, ppm

10

50*

2000

  • The oil industry and the environmental organizations requested the specifications on diesel MK1 and MK2 be revised

Aromatics, vol%

5

20

-

PAH (3 rings and more), vol%

0.02

0.1

-

Cetane index, min

50

47

46

Density, g/liter

800-820

800-820

820-860

Distillation** (T95) oC

285

295

-

Revised specifications per Jan. 1, 1992

* Sulfur changed from 200 to 50 ppm.

**Distillation was changed from a range to Initial Boiling Point to T95.


Motivation and introduction of improved fuel qualities diesel sweden2

4

Motivation and Introduction of Improved Fuel Qualities – Diesel Sweden

  • While MK1 was intended to be a ”city diesel” it has taken over 80% of the market

Fuel mix of diesel sold in Sweden 1989-1996


Table of contents

  • Table of contents

1

Background and Objectives

2

Summary

3

Approach and Methodology

4

Motivation and Introduction of Improved Fuel Qualities

5

Tax Differentials and Market Drivers

6

Industry Response

7

Environmental Benefit

8

Lessons Learned

A

Appendices


Tax differentials and market drivers first principles

5

Tax Differentials and Market Drivers – First Principles

  • A tax differential needs to be large enough to motivate the industry to invest without increasing the price to the consumer...

  • ...extra costs and investments are covered by higher sales volumes of improved fuels with increased price per liter for the refiner

E X A M P L ESwedish Diesel

Value of tax differentials

Swedish diesel tax revenues and value of differentials (excluding VAT) for the years 1990 to 1996

Value of differentials due to the use of improved fuel qualities(tax reductions)

Value of differentials due to the use of poorer fuel qualities (tax revenues) Tax revenues excluding differentials

Total tax revenues(excluding VAT)


Tax differentials and market drivers first principles1

5

Tax Differentials and Market Drivers – First Principles

  • Tax differentials are based on the belief that most consumers are not willing to pay a higher price for improved fuels that reduce emissions

E X A M P L ESwedish Gasoline

Price variation during 1996 was 0.07 ECU/liter

  • Tax differential of0.007 ECU/liter for gasoline

  • the difference in taxes between improved and poorer fuel qualities

  • the tax differential ensures at least price neutrality for MK2 with respect to standard gasoline (MK3) for the consumer*

*For diesel the improved quality (MK1) is sold at at lower price than the poorest quality (MK3).


Tax differentials and market drivers sweden

5

Tax Differentials and Market Drivers – Sweden

  • Sweden first pioneered the integration of tax differentials as a fiscal environmental policy instrument - with no precedence to lean on

Situation 1990:

Manufacturing Factors

Demand Factors

•Refinery configuration not favourable - refiners would not invest in quality beyond legal requirements

•Crude oil slate was already sweet

•Numerous oil companies in the market

  • •Oil market participants in general did not take the lead to introduce improved fuels

  • Consumer awareness of differences in fuel quality in general was low, but price sensitivity high


Tax differentials and market drivers diesel sweden

Tax decreased

Tax increased

Tax increased

5

Tax Differentials and Market Drivers – Diesel Sweden

  • Differentiated diesel taxes were first introduced in 1991...

Taxation in 1990

Taxation in 1991

Mechanisms

  • MK1 diesel

  • Tax decreased by 20 ECU/ m3

  • MK2 diesel

  • Tax increased by 4 ECU/m3

  • Tax differential of 24 ECU/m3 compared to MK1

  • MK3 diesel (standard diesel)

  • Tax increased by 21 ECU/m3

  • Tax differential of 41 ECU/m3 compared to MK1

148

ECU/ m3

131

ECU/ m3

127 ECU/ m3

107

ECU/ m3

Standard diesel

MK1 diesel

MK2diesel

MK3diesel


Tax differentials and market drivers diesel sweden1

Tax decreased

Tax decreased

5

Tax Differentials and Market Drivers – Diesel Sweden

  • ...with wider tax differentiatials in 1992

Taxation in 1991

Taxation in 1992

Mechanism

  • 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/m3 compared to MK1

148

ECU/ m3

148

ECU/ m3

131

ECU/ m3

119

ECU/ m3

107

ECU/ m3

95

ECU/m3

MK1

diesel

MK2

diesel

MK1

diesel

MK3

diesel

MK2

diesel

MK3

diesel


Tax differentials and market drivers diesel sweden2

5

Tax Differentials and Market Drivers – Diesel Sweden

  • In October 1993, the Swedish kilometer tax on diesel vehicles was replaced by a special tax on diesel

Diesel taxation

after October 1, 1993

Special tax on diesel(153 ECU/m3) replaced the kilometer tax on diesel vehicles

In 1994 the special tax was differentiated with respect to fuel qualities

In 1995 the special tax was incorporated into the energy tax


Tax differentials and market drivers gasoline sweden

Tax increased

Tax increased

5

Tax Differentials and Market Drivers – Gasoline Sweden

  • The general taxation on gasoline increased in 1995, but MK3 gasoline was raised 7.1 ECU/m3 further than MK2 gasoline

