Presentation, Tokyo (July 2004)

CAI-Asia – Oil Industry Dialogue for Cleaner Fuels in Asia Cornie Huizenga Michael Walsh John Courtis Grant Boyle July 2004 Tokyo, Japan

Overview 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

Part 1 400 Average Air Quality Levels in Asia 2000 – 2003 (*) 350 300 microgram per cubic meter 250 200 150 100 50 0 Shanghai Hong Kong Bangkok Surabaya Yogyakarta Seoul Kathmandu Singapore Hanoi Busan Karachi Kolkata Dhaka Taipei,China Tokyo Jakarta Osaka Mumbai Beijing Colombo New Delhi Manila Ho Chi Minh SPM Limit = 90 µg/m3 (WHO, 1979) SO2 Limit = 50 µg/m3 (WHO, 1999) SPM SO2 PM10 Limit = 50 µg/m3 (USEPA, 1997) NO2 Limit = 40 µg/m3 (WHO, 1999) (*) averages based on available data, PM10 NO2 Contact hfabian@adb.org for details

Part 1 - 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 NGAs CAI-Asia Membership CITIES Andhra Pradesh Pollution Control Board, India Bangkok,Thailand Australia Department of Environment and Heritage Chiang Mai,Thailand Balochistan EPA, Pakistan 50 NGOs Chengdu,PRC Central Pollution Control Board, India Chittagong,Bangladesh Department of Environment, Bangladesh and Department of Forests, Ecology and Env’t, Karnataka State, India Chongqing,PRC Colombo,Sri Lanka Department of Environment and Natural Resources, Philippines Academic Dhaka, Bangladesh Department of Energy, Philippines Department of Transportation and Communications, Philippines Institutions Guangzhou,PRC Haiphong, Viet Nam Dhaka Transport Coordination Board, Bangladesh Environmental Protection Agency Karachi, Pakistan in the Hangzhou,PRC Ministry of Environment, Cambodia Ministry of Environment, Indonesia Region Hanoi,Viet Nam Ministry of Public Works and Transport, Cambodia Harbin,PRC Ministry of Road Transport and Highways, India Ho Chi Minh City,Viet Nam Pollution Control Department, Thailand Hong Kong, SAR, China State Environmental Protection Administration (PRC focal point) Hyderabad, India Viet Nam Register, Viet Nam Islamabad,Pakistan Kathmandu,Nepal DEVELOPMENT AGENCIES FULL PRIVATE SECTOR Lahore, Pakistan Asian Development Bank Member Makati,Philippines Australian Department for Ford Motor Shell Metro Manila, Philippines Environment and Heritage Mumbai, India Company German Agency for Technical Naga,Philippines Cooperation ASSOCIATE PRIVATE SECTOR Phnom Penh,Cambodia Pune, India The William and Flora Hewlett Member Singapore, (NEA) Foundation AVL Corning ETI Surabaya,Indonesia United States-Asia ACFA DEKRA ESP Tianjin,PRC Environmental Partnership Cerulean EMITEC IPIECA Ulaanbaatar, Mongolia MAHA SGS Sida Yogyakarta,Indonesia World Bank

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 Reductions in Deaths after Sulfur Restriction an important in Hong Kong contributor to ambient air pollution in Asia 0.00% (PM, NOx, and Ozone being pollutants of -1.00% concern) • To reduce vehicle emissions an -1.60% % Reduction in annual trend -2.00% -1.80% integrated approach is required, in which fuels -2.40% play an important role -3.00% -2.80% • Fuels and vehicles are an integrated system, whereby fuel -4.00% quality is the main -4.20% enabler for cleaner vehicle technology and -5.00% -4.80% can have an important impact on emissions age 15 - 64 age 65 + from existing in-use -6.00% All causes Cardiovascular Respiratory vehicles Source: The Lancet

Part 1 Motorization Trends in Asia 600 500 400 300 200 U.S. Current Level 100 0 1995 2000 2005 2010 2015 2020 2025 2030 Vehicle growth scenario China Source: Dongquan He, Energy Foundation 2004 Source: ADB 2002. Policy Guidelines to Reduce Vehicle Emissions

