Transcript Case Study - Walsh Car Lines

casestudy-fin-rep-980727-37001
Table of contents
1
Background and Objectives
2
Summary
3
Approach and Methodology
4
Motivation and Introduction of Improved Fuel Qualities
5
Tax Differentials and Market Drivers
6
Industry Response
7
Environmental Benefit
8
Lessons Learned
A
Appendices
1
1
Background and Objectives
casestudy-fin-rep-980727-37001
Transport fuels with improved qualities are being introduced
throughout the European Union
Gasoline
Leaded gasoline phased out by
1994
Environmental Class MK2
introduced in 1994
MK2 specifications tightened in
1998
MK1 gasoline specified in 1998 to
take effect in 2000

Sweden





Finland

Diesel
Key Events


Oxygenated gasoline introduced in
1991
Leaded gasoline phased out by
1994
Reformulated gasoline (RFG)
introduced in 1994
Sulfur tax (>1000 ppm) on fuels
introduced in 1991
Environmental Classes MK1 and
MK2 introduced 1991

Reformulated diesel (RFD)
introduced in 1994
Finland

E.U.



Low benzene classifications
introduced in 1997 (Denmark)
Low aromatic limits mandated in
1998 (Italy)
Leaded gasoline to be phased out in
2000 (EU)
EU wide specifications to take effect
in 2000, specifications tightening in
2005




Ultralight diesel introduced in 1992
(Denmark)
EU wide 500 ppm sulfur limit
introduced in 1996
Low sulfur diesel introduced in
1997, specifications tightened in
1998 (UK)
EU wide specifications to take effect
in 2000, specifications tightening in
2005
2
1
Background and Objectives
casestudy-fin-rep-980727-37001
The Auto-Oil I program examined cost effective ways of improving air
quality in the EU 12 group of countries
Auto-Oil I
1992 - 1996

Comprehensive analysis of vehicle technology, fuel quality and other
measures to reduce emissions from vehicles

Conclusions based on cost effective measures
Tri-Partite Approach



Oil industry
Auto industry
European commission
Gasoline
Diesel
Limit Values for Year 2000
Important 1996
Commission
proposal made
for consideration by
Council and Parliament
Aromatics: 45 vol% maximum
Benzene: 2 vol% maximum
Oxygen: 2.3 wt% maximum
Sulfur: 200 ppm maximum
Cetane number: 51 minimum
Polyaromatics: 11 vol% maximum
T 95: 360° C maximum
Sulfur: 350 ppm maximum
Both the Council of Ministers and European Parliament recommended
more stringent specifications for 2000 and further improvements in 2005.
The final outcome was unclear in May, 1998
3
1
Background and Objectives
casestudy-fin-rep-980727-37001
Many Finnish and Swedish legislative fuel specifications exceed those
from the European Commission for 2000 based on the Auto-Oil I program
Gasoline
Specification
Diesel
Sweden
Finland
European
MK2
Reformulated Commission
2000
Specification
Sweden
Finland
European
MK1
Reformulated Commission
2000
Sulfur
ppm maximum
100
-
200
Sulfur
ppm maximum
10
50
350
RVP Summer
Kpa maximum
70
70
70**
Aromatics
vol% max
5
20
-
Benzene
vol% maximum
3.0
3.0
2.0
PAH vol% max
0.02*
-
11**
Aromatics
vol% maximum
*
-
45.0
Cetane index
minimum
50
47
Oxygen wt%
- maximum
Cetane number
minimum
2.0
-
2.3
-
2.0
-
T95 °C max
- minimum
*Aromatic index (AI) 5.5 max
AI = Aromatics vol%+ Benzene vol%
13
**Arctic climates; otherwise 60
51
285
360
*3 or more aromatic rings
**2 or more aromatic rings
4
1
Background and Objectives
casestudy-fin-rep-980727-37001
Accordingly the Swedish and Finnish Governments wish to share
their experience on how improved fuel qualities were introduced into
the market and subsequently gained dominant market shares
What was the motivation and drivers for introducing the fuels?
How did industry respond?
What were the fiscal implications, costs and environmental benefits?
Arthur D. Little was appointed to construct a
“Case Study” using publicly available information
and discussions with Swedish and Finnish oil
refiners and other relevant parties
5
casestudy-fin-rep-980727-37001
Table of contents
1
Background and Objectives
2
Summary
3
Approach and Methodology
4
Motivation and Introduction of Improved Fuel Qualities
5
Tax Differentials and Market Drivers
6
Industry Response
7
Environmental Benefit
8
Lessons Learned
A
Appendices
6
2
Summary – Motivation for Improved Fuel Qualities
casestudy-fin-rep-980727-37001
The motivation for Finland and Sweden for introducing improved fuel
qualities was to reduce vehicle emissions that have a negative effect
on human health and the environment
Reduction of emissions
Fuel type
Effects primarily on
human health
Effects primarily on
the environment
Gasoline
Benzene
Carbon monoxide (CO)
Hydrocarbons (HC)
Oxides of nitrogen (NOx)
Hydrocarbons
Oxides of nitrogen
Ozone
Sulfur*
Diesel
Particulate Matter (PM)
Polyaromatic
Hydrocarbons (PAH)
Odor
Oxides of nitrogen
Oxides of nitrogen
Ozone
Sulfur
*Lower levels of sulfur improve the performance of 3-way catalytic converters.
7
Summary – Motivation for Tax Differentials
2
casestudy-fin-rep-980727-37001
Market drivers were created by differentiating taxes on gasoline and
diesel grades - more polluting fuels were given higher taxes
Reasons for differentiating taxes on fuel qualities:
To eliminate the cost
advantage of lower quality fuel
in consumer pricing
To catalyze refinery
investments in order that the
fuels could be produced
To offset increased refinery
costs associated with
improved fuel grades
The majority of consumers would not
switch to cleaner grades if they
carried a higher price
Without anticipated demand the
refining industry would not invest in
quality beyond mandatory legal
requirements
Improved fuels cost more to produce
than normal ungraded fuels
8
2
Summary – Market Drivers for the Introduction of Improved Fuel Qualities
casestudy-fin-rep-980727-37001
While tax differentiation of fuel grades was the main market driver for
introducing improved fuel qualities - how the fuels were brought into the
market differed...
Finland


Deregulation of markets made
refineries more responsive to
environmental challenges and
higher value added products - this
resulted in the introduction of
improved fuels before tax
differences were in place (e.g.
oxygenated gasoline)
Sweden

Oil companies in general did not
take the lead in introducing
improved fuel qualities before tax
differentials were in place

Following the introduction and
further widening of tax differentials
the refiners invested to manufacture
improved quality fuels
Finnish refineries responded not
only to the Swedish differentials, but
also in anticipation of tax
differentials signaled by their
Government
9
2
Summary – Chronology for the Introduction of Improved Fuel Qualities
casestudy-fin-rep-980727-37001
... along with the timing of their introduction
Diesel - Sweden
Diesel & Gasoline - Finland
Gasoline - Sweden
• January 1, 1991
Swedish legislation
included specifications for
improved diesel qualities
• Finnish legislation included
specifications for improved:
• December 1, 1994
Swedish legislation
included specifications for
improved gasoline
qualities
• MK1 diesel
• MK2 diesel
1989
1990
• gasoline quality Reformulated gasoline
(January 1, 1993)
• MK2a gasoline
• diesel quality Reformulated diesel
(July 1, 1993)
1991
Neste introduced oxygenated
gasoline in Finland
1992
1993
• MK2b gasoline
• MK2c gasoline
1994
Preem (formally OK Petroleum)
introduced MK2 gasoline in Sweden
1995
1996
Swedish oil companies voluntarily
agree to sell only MK2 gasoline
10
2
Summary – Result of Tax Differentials
casestudy-fin-rep-980727-37001
The tax differentiation of gasoline and diesel qualities has been robust
enough to ensure a rapid change of the market
Finland
Sweden
1996 market share of improved fuels
January 1, 1993
Tax differentials on
gasoline introduced
by the Finnish
Government
Reformulated
gasoline:
July 1, 1993
Tax differentials on
diesel introduced by
the Finnish
Government
Reformulated
diesel:
99%*
85%
MK2 gasoline:
100%**
MK1 diesel:
85%
*Includes oxygenated gasoline (approximately 13% market share).
**After June 1995, Swedish petroleum companies voluntarily agreed to only sell MK2 gasoline.
December 1, 1994
Tax differentials on
gasoline introduced
by the Swedish
Government
January 1, 1991
Tax differentials on
diesel introduced by
the Swedish
Government
11
Summary – Size of the Tax Differential
2
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In most instances the tax differential is a fraction of the normal annual
price fluctuations caused by world markets
Price variation during
1996 was 0.07 ECU/liter
Tax differential of
0.007 ECU/liter for gasoline
• the difference in taxes
between improved and
poorer fuel qualities
• the tax differential ensures at
least price neutrality for MK2
with respect to standard
gasoline (MK3) for the
consumer*
*For diesel the improved quality
(MK1) is sold at at lower price than
the poorest quality (MK3).
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Summary – Tax Differentials vs. Tax Revenues
2
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A tax differential needs to be large enough to motivate the industry to invest
without increasing the price to the consumer...
Value of tax differentials
Swedish diesel tax revenues and value of
differentials (excluding VAT)
for the years 1990 to 1996
Value of differentials due to the use of
improved fuel qualities (tax reductions)
Value of differentials due to the use of
poorer fuel qualities (tax revenues)
Tax revenues excluding differentials
Total tax revenues
(excluding VAT)
...extra costs and investments are covered by higher sales volumes of
improved fuels with increased price per liter for the refiner
13
2
Summary – Tax Differentials vs. Tax Revenues
casestudy-fin-rep-980727-37001
The value of tax differentials has been small compared to tax revenues
from transport fuels
1 ECU
6 FIM
8.5 SEK
1.1 USD
Finland (ECU)
1993-1996
Sweden (ECU)
1991-1996
Value of tax differentials
0.15 billion
0.10 billion
5.1 billion
3%
2%
Value of differentials due to
the use of improved fuel
qualities (tax reductions)
3%
0.6 billion
Value of differentials due
to the use of poorer fuel
qualities (tax revenues)
3%
0.5 billion
Tax revenues excluding
differentials
18.5 billion
Total tax revenues
(excluding VAT)
14
2
Summary – Tax Differential Finland
casestudy-fin-rep-980727-37001
For Finland the value of tax differentials due to the use of improved
fuel qualities has been 152 million ECU for the period 1993 to 1996
Tax differentials
(ECU/m3)
Diesel
Gasoline
1990
-
-
1991
-
-
1992
-
-
1993
4.2*
25
1994
8.3
25
1995
8.3
25
1996
8.3
25
Value of differentials due to the use of
improved fuel qualities (tax reductions)
(1993 to 1996) = 152 million ECU
Value of differentials due to the use of
poorer fuel qualities (tax revenues)
(1993 to 1996) = 97 million ECU
*The tax incentive on diesel was introduced
July 1, 1993; 8.3/2=4.2
15
2
Summary – Tax Differential Sweden
casestudy-fin-rep-980727-37001
For Sweden the value of tax differentials due to the use of improved fuel
qualities has been 589 million ECU for the period 1991 to 1996
Value of differentials due to the use of
improved fuel qualities (tax reductions)
(1991 to 1996) = 589 million ECU
Tax differentials (ECU/m3)
Diesel compared to
MK1
Gasoline
MK2
MK3
MK3
1990
-
-
-
1991
24
41
1992
24
53
1993
24
53
1994
29
60
0.6*
1995
24
55
7.1
1996
25
57
7.1
Value of differentials due to the use of
poorer fuel qualities (tax revenues)
(1993 to 1996) = 97 million ECU
*The tax incentive on gasoline was introduced
December 1, 1994; 7.1/12=0.6
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2
Summary – Industry Response
casestudy-fin-rep-980727-37001
Industry response to the tax differentiating policies was to invest
approximately 540 million ECU over the period 1990 to 1996
1991
Typical refinery configuration, as
compared to the rest of the EU, but with
higher distillate hydrodesulfurization
(HDS) capabilities
1996




