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What drives China? Soon, cleaner fuel

Still, the world's second largest oil consumer is taking a cautious approach to introducing tougher diesel and gasoline specifications.

BEIJING--Lorry driver Zhang Jianwei isn't worried about cleaner fuel requirements that come into force in China next year, raising the price of motor fuels--he will just keep buying cheaper, dirtier diesel at smaller stations.

Zhang's example underscores the cautious approach the world's second largest oil consumer is taking to introducing tougher diesel and gasoline specifications, and shows why there will be little initial impact on China's fuel trade.

Fueling up at the gas pump

Motorists across China will switch to 150 parts-per-million (ppm) sulphur gasoline from January 1, 2010, from 500 ppm, and a lower content of benzene, a carcinogen, three years after the specifications were first announced.

The changes, a hard sell to motorists already facing record pump prices, won't bring China's fuel standards into line with even stricter Western market benchmarks, tempering the risk of Asia's leading gasoline seller flooding export markets with still more fuel.

"It will not allow them to break into advanced markets yet, but I don't think they aimed for that anyway," said Al Troner, managing director of AP Energy Consulting, and an expert on Asian fuel specifications.

But its start to move Chinese oil firms beyond their traditional role of being self-sufficient toward being more like aggressive exporters in South Korea and more recently, India. For example, 150-ppm gasoline will probably help boost Chinese sales into Australia, which uses a similar grade.

Also from January 1, China is launching automotive diesel with a sulphur content of 350 ppm, to differentiate from the 2,000-ppm general diesel used by its vast rural and industrial sectors. However an 18-month "transitional" period is allowed before the specification becomes mandatory.

One significant change in diesel quality is the cap on polyaromatics, a main contributor to urban smog. That requires refiners to use costly hydrocracking and hydrotreating units, instead of traditional catalytic crackers.

Oil duopoly Sinopec and PetroChina have in the past decade or so been spending heavily on units that strip sulphur and crack heavy residues into motor fuels, as China imports a growing share of sour and heavy crude oil.

The new specs mean the cost of fuel is set to rise further, a challenge for refiners like Sinopec to pass on to Chinese drivers already paying record pump prices.

"It's Sinopec's chance to showcase our strength in technology. But as it costs to build and run hydrocrackers to meet the specs, we will expect a premium price for premium quality," Sinopec's spokesman, Huang Wensheng, said.

The diesel factor
The formal introduction of automotive diesel specs highlights the oil industry's focus on meeting the rapid growth in road freight traffic in an economy that is heavy on manufacturing and as the country swiftly expands its highway networks.

China's demand for automotive diesel overtook gasoline in absolute volumes a couple of years ago, and is poised for strong growth in the coming years, analysts said.

Automotive diesel now makes up more than half of China's total diesel use of some 3 million barrels per day, against a third previously.

"The improvement in auto diesel standards in the past has been slowed in part because of China's massive use of rural diesel by tractors. Auto diesel is growing rapidly," said Lu Changjiang, Sinopec's fuel quality and efficiency chief.

China's environmental watchdog wants to fast track the more stringent standards, and Sinopec says it has the technical ability to produce Euro V motor fuels with sulphur content of 10 ppm and steeper cuts in polyaromatics.

"We're aiming to catch up with European standards (V) by around 2015/2016," said Tang Dagang, head of vehicle emissions control of the Ministry of Environmental Protection, adding that mationwide specifications for 50-ppm gasoline, already in use in Beijing and Shanghai, are expected to be announced soon.

For the country's swelling fleet of private car owners--car sales in China recently passed those in America to make it the world's top market--the mandatory shift to cleaner petrol of 150 ppm will put China in the league of clean fuel markets like Japan and Australia.

And the cut to 1 percent from 2.5 percent of benzene places China at the top of the moderately high quality ranks, said AP Energy's Troner.

But both the government and oil firms will need to gauge if users like lorry driver Zhang are going to pay up, after a doubling of prices in the past five years and a dwindling of China's exports, which has heightened competition among truckers.

To cut the bills for his 1,000-liter tank, Zhang says he may stop more often at gas stations near his mountainous hometown in Fujian, where cheaper and lower-grade fuels are popular, before hitting the 4-lane interprovincial highways dotted by petrol outlets run by state giants Sinopec and PetroChina.

"If it can save me 300 to 400 yuan ($45 to $60) per trip, I will not hesitate to refuel at the smaller stations," said Zhang.