Part 1 Vehicle Fleet Composition in 6000000 selected Asian Cities 1995 2000 5000000 2005 2010 4000000 3000000 2000000 1000000 0 Manila Gasoline Manila Diesel Bangkok Gasoline Bangkok Diesel Bangalore Gasoline Bangalore Diesel Source: Camarsa, 2004

Part 1 Increase in 2 & 3 The The Global Market For New Global Market for wheelers in Asia New Motorcyclesand Mopeds Motorcycles and Mopeds 40,000,000 Total: 29792139 North America 3.1% 35,000,000 Middle East Oceania 0.4% 0.3% Latin America Africa 3.5% 0.4% 30,000,000 Europe 7.9% 25,000,000 20,000,000 Asia 84.4% 15,000,000 Annual Motorcycle Production in Source: H onda Facts & Figures China 10,000,000 Annual Production motorcycles China Million Units (in millions) 20 5,000,000 15 - 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 10 (5,000,000) Bangladesh 2&3 wheelers Cambodia Hongkong, China 5 India Indonesia Japan Korea, Republic of Malaysia Pakistan 2&3 wheelers PRC Sri Lanka 2&3 wheelers Thailand 2&3 wheelers Viet Nam 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

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 Euro 1 Euro 2 Euro 3 Euro 4 Euro 5 Union Bangladesh Euro 2 (under discussion) Hong Kong, Euro 1 Euro 2 Euro 3 Euro 4 China a India Euro 1 Euro 2 E3 b India E1 Euro 2 Euro 3 Indonesia Euro 2 Malaysia Euro 1 Euro 2 Nepal Euro 1 Philippines Euro 1 a PRC Euro 1 Euro 2 Euro 3 c PRC Euro 1 Euro 2 Euro 3 e Singapore Euro 1 Euro 2 g Singapore 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 e Viet Nam Euro 1 f Viet Nam Euro 1 a Entire country d Gasoline vehicles under consideration b Delhi and other cities; Euro 2 introduced in Mumbai, Kolkata and Chennai in 2001; Euro 2 in e for gasoline vehicles Bangalore, Hyderabad, Khampur, Pune and Ahmedabad in 2003, Euro 3 to be introduced in f Delhi, Mumbai, Kolkata, Chennai, Bangalore, Hyderabad and Ahmedabad in 2005 for diesel vehicles g for all types of diesel vehicles c Beijing and Shanghai

Part 1 In-use Standards for Diesel Vehicles in Asia Smoke Smoke Effectivity Test Effectivity Test HSU HSU Bangladesh - 65 - Sri Lanka Current 65 Idle Cambodia Current 50 - Sri Lanka Current 75 Free acceleration 60 Free acceleration Thailand Current 45 Free acceleration Hong Kong, China Current Loaded lug down 50 test on a chassis Thailand Current 35% Loaded dynamometera India Current 65 Free acceleration Filter test – free Thailand Current 50 acceleration Indonesia Current 50 Free acceleration Malaysia Current 50 - Thailand Current 40% Filter test - loaded Nepalb Current 65 - Viet Name Current 72 Idle Pakistan Current 40 Free acceleration Philippines Current 2.5 m-1 Free accelerationc Viet Namf Current 85 Idle Philippines 2003 1.2 m-1 Free accelerationd Viet Namg 2005 72 Idle PRC Current 4.5 Rb Free acceleration Singapore Current 50 - 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 50 Hong Kong, China 500 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 Benzene RVP Sulfur Aromatics Olefins Oxygen Lead % v/v, summer ppm % % % m/m, max max kPa, max Linked to Euro 3 Vehicle Standards Lead free 150 1.0 42 18 2.7 60 Effective 2000 Linked to Euro 4 Vehicle Standards Lead free 50 1.0 35 18 2.7 60 Effective 2005 Bangladesh Lead free 1000 - - - - 0.7 kg/m2 Cambodia 0.15 g/l - 3.5 - - - - Hong Kong, Lead free 150 1 42 18 2.7 60 China 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% - 5000- Viet Nam Lead free 5 - - - - 10000 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 2 Part 2 The Impact of Fuels On Vehicle Emissions