Increased desulfurization capabilities
Installed de-aromatization capabilities
Increased use of oxygenates
Remove benzene precursors from
reformers
Total capital investment patterns in
study refineries: 1990-96
17
2
Summary – Industry Response
casestudy-fin-rep-980727-37001
Net incremental annual operating expenditure to meet the new
specifications was approximately 54 million ECU in 1996
Incremental annual operating expenditure in
study refineries 1996
Breakdown of incremental annual
operating expenditure
Labor
Cat &
4%
Chem
5%
Cooling
Water
4%
Fuel
37%
Power
12%
Steam
14%
*
Maintenance
23%
*Includes associated yield benefits which result directly from investment made for improved fuel qualities. Excludes
any capacity creep benefits associated with incremental ongoing investments (excluded in investment estimates).
18
2
Summary – Industry Response
% Sweet crude oil
100
The industry response coincided
effected product output
A decline in Soviet oil production encouraged Finnish
refiners to switch from Soviet sour
to North Sea sweet
casestudy-fin-rep-980727-37001
crudes resulting
in lower
than anticipated
costs for
with changes
in oil
supplies
and also
desulfurization*
80
60
40
Finland
Sweden
20
0 light distillation characteristics of Swedish MK1 diesel
The
1989 1990
1991
1992 jet
1993
1994 1995 1996
require
the use
of typical
fuel components,
this initially
reduced the production of jet fuel
Finnish and Swedish refinery jet fuel
production (1990-1995)
*Increased hydrotreating capacity was brought on-line during 1997 - reducing the amount of % sweet crude to 60%.
19
2
Summary – Industry Response vs. Tax Differentials
casestudy-fin-rep-980727-37001
Industry investments and increased operating costs for Finnish and
Swedish refiners are about equal to the value of tax differentials
provided from the use of improved fuels
741 million ECU
709 million ECU
(Finnish and Swedish
refineries are aggregated)
20
2
Summary – Environmental Benefit
casestudy-fin-rep-980727-37001
Emissions from vehicles in most cases have been reduced due to
improved fuels
Estimated range of changes in emissions (in %) relative to normal ungraded fuels (see Appendix A.3)
Finland
Sweden
Reformulated
gasoline
(unleaded)
Reformulated
diesel
CO
-25% to -12%
-6% to 2%
HC
-8% to -5%
NOX
MK2
gasoline
(unleaded)
MK1
Diesel
MK2
Diesel
CO
-1% to 4%
-6 to 8%
9%
-20% to 12%
HC
-3% to 1%
2% to 18%
-10% to 24%
-12% to -3%
-12% to -5%
NOX
-4% to -1%
-11% to -5%
-9% to -4%
PM
-15%
-25% to -10%
PM
-15%
-30% to -10%
-12% to -4%
PAH
-57%
-54%
PAH
-27%
-75%
-36%
SO2
-58%
-96%
SO2
-59%
-99%
-95%
• Uncertainties regarding the extent of emission changes for CO and HC from diesel vehicles is judged to be
higher than for NOx, PM, PAH, and SO2.
• A direct comparison of changes in emissions due to improved fuels for Finland and Sweden is not possible
since the initial and subsequent fuel qualities and test cycles for estimating emissions are different.
21
2
Summary – Environmental Benefit
casestudy-fin-rep-980727-37001
Using the ExternE* methodology it is estimated that reduced
environmental costs are in the order of 170 to 230 million ECU
Estimated reduction in environmental costs (million ECU)
1992
1993
Finland
1994
1995
1996
8 to 16
9 to 17
9 to 17
34
44 to 46
51 to 52
Sweden
21 to 22
34 to 35
Total
21 to 22
34 to 35 42 to 50
Finland (1994 - 1996)
Sweden (1992 - 1996)
53 to 63 60 to 69
CO**
HC**
NOx
PM
SO2
0.8 to 1.4
0.07 to 0.25
12 to 34
3 to 4
10
3 to 4
32
-0.7to 0.03 -0.08 to 0.05 150 to 154
reduced
environmental
costs are primarily
due to reduced
emissions of NOx
and sulfur
• Environmental cost calculations are intensely debated, for example Swedish
national models give significantly larger reductions in environmental costs than
the ExternE methodology.
• The ExternE methodology does not include for instance reductions in PAH or
benzene.
* A European Union project for estimating the external costs of different fuel cycles; see http://externe.jrc.es
**Negative numbers are due to an increase in estimated emissions.
22
casestudy-fin-rep-980727-37001
Table of contents
1
Background and Objectives
2
Summary
3
Approach and Methodology
4
Motivation and Introduction of Improved Fuel Qualities
5
Tax Differentials and Market Drivers
6
Industry Response
7
Environmental Benefit
8
Lessons Learned
A
Appendices
23
3
Approach and Methodology
casestudy-fin-rep-980727-37001
Four separate analyses were carried out for the case study
Establish
Sponsors
Objectives
• Kick-off meeting
February 27, 1998
Background
Research
• Interviews
• Document review
Preliminary
Analysis
Review
Preliminary
Findings
Case
Study
Final
Analysis
• Sponsors meeting
April 15, 1998
• Final Presentation
Interviews and Data Sources
Motivation and Introduction of Improved Fuel Qualities
• Swedish EPA
• Swedish and Finnish Ministries of Environment and Tax Authorities
• Swedish and Finnish petroleum organizations
Tax Differentials and Market Drivers
• Swedish Ministry of Finance; Tax Authorities and EPA
• Finnish Ministries of Taxation and Transport
• Swedish and Finnish Petroleum organizations
Industry Response
• Interviews with Swedish and Finnish refiners • Reality check
with refiners
• ADL in-house databases
• Environmental permit documentation and other
publicly available material
• ADL final judgement
Environmental Benefit
• Swedish EPA and Statistical Central Bureau (SCB)
• Technical Research Centre of Finland (VTT)
• European Commission
• Scientific literature
• ACEA
• Motortestcenter (Sweden)
• Automotive manufacturers
24
3
Approach and Methodology – Establish Sponsor Objectives
casestudy-fin-rep-980727-37001
The kick-off meeting allowed interested parties to comment on our
proposed approach and to highlight their interests and concerns
Arthur D. Little
• Presented initial approach
• Sought feedback on participant’s
objectives and concerns
Oil Companies
• Concern over maintaining
confidentiality
• Agreement to review initial
findings
Kick-off
meeting
Automotive Manufacturers
• Interest in impact of fuel
specification changes
• Agreement to assist in
environmental impact
Swedish and Finnish
Governments
• Sponsors of the case study
• Desire to pass experience on to
other E.U. Countries
25
Approach and Methodology – Motivation and Introduction of Improved Fuel Qualities
3
casestudy-fin-rep-980727-37001
To understand driving forces for the Swedish and Finnish governments
we needed to understand the relationship between improved fuel quality
and environmental benefits
Improved
fuel qualities
Reduced
emissions
Improved
air quality
Environmental
benefits
Aspects studied:

Gasoline - history and quantities

Carbon monoxide (CO)

Diesel - history and quantities

Hydrocarbons (HC)

Nitrogen oxides (NOX)

Particulate matter (PM)

Sulfur (SO2)

Polyaromatic hydrocarbons (PAH)

Relationship between fuel
quality and emissions

Improved human
health

Reduced corrosion

Improved crop yield

Less acidification,
eutrophication and
forest damage

The relationship between
improved air quality and
environmental impact

External cost estimates
(ECU/ton pollutant)
Input for evaluation:

Changes in specifications

Volumes sold for 1990-1996
26
3
Approach and Methodology – Tax Differentials and Market Drivers
casestudy-fin-rep-980727-37001
We analyzed the taxation systems to establish how the incentives were
provided...
Oil Companies
Refinery
Wholesale Depot
“Refinery gate”
product prices
Distributor Retailer
Consumer
Retail
revenues
Taxation
Government
27
3
Approach and Methodology – Tax Differentials and Market Drivers
casestudy-fin-rep-980727-37001
...and analyzed the size of tax differences with respect to fuel supply and
demand factors
Fuel Demand
Factors
Fuel Supply Factors

Refinery configuration

Crude oil slate

Industry structure


Consumers “willing
to pay for cleaner
fuels”
Industry structure
28
3
Approach and Methodology – Industry Response
casestudy-fin-rep-980727-37001
Estimates of capital and operating cost were developed using publicly
available information and discussions with refiners
Increased Operating Costs
Refinery Capital Investments

Refinery configuration changes
have been established using public
information and environmental
permits

A judgement was made of which
investments were made directly as a
result of fuel specification changes

Operating and raw material cost
changes were determined from inhouse databases and environmental
permits for each refinery
configuration

Allocation of costs to the improved
quality fuels was made
Crude/Feed Slate/Cost
Product Mix
Utility/Intermediate Costs
In-house
databases
Emissions
Changes
Energy
Increases
Product Costs (by grade)
29
3
Approach and Methodology – Industry Response
casestudy-fin-rep-980727-37001
Operating cost changes were assessed from in-house databases,
press and government sources
Feedstocks and Products

Crude oil, condensate,
atmospheric residues and other
intermediate feedstock usage
was drawn primarily from OECD
sources
Findings were combined with
information in environmental
permits and annual operating
reports from refineries
Product Specifications

Preliminary
Incremental
Operating Cost
Assessment
Yields and costs

Refinery Unit Capacity

Unit capacity was established
from environmental permits and
industry journals
Product specifications were
established from in-house
databases
Process unit yields and costs
was taken from ADL databases
for similar refineries
Findings were combined with
historical cost information from
industry reports and
environmental permits
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3
Approach and Methodology – Industry Response
casestudy-fin-rep-980727-37001
Key messages are presented on an aggregate basis for Finland and
Sweden
Individual refinery estimates are
aggregated...
... and segmented by investments,
operating costs and fuel types
Investments:
100
50
Gasoline
Diesel
Operating Costs:
Gasoline Opex
Sweet Crude costs
1996
1995
1994
1993
1992
1991
1990
Million ECU
Shell
100
80
60
40
20
0
1996
1995
1994
1993
1992
Neste
1991
0
1990
Preem
Million ECU
150
Diesel Opex
31
3
Approach and Methodology – Environmental Benefit
casestudy-fin-rep-980727-37001
Environmental benefit has been evaluated in terms of reduced
environmental costs
Tax
differences
Improved
fuel qualities
enter the
market
Changes
in fuel
consumption
patterns
Reduced
environmental
costs
Reduced
emissions
Total
changes in
emissions
External
costs of
emissions

National
emission
estimates
European Union ExternE Study
Average
change in
emissions due
to fuel quality

calculated by:
 reviewing available
literature data
 EPEFE equations
32
3
Approach and Methodology – Environmental Benefit
casestudy-fin-rep-980727-37001
The external costs of air pollution has been estimated in the European
Union’s ExternE* project
?

The purpose of the ExternE project is to develop a
unified methodology for quantifying the environmental
impact and social costs associated with the production
and combustion of energy

Each country in the EU and Norway have calculated
the external costs of emissions (CO, HC, NOx, PM and
SO2) from energy production

External costs are defined as costs associated with an
activity of a group or a second group which are not
fully accounted for by the first group (e.g.)