Taxation in 1994

Taxation in 1995

Mechanisms

  • Gasoline taxation increased by 11 ECU/m3

  • Tax differential:MK3 (standard gasoline) further increased by 7.1 ECU/m3 compared to MK2

  • Swedish oil companies voluntarily agreed to only sell MK2 gasoline after June, 1995

479

ECU/m3

472

ECU/m3

461 ECU/m3

MK2

Gasoline

MK3

Gasoline

Standard

gasoline


Tax differentials and market drivers gasoline and diesel sweden

5

Tax Differentials and Market Drivers – Gasoline and Diesel Sweden

  • For Sweden the market value of differentials due to the use of improved fuel qualities has been 589 million ECU for the period 1991 to 1996

Market value of differentials due to the use of improved fuel qualities(1991 to 1996) = 589 million ECU

Tax differentials (ECU/m3)

Diesel compared to MK1

Gasoline

MK2

MK3

MK3

1990

-

-

-

1991

24

41

Tax revenues from differentials due to the use of poorer fuel qualities (1991 to 1996) = 467 million ECU

1992

24

53

1993

24

53

1994

29

60

0.6*

1995

24

55

7.1

1996

25

57

7.1

*The tax incentive on gasoline was introduced December 1, 1994; 7.1/12=0.6


Tax differentials and market drivers finland

5

Tax Differentials and Market Drivers – Finland

  • In 1993 the Finnish government introduced tax differentials based on fuel quality - two years after Sweden and with the benefit of Swedish experiences

Situation 1992:

Demand Factors

Manufacturing Factors

  • The Government signaled that tax differentiation would occur

  • Refiners invested in anticipation of tax differentials

  • Oxygenated gasoline was made available before tax differentials were in place

  • Initial Refinery configuration favorable

  • Produced environmental diesel grades for the Swedish market

  • Sweet crude slate opportunity taken to reduce investment requirements


Tax differentials and market drivers gasoline finland

5

5

Tax Differentials and Market Drivers – Gasoline Finland

  • Oxygenated gasoline was marketed by Neste and purchased by consumers ahead of legislation - marketing companies absorbed the higher production costs

January 1, 1991

Relative sales of standard and oxygenated

January 1, 1993

gasoline in Finland

January 4, 1994

100%

80%

”City Gasoline” containing MTBE launched by Neste

60%

Specifications on improved fuel qualities were introduced in Finland

”Reformulated New Futura Gasoline” - oxygenated, less sulfur and benzene - launched by Neste

40%

20%

0%

1991

1992

1993

Year

Standard gasoline

Oxygenated gasoline


Tax differentials and market drivers gasoline and diesel finland

Tax decreased

Tax increased

Tax increased

5

Tax Differentials and Market Drivers – Gasoline and Diesel Finland

  • To support consumer demand, the Finnish government policy was to increase gasoline taxes to compensate for tax differentials on diesel

Taxation in 1992

Taxation in 1993

Mechanisms

  • Gasoline

  • General tax increased by 67 ECU/m3

  • Tax differential:standard gasoline tax further increased by 8.3 ECU/m3 compared to reformulated gasoline

  • 3.3 ECU/m3 of the overall tax raise on gasoline sponsored the diesel tax differentiation

375

ECU/m3

367

ECU/m3

300ECU/m3

174ECU/m3

174ECU/m3

149ECU/m3

  • Diesel

  • Tax differential:reformulated diesel tax reduced by 25 ECU/m3 compared to standard diesel

Standard*

gasoline

Standard

diesel

Reformulated

gasoline

Standard

gasoline

Reformulated

diesel

Standard

diesel


Tax differentials and market drivers gasoline and diesel finland1

Tax differentials (ECU/m3)

Gasoline

Diesel

1990

-

-

1991

-

-

1992

-

-

1993

4.2*

25

1994

8.3

25

1995

8.3

25

1996

8.3

25

*The tax incentive on diesel was introduced July 1, 1993; 8.3/2=4.2

5

Tax Differentials and Market Drivers – Gasoline and Diesel Finland

  • For Finland the market value of differentials due to the use of improved fuel qualities has been 152 million ECU for the period 1993 to 1996

Market value of differentials due to the use of improved fuel qualities (1993 to 1996) = 152 million ECU

Tax revenues from differentials due to the use of poorer fuel qualities (1993 to 1996) = 97 million ECU


Table of contents

  • Table of contents

1

Background and Objectives

2

Summary

3

Approach and Methodology

4

Motivation and Introduction of Improved Fuel Qualities

5

Tax Differentials and Market Drivers

6

Industry Response

7

Environmental Benefit

8

Lessons Learned

A

Appendices


Industry response summary

6

Industry Response –Summary

  • Finnish and Swedish refiners invested about 540 million ECU over the period 1990 to 1996...

