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

1. CAI-Asia – Oil Industry Dialogue forCleaner Fuels in Asia Cornie HuizengaGrant BoyleJohn CourtisMichael Walsh Better Air Quality (BAQ) 2004 6-8 December, 2004 Agra, India

2. 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

3. 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; and low capital cost of in-use 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

4. Gasoline Effects on Emissions Emissions Toxics (Unregulated ) Regulated Fuel- change CO HC NOx Benzene Butadiene Aldehyde Reduction of : +++ o o o o o Benzene --- --- - - ++ ++ +++ Aromatics ++ o o o o o Olefins + + + o o o Sulphur /+ o o Vapor pressure o o o o - ++ + +++ Distillation Characteristics ? ? -- ++ + o + o Addition Oxygenates 0 2-10 % 10-20 % > 20 % } Improvement or Deterioration + ++ +++ - -- ---  2 %

5. Diesel-Fuel Effects on Emissions Vehicle - Emissions LDV / HDV Diesel fuel-change CO HC NOx Particulates Reduction of: +/++ o o ? / o Sulphur -- ++/ + / ++/- ++/o o Density - - + / / / + + o o Aromatics - - - - - / / + o / o / o Back End Distillation (T95) Increase of ... - / +++/+ o +++/++ o Cetane Number 0 2-10 % 10-20 % > 20 % } Improvement or Deterioration + ++ +++ - -- ---  2 %

6. Control Devices, Emission reduction potential and effects of sulfur on catalyst performance (*) Note: CAI-Asia, a work in progress (not to be quoted)

7. The Asian Refining Industry • Significant number of small refineries • Even the complex refineries in the Asian region are not well equipped to produce clean fuels • Significant capital investments are required • Amongst the most critical parameters are sulfur, benzene, and aromatics.

8. COSTS OF COUNTRY PRODUCTION STUDY’S STUDIES REGION (cents/gallon) OBJECTIVES GASOLINE DIESEL Enstrat All Asia Sulfur Reductions Intl. ---- 8.1 - 12.4 - 50ppm - 10ppm Australia Australia Fuel Reformulation Gov. 2.5 4.2 EURO 4 (S, benzene) T rans - China Fuel 1.5 3.2 Reformulation Energy (EURO 4) Daedalus Thailand Fuel 6.1 - 25.3 2.3 Reformulation LLC (EURO 4) California California More severe 15.0 - 19.0 8.2 - 8 .7 than EURO 4 (Many Studies) ADL Europe EURO 4 (Gasoline) Costs of Production • Preliminary review of cost studies to determine the applicability of cost estimates to Asia • Comparison of refinery data for Asia with data from other countries to assess applicability 10.4 - 11.3 ----

9. Potential Options for Implementation of Clean Fuels • Option A:Follow an integrated strategy and regulate all fuel properties at the same time • optimum strategy; takes full advantage of refinery integration • requires larger capital investment; all air quality benefits materialized • Option B:Implement some fuel quality standards first and follow later with more comprehensive standards • 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 • some air quality benefits will be delayed • Option C: Limited introduction of fuel quality standards in cities and regions where air quality is an issue; different standards for the remainder of the country. • depends upon the ability to monitor compliance; possible enforcement and fuel adulteration issues • reduces the costs of compliance; increases the costs for fuel segregation • potential for the quality of fuels in the uncontrolled areas to deteriorate

10. Implementation Time-Frame • USA and EU issued regulations, which gave 4-7 years for the introduction of cleaner fuels, which was feasible • For Asian countries implementation time of 4-6 years can be considered for planning purposes, whereby: • 2 years permitting, engineering, financing • 2-4 years construction (includes contingencies) • However there will be location specific factors that will influence timing: • Ability to raise capital and to finance capital investments • Growth in demand for transportation fuels • Availability of trained labour, engineering services • Avoidance of risks in supply disruptions • Ability of the marketing and distribution system to adjust • Ability of the government to make, where relevant decisions on future of small scale refineries • Flexibility granted by regulators to refiners • Availability of merchant – export refiners in the region to meet shortfall in local production. NOT ALL COUNTRIES WILL OPERATE WITH SAME TIMEFRAMES

11. Implementation Strategies for Fuel Quality Improvements

12. Tax and Pricing Differentials in Asia Unleaded Gasoline Lower Sulfur Diesel

13. Market Orientation (EIA, 2004)

14. Incentives and taxation versus command and control • Taxation and Incentives can complement fuel quality regulations but not replace it. • Where the market will not accept the costs of higher quality fuels, governments should adjust taxes or duties to create a price advantage for the cleaner fuel. This can rest on pricing processes in both state-owned and market driven refining sectors. • Governments with state owned oil sectors and price controls should not rely on tax differentials between higher and lower quality fuels to stimulate investments in refinery upgrades, but instead may allocate directed subsidies to accelerate the introduction of higher quality fuels and complement regulations. • Where the costs of domestic refinery upgrading to produce desired cleaner fuels are prohibitive or the investment environment is not attractive, governments should look toward regional imports over the short term to supply cleaner fuel to the market. • Governments can develop tax incentives for cleaner vehicles to indirectly encourage the market for cleaner fuels.

15. Next steps in Oil Dialogue • Follow-up: Inform governments on the potential ability and associated efforts to produce cleaner fuels, this in support of the development of medium term fuel quality strategies by Asian governments • Road-map: Develop consensus among main stakeholders (oil industry, vehicle industry, emission control technology industry, regulators, NGO’s) on where, how, and when Asia will move in terms of fuel quality and vehicle emission levels. • CAI-Asia is considering a workshop for 2005 to bring together all stakeholders to discuss outputs of CAI-Asia Oil Industry Dialogue to develop consensus on the road map.CAI-Asia will invite different groups such as ASCOPE, AMEICC, ESCAP, PCFV, UNEP, Male Declaration, SASEC, SAARC to the workshop. • Policy advocacy:Promote the promulgation of medium term regulations to create predictability, and transparency in regulation