Part 2 What are the Air Quality Concerns? URBAN Industrial Emissions Human Health Concerns Energy Consumption AIR Vehicle Emissions GLOBAL Agriculture Global Warming QUALITY Acid Rain Ozone Depletion

Part 2 Different Fuels = Different Emissions Blending with Formulation ? 5 - 12 + Additives Gasoline different Components Sulfur Olefins Paraff. /Naphta Aromatics HC ÖL + Air Different Combustion NOx CO2 CO PAH C6H6 PM SO2 + Additives Olefins Aromatics Paraff./ Naptha Different Sulfur Formulation ? Crude Oils Diesel and Refineries

Part 2 Emission Control Reduction Requires a Systems Approach Advanced Engine Designs New cars Advanced Emission Low (er) Controls Emissions High Quality Fuel and Lubricants Retrofits In-use cars I&M Low (er) Emissions High Quality Fuel and Lubricants

Part 2 • Europe Auto Oil Programs • 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 Emissions Regulated Toxics (Unregulated ) Fuel- change CO HC NOx Benzene Butadiene Aldehyde Reduction of : Benzene o o o +++ o o Aromatics ++ ++ - +++ --- --- Olefins o o o o ++ o Sulphur + + + o o o Vapor pressure o o /+ o o o o Distillation Characteristics + +++ - ++ ? ? Addition Oxygenates ++ + o o o -- + - 2-10 % Improvement 0 2% ++ +++ -- --- 10-20 % } or Deterioration > 20 %

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

Part 2 Sulfur Effects H2SO4 SO3 SO2 Sulfate make O2 Sulfate Poisoning SO4 Precious Metal Sulfur inhibition Transition Metal Zeolite or refractory oxide support 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 (*) Control Required Potential Impact of Impact of Device Sulfur level For emission Permanent High temporary reduction Sulfur High sulfur ppm ppm TWC 500 ppm max. CO, HC, NOx, certain Sulfur Inhibition Depends On How 10-15 ppm optimal Toxics Sulfation Long, How Much 95%+ Oxidation Catalyst 500 ppm max. CO, HC, certain Toxics Sulfur Inhibition, Depends On How 10-15 ppm optimal 90%+ Sulfation Long, How Much Lean NOx 10-15 ppm max. NOx Sulfur Inhibition, Rapid Permanent Catalyst 90%+ (?) Sulfation Deterioration SCR with Urea Not Sulfur sensitive NOx Sulfur Inhibition, Depends On How except for oxidation 90%+ Sulfation Long, How Much catalyst (Oxidation Catalyst Only) Catalytic Filters 50 ppm max. PM, HC, CO, 95%+ Sulfur Inhibition, Rapid Permanent Sulfation Deterioration NOx Adsorbers 10-15 ppm max. NOx Extreme Sulfur Rapid Permanent 90%+ (?) Inhibition Deterioration * CAI-Asia, a work in progress (not to be quoted)

Part 2 U 0 50 100 150 200 PPM 250 300 350 400 450 500 S U EU 20 S 0 EU 20 6 EU 2 00 Sw 20 0 0 ed De 05 5 G e n -9 er n m m Cl ar an as k y s1 Ja 20 Ja p Ja 03 pa an pa So n 2 n ut H 2 00 Ta h on 00 4 ip Ko g 5- ei re Ko 7 Au , C a ng Spreading st hin 200 Th ra a 6 Sa ailalia ... Si n t nd 200 ng ia 2 6 ap go 01 or 20 0 e 0 20 4 06 Ultra Low Sulfur Diesel Fuel Is

Part 2 Impact of Clean Vehicles and Fuels On Diesel Vehicle Emissions Percent Reduction in Emissions 100% 90% PM10 2020 80% 70% PM10 2005 60% NOx 2020 50% 40% NOx 2005 30% 20% 10% 0% EURO II Vehicles EURO III Vehicles EURO IV Vehicles & Fuels with I/M & Fuels with I/M & Fuels with I/M Source: Camarsa, BAQ 2003