health effect costs for senior citizens from truck
transport in cities

crop damage from road transport
*See http://externe.jrc.es
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3
Approach and Methodology – Environmental Benefit
casestudy-fin-rep-980727-37001
Effects on human health represent the largest proportion of unit
damage costs estimates
% of
dam age
cost
estimate
% of
dam age
cost
estimate
% of
damage
cost
estimate
SO 2
NO X
PM
Health
87%
90%
97%
Based on the value of statistical human
life (VOS L), medical expenses, value of
work days lost and Willingness to Pay
(WTP) to avoid respiratory symptoms.
Buildings
10%
10%
3%
Based on the cost of repair and
maintenance of damaged buildings and
material. Historical and cultural
buildings have higher costs.
Crops
3%
<0.1%
Based on the damage cost due to
acidifying pollutants (crop yield loss at
international market prices).
Water
<0.1%
<0.1%
B ased on the costs of liming of S wedish
l akes.
comments:
34
3
Approach and Methodology – Environmental Benefit
casestudy-fin-rep-980727-37001
Changes in emissions due to improved fuel qualities was based on
review of emission studies and the Auto-Oil EPEFE equations
Emission Data
Literature
data
Swedish and Finnish
national data
EPEFE
Equations
EPEFE Programme
A set of multivariate
equations which relate
vehicle emissions to
fuel quality
EPEFE = European Programme
on Emissions, Fuels and Engine
Technologies
• identified the effect of fuel
quality on vehicle emissions
• separated the effect that
each fuel parameter had on
emissions
Auto-Oil Programme
Cooperation between the
European automotive and oil
industries to identify which
new measures would be
required to meet EU air quality
objectives
• cost-effective
• based on scientifically
sound data
35
casestudy-fin-rep-980727-37001
Table of contents
1
Background and Objectives
2
Summary
3
Approach and Methodology
4
Motivation and Introduction of Improved Fuel Qualities
5
Tax Differentials and Market Drivers
6
Industry Response
7
Environmental Benefit
8
Lessons Learned
A
Appendices
36
4
Motivation and Introduction of Improved Fuel Qualities – Summary
casestudy-fin-rep-980727-37001
Finnish and Swedish legislation introduced improved fuel qualities
mainly to reduce the impact of vehicle emissions on human health
Improved fuel qualities
Improved air quality
Benefits
Gasoline
Reduction of substances
in emissions
Improved human health
• maximum benzene content
• benzene
Reduction of:
• maximum and minimum oxygen
content
• hydrocarbons (HC)
• cancer
• carbon monoxide (CO)
• respiratory ailments
• volatile organic compounds (VOC)
• damages to the central neural
system
• maximum vapor pressure
• nitrogen oxides (NOx)
Diesel
• maximum sulfur content
• maximum aromatic content
• sulfur oxides (SO2)
• particulate matter (PM)
• polycyclic hydrocarbons (PAH)
• minimum cetane number
SO2 PAH
HC VOC
PM
NOx
Reduced environmental impact
• acidification
• greenhouse effect
• eutrophication
• damages to trees and crops
by ozone
37
4
Motivation and Introduction of Improved Fuel Qualities – Gasoline
casestudy-fin-rep-980727-37001
Finland and Sweden introduced improved gasoline qualities in order to
reduce emission of benzene, hydrocarbons, CO and NOx
Substance mainly reduced in car exhaust
Fuel parameter specified
HC
CO VOC SO2 NOx PM PAH
Benzene content
(max)
O2 content
(min/max)
Sulfur content
(max)
Aromatic content
(max)
Final Boiling Point (FBP)
(max)
Reid Vapor Pressure (RVP)
(max)
E100
(min)
Common parameters limited in Swedish and Finnish improved gasoline qualities.
38
4
Motivation and Introduction of Improved Fuel Qualities – Diesel
casestudy-fin-rep-980727-37001
Changes in diesel quality were designed to reduce sulfur, NOx, PM and
polyaromatic hydrocarbons and thereby improve urban air qualities
Substance mainly reduced in car exhaust
Fuel parameter
specified
HC
CO VOC SO2 NOx PM PAH
Max sulfur content
Max aromatic content
Fuel parameter
specified
Distillation range, max
spread
Cetane number
Density
Impact on air quality
• A narrow and well defined distillation range improves engine operation
and thereby leads to reduced emissions in general
• Emissions of NOx decrease with a higher cetane number - a high cetane
number does not guarantee lower emissions of other substances
• Too high density leads to increased emissions
• Too low density results in poorer engine output
Common parameters limited in Swedish and Finnish enhanced quality fuels.
39
4
Motivation and Introduction of Improved Fuel Qualities – Benefits
casestudy-fin-rep-980727-37001
The main benefit of improved fuels is expected to be improved health
Benefit to society
Reduced
substance in air
Health
Environment
Other
• Reduced cancer
HC
• Reduced respiratory illness
• Reduced cancer
• Reduced damage to plants
and crops by ozone*
CO
• Improved ability of blood to
transport oxygen to the brain
• Reduced greenhouse effect
VOC
• Reduced respiratory illness
• Reduced cancer
• Reduced damage to plants
and crops by ozone*
SO2
• Reduced respiratory illness
• Reduced acidification
• Reduced damage to buildings
and stone materials
NOx
• Reduced respiratory illness
• Reduced cancer
• Reduced acidification and
eutrophication
• Reduced damage to plants and
crops by ozone*
• Reduced damage to buildings
and stone materials
PM
• Reduced respiratory illness
• Reduced cancer
PAH
• Improved visibility
• Reduced cancer
* NOx, HC and VOC are sources to photochemical oxidation substances that produce ozone.
40
4
Motivation and Introduction of Improved Fuel Qualities – Chronology
casestudy-fin-rep-980727-37001
While the purpose for enhanced fuel qualities was the same in both
Finland and Sweden the timing of their introduction was different
Diesel - Sweden
Diesel & Gasoline - Finland
Gasoline - Sweden
• January 1, 1991
Swedish legislation
included specifications for
improved diesel qualities
• Finnish legislation included
specifications for improved:
• December 1, 1994
Swedish legislation
included specifications for
improved gasoline
qualities
• MK1 diesel
• MK2 diesel
1989
1990
• gasoline quality Reformulated gasoline
(January 1, 1993)
• MK2a gasoline
• diesel quality Reformulated diesel
(July 1, 1993)
1991
Neste introduced oxygenated
gasoline in Finland
1992
1993
• MK2b gasoline
• MK2c gasoline
1994
Preem (formally OK Petroleum)
introduced MK2 gasoline in Sweden
1995
1996
Swedish oil companies voluntarily
agree to sell only MK2 gasoline
41
Motivation and Introduction of Improved Fuel Qualities – Gasoline Finland
4
casestudy-fin-rep-980727-37001
Since 1993 Finland classifies gasoline according to limits on benzene,
oxygen content and vapor pressure
Gasoline specifications
• Finland follows EN 228 standards
Jan. 1, 1993
Gasoline specifications
• Reformulated gasoline
• maximum benzene content of
3 vol%
• oxygen content minimum of
2 wt%
• maximum vapor pressure
• summer quality: 70 kPa
• winter quality: 90 kPa
• Lower qualities carry a 0.008
ECU/liter higher excise tax
• EN 228 mandatory minimum
requirement (standard quality)
42
4
Motivation and Introduction of Improved Fuel Qualities – Gasoline Finland
casestudy-fin-rep-980727-37001
Two years after Finnish legislation, reformulated gasoline had a
market share of about 90%
Fuel mix of gasoline sold in Finland 1989-1996
Finnish legislation on reformulated gasoline
43
Motivation and Introduction of Improved Fuel Qualities – Gasoline Sweden
4
casestudy-fin-rep-980727-37001
Since 1994 Sweden classifies gasoline according to limits regarding a
wide range of parameters
Gasoline specifications*
• Sweden follows EN228 standards
Dec. 1, 1994
Gasoline specifications
• MK2 gasoline
• maximum benzene content of
3 vol%
• Maximum oxygen content of
2 wt%
• maximum vapor pressure
• summer quality: 70 kPa
• winter quality: 95 kPa
• MK2 gasoline is considered a
transitional class which will
eventually be replaced by an MK1
gasoline grade
• Lower qualities carry a 0.007
ECU/liter higher tax
• EN228 mandatory minimum
requirement (MK3)
44
4
Motivation and Introduction of Improved Fuel Qualities – Gasoline Sweden
casestudy-fin-rep-980727-37001
Less than one year after legislation, MK2 gasoline had a 100% market
share
Fuel mix of gasoline sold in Sweden 1989-1996
Swedish oil companies
only sell MK2 gasoline
after June, 1995
Swedish legislation on MK2 gasoline
45
4
Motivation and Introduction of Improved Fuel Qualities – Diesel Finland
casestudy-fin-rep-980727-37001
Since 1993 Finland classifies diesel by setting limits on sulfur content,
aromatic concentration and cetane index
Diesel specifications
• Finland follows European standard
• Maximum sulfur content of 2000
ppm (wt.) regulated by Finnish
legislation
July 1, 1993
Diesel specifications
• Reformulated diesel
• maximum sulfur content of
50 ppm
• maximum aromatic content of
20 vol%
• minimum cetane index of 47
• Lower qualities carry a 0.025
ECU/liter higher tax
• EN 590 as mandatory minimum
requirement (standard diesel)
46
Motivation and Introduction of Improved Fuel Qualities – Diesel Finland
4
casestudy-fin-rep-980727-37001
Reformulated diesel was introduced and in one year had over half of
the Finnish diesel market
Fuel mix of diesel sold in Finland 1989-1996
Finnish legislation on reformulated diesel
47
Motivation and Introduction of Improved Fuel Qualities – Diesel Sweden
4
casestudy-fin-rep-980727-37001
In 1991 Sweden first classified diesel into three classes by setting
limits on sulfur content, aromatic concentration and distillation range
Diesel specifications
• Swedish standard
Jan. 1, 1991
Diesel specifications
• MK1 diesel
• maximum S content of 10 ppm
• maximum aromatic content of
5 vol%
• distillation range: 180-285 oC
• MK2 diesel
• maximum S content of 200 ppm
• maximum aromatic content
of 20 vol%
• distillation range of 180-295 oC
• 0.024 ECU/l higher tax than MK1
• EN 590 as mandatory minimum
requirement (MK3) has 0.041
ECU/liter higher tax than MK1
• Sulfur tax on fuels exceeding 1000
ppm ensured that MK3 has a sulfur
content <1000 ppm
48
4
Motivation and Introduction of Improved Fuel Qualities – Diesel Sweden
casestudy-fin-rep-980727-37001
In 1992 the specifications of MK1 and MK2 were revised
Diesel specifications as from Jan. 1, 1992
MK1
MK2
MK3
10
50*
2000
Aromatics, vol%
5
20
-
PAH (3 rings and
more), vol%
0.02
0.1
-
Cetane index, min
50
47
46
800-820
800-820
820-860
285
295
-
Sulfur, ppm

