China announces new pricing policy for higher quality fuels

The Chinese government has released new, higher prices for higher quality gasoline and diesel fuel which will become mandatory nationwide with the roll-out of its stage IV and V fuel specifications.
The new pricing policy is aimed at helping Chinese refiners recover their investments in upgrading their refining capacity to meet China’s stricter fuel standards, which will be implemented in stages, between 2013 and 2017.
This latest price adjustment is an important step in the effort to avoid a nationwide shortage of these higher quality fuels, which has happened in the past.
Nonetheless, according to the National Development and Reform Commission (NDRC), refiners will have to bear between 20% and 30% of the incremental cost from the refinery upgrades, while consumers will bear roughly 70%. Further, the NDRC said subsidies will be given to certain groups, such as farmers, workers in the fishing and forestry industries and public transportation, to ease the burden from the additional cost of these higher quality fuels.
China V standards, which are equivalent to Euro V standards, will become mandatory nationwide in 2017, while an equivalent Beijing V standard is already mandatory in the capital city. China IV fuel standards will become mandatory nationwide in 2014. The new standards require progressively tighter restrictions on the content of pollutants, such as sulfur.
China had originally planned to implement China IV diesel standards for all new trucks and buses in January 2011, but delayed issuing those standards until January 2012, then delayed it again to July 2013, because the government felt that there was an insufficient supply of high-quality diesel fuel that could be used in buses and trucks built to China IV emissions standards. China’s two largest refiners, Sinopec and PetroChina, are state-owned.
However, the level of political pressure to ensure the government releases new fuel and vehicle emissions standards and implements them according to schedule has increased in recent months, after record-breaking levels of air pollution in major cities such as Beijing over the winter of 2012-13 period, and recently in Harbin. A report from China’s Ministry of Environmental Protection found that the use of low-quality, high-sulfur fuel is a key contributor to air pollution.
This political pressure has also raised the stakes for China’s largest oil refiner, Sinopec, to meet its deadlines to upgrade its refining capacity. Sinopec Chairman Fu Chengyu said that the company is on track to complete desulfurization at its refineries by the end of 2013, and will begin production of China IV gasoline and diesel fuel in time to meet the government deadline for nationwide implementation of these standards.
The upgrades are expected to come at a high cost to refiners; the price increases announced by the NDRC give an indication of how much refiners will need to spend for their refinery upgrades. As an example, if Sinopec was to have upgraded the equivalent of its total gasoline production in 2012 to China IV standards, based on the NDRC’s estimated upgrade cost of CNY370 per ton (USD60), Sinopec would have spent an extra CNY15 trillion (USD2.4 trillion) producing China IV gasoline versus China III gasoline.
In the first half of this year, Sinopec saw its profits rise by 24% while another state-owned oil company, PetroChina, saw profits rise by 9.5%, largely due to smaller losses from its refining assets as a result of price increases earlier in 2013. The NDRC’s price increases will further boost refiners’ margins.
Taken with the crucial reform of China’s oil product pricing mechanism implemented earlier this year, this latest price adjustment is an important step in providing price incentives necessary for Chinese refiners to upgrade their capacity and avoid further delays in China’s efforts to phase in China IV and V standards.
(September 24, 2013)