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China to Enforce New Fuel Standards

11-19 14:13 Caijing
Major state-owned oil companies might be the biggest winners in this upcoming upgrades of fuel standards, as increases in oil prices unveiled by the NDRC far exceed estimated increases in production costs.

By staff reporters He Tao, and Gao Shengke

China will enforce the National IV Standard for gasoline beginning Jan. 1, 2014.

China National Petroleum Corporation (CNPC) and China Petrochemical Corporation (Sinopec), the two largest state-owned oil companies, have long been criticized for delaying the upgrade of fuel standards in China. The country has been hit repeatedly by lingering smog since the beginning of 2013. In major Chinese cities, 22 to 34 percent of total PM2.5 emissions come from motor vehicles. Also, 30 percent of total nitrogen oxide emissions come from vehicles nationwide. Strong public complaints about air pollution have prompted the government to contain vehicle emissions.

China will begin enforcing the National IV Standard for gasoline in 2014, the National IV Standard for diesel in 2015, and the National V Standard for both gasoline and diesel in 2018, announced the National Development and Reform Commission (NDRC) upon unveiling the Notice of Opinions on Pricing Policies on the Upgrades of Fuel Standards (the "Notice") on Sept. 23, 2013.

The National IV Standard for gasoline did not come into effect until two and half years after implementation of the National IV Standard for Emissions from Light-Duty Gasoline Vehicles began on July 1, 2011. Domestic oil companies can be blamed for the lag, as they procrastinated in upgrading fuel standards to avoid consequent increases in production costs.

Indeed, the National I Standard for gasoline was enforced two years after the enforcement of the National I Standard for Emissions from Gasoline Vehicles; the National II Standard for gasoline was implemented 18 months after the implementation of the National II Standard for Vehicle Emissions; and the National III Standard for gasoline was put into force 20 months after the National III Standard for Vehicle Emissions was put into effect.

Moreover, particle emissions from diesel vehicles that meet a particular national standard are generally 100 times higher than emissions from gasoline vehicles that meet the same level of national standard; while control of emissions from diesel vehicles has always lagged behind that of emissions from gasoline vehicles.

As far as vehicle emissions are concerned, the primary determinant of oil quality is the level of sulfur. Crude oil with a high level of sulfur adds to nitrogen oxide and PM2.5 pollutants in the air. A main objective of oil quality upgrades is to lower sulfur content.

Catalytic cracking gasoline with high sulfur content accounts for nearly 80 percent of the gasoline mix in China. Compared with their European and U.S. counterparts, Chinese oil companies are under greater pressure to develop desulfurization technologies, and are more severely challenged by the octane loss caused by deep desulfurization.

It is even more difficult to improve the quality of diesel fuel as opposed to gasoline. Old oil refineries have to upgrade their techniques to improve product quality. The cost for transforming hydrodesulfurizing units used in refining diesel is higher than the cost for transforming similar units used in refining gasoline.

Domestic oil companies delayed upgrades of fuel standards mainly to avoid consequent increases in production costs. A study by the International Council on Clean Transportation (ICCT) shows that as China upgrades its gasoline and diesel fuel standards from the National III Standard to the National V Standard, gasoline refining costs will increase 0.04 fen per liter, or around 53 yuan per ton, for domestic oil refineries; while diesel refining costs will increase 0.11 fen per liter, or about 130 yuan per ton.

However, according to the Notice released by the NDRC on Sept. 23, the price for motor gasoline will increase by 290 yuan per ton and the price for motor diesel by 370 yuan per ton as the country upgrades from the National III to the National IV Standard; in addition, the price for motor gasoline will increase 170 yuan per ton and the price for motor diesel 160 yuan per ton as China moves further up to the National V Standard.

A motor oil industry researcher told Caijing that major state-owned oil companies might be the biggest winners in the upgrade of fuel standards, as increases in oil prices unveiled by the NDRC far exceed estimated increases in production costs.

Private oil refineries in China, with little research and development (R&D) capability, are no match for state-owned oil companies in terms of technology or talent. Ren Haoning, an energy industry researcher at CIConsulting, contends that massive capital investment needed for oil upgrades will impose heavy financial burden on private refineries, reducing the companies' profitability and possibly even eliminating some of them from the competition.

There will be a wave of mergers and acquisitions (M&As) among private refineries in China unless the central government lifts its restrictions on the right to import crude oil or break up the monopoly state-owned oil companies now enjoy in the domestic market for refined oil, said Ren.

Full article in Chinese:http://magazine.caijing.com.cn/2013-11-16/113574379.html

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