THE EUROPEAN UNION (EU) IN 1998 tightened fuel specifications in a move long expected by the petroleum industry but which nevertheless increased the financial burden on an already hard-pressed sector.
Western Europe`s refiners had combined crude distillation capacity of more than 14 million b/d. Despite a number of refinery closures, capacity still exceeded demand.
For many years a number of Europe`s small, relatively simple refineries had remained in operation because owners found it more expensive to shut plants down than to keep them running.
As part of its strategy to reduce air pollution, the EU had been debating a tightening of fuel specifications for a number of years. The 1998 rules were agreed by the EU, the European Petroleum Industry Association (Europia), and the European Motor Vehicles Manufacturers Association.
These three parties set out in 1995 on a study called the AutoOil program, which showed that nitrogen oxides were the main threat to Europe`s air quality in cities, although sulfur, carbon monoxide, and benzene emissions also needed cutting.
The AutoOil program was seen to be a more likely catalyst of dramatic changes in Europe`s overcrowded refining section than low margins because small refiners were not expected to be able to afford to invest in the equipment needed to meet the new specifications.
Specs furor
Although the EU, refiners, and automakers agreed new fuel specifications to meet EU`s emissions targets, the complex politics of the EU made the final stages of the regulation-setting a nerve-wracking time for refiners.
In March 1998 the European Parliament and European Council failed to agree on a proposed tightening of fuel specifications, making refiners wait to know what was ahead.
Though the European Parliament accepted the AutoOil specifications, which were expected to require Europe`s refiners to invest $9 billion by 2000, the European Commission tried to bring forward tighter rules still, expected by refiners to cost a further $49.5 billion.
Wood Mackenzie Consultants Ltd., Edinburgh, said that coming in a climate of poor refining margins, overcapacity, and misalignment of the supply barrel, the proposed super-tight specifications would put yet more pressure on a hard-pressed industry.
"European Parliament," said Wood Mackenzie, "may in effect be punishing the industry for its habit of crying wolf when faced with the prospect of tightening product quality specifications.
"European downstream profitability may not be sufficient to fund the required investment, but major oil companies have reported record profits in recent times.
"Experience from the U.S. also suggests that the actual cost of the reformulated gasoline program has been significantly lower than the original claims. When it comes to the crunch refiners find ways of innovating and reducing costs, and this is likely to be the case in Europe also."
The analyst reckoned that meeting the council`s first proposals would cost a total $20 billion, while meeting the parliament`s tougher proposals could cost as much as $60 billion.
"With sales of gasoline and diesel within the EU totaling around 240 million metric tons/year," said Wood Mackenzie, "an increase in the end-user price of between 1.5¢/l. for a compliance cost of $20 billion and 4¢/l. for a compliance cost of $60 billion would pay back costs over 5 years.
"Of course, we know that price rises of this nature may not stick as refiners who are already able to produce products to the new specifications try to gain an advantage."
CO2 curb plan
Besides the AutoOil program refiners also found their business under threat from further EU legislation, again aimed at environmental improvements.
In April 1998 the EU outlined a plan to halve anticipated growth in emissions of carbon dioxide from the transport sector, with road traffic being the main target.
EU said the planned reduction was in line with its commitment at the Kyoto climate change conference in December to reduce overall emissions of greenhouse gases by 8%.
Transport Commissioner Neil Kinnock said change would not be easy and highlighted four main ways of achieving the target: improved fuel economy of passenger cars; reduced rail prices; completion of an internal rail transport market; and improved integration of freight and passenger transport.
EU said that without coordinated action across Europe, CO2 emissions from transport as a share of total CO2 in the region was expected to increase from 26% to 40% by 2010.
Transport relied almost entirely on fossil fuels, said EU, but CO2 emissions were expected to be reduced by making the overall transport system more efficient and by introducing technologies such as fuel cells.
"Beyond 2010," said EU, "the large scale introduction of new technologies such as hybrid cars, fuels cells, and alternative fuels will significantly cut emissions levels.
"Yet average fuel consumption, and therefore emissions, are currently increasing after a decline in the 1980s because of the trend towards heavier, more powerful cars.
