Clean Air Initiative for Asian Cities

1. Clean Air Initiative for Asian Cities Producing and Implementing Clean Fuels for Asia John D. Courtis Daedalus LLC Environmental Consulting and Management 3269 1/2 Folsom Blvd. Sacramento, CA 95616 e-mail: jcourtis@aol.com

2. Why Fuel Standards Are Needed? • Some fuel standards are necessary to maintain satisfactory performance of emission controls Gasoline Diesel Zero lead: Catalytic vehicles Very Low S: Aftertreatment Very Low S: Catalyst performance Gasoline Additives: Clean injectors, intake valves, CCDs • Some fuel standards are needed for emission improvements from all vehicles 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 Aro, PNAs: HC Oxygenates: CO(older vehicles) Olefins: Reactivity, toxics Distillation: HC, NOx

3. The Levels of Fuel Standards • The air quality needs of the region will determine the level of fuel standards • Because of severe air quality problems in most metropolitan areas, consideration is given for the final target values of fuel standards to be set at Euro 4 or equivalent levels

4. Asian Refining Industry Vs.USA, Europe, Australia

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

6. Asian Refineries by Category

7. Number of Small Refineries<65,000bpd

8. Refineries ComplexityAsia Vs. USA

9. Refineries Complexity(Asia-Japan) Vs.USA

10. Refineries Complexity(Asia-Japan) Vs. Australia

11. Refineries Complexity(Asia-Japan)Vs. S. Europe

12. Costs of Production

13. Cost Evaluations • A number of studies are done to determine the costs of production(USA, EU, Australia, Asia) • We reviewed the studies to determine the applicability to Asia • We compared refinery data for Asia with other countries • Identified some important issues that need to be addressed

14. Costs of Production(selected studies)

15. Capital Investments • All studies indicate that large capital investments are required for the production of Euro 4 clean fuels

16. Review of the Cost Results • Variability in the estimates of cost results because of differences in: • LP methodologies • Refining structures modeled and fuel baselines • Capital investments and offsites costs used • Operating and other costs • Would be difficult to extrapolate the results of the existing cost analyses to Asian countries

17. Costs: Asian Studies

18. Example: Variability in Capital Investments Used

19. Other Issues that will Affect the Costs of Compliance • Availability and cost of capital for Asia; ability to recover the cost of production • Operating and offsites costs for Asia • Availability of blendstcoks or products at the regional markets • The costs to small-independent refineries • Refinery expansions to satisfy increased demand

20. The Ability to Recover the Costs of Production is a Critical Issue • In free markets the refiners’ ability to recover costs is a function of supply-demand, competition • In controlled or subsidized markets new mechanisms or price adjustments will be required • Ability to finance is critically dependent upon the ability to recover costs

21. Small-Independent Refiners Issues • Will experience higher costs because of the absence of economies of scale • The ability to raise capital is limited • Potential to quit the regulated fuels market • Special treatment or incentives may be required to maintain their presence in the MV fuels market

22. Production Issues • Some refiners will choose to make the investments needed to produce ultra low sulfur fuels • Others will choose to make smaller investments and produce smaller volumes • Still others could choose to exit the MV diesel or gasoline market, or even shut down completely in the face of capital costs

23. Production Issues • Supply and demand balance will change • Expected increased demand due to growth • Potential reductions in supply due to: • small-independent refiners removal from the market • reductions in yields • Questions • How much clean fuels will be produced by merchant-export refineries? • Will local refiners invest additional and sufficient capital to increase production as needed?

24. Marketing and Distribution System Issues • Capability of local marketing and distribution systems to handle multiple grades of fuels must be upgraded • Increased imports will require adjustments/changes in marine infrastructure • Additional costs that should be considered

25. Implementation of Fuel Standards

26. Potential Options for Implementation • Option A: Follow an integrated strategy for 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 • lose some air quality benefits

27. Potential Options for Implementation (continued) • 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 quality of fuels in the uncontrolled areas to deteriorate

28. Timing for Implementation • European implementation in 4-6 years • USA implementation in 6-7 years • Realistic implementation time: • Permitting, financing, engineering, etc.: ~2years • Construction: ~ 2 years • Contingencies: ~ 2 years • Total time:~ 4-6 years • Must be concurrent with the implementation of M.V standards

29. In Producing Clean Fuels Flexibility is Critical • Fuel regulators in the USA have built flexibility in their fuels programs • Flexible standards: Average, caps, predictive models, alternative standards • Special treatment for small-inefficient refineries • Time phase-in, regional delays • Flexibility would allow reductions on both capital and operating expenses • However, flexibility would require increased resources for monitoring, enforcement, etc.

30. Thank You