The oil industry and the
environmental organizations
requested the specifications
on diesel MK1 and MK2 be
revised
Density, g/liter
Distillation** (T95) oC
Revised specifications per Jan. 1, 1992
* Sulfur changed from 200 to 50 ppm.
**Distillation was changed from a range to Initial Boiling Point to T95.
49
Motivation and Introduction of Improved Fuel Qualities – Diesel Sweden
4
casestudy-fin-rep-980727-37001
While MK1 was intended to be a ”city diesel” it has taken over 80% of
the market
Fuel mix of diesel sold in Sweden 1989-1996
50
casestudy-fin-rep-980727-37001
Table of contents
1
Background and Objectives
2
Summary
3
Approach and Methodology
4
Motivation and Introduction of Improved Fuel Qualities
5
Tax Differentials and Market Drivers
6
Industry Response
7
Environmental Benefit
8
Lessons Learned
A
Appendices
51
Tax Differentials and Market Drivers – First Principles
5
casestudy-fin-rep-980727-37001
A tax differential needs to be large enough to motivate the industry to
invest without increasing the price to the consumer...
Value of tax differentials
Swedish diesel tax revenues and value of
differentials (excluding VAT)
for the years 1990 to 1996
Value of differentials due to the use of
improved fuel qualities (tax reductions)
Value of differentials due to the use of
poorer fuel qualities (tax revenues)
Tax revenues excluding differentials
Total tax revenues
(excluding VAT)
...extra costs and investments are covered by higher sales volumes of
improved fuels with increased price per liter for the refiner
52
Tax Differentials and Market Drivers – First Principles
5
casestudy-fin-rep-980727-37001
Tax differentials are based on the belief that most consumers are not
willing to pay a higher price for improved fuels that reduce emissions
Price variation during
1996 was 0.07 ECU/liter
Tax differential of
0.007 ECU/liter for gasoline
• the difference in taxes
between improved and
poorer fuel qualities
• the tax differential ensures at
least price neutrality for MK2
with respect to standard
gasoline (MK3) for the
consumer*
*For diesel the improved quality
(MK1) is sold at at lower price than
the poorest quality (MK3).
53
5
Tax Differentials and Market Drivers – Sweden
casestudy-fin-rep-980727-37001
Sweden first pioneered the integration of tax differentials as a fiscal
environmental policy instrument - with no precedence to lean on
Situation 1990:
Manufacturing Factors
Demand Factors
• Refinery configuration not
favourable - refiners would
not invest in quality beyond
legal requirements
• Oil market participants in
general did not take the
lead to introduce
improved fuels
• Crude oil slate was already
sweet
• Consumer awareness of
differences in fuel quality
in general was low, but
price sensitivity high
• Numerous oil companies in
the market
54
5
Tax Differentials and Market Drivers – Diesel Sweden
casestudy-fin-rep-980727-37001
Differentiated diesel taxes were first introduced in 1991...
Taxation in 1990
Taxation in 1991
MK1 diesel
• Tax decreased by 20 ECU/ m3
Tax decreased
Tax increased
Tax increased
127
ECU/ m3
Standard
diesel
107
ECU/ m3
MK1
diesel
Mechanisms
131
ECU/ m3
MK2
diesel
148
ECU/ m3
MK2 diesel
• Tax increased by 4 ECU/m3
• Tax differential of
24 ECU/m3 compared to MK1
MK3 diesel (standard diesel)
• Tax increased by 21 ECU/m3
• Tax differential of 41 ECU/m3
compared to MK1
MK3
diesel
55
5
Tax Differentials and Market Drivers – Diesel Sweden
casestudy-fin-rep-980727-37001
...with wider tax differentiatials in 1992
Taxation in 1991
Taxation in 1992
MK1 diesel
• Tax decreased by
12 ECU/ m3
Tax decreased
Tax decreased
107
ECU/ m3
MK1
diesel
131
ECU/ m3
MK2
diesel
148
ECU/ m3
MK3
diesel
95
ECU/m3
MK1
diesel
119
ECU/ m3
MK2
diesel
Mechanism
148
ECU/ m3
MK3
diesel
MK2 diesel
• Tax decreased by
12 ECU/ m3
• Tax differential of
24 ECU/m3 compared to
MK1
MK3 diesel
• Tax differential of
53 ECU/m3 compared to
MK1
56
5
Tax Differentials and Market Drivers – Diesel Sweden
casestudy-fin-rep-980727-37001
In October 1993, the Swedish kilometer tax on diesel vehicles was
replaced by a special tax on diesel
Diesel taxation
after October 1, 1993
Special tax on diesel
(153 ECU/m3) replaced
the kilometer tax on diesel
vehicles
In 1994 the special tax
was differentiated with
respect to fuel qualities
In 1995 the special tax
was incorporated into the
energy tax
57
Tax Differentials and Market Drivers – Gasoline Sweden
5
casestudy-fin-rep-980727-37001
The general taxation on gasoline increased in 1995, but MK3 gasoline
was raised 7.1 ECU/m3 further than MK2 gasoline
Taxation in 1994
Taxation in 1995
Mechanisms
• Gasoline taxation
increased by 11 ECU/m3
461
ECU/m3
Standard
gasoline
Tax increased
Tax increased
472
ECU/m3
479
ECU/m3
MK2
Gasoline
MK3
Gasoline
• Tax differential:
MK3 (standard gasoline)
further increased by 7.1
ECU/m3 compared to MK2
• Swedish oil companies
voluntarily agreed to only
sell MK2 gasoline after
June, 1995
58
5
Tax Differentials and Market Drivers – Gasoline and Diesel Sweden
casestudy-fin-rep-980727-37001
For Sweden the market value of differentials due to the use of
improved fuel qualities has been 589 million ECU for the period 1991
to 1996
Market value of differentials due to the use
of improved fuel qualities
(1991 to 1996) = 589 million ECU
Tax differentials (ECU/m3)
Diesel compared to
MK1
Gasoline
MK2
MK3
MK3
1990
-
-
-
1991
24
41
1992
24
53
1993
24
53
1994
29
60
0.6*
1995
24
55
7.1
1996
25
57
7.1
Tax revenues from differentials due to
the use of poorer fuel qualities
(1991 to 1996) = 467 million ECU
*The tax incentive on gasoline was introduced
December 1, 1994; 7.1/12=0.6
59
5
Tax Differentials and Market Drivers – Finland
casestudy-fin-rep-980727-37001
In 1993 the Finnish government introduced tax differentials based on
fuel quality - two years after Sweden and with the benefit of Swedish
experiences
Situation 1992:
Manufacturing Factors
• Initial Refinery configuration
favorable
• Produced environmental
diesel grades for the Swedish
market
• Sweet crude slate opportunity
taken to reduce investment
requirements
Demand Factors
• The Government signaled that
tax differentiation would occur
• Refiners invested in
anticipation of tax differentials
• Oxygenated gasoline was
made available before tax
differentials were in place
60
5
5
Tax Differentials and Market Drivers – Gasoline Finland
casestudy-fin-rep-980727-37001
Oxygenated gasoline was marketed by Neste and purchased by
consumers ahead of legislation - marketing companies absorbed the
higher production costs
January 1,
1991
January 1,
1993
January 4,
1994
Relative sales of standard and oxygenated
gasoline in Finland
100%
80%
”City Gasoline”
containing MTBE
launched by Neste
Specifications on
improved fuel qualities
were introduced in
Finland
60%
”Reformulated New
Futura Gasoline” oxygenated, less sulfur
and benzene launched by Neste
40%
20%
0%
1991
1992
1993
Year
Standard gasoline
Oxygenated gasoline
61
5
Tax Differentials and Market Drivers – Gasoline and Diesel Finland
casestudy-fin-rep-980727-37001
To support consumer demand, the Finnish government policy was to
increase gasoline taxes to compensate for tax differentials on diesel
Taxation in 1992
Taxation in 1993
Mechanisms
Gasoline
• General tax increased by 67
ECU/m3
• Tax differential:
standard gasoline tax further
increased by 8.3 ECU/m3
compared to reformulated
gasoline
Tax decreased
Tax increased
Tax increased
300
ECU/m3
Standard*
gasoline
174
ECU/m3
Standard
diesel
367
ECU/m3
375
ECU/m3
149
ECU/m3
Reformulated
gasoline
Standard
gasoline
Reformulated
diesel
174
ECU/m3
Standard
diesel
• 3.3 ECU/m3 of the overall tax
raise on gasoline sponsored the
diesel tax differentiation
Diesel
• Tax differential:
reformulated diesel tax
reduced by 25 ECU/m3
compared to standard diesel
62
5
Tax Differentials and Market Drivers – Gasoline and Diesel Finland
casestudy-fin-rep-980727-37001
For Finland the market value of differentials due to the use of
improved fuel qualities has been 152 million ECU for the period 1993
to 1996
Market value of differentials due to the
Tax differentials
(ECU/m3)
Diesel
Gasoline
1990
-
-
1991
-
-
1992
-
-
1993
4.2*
25
1994
8.3
25
1995
8.3
25
1996
8.3
25
use of improved fuel qualities
(1993 to 1996) = 152 million ECU
Tax revenues from differentials due to
the use of poorer fuel qualities
(1993 to 1996) = 97 million ECU
*The tax incentive on diesel was introduced
July 1, 1993; 8.3/2=4.2
63
casestudy-fin-rep-980727-37001
Table of contents
1
Background and Objectives
2
Summary
3
Approach and Methodology
4
Motivation and Introduction of Improved Fuel Qualities
5
Tax Differentials and Market Drivers
6
Industry Response
7
Environmental Benefit
8
Lessons Learned
A
Appendices
64
Industry Response – Summary
6
casestudy-fin-rep-980727-37001
Finnish and Swedish refiners invested about 540 million ECU over the
period 1990 to 1996...
Total capital investment patterns in
study refineries 1990-96
Total incremental operating
expenditure in study refineries 1990-96
...and by 1996 incurred additional costs of 57 million ECU/year to meet
the new fuel specifications
65
Industry Response – Summary
6
casestudy-fin-rep-980727-37001
Over a 15 year lifecycle capital and operating costs are equivalent to an
additional unit cost of 10 ECU/ton for enhanced quality gasoline
Total enhanced quality gasoline life cycle cost
(15 year plant life)
Weighted average tax
incentives 1990-96
66
6
Industry Response – Summary
casestudy-fin-rep-980727-37001
Similarly unit costs for diesel were estimated at 28 ECU/ton
Total enhanced quality diesel life cycle cost
(15 year plant life)
1996
1995
Opex
2010
2008
2006
2004
2002
2000
1998
1996
1994
0
1992
0
1994
10
1993
50
1992
20
1991
100
ECU/ton
30
ECU/ton
40
150
50
45
40
35
30
25
20
15
10
5
0
1990
50
1990
Million ECU/year
200
Weighted average tax
incentives 1990-96
Capital charge (14% per annum)
Cumulative cost ECU/ton (right hand scale)
67
6
Industry Response – Initial Configuration
casestudy-fin-rep-980727-37001
The five refineries in the study group were of similar size to the average
EU refinery in 1991, but had a higher mild hydrocracking and distillate
hydro-desulfurization (HDS) capability...
Refinery Capabilities
January 1, 1990
Unit
Study Group
NWE (1)
E.U.
5.92
6.47
6.11
Average Refinery Capacity
Million Tons/Year (CDU)
3
5
2
Total cracking (2)
47
41
38
Mild VGO hydrocracking
9
7
5
31
27
19
53
56
48
17
15
13
1
1
1
Other distillate HDS
Total HDS
Reforming
Alkylation
As % of CDU
Conventional hydrocracking
Isomerization
3
2
2
De-aromatization
0
0
0
Produces high quality
diesel components
Distillate desulfurization
processes which remove
sulfur
Hydrogen is an important
bi-product needed in
desulfurization processes
Produce high octane
blending components
(aromatics and benzene free)
(1) Belgium, Netherlands, Germany, Denmark
(2) Conventional hydrocracking, catalytic cracking and thermal cracking
...although no refineries in Europe had distillate de-aromatization
68
6
Industry Response – Initial Configuration Finland
casestudy-fin-rep-980727-37001
Refineries had a higher capability to desulfurize distillates than the
rest of Europe
Finland
(Two Refineries)
NWE (1)
Average Refinery Capacity
Million Tons/Year (CDU)
5.05
Average Downstream
Processing Per Refinery
Million Tons
Per Year
% CDU
% CDU
Conventional hydrocracking
0.38
8
5
Total cracking (2)
2.97
59
41
-
0
7
Other distillate HDS
2.37
47
27
Total HDS
4.17
83
56
Reforming
0.92
18
15
Alkylation
0.08
1
1
Isomerization
0.08
1
2
Mild VGO hydrocracking
Refinery Capabilities
January 1, 1990
6.47
(1) Belgium, Netherlands, Germany, Denmark
(2) Conventional hydrocracking, catalytic cracking and thermal cracking
Produces high quality
diesel components
Distillate desulfurization
processes which remove
sulfur
Hydrogen is an important
bi-product needed in
desulfurization processes
Produce high octane
blending components
(aromatics and benzene free)
69
6
Industry Response – Initial Configuration Sweden
casestudy-fin-rep-980727-37001
The Swedish refineries were similar to the average for Northwest
Europe
Sweden
(Three Refineries)
NWE (1)
Average Refinery Capacity
Million Tons/Year (CDU)
6.40
Average Downstream
Processing Per Refinery
Million Tons
Per Year
% CDU
% CDU
Conventional hydrocracking
-
0
5
Total cracking (2)
2.21
34
41
Mild VGO hydrocracking
0.88
14
7
Other distillate HDS
1.63
25
27
Total HDS
2.75
42
56
Reforming
1.08
17
15
Alkylation
-
0
1
0.22
3
2
Isomerization
Refinery Capabilities
January 1, 1990
6.47
(1) Belgium, Netherlands, Germany, Denmark
(2) Conventional hydrocracking, catalytic cracking and thermal cracking
Produces high quality
diesel components
Distillate desulfurization
processes which remove
sulfur
Hydrogen is an important
bi-product needed in
desulfurization processes
Produce high octane
blending components
(aromatics and benzene free)
70
6
Industry Response – 1997 Configuration
casestudy-fin-rep-980727-37001
The study group refineries had increased the capacity of key process
units by 1997
Unit
Study Group
NWE (1)
E.U.
5.92
7.08
6.6
Average Refinery Capacity
Million Tons/Year (CDU)
3
6
3
Total cracking (2)
49
45
41
Mild VGO hydrocracking
12
7
5
36
29
23
71
67
53
17
15
13
Alkylation
1
1
1
Isomerization
4
2
3
De-aromatization
13
2
1
Other distillate HDS