Part 2 Worldwide Motorcycle Emission Regulations Japan China (2006/2007) II Stage (2004) ECE40 Europe ECE40 Cold Start EU II HC: 1.2 HC: 0.3/0.5 (2003) NOx:0.3 NOx:0.15 ECE40 CO: 5.5 CO: 2.0 Cold Start 10,000 km 12,000/24,000 km HC: 1.0 NOx:0.3 CO: 3.0 Taiwan India IV Stage (2004) EU III II Stage (2005) IDC Cold Start ECE40 (2006) HC: 0.8 HC+NOx:1.5 Cold Start NOx:0.15 CO: 1.5 HC+NOx:2.0 CO: 2.0 30,000 km CO: 7.0 30,000 km 15,000 km III Stage (2008) HC+NOx:1.0~1.25 CO: 1.0~1.25 What are the important Fuel/Lube constituents for current motorcycles and future technology? Lead, Sulfur, Benzene?

Part 2 MMT Becoming Serious Concern In 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 Concerns Regarding – Potential For Accumulation in Brain Catalysts With High – Parkinsonian Symptoms? • Under consideration or already used Cell Density Substrates in China, Thailand, Indonesia, Vietnam, Others(?)

Part 2 Dealing With Existing Vehicles •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

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 of sulfur in gasoline on Increase in In-Use Vehicle Emissions emissions in-use vehicles inin Fuel in Bangkok Due To Sulfur Bangkok (Gasoline) Percent Increase Compared to 150 PPM Sulfur 60% 67% 500 ppm 800 ppm 50% 70% 40% 33% 30% 74% 30% 20% 26% 10% 0% CO/10 HC NOx Impact on Vehicles Meeting EURO 3 Standards

Part 2 Impact of sulfur in diesel on Increase in In-Use Vehicle Emissions emissions in-use vehicles in in Fuel in Bangkok Due To Sulfur Bangkok (Diesel) Percent Increase Compared to 150 PPM Sulfur 94% 100% 350 ppm 500 ppm 90% 80% 70% 60% 45% 50% 33% 40% 30% 16% 20% 5% 10% 0% 0% HC NOx PM Impact on Vehicles Meeting EURO 3 Standards

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 3 Part 3 Producing Cleaner Fuels

Part 3 Selective EU Fuel Quality Requirements Selective EU Fuel Quality Requirements Requirement 1996 (Euro 2) 2000 (Euro 3) 2005 (Euro 4) 2009 (Euro 5) Gasoline Vapour Pressure (Summer) 60 60 ? max kPa Benzene max Vol % 1 1 ? Aromatics max Vol % 42 35 ? Sulphur max ppm 500 150 50/10 10 Diesel Cetane Number min 48 51 51 ? Density max kg/m3 845 845 ? Polycyclic Aromatics max Mass % 11 11 ? Sulphur max ppm 500 350 50/10 10

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-treatment Low sulfur: Catalyst performance • Some changes are required for emission improvements Gasoline Diesel Sulfur: SO2, HC, Nox, CO, Toxics Sulfur: SO2, Nox,PM RVP: HC, Toxics Cetane: HC, CO, NOx Benzene: Toxics Density: PM, NOx Aromatics: Toxics, Nox, HC Oxygenates: CO (older vehicles) Olefins: Reactivity, toxics Distillation: HC, NOx

Part 3 Investment Process Options and Impacts on Gasoline Properties Blendstock Octane RVP Olefins Aromatics Benzene Sulfur T50 T90 Processing Alkylation + _ _ _ _ _ + + Isomerization + + _ _ _ _ _ _ Reformer + _ _ + + + + + Aromatics _ + NE _ _ _ NE NE Saturation BTX _ _ NE _ _ _ _ _ Oxygenates + NE/+ _ _ _ _ _ _ FCC _ NE _ _ _ _ NE NE Hydrotreating Note: + = increase - = decrease -NE = no effect

Part 3 Comparison of Refinery Complexity 40% Percent of Crude 30% Throughput Japan Germany 20% California Singapore 10% Indonesia India 0% Visbreaking Cracking Cracking Cracking Coking Thermal China Hydro Cat