"The solution lies in technical improvements and consumers choosing lower consumption vehicles. The commission has provided a strategy for reducing cars` CO2 emissions by improving fuel economy, with the aim of an average CO2 emission value of 120 g/km by 2010 at the latest for all new cars."
EU was working with the European Automobile Manufacturers Association on a plan to reduce average CO2 emissions to 140 g/km by 2009.
Kyoto program
In May 1998 the European Union (EU) signed the Kyoto protocol on climate change and called on the U.S. government to sign, too.
Ritt Bjerregaard signed the agreement at United Nations headquarters in New York, committing EU as a whole to an 8% reduction in emissions of greenhouse gases by 2012.
Bjerregaard called for the U.S. government to adopt Clinton administration proposals for tax incentives and subsidies to encourage more efficient use of fossil fuels and development of renewable energy technologies.
Bjerregaard said, "The fight against climate change is linked extremely closely to domestic action. The U.S. is by far the world`s biggest emitter of greenhouse gases and ought to do more than everybody else, not less. There is a need to develop a strong, efficient, and effective compliance regime backing the legally binding commitments under the protocol."
EU also adopted a communication on energy efficiency, said to be the first step towards an EU strategy for the rational use of energy. This particularly targeted energy efficiency in buildings, where 40% of EU energy is used.
EU said its strategy should include realization of significant economic potential for energy efficiency, estimated to be 18% of 1995 energy consumption by 2010.
Christos Papoutsis, EU energy commissioner, said: "Energy we avoid using constitutes the cleanest energy source. Energy saving also makes good economic sense, and we are giving a clear signal of the importance we attach to energy efficiency."
EU said promotion of energy-efficient household appliances and other energy-using equipment would be given priority through extension of an EU labeling scheme and negotiated agreements with manufacturers.
Increased use of voluntary agreements to reduce consumption would be pursued, including demand side management by utilities and better energy management in the public sector.
Refiners` dilemma
The biggest problem facing Europe`s refiners was not ever-tightening emissions rules but trying to guess the auto industry`s requirements for future transport fuels.
Bernard Bulkin, director of environmental affairs at BP Oil International Ltd., told delegates attending a London seminar in May 1998 that the refiners and marketers were "in more trouble than we think. We think short term, seeing low margins, massive pressure to change fuel specifications, and large capital investment looming.
"We see intense competition in retailing and declining market shares and worry that Asia is not expected to bail us out in the short term. But these problems are merely business as usual."
Bulkin said that while legislators were pushing for lower pollutant levels in transport fuels, this was technically feasible although painful for many refiners, many of whom could not afford the investment.
While anticipated changes to gasoline and diesel specifications would go some way to meeting air quality and climate change targets of legislators, auto industry moves to new fuels could make much refining investment irrelevant.
"The motor industry," said Bulkin, "is simultaneously advancing and promoting technologies along widely differing lines. Liquefied petroleum gas (LPG) and compressed natural gas (CNG) may play a large role."
Vehicles fueled with LPG and CNG certainly address the air quality problems of many cities, said Bulkin. Gas-powered trucks are increasingly being used in public services, while gas is now being promoted for car fleets.
Bulkin noted that a number of gas-to-liquids (GTL) process developments had been announced in the preceding 2 years, with GTL-produced fuels being viewed favorably by Detroit and Stuttgart auto makers.
"Fuels from GTL plants have been provided for tests," said Bulkin, "and have produced outstanding results. One question is whether petroleum companies are going to make massive investments in Fischer-Tropsch technologies."
At the same time, said Bulkin, hardly a week goes by without the announcement of another fuel cell venture. He cited Toyota, Ford, and Mercedes-Benz among a growing number of auto manufacturers chasing fuel cell advances.
For fuel cells there were a number of fuel choices: the final fuel is hydrogen, but it could be sourced from methane outside the car, from methanol carried on board, and even from gasoline processed on board.
"The implications for refining of any of these fuel cell technologies coming to pass are huge," said Bulkin. "Even if the fuel cell is run on gasoline, this fuel would be nothing like the gasoline we produce today."
While current refineries were not configured to produce the type of gasoline expected to be required by fuel cells, demand for gasoline would probably decline from levels of the late 1990s.
