SINGAPORE: Asia's uneven sprint to match the West's stringent fuel standards has roiled markets, tightened supplies and forced older refiners to gear up or bow out.

And, say experts, the race has years left to run.
By the end of 2007, countries that consume more than half of Asia's 24 million barrels per day (bpd) of oil demand will move to lower sulphur emission standards, a Reuters survey has found. By 2010, nearly all of Asia will have tightened specifications.

Looming changes in Indonesia and Vietnam, Asia's leading importers of gasoline and diesel, threaten to further strain clean fuel supplies after new specifications in India and the Philippines triggered a wave of imports.

Further down the line, refiners in China -- the world's second biggest consumer -- face the challenge of satisfying more stringent rules in 2010 at the same time as rapidly rising demand and increasing high-sulphur crude imports.

Unlike the West, Asia has no harmonised standard on limits for sulphur, a cause of acid rain and lung problems.

Nations are left to move forward at their own pace, causing sometimes sudden and irregular shifts in cleaner-fuel demand that can spike prices and re-route trading flows.

Multi-billion-dollar investments have also taxed budgets at a time when analysts say the world's refiners should be expanding capacity to meet soaring demand for transport fuels.

"The tightening of standards plus the tightening of refining capacity is going to drive margins and shift trade," said Peter Fusaro, chairman of Global-Change Associates. "The markets are going to get really tight this summer."

Still haunted by the anaemic margins and costly overcapacity of the 1990s, refiners are understandably reluctant to plough in the up to $30 billion analysts say is needed to meet higher environmental standards over the next decade.

China alone needs at least $3 billion worth of investment.

PLAYING CATCHUP

Asia -- which has the fastest rate of vehicle growth in the world -- has a proven track record in catching up with the West when it comes to consumer fuels.

Europe and the United States took 20 years to remove lead from gasoline; most of Asia did it in four.

Now, Asian governments are racing to institute European fuel quality standards at a breakneck pace.

In the next year alone, four Asian countries that consume 8.2 million bpd will reduce their sulphur limit to 500 parts per million (ppm) -- or 0.05 percent -- the so-called EURO-II standard that came into force in Europe in 1996.

More than half of Asia is already at this standard.

By 2010, nations with more than 8 million bpd of demand plan to cap sulphur at 50ppm, a move Europe officially made this year.

"A lot has happened in the last three or four years," said Cornie Huizenga, head of secretariat for the Asian Development Bank's Clean-Air Initiative. "The majority of fuels in Asia are now covered by some kind of roadmap to reduce sulphur."

Refiners who spent early enough can expect bumper profits, while those who waited will be under pressure to catch up or face a dwindling market and lower returns.

Major oil product exporters such as Singapore, South Korea and Taiwan, whose refiners are set to leapfrog mid-tier European standards to meet a diesel sulphur limit of 50ppm by 2007, will gain as the region's supply tightens, analysts say.

Japanese refiners produce the region's cleanest gasoline and have moved faster than government regulation.

But faced with high investment costs and a rapidly shifting landscape, some refiners have opted simply to shut older plants, exacerbating the current crunch in product supply.

Exxon Mobil Corp. mothballed its Port Stanvac refinery in Australia due to poor profits, turning the country into a net importer of petrol. Analysts say new specifications from 2009 could keep the plant off the market for good.

DEVELOPING NATIONS HIT

The changes are taking a heavy toll on Asia's developing nations, which for years have been a dumping ground for lower-quality oil products produced elsewhere.

In the Philippines and India, where new standards took hold this year, refiners have been forced to import low-sulphur fuel after hesitating to invest in costly upgrades.

Analysts say Royal Dutch/Shell's 10-year-old refinery in the Philippines may struggle if it does not upgrade soon. Caltex mothballed a 49-year-old refinery there in 2003.

"Developing countries such as India lack the secondary units needed to produce sufficient quantities to meet the new specifications," said an analyst at FACTS Inc. in Singapore.

India, normally a top exporter of diesel and gasoline, bought a massive 80,000 bpd of cleaner diesel in March to meet new clean fuel laws in its 11 largest cities and may not be able to provide high-quality fuel nationwide until the end of this year.

Diesel imports could stay as high as 45,000 bpd through June due to refinery upgrade delays, an Indian refinery source said.

And in Thailand, Bangchak Petroleum PCL is raising funds for a $220-million plant to make cleaner fuels and boost profits by 2007 amid worries it would be left behind as the government aims for 50-ppm fuels by 2010.

China has taken a measured approach, instituting a nationwide 500-ppm limit for both gasoline and diesel from July that refiners say they are able to meet. Beijing has committed to improving air quality ahead of the 2008 Olympic Games.

The next push to make even cleaner fuel by 2010 may be more difficult, however, as Chinese refiners face the fastest demand growth of any major consumer.

(Additional reporting by Nopporn Wong-Anan in Bangkok, Joanne Collins in Melbourne, Dolly Aglay in Manila and Park Sung-woo in Seoul)

Source: Planet Ark