Total HDS
Reforming
As % of CDU
Conventional hydrocracking
(1) Belgium, Netherlands, Germany, Denmark
(2) Conventional hydrocracking, catalytic cracking and thermal cracking
71
6
Industry Response – Capital Investments
casestudy-fin-rep-980727-37001
Capital investments* were made to meet fuel specification changes in the
period 1990-1996 at Scanraff and Preem Gothenburg refineries in Sweden
Scanraff
Unit
Gothenburg
Startup
year
Capacity
increase
Isomerizer (recycle)
1990
12.4 kbd
VGO Mild Hydrocracker
(expansion)
1993
+5 kbd
Distillate Hydrofiner
(expansion)
1994
+17 kbd
Distillate De-aromatiser
(new)
1994
47 kbd
SCOT Tail gas plant
(new)
1994
Hydrogen Purification
(membrane- new)
Isomerizer (expansion)
Unit
Startup 6
Year
Capacity
increase
Isomerizer (once through)
1992
10 kbd
Distillate de-aromatizer
and desulfurization
1996
>30 kbd
Sulfur plant
1996
100 ton/day
Amine plant re-build
1996
+40 ton/day
200 ton/day
Hydrogen recovery
(cryogenic)
1996
36 MMcfd
1994
14 MMcfd
Reformate splitter
modification
1996
7.1 kbd
1995
+2 kbd
kbd = 1000 barrels/day; MMcfd = million cubic feet/day
*Based on a combination of actual investments reported publicly and ADL estimates.
72
6
Industry Response – Capital Investments
casestudy-fin-rep-980727-37001
Capital investments* were made to meet fuel specification changes in
the period 1990-1996 at Shell Gothenburg
Unit
Startup
year
Capacity
increase
Distillate hydrotreater
(new)
1993
Distillate De-aromatizer
(new)
1993
11 kbd
1993
10 MMcfd
1993
32 ton/day
1994
20 kbd
Hydrogen Purification
(membrane - new)
SCOT Tail-gas (new)
Naphtha splitter
(new)
11 kbd
kbd = 1000 barrels/day; MMcfd = million cubic feet/day
*Based on a combination of actual investments reported publicly and ADL estimates.
73
6
Industry Response – Capital Investments
casestudy-fin-rep-980727-37001
Capital investments* were made to meet fuel specification changes in the
period 1990-1996 at Neste’s Porvoo and Naantali refineries in Finland
Porvoo
Naantali
Unit
Startup
Year
Capacity
Increase
Alkylation unit (expansion)
1993
+110 Mton/y
MTBE unit (expansion)
1993
+30 Mton/y
VGO hydrotreater
1993
2.0 MMton/y
GO hydrotreater
(revamp)
Hydrogen purification
(membrane - new)
1993
1994
18 MMcfd
Reformate de-benzenizer
1994
1.6 MMton/y
TAME (new)
1995
110 Mton/y
Catalyst
change
Unit
Startup
Year
Capacity
Increase
Distillate hydrotreater
1993
3.5 kbd
GO de-aromatizer
1993
3.5 kbd
GO hydrotreater (revamp)
1994
Catalyst
change
Naphtha de-hexanizer
1996
8.4 kbd
kbd = 1000 barrels/day; MMcfd = million cubic feet/day;
Mton/y = thousand ton/year; MMton/y = million ton/year
*Based on a combination of actual investments reported publicly and ADL estimates.
74
6
Industry Response – Capital Investments
casestudy-fin-rep-980727-37001
Other investments were made for both environmental and business
reasons, but these were excluded if made before 1990 or were not
considered to be a direct cost for improved fuel quality
Company
Preem
Preem
Shell
Refinery
Location
Scanraff
Sweden
Gothenburg
Sweden
Gothenburg
Sweden
Porvoo
Finland
• FCCU
expansion
• HGO desulfurization
cold flow
(improvemen)
• Ballast
water
treatment
• Conventional
hydrocracker
(pre-1990)
• Alkylation
unit (new unit
pre-1990)
• MTBE unit
(Return on
investment)
• Benzene
recovery
heartcut
(chemicals
return on
investment)
• Double tank
seals
Neste
Neste
Naantali
Finland
• Part of
hydrotreater
benefits used
for enhanced
solvents
production
75
6
Industry Response – Operating Expenditure
casestudy-fin-rep-980727-37001
Net incremental annual operating expenditure to meet the new
specifications was approximately 54 million ECU in 1996
Incremental annual operating expenditure in
study refineries 1996
Breakdown of incremental annual
operating expenditure
Labor
Cat &
4%
Chem
5%
Cooling
Water
4%
Fuel
37%
Power
12%
Steam
14%
*
Maintenance
23%
*Includes associated yield benefits which result directly from investment made for improved fuel qualities. Excludes any
capacity creep benefits associated with incremental ongoing investments (excluded in investment estimates).
76
Industry Response – Basis and Assumptions
6
casestudy-fin-rep-980727-37001
Actual data was used when available and typical N.W European data
was used otherwise
Capital Investment Basis
Operating Expenditure Basis
• Capital investment costs are given as
installed project cost and, where appropriate,
include a 40% “offsites” charge and a 5%
working capital charge for new stand alone
units
• Opex was based on ADL internal database
data and has been split into fuel, steam,
power, cooling water, maintenance, labor
and catalyst & chemicals
• “Once off” reactor catalyst changes have
been included in capital costs
• Only capital investments made specifically to
meet the changing fuel specifications in the
study period (1990-96) were included
• Capital investment to replace obsolete
equipment was judged to be “business as
usual” and not included in the study
• Fuel and steam costs were based on the
LSFO price
• Power costs were based on Eurostat
Swedish/Finnish averages for a 25 million
kWh user, inclusive of taxes
• labor costs were only charged for new
units on the assumption that there was a
“lost opportunity cost”
77
6
Industry Response – Feedstock Costs
casestudy-fin-rep-980727-37001
Additional feedstock costs were incurred as a result of the sweeter
crude slate...
Annual cost of sweeter crude slate
in Finland vs. EU average slate
Source: IEA Statistics, Platt’s pricing
Proportion of sweet crude in slate
Source: IEA Statistics, Company data
78
6
Industry Response – Feedstock Costs
casestudy-fin-rep-980727-37001
. . . with an average “low sulfur premia” of 3.8 ECU/ton
“Low sulfur premia” based on Brent / Urals price differentials adjusted for API
density and fuel oil sulfur premia
Source: IEA Statistics, Platt’s pricing, ADL Data
1. Brent has two superior qualities compared with Soviet export blend - better American API gravity and
lower fuel oil sulfur content
2. After adjusting the difference in delivered prices from the benefits of API and low sulfur fuel
oil, there is a remaining “low sulfur premia”. This is a cost element of producing low sulfur diesel
79
Industry Response – Crude Oil Quality
6
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Increased availability of sweet North Sea crude oils has benefited the
refiners
North Sea crude oil production
80
6
Industry Response – Crude Oil Quality
casestudy-fin-rep-980727-37001
Sweet crude oil supplies have also increased for the EU but not as
much as in Finland
100
% Sweet crude oil
Finland*
80
Sweden
60
EU
40
20
0
1989
1990
1991
1992
1993
1994
1995
1996
*As deslfurization capacity is expanded in Finland - flexibility in choice of crudes is returning during 1997 % sweet crude used has reduced to 60%.
81
6
Industry Response – MK1 Diesel Sweden
casestudy-fin-rep-980727-37001
The distillation specifications for Swedish MK1 require the use of
components for jet fuel manufacture
Key diesel product specifications
Finnish
Swedish
Reformulated MK1
Density (kg/m3) 820-850
Finnish and Swedish jet fuel production
(1990-1995)
EN590
800-820
860
(max)
T95 (Max oC)
-
285
370
Sulfur (ppm)
50
10
500
Source: IEA Statistics, OECD, Paris, 1997
82
casestudy-fin-rep-980727-37001
Table of contents
1
Background and Objectives
2
Summary
3
Approach and Methodology
4
Motivation and Introduction of Improved Fuel Qualities
5
Tax Differentials and Market Drivers
6
Industry Response
7
Environmental Benefit
8
Lessons Learned
A
Appendices
83
7
Environmental Benefit
casestudy-fin-rep-980727-37001
Reduced environmental costs for CO, HC, NOx, PM and SO2 due to
improved fuel qualities have been assessed in economic terms
Reduced
environmental
costs
Total
changes in
emissions
Sections in this chapter:
1.
2.
External
costs of
emissions
Estimates of reduced
environmental costs for Finland
and Sweden
Uncertainties associated with
data and methodology
National
emission
estimates
Average
change in
emissions due
to fuel quality
84
7
Environmental Benefit – Reduced Environmental Costs
casestudy-fin-rep-980727-37001
For the years 1992 to 1996 environmental cost reductions associated
with improved fuels are estimated to be on the order of 170 to 230
million ECU
Estimated reduction in environmental costs due to improved fuel qualities using ExterneE
methodology (million ECU; see Appendix A.3)
1992
1994
1995
1996
SUM
Finland
8 to16
9 to 17
9 to 17
26 to 50
Gasoline
3 to 10
4 to 10
3 to 10
10 to 30
Diesel
5 to 6
5 to 7
6 to 7
16 to 20
Sweden*
21 to 22
1993
34 to 35
Gasoline
Diesel
21 to 22
34 to 35
34
44 to 46 51 to 52
184 to 189
2
11 to 13
12 to 13
25 to 28
32
33
39
159 to 161
*Swedish estimates include the contribution from off-road vehicles and machines that use
diesel.
85
7
Environmental Benefit – Reduced Environmental Costs
casestudy-fin-rep-980727-37001
The reduction in environmental costs* is primarily due to lower NOx
and sulfur emissions
Finland
Reduced environmental
costs: 1994 - 1996
(million ECU)
Sweden
Reduced environmental
costs: 1992 - 1996
(million ECU)
gasoline
diesel
CO
0.8 to 1.4
-0.01 to 0.01
CO
-0.6 to 0.08
-0.1 to -0.05
HC
0.1 to 0.2
-0.03 to 0.05
HC
-0.05 to 0.05
-0.03 to 0.001
NOx
6 to 25
6 to 9
NOx
21 to 23
129 to 131
PM
1
2 to 3
SO2
2
8
SO2
4
28
10 to 30
16 to 20
25 - 28
159 - 161
Total
*Negative numbers are due to increased
emissions from improved fuel qualities
gasoline
diesel
Changes in diesel quality have had the
PM
1
2 to 3 in
greatest contribution
to reductions
environmental costs
Total
86
7
Environmental Benefit – Total Change in Emissions
casestudy-fin-rep-980727-37001
The largest reduction in national emission estimates in relative terms
is for sulfur and PM
Expected changes in national emissions due to the usage of improved fuel qualities - 1996 (see, Appendix A.3)
Finland
(% change)
CO
HC
NOX
PM
SO2
gasoline
-18% to -11%
-7% to -5%
-8% to -2%
-10%
-50%
diesel
-2% to 2%
-14% to 8%
-5% to -3%
-13% to -7%
-82%
Sweden
(% change)
CO
HC
NOX
PM
SO2
gasoline
-1% to 4%
-1% to 1%
-4%
-15%
-59%
diesel
4%
3% to 15%
-9%
-13% to -11%
-85%
• Uncertainties regarding the extent of emission changes for CO and HC from diesel vehicles is judged to be
higher than for NOx, PM, PAH, and SO2.
• A direct comparison of changes in emissions due to improved fuels for Finland and Sweden is not possible
since the initial and subsequent fuel qualities and test cycles for estimating emissions are different.
87
7
Environmental Benefit – ExternE data
casestudy-fin-rep-980727-37001
External costs of air pollution for Finland and Sweden has recently been
estimated in the European Union’s ExternE* project...
Finland
Unit cost of damage by pollutant based on
ExternE calculations
(ECU/ton of pollutant)
CO
HC
NOX
PM
SO2
9**
17**
1310
1555
1486
Sweden
Unit cost of damage by pollutant based on
ExternE calculations
(ECU/ton of pollutant)
CO
HC
NOX
PM
SO2
9**
17**
2732
1957
2357
*See http://externe.jrc.es
**European Commission, DGXII - ExternE, 1995.; European Commission, DGXI - Cost Benefit Analysis of the Different Municipal
Solid Waste Management Systems: Objectives and Instruments for the Year 2000, Final Report, Coopers & Lybrand, March 1996
88
7
Environmental Benefit – National Emission Estimates
casestudy-fin-rep-980727-37001
National emission estimates were taken from publicly available data
National emission estimates from road transport - 1996 (tons)
Finland*
CO
HC
NOx
PM
SO2**
Gasoline
276000
41000
83000
3100
900
Diesel
20000
8000
44000
4500
2500
*VTT; Finland
**Mass balance estimate using average sulfur content in fuels.
National emission estimates from road transport,
off-road vehicles and machines - 1996 (tons)
Sweden*
CO
HC
NOx
PM
SO2**
Gasoline
770000
145000
83000
2000
550
Diesel
58000
3000
122000
3000
500
*SCB; Sweden
**Mass balance estimate using average sulfur content in fuels.
89
7
Environmental Benefit – Vehicle Emission Data
casestudy-fin-rep-980727-37001
Reduction in emissions due to improved fuel qualities has been estimated
by reviewing emission data* and by the EPEFE equations
Percent changes in emissions compared to normal ungraded fuels
Finland
Unleaded gasoline
Reformulated Diesel
Oxygenated
Reformulated
VTT**
EPEFE
VTT**
EPEFE
average
range
EPEFE
CO
-9%
-7%
-12%
-25%
-3%
-6% to 0%
2%
HC
-6%
-4%
-8%
-5%
-20%
–
12%
NOX
0%
0%
-3%
-12%
-7%
-12% to -5%
-5%
PM
0%
-19%
-25% to -10%
-10%
-15%
*See Appendix A.3 for references and ranges.
**Source: VTT Finland assuming 50% city traffic and 50% catalytic converter car fleet.
90
7
Environmental Benefit – Vehicle Emission Data
casestudy-fin-rep-980727-37001
Reduction in emissions due to improved fuels has been estimated by
reviewing emission data* and by the EPEFE equations
Percent changes in emissions compared to normal ungraded fuels
Sweden
Diesel
MK2 Gasoline
MK2
MK1
average
EPEFE
average
range
EPEFE average
range
EPEFE
CO
4%
-1%
5%
-6% to 8%
5%
-
-
9%
HC
-3%
1%
4%
-2% to 30%
18%
-5%
-10% to 1%
24%
NOX
-1%
-4%
-9%
-11% to -5%
-11%
-6%
-8% to -4%
-9%
PM
-15%
-16%
-30% to -10%
-13%
-9%
-12% to -5%
-8%
*See Appendix A.3 for references and ranges.
91
7
Environmental Benefit – Uncertainties
casestudy-fin-rep-980727-37001
There are large uncertainties in the calculations
Reduced
environmental
costs
Total
changes in
emissions