Total capital investment patterns in study refineries 1990-96

Total incremental operating expenditure in study refineries 1990-96

...and by 1996 incurred additional costs of 57 million ECU/year to meet the new fuel specifications


Industry response summary1

6

Industry Response – Summary

  • Over a 15 year lifecycle capital and operating costs are equivalent to an additional unit cost of 10 ECU/ton for enhanced quality gasoline

Total enhanced quality gasoline life cycle cost

(15 year plant life)

Weighted average tax incentives 1990-96


Industry response summary2

6

Industry Response – Summary

  • Similarly unit costs for diesel were estimated at 28 ECU/ton

Total enhanced quality diesel life cycle cost

(15 year plant life)

Weighted average tax incentives 1990-96

200

50

50

45

40

40

150

35

30

30

100

25

Million ECU/year

ECU/ton

20

ECU/ton

20

50

10

15

10

0

0

5

0

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

1990

1991

1992

1993

1994

1995

1996

Opex

Capital charge (14% per annum)

Cumulative cost ECU/ton (right hand scale)


Industry response initial configuration

6

Industry Response – Initial Configuration

  • The five refineries in the study group were of similar size to the average EU refinery in 1991, but had a higher mild hydrocracking and distillate hydro-desulfurization (HDS) capability...

  • ...although no refineries in Europe had distillate de-aromatization capability

Refinery CapabilitiesJanuary 1, 1990

Unit

Study Group

NWE (1)

E.U.

Average Refinery CapacityMillion Tons/Year (CDU)

5.92

6.47

6.11

Produces high qualitydiesel components

Conventional hydrocracking

3

5

2

Total cracking (2)

47

41

38

Distillate desulfurizationprocesses which removesulfur

Mild VGO hydrocracking

9

7

5

Other distillate HDS

31

27

19

Total HDS

53

56

48

As % of CDU

Hydrogen is an importantbi-product needed in desulfurization processes

Reforming

17

15

13

Alkylation

1

1

1

Produce high octaneblending components(aromatics and benzene free)

Isomerization

3

2

2

De-aromatization

0

0

0

(1) Belgium, Netherlands, Germany, Denmark(2) Conventional hydrocracking, catalytic cracking and thermal cracking


Industry response initial configuration finland

6

Industry Response – Initial Configuration Finland

  • Refineries had a higher capability to desulfurize distillates than the rest of Europe

Refinery CapabilitiesJanuary 1, 1990

Finland(Two Refineries)

NWE (1)

Average Refinery Capacity Million Tons/Year (CDU)

5.05

6.47

Average DownstreamProcessing Per Refinery

Million TonsPer Year

% CDU

% CDU

Produces high qualitydiesel components

Conventional hydrocracking

0.38

8

5

Total cracking (2)

2.97

59

41

Mild VGO hydrocracking

-

0

7

Distillate desulfurizationprocesses which removesulfur

Other distillate HDS

2.37

47

27

Total HDS

4.17

83

56

Hydrogen is an importantbi-product needed in desulfurization processes

Reforming

0.92

18

15

Alkylation

0.08

1

1

Produce high octaneblending components(aromatics and benzene free)

Isomerization

0.08

1

2

(1) Belgium, Netherlands, Germany, Denmark(2) Conventional hydrocracking, catalytic cracking and thermal cracking


Industry response initial configuration sweden

6

Industry Response – Initial Configuration Sweden

  • The Swedish refineries were similar to the average for Northwest Europe

Refinery CapabilitiesJanuary 1, 1990

Sweden(Three Refineries)

NWE (1)

Average Refinery Capacity Million Tons/Year (CDU)

6.40

6.47

Average DownstreamProcessing Per Refinery

Million TonsPer Year

% CDU

% CDU

Produces high qualitydiesel components

Conventional hydrocracking

-

0

5

Total cracking (2)

2.21

34

41

Mild VGO hydrocracking

0.88

14

7

Distillate desulfurizationprocesses which removesulfur

Other distillate HDS

1.63

25

27

Total HDS

2.75

42

56

Hydrogen is an importantbi-product needed in desulfurization processes

Reforming

1.08

17

15

Alkylation

-

0

1

Produce high octaneblending components(aromatics and benzene free)

Isomerization

0.22

3

2

(1) Belgium, Netherlands, Germany, Denmark(2) Conventional hydrocracking, catalytic cracking and thermal cracking


Industry response 1997 configuration

6

Industry Response – 1997 Configuration

  • The study group refineries had increased the capacity of key process units by 1997

Unit

Study Group

NWE (1)

E.U.