Part 3 Comparison of Average Hydrotreating, Hydrocracking Capacity 50% Percent of Crude 40% Througput 30% 20% Hydro-treating Hydro-cracking 10% 0% China India Singapore Germany California Japan

Part 3 Characterization of refinery sector by country (*) Country Ownership Number and Demand Key Issues Complexity Forecast Transportation Sector Singapore Private 3 + -Merchant refineries Complex -Net Exporter -Large inv. needed Thailand Private+ 4 +++ -Inv. needed Public Complex -RVP, S, Aro., octane -Use of Ethanol Malaysia Private+ 6 +++ -Importer Public Complex/ -Cap. Inv. needed Small -RVP, S, Aro., benzene -Gov. price controls Philippines Private+ 3 +++ -Growth in demand/importer Public Complex -RVP, S, Octane -Cap. Inv. needed Indonesia Public 8 +++ -Growth in demand/Importer Complex/ -Large Cap. Inv. Small -Octane, RVP, S, Aro., Olefins -Gov. price controls * CAI-Asia, a work in progress (not to be quoted)

Part 3 Example: Refinery investment Chinese Sulfur-Related Refinery Investment by 4,000 Scenario, Model Results 3,500 BLD.RDS 3,000 BLD.HDF BLD.H2 2,500 BLD.HDA kbpd capacity BLD.HDS BLD.HDC 2,000 1,500 1,000 500 0 o2 o4 o3 4 5 5 3 4 4 4 4 ro ro 2& 2& 3& 3& 3& 3& r r r Eu Eu Eu Eu Eu ro ro ro ro ro ro Eu Eu Eu Eu Eu Eu -2 -4 -7 1 2 -1 -1 Source:Trans-Energy 05 05 10 -3 -5 -6 -8 -9 0 10 10 -1 05 05 08 10 10 Research Associates 10

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/ STUDY‟S COSTS OF PRODUCTION REGION OBJECTIVES (cents/gallon) GASOLINE DIESEL Enstrat Intl. All Asia Sulfur Reductions --- 8.1-12.4 -50ppm -10ppm Australia Gov. Australia Fuel 2.5 4.2 Reformulation EURO 4 (S, benzene) Trans-Energy China Fuel 1.5 3.2 Reformulation (EURO 4) Daedalus LLC Thailand Fuel 6.1-25.3 2.3 Reformulation (EURO 4) California (Many California More severe than 15.0-19.0 8.2-8.7 Studies) EURO 4 ADL Europe EURO 4 (Gasoline) 10.4-11.3 ----

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 Is there a need for a new & more detailed cost analysis on fuel improvement in Asia? • 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

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 Issues to be addressed on a cost analysis for fuel improvement in Asia (2) • 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

Part 3 Issues to be addressed on a cost analysis for fuel improvement in Asia (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

Part 4 Part 4 Cleaner Fuels in Asia: The Role of Pricing, Taxation and Incentives

Part 4 Overview Main Questions How 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 presentation Fuel Tax Differentials 1. Factors Influencing Use of Tax Differentials in Asia for Cleaner Fuels 2. Supportive other (vehicle related) incentives

Part 4 Implementation Strategies for Fuel Quality Improvements Market Based Regulatory Removal of subsidies for polluting Fuel specifications fuel Phasing out of high polluting fuels Differential fuel taxation (to industry, retailer or final consumer) Earmarked charges Direct subsidies Ecological taxes (carbon tax) Education and Public Outreach Stakeholder Consensus Building

Part 4 Where Do Fuel Taxes Differentials Fit In to Energy and Air Quality? Urban Scale Energy consumption Human health Vehicle emissions Regional/Global Scale Industrial Climate Change Agriculture Acid Rain Ozone Depletion Vehicle Emissions Strategy (Fuel) Policy Implementation Strategy (Tax & incentives)

Part 4 Reduced Environmental Cost Improved Improved Changes Changes Reduced Reduced Tax Tax fuel qualities fuel in fuel in fuel Reduced Reduced environmental environmental differences differences enter the enter the consumption consumption emissions emissions costs costs market market patterns patterns Total Total External External changes in changes in Costs of costs of emissions emissions Emissions emissions (health + environment) Source: Little, Arthur 1998