Different methodologies
for aggregating
emission data
National
emission
estimates

Uncertainties in the
valuation methods

Secondary effects of
improved fuels

Exclusion of PAH and
benzene in the
valuation
External
costs of
emissions
Average
change in
emissions due
to fuel quality

Small number of studies
and large variations in the
data

Uncertainties in the
EPEFE equations
Emission data from
Finland and Sweden
are not concurrent
92
7
Environmental Benefit – Uncertainties
casestudy-fin-rep-980727-37001
There are large uncertainties in each step of the ExternE valuation
methodology
Valuation methodology steps:
Quantifying
emissions
Model dispersion
(concentration)
• uncertainties in
• uncertainties in appointing
calculating emissions the source of pollutants
from road transport
• inherent uncertainties
associated with air pollution
dispersion models
?
Model exposure to
receptors and
effect of exposure
Quantify
costs
• uncertainties in the
• uncertainties
dose response functions associated with the
actual costs associated
• receptors (e.g.):
with the response (e.g.)
- population
health care costs
- crops
- buildings
• uncertainties in the
- forests and rivers
current value of
receptors
- the value of human life
- costs associated with
“non-productive”
individuals
93
7
Environmental Benefit – Uncertainties
casestudy-fin-rep-980727-37001
All existing methods to estimate the monetary value of external effects
are intensely debated and results need to be interpreted with great care