Average Refinery CapacityMillion Tons/Year (CDU)

5.92

7.08

6.6

Conventional hydrocracking

3

6

3

Total cracking (2)

49

45

41

Mild VGO hydrocracking

12

7

5

Other distillate HDS

36

29

23

As % of CDU

Total HDS

71

67

53

Reforming

17

15

13

Alkylation

1

1

1

Isomerization

4

2

3

De-aromatization

13

2

1

(1) Belgium, Netherlands, Germany, Denmark(2) Conventional hydrocracking, catalytic cracking and thermal cracking


Industry response capital investments

6

Industry Response –Capital Investments

  • Capital investments* were made to meet fuel specification changes in the period 1990-1996 at Scanraff and Preem Gothenburg refineries in Sweden

Scanraff

Gothenburg

Unit

Capacityincrease

Startup

year

Startup

Year

Unit

Capacityincrease

6

Isomerizer (recycle)

Isomerizer (once through)

12.4 kbd

1990

10 kbd

1992

VGO Mild Hydrocracker (expansion)

1996

>30 kbd

Distillate de-aromatizerand desulfurization

1993

+5 kbd

Distillate Hydrofiner (expansion)

1994

+17 kbd

Sulfur plant

1996

100 ton/day

Distillate De-aromatiser(new)

1994

47 kbd

+40 ton/day

Amine plant re-build

1996

Hydrogen recovery (cryogenic)

SCOT Tail gas plant(new)

200 ton/day

1996

1994

36 MMcfd

Reformate splitter modification

1996

7.1 kbd

Hydrogen Purification(membrane- new)

14 MMcfd

1994

1995

Isomerizer (expansion)

+2 kbd

kbd = 1000 barrels/day; MMcfd = million cubic feet/day

*Based on a combination of actual investments reported publicly and ADL estimates.


Industry response capital investments1

6

Industry Response –Capital Investments

  • Capital investments* were made to meet fuel specification changes in the period 1990-1996 at Shell Gothenburg

Unit

Startup

year

Capacityincrease

11 kbd

Distillate hydrotreater(new)

1993

Distillate De-aromatizer(new)

1993

11 kbd

1993

Hydrogen Purification(membrane - new)

10 MMcfd

SCOT Tail-gas (new)

1993

32 ton/day

1994

Naphtha splitter(new)

20 kbd

kbd = 1000 barrels/day; MMcfd = million cubic feet/day

*Based on a combination of actual investments reported publicly and ADL estimates.


Industry response capital investments2

6

Industry Response –Capital Investments

  • Capital investments* were made to meet fuel specification changes in the period 1990-1996 at Neste’s Porvoo and Naantali refineries in Finland

Porvoo

Naantali

Startup

Year

Unit

CapacityIncrease

Startup

Year

Unit

CapacityIncrease

1993

Alkylation unit (expansion)

+110 Mton/y

Distillate hydrotreater

3.5 kbd

1993

1993

MTBE unit (expansion)

+30 Mton/y

GO de-aromatizer

1993

3.5 kbd

VGO hydrotreater

1993

2.0 MMton/y

1994

Catalyst change

GO hydrotreater (revamp)

1993

Catalyst change

GO hydrotreater (revamp)

8.4 kbd

Naphtha de-hexanizer

1996

1994

Hydrogen purification (membrane - new)

18 MMcfd

Reformate de-benzenizer

1994

1.6 MMton/y

kbd = 1000 barrels/day; MMcfd = million cubic feet/day;Mton/y = thousand ton/year; MMton/y = million ton/year

110 Mton/y

1995

TAME (new)

*Based on a combination of actual investments reported publicly and ADL estimates.


Industry response capital investments3

6

Industry Response –Capital Investments

  • Other investments were made for both environmental and business reasons, but these were excluded if made before 1990 or were not considered to be a direct cost for improved fuel quality

Preem

Preem

Shell

Neste

Neste

Company

RefineryLocation

  • ScanraffSweden

  • FCCU expansion

  • Gothenburg Sweden

  • HGO de-sulfurization cold flow (improvemen)

  • GothenburgSweden

  • Ballast water treatment

  • Double tank seals

  • Porvoo

  • Finland

  • Conventional hydrocracker (pre-1990)

  • Alkylation unit (new unit pre-1990)

  • MTBE unit (Return on investment)

  • Benzene recovery heartcut (chemicals return on investment)

  • NaantaliFinland

  • Part of hydrotreater benefits used for enhanced solvents production


Industry response operating expenditure

6

Industry Response –Operating Expenditure

  • Net incremental annual operating expenditure to meet the new specifications was approximately 54 million ECU in 1996

Incremental annual operating expenditure in study refineries 1996

Breakdown of incremental annual operating expenditure

Cooling

Water

Labor

Cat &

4%

4%

Chem

5%

Fuel

37%

Power

12%

Steam

14%

Maintenance

*

23%

*Includes associated yield benefits which result directly from investment made for improved fuel qualities. Excludes any capacity creep benefits associated with incremental ongoing investments (excluded in investment estimates).