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 To eliminate the cost not switch to cleaner grade if it advantage of lower quality carries a higher price fuel in consumer pricing Refiners Without anticipated demand, To catalyze refinery the refining sector does not investments to produce fuel invest in quality better than legal requirements Refiners Improved fuels cost To offset increased refinery more to produce costs for improved fuels Source: Adapted from Arthur D. Little, 1998

Part 4 Example: Sweden introduced a tax differential for lower sulfur diesels Taxation Taxation in 1991 Taxation in 1992 in 1990 148 148 119 127 131 ECU/ ECU/ 107 ECU/ ECU/ m3 95 ECU/ ECU/ m3 m3 m3 m 3 ECU/m 3 m 3 MK1 MK1 MK2 MK3 MK3 MK2 MK3 diesel diesel diesel diesel diesel diesel diesel MK1 diesel MK1 diesel • Tax decreased by 20 ECU/ m3 • Tax decreased by 12 ECU/ m3 MK 1 10 ppm MK2 diesel MK2 diesel • Tax increased by 4 ECU/m3 • Tax decreased by 12 ECU/ m3 MK 2 • Tax differential of • Tax differential of 24 ECU/m3 50 ppm 24 ECU/m 3 compared to MK1 compared to MK1 MK3 diesel MK 3 MK3 diesel (standard diesel) • Tax differential of 53 ECU/m 350 ppm • Tax increased by 21 ECU/m3 compared to MK1 • Tax differential of 41 ECU/m3 Source: Arthur D. Little, 1998 compared to MK1

Part 4 Market for Lower Sulfur Diesel in Sweden 1992-2000 100% 80% 60% 350 ppm 50 ppm 40% 10 ppm 20% 0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: ECMT, 2001, in CAI-Asia -IFQC, 2003

Part 4 Unleaded Gasoline in Thailand • 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 Removal of lead from gasoline has revised to ensure that it was budget drastically reduced lead being emitted per vehicle neutral Source: Wangwongwatana, BAQ 2002 • 1995 ban announced in 1993.

Part 4 ULSD in Hong Kong • Lower tax and lower 500 PPM 50 PPM pump price for ULSD in Sulfur Sulfur Diesel Diesel July 2000. Fuel Duty 1.04 0.56 • In 2002, ULSD was made mandatory. • The ULSD enabled the introduction of stricter Pump 3.32 3.24 Price new vehicle standards and the retrofit of existing vehicles.

Part 4 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 Orientation Dominant Oil companies/ Country Regulation Pricing ownership refiners structure Bangladesh Petrobangla Controlled/transitional public Petrobangla India Ministry of Petroleum transitional public/private Indian Oil Corporation/Reliance and Natural Gas Indonesia BP Migas controlled/subsidized public 1 Pertamina (7 major refineries) Malaysia Petronas controlled/subsidized public/private Petronas ( 6 refineries) Pakistan Petroleum transitional public/private Pakistan State Oil, BP Regulatory Board Philippines DOE market public/private Petron, Pilipinas Shell, Caltex ( 2 refineries) PRC State Energy controlled/transitional public CNPC/ Sinopec/ CNOOC (16 Administration refiners) (BP, Exxon, Shell) Singapore EMA market private Shell, Exxon, SRC Taipei, China transition to market/ public/private Chinese Petroleum Corporation, market Formosa Petrochemical Thailand PTT transition to market/market public/private PTT ( 3 refiners: Shell, ESSO) Vietnam Petro Vietnam controlled public No refineries Asia is different from OECD in terms of ownership structure and pricing (Sources: APEC, ASEAN, EIA DOE Country Analysis Briefs)

Part 4 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, co mpliance and reporting. These are also weak in Asian countries.

Part 4 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.

Part 4 Towards Three Scenarios Fuel 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 5 Part 5 Continuation of the CAI-Asia – Oil Industry Dialogue

Part 5 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 Continuation of CAI-Asia Oil-Industry Dialogue - fuels- • 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

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.

Presentation, Tokyo (July 2004)

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Presentation, Tokyo (July 2004) Presentation Transcript