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Asia thirst for high-sulphur gas oil boosts fuel prices
March 14, 2012 / 4:43 AM / 6 years ago

Asia thirst for high-sulphur gas oil boosts fuel prices

SINGAPORE (Reuters) - Refiners in Asia and the Middle East are turning high-sulphur gasoil into environmentally friendly fuel quicker than customers can use it, reducing supplies of the lower-quality, cheaper fuel and forcing key importers to make a hard choice.

Asian nations consume at least 165 million barrels of high sulphur gasoil a year, and the heaviest users will either have to invest in costly infrastructure to use the greener, pricier diesel, or increase fuel subsidies to prevent their populations being hit with the additional costs.

As the global vehicle fleet grows, swelled by Asia, the movement towards cleaner fuel standards to cap sulphur emissions has accelerated.

The region’s two biggest consumers of diesel, China and India, have recently switched to cleaner fuel, as has Thailand. Others such as Bangladesh, Malaysia, Pakistan, the Philippines, Sri Lanka and Vietnam say they are planning similar investments.

But it remains unclear when, or if, the plans will materialize, especially in countries where consumers depend on subsidies that cost Indonesia, for example, about $18 billion last year -- funds that analysts say would have been better spent on infrastructure.

Individual countries would try to delay making the change until Asia has evolved into a low-sulphur market, said Suresh Sivanandam, an analyst at Wood Mackenzie.

“If these countries shift, it will increase a lot of import costs for them and countries like Indonesia are already bleeding from the subsidy burden,” he added.

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Graphic on sulphur content of diesel:

link.reuters.com/zam96s

Graphic on sulphur content of gasoline:

link.reuters.com/qem96s

FACTBOX: Exporters of high sulphur gasoil <ID:L4E8E84R0>

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PREMIUMS AT 20-MONTH HIGH

Premiums for high-sulphur gasoil in the Middle East have soared to their highest in more than 20 months as upgraded refineries took between one million and four million barrels out of the market over the last two years.

Another 10 million to 17 million barrels will be depleted from the Asian and Middle Eastern market in the next two years.

The push to upgrade facilities is being driven by the plans of oil price reporting agency Platts to peg its benchmark gasoil assessment, a pricing reference for almost all of Asia’s major contracts, to a variety with lower sulphur content of 500 parts per million (ppm) by 2013 from the 5,000 ppm used now.

Refiners earn as much as $3 a barrel more from selling a diesel cargo with 10 ppm sulphur content than by selling one with 5,000 ppm sulphur content, though removing the sulphur only costs about 20-40 cents. That means a profit of up to 90 percent for the refiners, making them reluctant to sell heavier gasoil.

The sulphur content of diesel varies with its use, as the fuel with lower sulphur content is generally used for transport, while gasoil with higher sulphur content is used for farms, mines, power generation and industry.

CATCH-22?

But what is beneficial for the environment is not always the cheapest option for consumers, a worry for policymakers and a hurdle in the adoption of cleaner fuel, analysts say.

Progress towards cleaner fuels in Asian nations is not uniform, unlike in the European Union, whose members all use fuel with 10 ppm sulphur content.

Southeast Asia will not take the next step from where it is now until 2016 or 2017, said Clarence Woo, executive director of the Asian Clean Fuels Association.

“There’s no impetus for (countries with subsidies) to move to better quality fuel because every liter that they produce, either they lose money or the government loses money,” he said.

If Indonesia, Asia’s biggest importer of gasoil, were to adopt cleaner fuel, its import costs would rise by as much as $102 million for the 36 million to 60 million barrels of high sulphur gasoil and 96 million barrels of 88-octane gasoline it buys annually.

This figure is based on the spread of about $1.70 between 0.5 percent and 500 ppm sulphur diesel through March.

Producing its own clean fuels could be an alternative, but Indonesia has no concrete plans for new refineries so far.

“Indonesia is not really investing in massive desulphurization capacities to upgrade gasoil ... they can’t seem to get the funds and can’t seem to get the economics right,” said H.S. Yen at FACTS Global Energy, which specializes in oil and gas consultancy.

Desulphurization requires an investment of about $100 to $200 million for each refinery, said Tan Khoon Tee, an analyst at consultancy McKinsey.

To upgrade its nine refiners, Indonesia’s state-owned refiner Pertamina would have to pay up to $1.8 billion, which would inevitably fuel inflation when passed on to consumers.

Still, investments will be required when countries such as Indonesia and Malaysia run out of low-sulphur crude and have to import sour crude with a higher sulphur content that needs to be processed in a more sophisticated refinery, Sivanandam said.

VIETNAM

Vietnam, Asia’s second biggest importer of diesel, buys about 59.6 million barrels of gasoil in the world market each year, which means an extra expense of at least $25 million if it decides to standardize on cleaner fuel.

Vietnam uses 500 ppm sulphur diesel -- which makes up about 40 percent of its overall diesel imports -- and gasoline for road vehicles, but allows industrial use of 2,500 ppm diesel.

Its Dung Quat refinery produces only diesel fuel of 500 ppm sulphur content, so no upgrade expenses will be necessary.

Vietnam also plans to build six more oil refineries, with capacities ranging from 40,000 bpd to 241,000 bpd, that could cut imports of diesel and gasoline.

Exxon Mobil Corp (XOM.N) and Royal Dutch Shell (RDSa.L), two of the biggest suppliers of high sulphur gasoil to the region, are both investing heavily in hydrotreating capabilities in their Singapore refineries to meet the new fuel specifications.

It is still unclear if both refineries will phase out high sulphur gasoil exports, but they are expected to remove some.

Either way, costs for the countries still on higher sulphur gasoil are bound to go up, said traders, since scarce supply will push up premiums. A shortage could also force refiners to sell them cleaner fuels, which could force the buyers to pay most of the increment in premiums, if not all, they said.

Editing by Clarence Fernandez

Our Standards:The Thomson Reuters Trust Principles.
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