Industry response basis and assumptions

6

Industry Response – Basis and Assumptions

  • Actual data was used when available and typical N.W European data was used otherwise

Capital Investment Basis

Operating Expenditure Basis

  • Capital investment costs are given as installed project cost and, where appropriate, include a 40% “offsites” charge and a 5% working capital charge for new stand alone units

  • “Once off” reactor catalyst changes have been included in capital costs

  • Only capital investments made specifically to meet the changing fuel specifications in the study period (1990-96) were included

  • Capital investment to replace obsolete equipment was judged to be “business as usual” and not included in the study

  • Opex was based on ADL internal database data and has been split into fuel, steam, power, cooling water, maintenance, labor and catalyst & chemicals

  • Fuel and steam costs were based on the LSFO price

  • Power costs were based on Eurostat Swedish/Finnish averages for a 25 million kWh user, inclusive of taxes

  • labor costs were only charged for new units on the assumption that there was a “lost opportunity cost”


Industry response feedstock costs

6

Industry Response –Feedstock Costs

  • Additional feedstock costs were incurred as a result of the sweeter crude slate...

Annual cost of sweeter crude slate in Finland vs. EU average slate

Proportion of sweet crude in slate

Source: IEA Statistics, Platt’s pricing

Source: IEA Statistics, Company data


Industry response feedstock costs1

6

Industry Response –Feedstock Costs

  • . . . with an average “low sulfur premia” of 3.8 ECU/ton

“Low sulfur premia” based on Brent / Urals price differentials adjusted for API density and fuel oil sulfur premia

Source: IEA Statistics, Platt’s pricing, ADL Data

1. Brent has two superior qualities compared with Soviet export blend - better American API gravity and lower fuel oil sulfur content

2. After adjusting the difference in delivered prices from the benefits of API and low sulfur fuel

oil, there is a remaining “low sulfur premia”. This is a cost element of producing low sulfur diesel


Industry response crude oil quality

6

Industry Response –Crude Oil Quality

  • Increased availability of sweet North Sea crude oils has benefited the refiners

North Sea crude oil production


Industry response crude oil quality1

6

Industry Response –Crude Oil Quality

  • Sweet crude oil supplies have also increased for the EU but not as much as in Finland

Finland*

Sweden

EU

% Sweet crude oil

*As deslfurization capacity is expanded in Finland - flexibility in choice of crudes is returning - during 1997 % sweet crude used has reduced to 60%.


Industry response mk1 diesel sweden

6

Industry Response – MK1 Diesel Sweden

  • The distillation specifications for Swedish MK1 require the use of components for jet fuel manufacture

Finnish and Swedish jet fuel production (1990-1995)

Key diesel product specifications

Finnish Reformulated

820-850

-

50

Swedish MK1

800-820

285

10

Density (kg/m3)

T95 (Max oC)

Sulfur (ppm)

EN590

860(max)

370

500

Source: IEA Statistics, OECD, Paris, 1997


Table of contents

  • Table of contents

1

Background and Objectives

2

Summary

3

Approach and Methodology

4

Motivation and Introduction of Improved Fuel Qualities

5

Tax Differentials and Market Drivers

6

Industry Response

7

Environmental Benefit

8

Lessons Learned

A

Appendices


Environmental benefit

Reduced environmental costs

Total changes in emissions

External costs of emissions

National emission estimates

Average change in emissions due to fuel quality

7

Environmental Benefit

  • Reduced environmental costs for CO, HC, NOx, PM and SO2 due to improved fuel qualities have been assessed in economic terms

Sections in this chapter:

1.

Estimates of reduced environmental costs for Finland and Sweden

Uncertainties associated with data and methodology

2.


Environmental benefit reduced environmental costs

7

Environmental Benefit – Reduced Environmental Costs

  • For the years 1992 to 1996 environmental cost reductions associated with improved fuels are estimated to be on the order of 170 to 230 million ECU

Estimated reduction in environmental costs due to improved fuel qualities using ExterneE methodology (million ECU; see Appendix A.3)

1992

1993

1994

1995

1996

SUM

Finland

8 to16

9 to 17

9 to 17

26 to 50

Gasoline

3 to 10

4 to 10

3 to 10

10 to 30

Diesel

5 to 6

5 to 7

6 to 7

16 to 20

Sweden*

21 to 22

34 to 35

34

44 to 46

51 to 52

184 to 189

Gasoline

2

11 to 13

12 to 13

25 to 28

Diesel

21 to 22

34 to 35

32

33

39

159 to 161

*Swedish estimates include the contribution from off-road vehicles and machines that use diesel.


Environmental benefit reduced environmental costs1

gasoline

diesel

CO-0.6 to 0.08-0.1 to -0.05

HC-0.05 to 0.05-0.03 to 0.001

NOx21 to 23129 to 131

PM12 to 3

SO2428

Total25 - 28159 - 161

7

Environmental Benefit – Reduced Environmental Costs

  • The reduction in environmental costs* is primarily due to lower NOx and sulfur emissions

Finland

Sweden

Reduced environmental costs: 1994 - 1996(million ECU)

Reduced environmental costs: 1992 - 1996(million ECU)

gasoline

diesel

CO0.8 to 1.4-0.01 to 0.01

HC0.1 to 0.2-0.03 to 0.05

NOx6 to 256 to 9

PM12 to 3

SO228

Total10 to 3016 to 20

Changes in diesel quality have had the greatest contribution to reductions in environmental costs