Another emergent technology was the hybrid vehicle, which could be powered typically by a combustion engine-fuel cell combination. Bulkin warned that this technology, and maybe others, could be transitory, causing yet another planning headache for refiners.
Bulkin noted that electric-vehicle sales in California, where legislation pushed zero-emission vehicles, were poor: "Only 300 electric cars have been sold in 2 years, after a development program costing $6 billion, and despite a 20% price reduction."
While electric vehicles struggled to become established, improvements were constantly being made, and several large auto makers instigated major development programs.
In the wings, said Bulkin, were still other contenders for future transport power sources, including the Stirling engine, small gas turbines, solar power units, and flywheels, all of which had proponents.
Bulkin noted that the end of the internal combustion engine was being flagged 25 years ago, but development of alternatives had reached the stage where significant change was likely to happen in the 5 years after he spoke.
He expected the use of gas as a transport fuel to expand greatly soon, while the future for fuel cells remained a question. Technical problems with fuel cells had not been solved, but there was more progress in fuel cells in the preceding 5 years than in battery technology over 30 years.
Bulkin expected the auto industry to make a decision within 2-3 years on which way fuel cell technology would be developed. Then it could be 2005-2010 before fuel cells were implemented.
"After 100 years of evolution the internal combustion engine is faced with a myriad alternatives," said Bulkin, "which mostly involve radical changes from the engines of today.
"For our industry this represents a major difficulty, because in Europe we are being asked by governments to invest for tighter fuel specifications by 2005 while being told by auto makers that 2005 may mark the end of the vehicles these fuels are designed to move.
"These changes could leave refiners configured in such a way that they are unable to respond. This is the dilemma that government and the auto industry have put us in, but what does the public want?"
Bulkin said the public was confused by claims, often widely diverging, not backed up by sound science: "Some companies are doing what others say cannot be done."
A further problem, for refiners and the auto industry alike, was that the word "environment" meant different things to different people and that when the petroleum industry talked about the environment its customers were unlikely to be thinking about tailpipe emissions.
"Market research has shown," said Bulkin, "that typically 75% of people asked if they would buy an environmental product say yes, but only 6% will then actually buy it.
"They really want an environmental product to be as good or better than the current product, a brand they trust, and available from the same location as the current product.
"If these three demands are not the case then customers will not buy environmental products. This is good for our industry, but we must promote the efficacy of our own products. The environment is not first in the customer`s mind-at best it is a tie-breaker."
`Green` cars
The EU supported a number of projects for development of clean, efficient transport technologies, while some individual governments supported their own auto industries.
For example, German auto manufacturers, government, and oil companies decided to work together to develop vehicles more fuel-efficient and environmentally friendly than traditional vehicles.
In May 1998 Germany`s transport ministry announced a joint initiative to combine know-how so as to avoid unnecessary duplication and costs in developing competing technologies.
Participants included BMW, Volkswagen AG, and Daimler-Benz AG among vehicle makers, Deutsche Shell AG and RWE-DEA AG among petroleum companies, and retailer Aral AG.
Transport Minister Matthias Wissmann told reporters the participants aimed to identify by the end of 1999 up to three energy sources on which to focus development work.
The aim was to develop a joint strategy, he said. Potential energy sources included internal combustion engines running on natural gas or hydrogen, electric motors, and hybrid systems.
The group was expected to concentrate first on developing existing gasoline and diesel technology, which was expected to lead to several manufacturers introducing cars able to travel 100 km on less than 3 l. of fuel.
EU specification
In July 1998 the EU ended a long period of uncertainty for refiners by deciding new fuel specifications after a protracted debate that ended with an EU agreement behind closed doors.
After EU`s parliament and council failed to agree on what fuel standards should apply, a "conciliation committee" set mandatory limits for sulfur and aromatics for 2000.
The specifications to be met by 2000 were as follows: gasoline limits-1% for benzene, 42% for aromatics, 18% for olefins, 150 ppm for sulfur, and 2.3% for oxygen; diesel limits-cetane number 51, density 845 kg/cu m, 11% for polyaromatics, and 350 ppm for sulfur.
