By Dong Hoon Lee
South Korea has rapidly become an economic powerhouse and is now one of the most affluent nations in As ia. Innovations like unrivalled, superfast broadband and considerable investment in higher education– 64% of 25 to 34-year-old South Koreans hold a tertiary education degree–have made the nation the eighth largest country in international trade.
The automotive industry has played a key role in the nation’s development with domestic manufacturer Hyundai now the fourth largest car manufacturer in the world. More than 20 million vehicles are on the road in South Korea, an increase of five million in just nine years.
However, economic developments and changes in legislation have had a consider- able impact on South Korea in recent years, which could have far reaching consequences for the fuels and lubricants industry in the years to come.
MORE STRINGENT STANDARDS
The implementation of the more stringent vehicle emissions being phased in during 2014-15 is a major opportunity for the fuels and lubricants industry with higher quality engine oils aligned with the introduction of Euro 6 emissions standards.
In accordance with the Clean Air Conservation Act enforcement rules, the Ministry of Environment is transitioning from Euro 5 to Euro 6. The tighter regulations came into effect in January 2014 for new vehicles weighing more than 3.5 metric tonnes, such as vans and busses.
Vehicles with a reference weight of less than 1.3 tonnes, including passenger cars and small- or medium sized trucks were covered by the Euro 6 standard from September 2014.
Vehicles weighing between 1.3-3.5 tonnes must comply by September 2015. This has led to an increased demand for advanced after-treatment technologies, such as diesel particulate filters, catalyzed particulate filters, diesel oxidation catalysts and selective catalytic reduction. Engine oil marketers must adapt their formulations to contain less sulphated ash, phosphorus and sulphur (SAPS) to accommodate those technologies.
The transition to Euro 6 standards is expected to be smoothly implemented, based on previous experiences with Euro 3-5. South Korea is one of the leading nations in terms of engine oil and fuel quality, and oil marketers have already made preparations for the necessary technology to accompany the changeover. One noteworthy challenge here is that South Korea employs Euro standards for emissions from diesel-powered vehicles but follows U.S. guidelines for gasoline-powered vehicles.
HIGHER BIODIESEL BLENDS?
Over the past decade, the Korean government has implemented measures to tighten fuel efficiency standards to accelerate the development of hybrid or clean energy cars, such as electric and fuel cell vehicles. These initiatives were also part of a wider push to contribute to the government’s aim to cut greenhouse gas emissions by 30% by 2020.
Biofuel was targeted as a key component of these plans, and in 2007 a programme to promote biofuel was first implemented. The initial targets have since been scaled back, and the legislation appears to have caused as many issues as it has solutions.
The country currently has a B2 biodiesel mandate in place with the law requiring that all diesel fuel sold in the country contain a minimum of 2% biodiesel. In 2013 the oil industry petitioned the government to keep the biodiesel blend at 2% rather than raise it to the proposed 3%, as this would increase production costs that would then have to be levied onto the consumer.
There is still a question mark over whether South Korea will raise the biodiesel level to 5%, but it seems unlikely in the near future due to refining economics and the potential issues raised by doing so. It appears that there are no particular issues in raising the biodiesel blend, as fuel quality would be maintained at the same level as today.
The higher blending mandate has been delayed previously, which the national biodiesel industry said hurts local producers. Oil refiners, on the other hand, are said to be suffering from reduced exports and weakened margins due to heavy investment in large-scale facility upgrades to keep pace with the government’s original plans.
This has led to supply exceeding demand, causing the closure of multiple South Korean biodiesel manufacturers and contributing to a low margin on diesel production across Asia, which now stands at the lowest rate since late 2010 at USD12.99 per barrel. During the first half of 2014, South Korean oil refiners produced 152 million barrels, up 3.7% on the previous year’s figures.
During this period, domestic diesel fuel consumption edged up 1.2% to 70.4 billion barrels, which is less than half of the total diesel fuel output. Clearly the industry has great opportunities for further growth, and Euro 6 can play an essential part in shaping the future of the fuels industry in South Korea. However, many challenges lie ahead, and the government, OEMs and oil marketers need to clearly define a path moving forward.
Although details on the future of biofuel regulation remain vague, South Korea is set for a major development in legislation in 2015 with the implementation of the Korean Registration, Evaluation, Authorisation and Restriction of Chemicals (K-REACH) legislation. REACH was first implemented by the European Union in 2007 to streamline and improve the previous legislative framework on chemicals.
REACH placed greater responsibility on the industry to develop information on and manage the risks that chemicals may pose to human health and the environment. Following the introduction of the second phase in May 2013, all substances manufactured or imported into the EU in the range of 100- 1,000 metric tonnes per annum must be registered with the European Chemicals Agency.
REACH has had a major impact over the past seven years and has inspired an increasing trend of regulatory activity across the globe. This legislation was introduced in Korea on 1 Jan. 2015 and mirrors many of the concepts set out by its European counterpart with a view to eventually overhaul the current Toxic Chemicals Control Act.
K-REACH requires manufacturers, importers and sellers to report information about substances to the South Korean Ministry of Environment. Foreign manufacturers and exporters will be required by law to appoint local representatives to carry out pre-registration and registration for KREACH on their behalf. Further details on future phases are expected in 2015.