*Negative numbers are due to increased emissions from improved fuel qualities


Environmental benefit total change in emissions

7

Environmental Benefit – Total Change in Emissions

  • The largest reduction in national emission estimates in relative terms is for sulfur and PM

Expected changes in national emissions due to the usage of improved fuel qualities - 1996 (see, Appendix A.3)

Finland (% change)

CO

HC

NOX

PM

SO2

gasoline

-18% to -11%

-7% to -5%

-8% to -2%

-10%

-50%

-14% to 8%

-5% to -3%

-13% to -7%

-82%

-2% to 2%

diesel

Sweden (% change)

CO

HC

NOX

PM

SO2

gasoline

-1% to 4%

-1% to 1%

-4%

-15%

-59%

diesel

4%

3% to 15%

-9%

-13% to -11%

-85%

  • Uncertainties regarding the extent of emission changes for CO and HC from diesel vehicles is judged to be higher than for NOx, PM, PAH, and SO2.

  • A direct comparison of changes in emissions due to improved fuels for Finland and Sweden is not possible since the initial and subsequent fuel qualities and test cycles for estimating emissions are different.


Environmental benefit externe data

7

Environmental Benefit – ExternE data

  • External costs of air pollution for Finland and Sweden has recently been estimated in the European Union’s ExternE* project...

Unit cost of damage by pollutant based onExternE calculations(ECU/ton of pollutant)

Finland

CO

HC

NOX

PM

SO2

9**

17**

1310

1555

1486

Unit cost of damage by pollutant based onExternE calculations(ECU/ton of pollutant)

Sweden

CO

HC

NOX

PM

SO2

9**

17**

2732

1957

2357

*See http://externe.jrc.es

**European Commission, DGXII - ExternE, 1995.; European Commission, DGXI - Cost Benefit Analysis of the Different Municipal Solid Waste Management Systems: Objectives and Instruments for the Year 2000, Final Report, Coopers & Lybrand, March 1996


Environmental benefit national emission estimates

7

Environmental Benefit – National Emission Estimates

  • National emission estimates were taken from publicly available data

National emission estimates from road transport - 1996 (tons)

CO

Finland*

HC

NOx

PM

SO2**

Gasoline

276000

41000

83000

3100

900

Diesel

20000

8000

44000

4500

2500

*VTT; Finland

**Mass balance estimate using average sulfur content in fuels.

National emission estimates from road transport, off-road vehicles and machines - 1996 (tons)

CO

Sweden*

HC

NOx

PM

SO2**

Gasoline

770000

145000

83000

2000

550

Diesel

58000

3000

122000

3000

500

*SCB; Sweden

**Mass balance estimate using average sulfur content in fuels.


Environmental benefit vehicle emission data

7

Environmental Benefit – Vehicle Emission Data

  • Reduction in emissions due to improved fuel qualities has been estimated by reviewing emission data* and by the EPEFE equations

Percent changes in emissions compared to normal ungraded fuels

Finland

Unleaded gasoline

Reformulated Diesel

Reformulated

Oxygenated

VTT**

EPEFE

VTT**

EPEFE

average

range

EPEFE

CO

2%

-9%

-7%

-12%

-25%

-3%

-6% to 0%

HC

12%

-6%

-4%

-8%

-5%

-20%

-5%

0%

0%

-3%

-12%

-7%

-12% to -5%

NOX

PM

0%

-15%

-19%

-25% to -10%

-10%

*See Appendix A.3 for references and ranges.

**Source: VTT Finland assuming 50% city traffic and 50% catalytic converter car fleet.


Environmental benefit vehicle emission data1

7

Environmental Benefit – Vehicle Emission Data

  • Reduction in emissions due to improved fuels has been estimated by reviewing emission data* and by the EPEFE equations

Percent changes in emissions compared to normal ungraded fuels

Sweden

MK2 Gasoline

Diesel

MK2

MK1

average

EPEFE

average

range

EPEFE

average

range

EPEFE

CO

-1%

4%

5%

-6% to 8%

5%

-

-

9%

HC

1%

-3%

4%

-2% to 30%

18%

-5%

-10% to 1%

24%

-4%

-1%

-9%

-11% to -5%

-11%

-6%

-8% to -4%

-9%

NOX

PM

-15%

-16%

-30% to -10%

-13%

-9%

-12% to -5%

-8%

*See Appendix A.3 for references and ranges.


Environmental benefit uncertainties

7

Environmental Benefit – Uncertainties

  • Uncertainties in the valuation methods

  • Secondary effects of improved fuels

  • Exclusion of PAH and benzene in the valuation

  • There are large uncertainties in the calculations

Reduced environmental costs

Total changes in emissions

External costs of emissions

  • Small number of studies and large variations in the data

  • Uncertainties in the EPEFE equations

National emission estimates

Average change in emissions due to fuel quality

  • Different methodologies for aggregating emission data

  • Emission data from Finland and Sweden are not concurrent


Environmental benefit uncertainties1

?