Uncertainties with the actual costs associated with the receptor response:

health care costs

the current value of receptors

the value of human life

”non-productive” individuals
Current valuation methods have their strengths and weaknesses


”willingness to pay” (WTP)
–
income is constrained, since people can not pay what they do not have
–
easily encourage biased results, due to ”strategic answers” by people who
want to influence decisions
Restoration valuation methodologies can not account for non-reversible damage
to buildings and ecosystems
94
7
Environmental Benefit – Uncertainties
casestudy-fin-rep-980727-37001
Swedish economic costs estimates which are used in policy formulation
are much higher than unit economic costs calculated with the ExternE
methodology
Swedish economic cost estimate*
regional effects to
urban effects
(ECU/ton)
CO
9*
CO
HC
17*
1,900 to
7,800
HC
NOX
2,732
5,100 to
11,000
NOX
PM
1,957
21,000 to
130,000
PM
SO2
2,357
1,900 to
13,000
SO2
*Source: SOU 1996:165;
Unit cost of damage by pollutant
(ECU/ton of pollutant)
Unit cost of damage by pollutant
(ECU/ton of pollutant)
ExternE economic cost estimate
95
Environmental Benefit – Uncertainties
7
casestudy-fin-rep-980727-37001
Lower sulfur levels in diesel have allowed for secondary treatment of
diesel exhausts - this is not included in emission estimates


Over 1,000 buses and trucks have been fitted in Scandinavia with oxidation
catalysts, filters or CRT (Continuous Regenerating Trap) packages which require
diesel with a sulfur content less than 50 ppm

Both techniques reduces CO and HC emissions

CRT also greatly reduces particulate emissions (~90%)
While the catalyst does not remove particles it removes the organic material
which contributes to particle mass
96
7
Environmental Benefit – Uncertainties
casestudy-fin-rep-980727-37001
The ExternE methodology does not does not evaluate environmental
costs associated with benzene, PAH, biological activity and
mutagenicity of emissions*
Decrease in particle emissions
with improved diesel qualities
Decrease in PAH emissions
with improved diesel qualities
5 - 30 %
22 - 84%
(average 16%)
(average 61%)
Not allocated in the
ExternE framework or in
the calculations of
reduced environmental
costs
Decrease in biological activity
as tested with the Ames
mutagenicity and TCDD
receptor binding test
97
7
Environmental Benefit – Uncertainties
casestudy-fin-rep-980727-37001
National emission estimates are not concurrent and there are discrepancies
when comparing the magnitude of emissions between the countries

The methods used in Sweden and Finland for calculating emissions are not the same
(e.g):

how fuel qualities and improvement in technology affect emissions

the detail of statistics used with respect to transportation patterns, fuel consumption
and actual fuel qualities on the market
Differences in
national emission
estimates...
... lead to differences in
expected reductions in
emissions due to
improved fuels...
...which lead to
differences in expected
reductions in
environmental costs...
...which then makes it
difficult to compare the
environmental improvement
in different countries when
improved fuels are
introduced
98
7
Environmental Benefit – Uncertainties
casestudy-fin-rep-980727-37001
Expected reductions due to improved fuel qualities are based on a few
studies with different test cycles and reference fuels*
Finland
Oxygenated gasoline
Reformulated gasoline
no independent studies found
1 study
Reformulated diesel
4 studies, 2 reference fuels
Sweden
MK2 gasoline
1 study
MK2 diesel
MK1 diesel
2 studies, Braunshwieg bus and test cycles
9 studies, 5 test cycles, 3 reference fuels
*see Appendix A.3
99
7
Environmental Benefit – Uncertainties
casestudy-fin-rep-980727-37001
There are also discrepancies in the EPEFE equations for diesel emissions
Change in Emissions:
% measured
% predicted from the
EPEFE equations
CO
+2.4%
+0.4%
• MK1 diesel - Sweden
HC
-12.5%
+14.7%
• EPEFE reference fuel
NO
-8.4%
-7.5%
PM
-29,4%
-4.3%
Emissions from a Scania
and a Volvo motor were
measured from two fuels:
Subsequently ACEA (European Association of Automotive
Manufacturers have revised the equations
(see ACEA report, Influence of Diesel Quality on Heavy Duty Diesel Engine
Emissions, 20.3.1997)
100
casestudy-fin-rep-980727-37001
Table of contents
1
Background and Objectives
2
Summary
3
Approach and Methodology
4
Motivation and Introduction of Improved Fuel Qualities
5
Tax Differentials and Market Drivers
6
Industry Response
7
Environmental Benefit
8
Lessons Learned
A
Appendices
101
8
Lessons Learned – Tax Differentiation
casestudy-fin-rep-980727-37001
Tax differentiation is a quick and effective method to change market
conditions so that improved fuel qualities for road transport can be
introduced

Tax differentials change market conditions in order that improved fuels can be
rapidly introduced

Tax differentials should not be considered as a tax revenue gain or loss

If consumers are not willing to pay a higher price for less polluting fuels, then tax
differentials needs to be large enough to cover extra investments and net
increased operating costs* in order to encourage refiners to produce the
improved fuels

After the new fuels have been introduced and the appropriate investments been
made ”a new steady state” has been achieved - therefore tax differentials can be
altered to reflect new market condition
*Net increased operating costs - the associated extra costs for producing improved qualities less general
productivity improvements due to investments associated with improved qualities.
102
8
Lessons Learned – Market Conditions
casestudy-fin-rep-980727-37001
The policies adopted by the Finnish and Swedish governments in early
1990’s were successful in introducing improved fuels into the market


The size of the tax differentials in most instances needed to change market
conditions was small:

when compared to the total tax on fuels

when compared to the annual fluctuations in market price
Tax differentials allow the consumer to always choose the lower priced fuel:

even if the tax differential is too large, market forces ensure that the price of the
improved fuel is lower than the more polluting grade

if the tax differential is too small, the price of the improved grades will be higher
and consumers may switch back to the more polluting grade*

Consumers of lower quality fuels contribute to tax revenues - i.e. “polluter pays”

Once the investments are recovered from the market place it would appear that
refiners have become more competitive and are more flexible
*This has not been observed for transport fuels, but occurred when tax differentials in Sweden were
removed from heating oil grades in 1994.
103
8
Lessons Learned – Industry Response
casestudy-fin-rep-980727-37001
Tax differentials on transport fuels gave refiners an incentive to invest
and in some instances provided positive effects on operations

Refinery investments for producing improved fuels
improvements in terms of productivity and flexibility (e.g.):
 VGO Hydrotreaters
 MTBE production
 hydrotreating

Availability of sweet crudes were not a prerequisite for introducing improved
fuels, but the Finnish refiner was able to reduce his initial investment costs by
switching to a sweet crude slate
The major global reserves of
crude oil are located in the
Middle East and are sour

Other EU refiners are likely to
require higher investments
consistent with sour crude supplies
gave
secondary
This may have an
impact on the level of
tax differentiation
Even though Swedish MK1 diesel requires components which are used in jet
fuel, total production of jet fuel has increased in the region as a whole
There is a world wide
increase in the demand
for jet fuels
Other EU refiners may find it difficult to
produce both improved diesel qualities
and increased amounts of jet fuel
This may have an
impact on the level of
tax differentiation
104
8
Lessons Learned – Environmental Benefit
casestudy-fin-rep-980727-37001
Reduced environmental costs are difficult to estimate and the
uncertainties are large

Environmental improvements should be measured after the improved fuels are
established on the market to review future policy on tax incentives

Better information and universal measuring standards are needed in order to
assess environmental benefits

changes in emissions due to changes in fuel quality

aggregation methods for estimating emissions from road transport on a
national level

inclusion of relevant substances (e.g. benzene and PAH)

valuation techniques for estimating environmental costs
While the exact size of the reduced environmental costs are uncertain...
we expect even greater environmental benefit in more densely populated
areas of Europe since improved fuel qualities reduce emissions which
have an adverse effect on human health
105
casestudy-fin-rep-980727-37001
Table of contents
1
Background and Objectives
2
Summary
3
Approach and Methodology
4
Motivation and Introduction of Improved Fuel Qualities
5
Tax Differentials and Market Drivers
6
Industry Response
7
Environmental Benefit
8
Lessons Learned
A
Appendices
106
casestudy-fin-rep-980727-37001
Appendices
A.1
Net Present Costs
A.2
Tax Differentiation Calculations
A.3
Net Environmental Cost Calculations
107
casestudy-fin-rep-980727-37001
Appendices
A.1
Net Present Costs
A.2
Tax Differentiation Calculations
A.3
Net Environmental Cost Calculations
108
casestudy-fin-rep-980727-37001
Appendices
A.1
Net Present Costs
A.2
Tax Differentiation Calculations
A.3
Net Environmental Cost Calculations
109
casestudy-fin-rep-980727-37001
Case Study –
The Introduction of
Improved Transport
Fuel Qualities in
Finland and Sweden
Presentation report to the
Governments of
Finland, Norway and Sweden
Arthur D. Little AB
Box 70434
107 25 Stockholm
Telephone +46 8 698 30 00
Telefax +46 8 698 30 02
Final Report
Reference 37001
July 27, 1998
110