Wood Mackenzie said standards for 2005 had not been fixed and would be drawn up in the second phase of the auto-oil initiative by EU, auto makers, and refiners.
Some limits for 2005 had already been agreed, though. Gasoline maxima for aromatics and sulfur would be 35% and 50 ppm respectively, while the sulfur maximum for diesel fuel would be 50 ppm.
The analyst said the 2000 specification was that proposed by the council of ministers in 1997. A group of "green" members of the European Parliament pushed for tighter regulations still, but refiners successfully campaigned to have cost-effectiveness made a key factor in deciding legislation in the EU drive to improve European air quality.
Investment need
Following the EU announcement, Europe`s refiners put the cost of meeting the new fuel specifications for 2000 at $20-23 billion.
Europia reckoned refiners might need to spend $20-23 billion to meet the year 2000 specs and as much as $44-55 billion to meet requirements for 2000 and 2005.
However, Phil Morris, refineries strategist at Air Products plc, Walton-on-Thames, U.K., said actual investment required might not be as high as this.
"The refining industry has repeatedly found it can do things cheaper than it first thought," said Morris. "For instance, most process units are built with a bit of slack, so they can often be modified to meet new specifications rather than requiring plant to be built anew."
Morris expected total spending to meet year 2000 fuel regulations to be "much less" than the industry estimated. He said very little had been spent to that time on equipment to meet the new rules, but all refiners were "talking about doing something."
Morris believed many refiners could comfortably meet the year 2000 specifications with existing plant. Much of the upgrading work would center on splitting naphtha streams and desulfurizing them by passing them through existing reformers or new hydrotreaters.
"In the longer term, though," said Morris, "refiners are faced with much more significant investments to meet the 2005 diesel specification. In particular, meeting a 50 ppm sulfur limit for diesel will not be an easy task."
Some European refiners were already marketing 50 ppm-sulfur diesel fuel, but these were niche players which had made an early investment to cash in on premium prices for the fuels.
"Most European refiners will struggle along through the year 2000 changes," said Morris, "because the investment is not significant. Some will not do anything.
"The refining majors will be able to move products streams from one refinery to another for clean-up. I expect there will be lots of internal products movements by refiners.
"Super-sites may even take products streams from other sites nearby for treatment, but this won`t last forever because shipping will not be cheap. At a time when margins are low, a further $1/bbl could easily be lost."
Morris said companies owning `supersites` or based in refining clusters such as Rotterdam might pipe products streams from nearby unmodified plants as a way of delaying investments at these smaller units.
Hydrogen need
Although transport visionaries viewed hydrogen as the fuel of the future, the 1998 EU legislation made it a key ingredient for producing conventional fuels.
Morris said the legislation required refiners to remove sulfur in particular from their products. They would achieve this by increasing severity of hydrotreating.
This created a new problem for refiners since refinery hydrotreaters normally relied on hydrogen generated as a byproduct in catalytic reformers used to convert paraffins to aromatics.
"This was fine until the new legislation was agreed," said Morris. "Now refiners are having to go for deeper desulfurization they need more hydrogen. Refineries are coming out of balance in their H2 production."
Morris said one way for refiners to source extra hydrogen would be to recover it from purge streams. The first move for refiners running short on H2 would be to consider waste clean-up, but this was not always economic.
"Also, recovery could still leave the refiners with a shortage of H2," said Morris. "Then the refiners could go for on-purpose H2 production, either doing it themselves or through a supplier like Air Products."
Morris said that while it was sensible for refiners to own and operate small hydrogen recovery plants, Air Products pioneered a business in which it built and operated large on-purpose hydrogen plants at refineries on behalf of the owners.
For the supply of H2 plants, Air Products formed an alliance in 1992 with Kinetics Technology International Group BV unit KTI Corp., San Dimas, Calif. The venture blossomed in California, birthplace of tight fuel specifications.
"We told Californian refiners," said Morris, "that we would build, own, and operate steam reformers on their own sites to produce hydrogen, steam, and possibly power for integration into their refineries."
The benefit to refiners was that they did not need to raise capital: Air Products charged a fixed rate for provision of hydrogen, steam, and power, typically spread over 15 years.