7

Environmental Benefit – Uncertainties

  • There are large uncertainties in each step of the ExternE valuation methodology

Valuation methodology steps:

Model exposure to receptors and effect of exposure

Quantify costs

Quantifying emissions

Model dispersion(concentration)

  • uncertainties in calculating emissions from road transport

  • uncertainties in appointing the source of pollutants

  • inherent uncertainties associated with air pollution dispersion models

  • uncertainties in the dose response functions

  • receptors (e.g.):- population- crops- buildings- forests and rivers

  • uncertainties associated with the actual costs associated with the response (e.g.) health care costs

  • uncertainties in the current value of receptors- the value of human life- costs associated with “non-productive” individuals


Environmental benefit uncertainties2

7

Environmental Benefit – Uncertainties

  • All existing methods to estimate the monetary value of external effects are intensely debated and results need to be interpreted with great care

    • Uncertainties with the actual costs associated with the receptor response:

      • health care costs

      • the current value of receptors

      • the value of human life

      • ”non-productive” individuals

    • Current valuation methods have their strengths and weaknesses

      • ”willingness to pay” (WTP)

        • income is constrained, since people can not pay what they do not have

        • easily encourage biased results, due to ”strategic answers” by people who want to influence decisions

      • Restoration valuation methodologies can not account for non-reversible damage to buildings and ecosystems


Environmental benefit uncertainties3

7

Environmental Benefit – Uncertainties

  • Swedish economic costs estimates which are used in policy formulation are much higher than unit economic costs calculated with the ExternE methodology

Swedish economic cost estimate*

ExternE economic cost estimate

regional effects tourban effects(ECU/ton)

CO

9*

CO

HC

17*

1,900 to 7,800

HC

Unit cost of damage by pollutant (ECU/ton of pollutant)

Unit cost of damage by pollutant (ECU/ton of pollutant)

NOX

2,732

5,100 to 11,000

NOX

PM

1,957

21,000 to 130,000

PM

SO2

2,357

1,900 to 13,000

SO2

*Source: SOU 1996:165;


Environmental benefit uncertainties4

7

Environmental Benefit – Uncertainties

  • Lower sulfur levels in diesel have allowed for secondary treatment of diesel exhausts - this is not included in emission estimates

    • Over 1,000 buses and trucks have been fitted in Scandinavia with oxidation catalysts, filters or CRT (Continuous Regenerating Trap) packages which require diesel with a sulfur content less than 50 ppm

      • Both techniques reduces CO and HC emissions

      • CRT also greatly reduces particulate emissions (~90%)

    • While the catalyst does not remove particles it removes the organic material which contributes to particle mass


Environmental benefit uncertainties5

7

Environmental Benefit – Uncertainties

  • The ExternE methodology does not does not evaluate environmental costs associated with benzene, PAH, biological activity and mutagenicity of emissions*

Decrease in particle emissionswith improved diesel qualities

Decrease in PAH emissionswith improved diesel qualities

5 - 30 %

(average 16%)

22 - 84%

(average 61%)

Decrease in biological activity as tested with the Ames mutagenicity and TCDD receptor binding test

Not allocated in the ExternE framework or in the calculations of reduced environmental costs


Environmental benefit uncertainties6

7

Environmental Benefit – Uncertainties

  • National emission estimates are not concurrent and there are discrepancies when comparing the magnitude of emissions between the countries

    • The methods used in Sweden and Finland for calculating emissions are not the same (e.g):

      • how fuel qualities and improvement in technology affect emissions

      • the detail of statistics used with respect to transportation patterns, fuel consumption and actual fuel qualities on the market

Differences in national emission estimates...

... lead to differences in expected reductions in emissions due to improved fuels...

...which lead to differences in expected reductions in environmental costs...

...which then makes it difficult to compare the environmental improvement in different countries when improved fuels are introduced


Environmental benefit uncertainties7

7

Environmental Benefit – Uncertainties

  • Expected reductions due to improved fuel qualities are based on a few studies with different test cycles and reference fuels*

Finland

Oxygenated gasolineno independent studies found

Reformulated gasoline1 study

Reformulated diesel4 studies, 2 reference fuels

Sweden

MK2 gasoline1 study

MK2 diesel2 studies, Braunshwieg bus and test cycles

MK1 diesel9 studies, 5 test cycles, 3 reference fuels

*see Appendix A.3


Environmental benefit uncertainties8

7

Environmental Benefit – Uncertainties

  • There are also discrepancies in the EPEFE equations for diesel emissions

Change in Emissions:

% measured% predicted from theEPEFE equations

CO+2.4%+0.4%

HC-12.5%+14.7%

NO-8.4%-7.5%

PM-29,4%-4.3%

  • Emissions from a Scania and a Volvo motor were measured from two fuels:

  • MK1 diesel - Sweden

  • EPEFE reference fuel

Subsequently ACEA (European Association of Automotive Manufacturers have revised the equations(see ACEA report, Influence of Diesel Quality on Heavy Duty Diesel Engine Emissions, 20.3.1997)


Table of contents

  • Table of contents

1

Background and Objectives

2

Summary

3

Approach and Methodology

4

Motivation and Introduction of Improved Fuel Qualities

5

Tax Differentials and Market Drivers

6

Industry Response

7

Environmental Benefit

8

Lessons Learned

A

Appendices


Lessons learned tax differentiation

8

Lessons Learned – Tax Differentiation

  • Tax differentiation is a quick and effective method to change market conditions so that improved fuel qualities for road transport can be introduced

    • Tax differentials change market conditions in order that improved fuels can be rapidly introduced

    • Tax differentials should not be considered as a tax revenue gain or loss

    • If consumers are not willing to pay a higher price for less polluting fuels, then tax differentials needs to be large enough to cover extra investments and net increased operating costs* in order to encourage refiners to produce the improved fuels

    • After the new fuels have been introduced and the appropriate investments been made ”a new steady state” has been achieved - therefore tax differentials can be altered to reflect new market condition

*Net increased operating costs - the associated extra costs for producing improved qualities less general productivity improvements due to investments associated with improved qualities.


Lessons learned market conditions

8

Lessons Learned – Market Conditions

  • The policies adopted by the Finnish and Swedish governments in early 1990’s were successful in introducing improved fuels into the market

    • The size of the tax differentials in most instances needed to change market conditions was small:

      • when compared to the total tax on fuels

      • when compared to the annual fluctuations in market price

    • Tax differentials allow the consumer to always choose the lower priced fuel:

      • even if the tax differential is too large, market forces ensure that the price of the improved fuel is lower than the more polluting grade

      • if the tax differential is too small, the price of the improved grades will be higher and consumers may switch back to the more polluting grade*

    • Consumers of lower quality fuels contribute to tax revenues - i.e. “polluter pays”

    • Once the investments are recovered from the market place it would appear that refiners have become more competitive and are more flexible

*This has not been observed for transport fuels, but occurred when tax differentials in Sweden were removed from heating oil grades in 1994.


Lessons learned industry response

8

Lessons Learned – Industry Response

  • Tax differentials on transport fuels gave refiners an incentive to invest and in some instances provided positive effects on operations

    • Refinery investments for producing improved fuels gave secondary improvements in terms of productivity and flexibility (e.g.):

      • VGO Hydrotreaters

      • MTBE production

      • hydrotreating

    • Availability of sweet crudes were not a prerequisite for introducing improved fuels, but the Finnish refiner was able to reduce his initial investment costs by switching to a sweet crude slate

    • Even though Swedish MK1 diesel requires components which are used in jet fuel, total production of jet fuel has increased in the region as a whole

The major global reserves of crude oil are located in the Middle East and are sour

Other EU refiners are likely to require higher investments consistent with sour crude supplies

This may have an impact on the level of tax differentiation

This may have an impact on the level of tax differentiation

There is a world wide increase in the demand for jet fuels

Other EU refiners may find it difficult to produce both improved diesel qualities and increased amounts of jet fuel


Lessons learned environmental benefit

8

Lessons Learned – Environmental Benefit

  • Reduced environmental costs are difficult to estimate and the uncertainties are large

    • Environmental improvements should be measured after the improved fuels are established on the market to review future policy on tax incentives

    • Better information and universal measuring standards are needed in order to assess environmental benefits

      • changes in emissions due to changes in fuel quality

      • aggregation methods for estimating emissions from road transport on a national level

      • inclusion of relevant substances (e.g. benzene and PAH)

      • valuation techniques for estimating environmental costs

While the exact size of the reduced environmental costs are uncertain... we expect even greater environmental benefit in more densely populated areas of Europe since improved fuel qualities reduce emissions which have an adverse effect on human health


Table of contents

  • Table of contents

1

Background and Objectives

2

Summary

3

Approach and Methodology

4

Motivation and Introduction of Improved Fuel Qualities

5

Tax Differentials and Market Drivers

6

Industry Response

7

Environmental Benefit

8

Lessons Learned

A

Appendices


Table of contents

  • Appendices

A.1

Net Present Costs

A.2

Tax Differentiation Calculations

A.3

Net Environmental Cost Calculations


Table of contents

  • Appendices

A.1

Net Present Costs

A.2

Tax Differentiation Calculations

A.3

Net Environmental Cost Calculations


Table of contents

  • Appendices

A.1

Net Present Costs

A.2

Tax Differentiation Calculations

A.3

Net Environmental Cost Calculations


Table of contents

Case Study –

The Introduction of Improved Transport Fuel Qualities in Finland and Sweden

Arthur D. Little AB

Box 70434

107 25 Stockholm

Telephone +46 8 698 30 00

Telefax +46 8 698 30 02

Reference 37001

Presentation report to the

Governments of Finland, Norway and Sweden

Final Report

July 27, 1998


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