What is the impact of improved oil quality on refineries?

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Sinopec Group announced that, in accordance with the requirements of the General Administration of Quality Supervision, Inspection and Quarantine and the Standardization Administration Committee, China will use only National III standard gasoline for vehicles starting next year. As of now, with only two weeks left before the end of the year when the national standard for vehicle gasoline will become National III, what changes will the upgrade from National II to National III standards bring to oil refining companies? Comment: The upgrade of oil products is now on a countdown, in response to the needs of a low-carbon economy. As required, starting from New Year’s Day 2010, the use of National III standard gasoline will be made mandatory in nine provinces and municipalities, including Guangdong, Fujian, Hubei, Henan, Jiangsu, Zhejiang, Hebei, Tianjin, and Qingdao in Shandong. Subsequently, other cities will also gradually adopt the National III standard, marking the countdown to this upgrade of fuel standards. Currently, Beijing, Guangzhou, and Shanghai already supply gasoline meeting National IV standards, while most other provinces and cities are still at the National II level. In 2000, China established phased emission standards, namely what we refer to as National I to National IV emission standards. In 2000, China implemented emission standards corresponding to Euro I standard (i.e., National I standard), and in 2004 it began to enforce the National II emission standards, which are equivalent to Euro II standard. The upgrading of fuel grades is primarily driven by environmental concerns: vehicle exhausts have now become the main cause of air pollution in major cities. According to statistics from the Beijing Environmental Protection Bureau, approximately 73% of hydrocarbons, 50% of nitrogen oxides, and 63% of carbon monoxide in Beijing’s air come from vehicle exhaust emissions. To reduce the emission of pollutants from vehicles, it is necessary to improve vehicle engine technology on the one hand, and to enhance the quality of fuel used in vehicles on the other hand. It is said that a household car meeting National Standard III will emit 30% less carbon monoxide when using gasoline that meets National Standard III, while hydrocarbons and nitrogen oxides will be reduced by 40% respectively. Impact on refining companies: Price increases generally cover the rise in costs. Rising costs: Due to the significant reduction in harmful substances, the need for many new and upgraded facilities, as well as high investment amounts, the upgrading of oil products inevitably leads to increased costs. It is understood that the processing cost of National III gasoline will be about 0.145 yuan higher than that for National II standards, resulting in an increase of approximately 200 yuan per ton in processing costs. Rising prices: With the upgrade of oil products, their prices inevitably increase, both to cover the rising costs for enterprises and, from another perspective, to control the rapidly growing demand for such oil products. Based on the previous experience of upgrading oil standards in Beijing (from National II to National III), after such an upgrade, the price of refined oil increases by 200 to 300 yuan per ton as stipulated ； Based on the experience of price increases that took effect on August 1, 2008, in Dongguan City, Guangdong Province, following the implementation of Standard III, compared to Standard II refined oil, the maximum retail price per liter for Standard III gasoline increased by 0.19–0.23 yuan, while the maximum retail price per liter for Standard III diesel increased by 0.20 yuan. It can be seen that the increase in prices generally covers the rise in corporate costs; in times of strong demand, it can even lead to profits. Abroad, in order to offset the increased costs resulting from the improvement in oil quality, major countries adopt incentive measures in three areas: taxation, loan incentives, and premium pricing for higher-quality products. Source: HuiCong.com