The Air Products alliance with KTI became worldwide in 1995, said Morris, to meet an anticipated global need for hydrogen as other countries tightened their gasoline and diesel fuel specifications.
Air Products owned and operated 36 steam reformers and 18 H2 off-gas recovery plants around the world, supplying pipeline delivery systems at refining and petrochemical centers in Los Angeles, Houston, Louisiana`s Mississippi River corridor, Europoort in the Netherlands, Teesside in the U.K., Mab Ta Phut in Thailand, and Camaçari in Brazil.
Air Products`s existing H2 plants at refineries ranged in size to more than 200 metric tons/day. A 40,000 b/d hydrocracker would typically require 200 tons/day of H2, and plant this size would typically cost $80-100 million to build.
Morris reckoned European refiners would need an extra 2,750 tons/day of H2 to meet the EU`s 2000 and 2005 specifications: "The later specifications in particular will gobble up hydrogen."
Compromise
Wood Mackenzie said the European Parliament compromised over the 2000 specifications in order to secure mandatory limits for the key pollutants, principally sulfur, in the 2005 specification.
"The parliament," said the analyst, "also conceded on the key diesel specifications, cetane and density, for 2005 and accepted that these and other environmentally emotive specifications such as benzene in gasoline should be determined by a further AutoOil program.
"Contrary to recent perceptions, AutoOil is not dead after all. Sulfur specifications notwithstanding, rational science and cost benefit analysis can still figure in deciding how best to improve European air quality.
"However, by securing severe mandatory specifications for sulfur levels-numbers which figure strongly in any public debate because of the links with particulate emissions-the parliament has ensured that it will retain control of the debate."
The specifications were expected to affect the average European refiner through increased operating costs and perhaps investment in new plant. A number of refiners in southern Europe were not expected to meet the new fuel rules within the time limit.
"Beyond 2000," said Wood Mackenzie, "while mandating some of the 2005 specifications means that the refiner now knows some of the investment that will be required, considerable uncertainty remains.
"In particular, given the implications of a low density diesel-which the parliament originally wanted-both in terms of investment costs and the impact on jet kerosene availability, it is important that the new AutoOil process is started as soon as possible.
"The oil industry has been given a second chance to influence the debate for 2005, and it is important that the lessons from the first phase of AutoOil are learnt.
"In spite of the sound science and cost-benefit approach of the AutoOil program, the oil industry lost ground in the subsequent political arguments which took the debate to a more emotional level.
"Some of the major oil companies have shown that they are keen to be seen as good corporate citizens. However, the industry as a whole needs to redouble its efforts and ensure that it is seen to be working with the politicians to deliver what the public wants-cleaner air."
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Conoco (U.K.) Ltd. upgraded its Humber refinery in the U.K. in line with the first level of European Union fuel specifications. Europe`s refiners in 1998 faced increased operating costs and investments to meet rules due in place in 2000, and even more investment to meet tighter specifications still due in force in 2005. Photo courtesy of Conoco.
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Texaco Ltd. had one of Europe`s most up-to-date refineries at Pembroke, South Wales. Yet the European Petroleum Industry Association said refiners might need to spend $20-23 billion to meet the year 2000 specs and as much as $44-55 billion to meet requirements for 2000 and 2005. Photo courtesy of Texaco.
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Majors in 1998 were pushing to reduce costs because of refining and marketing overcapacity in Europe. In July the European Union cleared a planned merger of the worldwide petroleum additives businesses of Shell Petroleum Co. Ltd., Shell Chemical Co., and Exxon Chemical Co. in early 1999. Photo courtesy of Shell U.K. Ltd.
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Intense price competition and stagnant demand threatened western Europe`s fuel retailers. The region`s 1998 total of 122,998 service stations was expected to be cut to 102,937 in 2003, with fuel sales rising only 0.35%/year during the forecast period and station volume throughput set to increase by 3.4%/year on average. Photo courtesy of Texaco Ltd.
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Among concerns for fuel manufacturers in 1998 was a European Union move to reduce CO2 emissions by making the overall transport system more efficient and by introducing technologies such as fuel cells. Photo courtesy of Esso U.K. plc.
