In this issue of In Focus, we look at the key features affecting the clean fuels industry this year. This, taking into consideration current events, such as the Russian war in Ukraine which has dragged into a second year. Then, there is the inflationary and recessionary threats over the global energy markets which was recently rekindled by the banking crisis in the USA and Europe.

Crude oil and fuel supply shortages hit 2022, sending energy prices to multi-year highs and helping oil companies post record profits. Embargoes were imposed on Russian deliveries in Europe, which has now also seriously shifted international trade flows and delivery availability. Governments in some regions, particularly so in China and Europe, continue to focus on developing alternative energy sources to meet sustainability and decarbonisation targets, but also to reduce supply dependency on crude oil and conventional fuels.

Below we highlight some specific regions and countries and their developments and plans for this year that are impacting the clean fuels markets globally.

China: The market share of NEVs in total vehicle sales exceeded the 30% mark in 2022

As the country only recently emerged from stringent COVID19 measures, car sales and fuel consumption were down in 2022, eventually on a recovery path now. Domestic gasoline demand in 2022 dropped by around 15% year-on-year and sales and registration totals for new, conventional vehicles also declined by approx. 8.4%. Automobile sales in January 2023 declined further, which was however mainly due to the expiration of tax credits and other subsidy plans.  

However, NEV passenger car sales totalled 6.5m units in 2022, up by 94%, while commercial NEVs increased by 78.9% to 338,000 units. Compared to China’s total vehicle sales of 26.8m units in 2022, the NEV market share exceeded 27%, up from around 13.5% in 2021. The NEV market share climbed steadily during the year, making up almost 32% in December 2022, based on total vehicle sales for the month of 2.556m units and NEV sales at 814,000 units.  

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While China expects a steep recovery of around 10% in domestic refined fuel demand this year, the growth will predominantly come from the jet fuel segment, while year-round diesel and gasoline sales are set for a marginal increase only. According to China’s Automobile Association, sales of NEVs are expected to reach 9m units in 2023, making this a market share of 32.6% in the overall market, up from an average share of 27.6% in 2022. Other analysts indicate a market share of up to 35%.

Going back a little further, China's growth has been in the making for years, with the government offering generous subsidies for electric cars, in addition to incentives and policies encouraging production. Since 2016, Chinese consumers have bought more electric vehicles than the rest of the world combined, except during the 2020 surge in the COVID pandemic.

Gasoline sales are forecast to peak in 2025 and gradually decline from there. Referring to previous points, however, long-term growth for NEVs will depend primarily on Beijing's tax credit and subsidy support, as buying interest in major cities and municipalities may approach saturation levels, while financial aid programmes in more rural areas have been less generous to date.

For gasoline itself, China has now started to roll out its National 6B Gasoline Standard (GB-VIB), and pump prices for the new, cleaner petrol are the same as it was for National 6A Standard (GB-VIA). The step from GB-VIA to GB-VIB will additionally reduce olefins levels from 18% to 15% for all fuel grades. Till date, only 98RON gasoline required to have max. 15% olefins contained. With this change, gasoline specification standards in China remain the leading reference for fuel standards globally.  

Japan: New biofuel standards being drafted - ETBE expected to maintain 4-5% blending ratio

Japan is currently reviewing the country’s biofuel standards, which expired end March this year. The government issued updated, proposed biofuel standards for 2023-2027 term that address both ethanol and sustainable aviation fuel (SAF). The new standards are scheduled to be enacted on 1 April 2023.

The Ministry of Economy Trade and Industry (METI) held four expert committee meetings since September 2022, specifically focused on updating the country’s biofuel standards. An interim proposal was released in late December 2022 and the final draft was ratified after an expert committee meeting on 1 February 2023 for public commenting.

The draft highlights that

Indonesia: New gasoline standards announced

After years of deliberation, Indonesia has finally issued a decree simplifying the country's gasoline standards, which came into effect at the end of 2022. The new policy from the Department of Energy and Natural Resources reduces the number of marketable petrol qualities available to two grades, RON91 and RON95, which virtually eliminates the low octane RON88 fuel grade.

While the government was under internal and international pressure to improve fuel standards, the specification details implemented fell short of the intended Euro IV-like standard, a minimum quality desired by clean fuel advocates to protect a country's environment and population. Indonesia sees considerable growth potential for conventional fuels over a longer period of time.

More specifically, specification limits were set for a range of parameters, among those

-        Allowed Benzene content of up to 5%

-        Permissible aromatics at 40%, extended to 50% for supply from local refineries by the end of 2024

-        No specified limit on olefins, only to be indicated as a reporting reference point

-        Sulphur limits of up to 500ppm, eventually reduced to 50ppm in stages for RON 91 gasoline until 2028 and for RON95 quality in 2024.

While this must be viewed as a missed opportunity to significantly improve fuel quality with a speedier timeline, the fact that RON88 is no longer offered as a marketable grade should be viewed as progress. Aside from the above, it also remains to be seen how accurately actual fuel qualities will be measured and how seriously circumventions will be pursued.

After the country was plagued by prolonged COVID movement restrictions in 2020 and 2021, fuel demand rebounded in 2022, only to fall sharply again in the fourth quarter as the government was forced to scrap available fuel subsidies that had previously caused severe losses in the national budget. Consumer prices shot up by 30%, in line with international cost pressures. In 2023, consumption has recovered and most market insiders expect Indonesia's gasoline demand to grow again in 2023.

With regard to Indonesia and its challenges to move towards cleaner fuel quality, a reference should be made to other Asian countries that have already advanced to Euro V and above levels. Neighbouring Malaysia would be a good case study as it faced similar issues between consumer price increases and the need to invest in better fuel quality. Today, Malaysia has progressed to Euro V faster than anticipated.

India: High emission standards – low octane ratings, opportunities for clean fuels

When India government realized that air pollution was spinning out of control, affecting human life and the environment dramatically, gasoline emission standards were one of the areas the government targeted for improvements. As initially announced in 2016, India implemented its Bharat 6 gasoline specification and emission standards in April 2020, which were finally fully rolled-out in 2022 after the peak of the COVID-19 pandemic. In fact, the new Euro VI-like standards leapfrogged previously planned Bharat V standards, directly onto Bharat VI.

While this step was welcomed by consumers and environmentalists, one issue with Indian gasoline remains till date, which is that octane ratings stay well below international standards. The main fuel grade is RON91, representing a market share of >90%. Clean fuel proponents are pushing for higher octane ratings in order to achieve intended air pollution improvement and fuel efficiency targets for 2030.

Fuel consumption in India is climbing higher again after the pandemic, and gasoline in particular is producing above-average growth rates. Gasoline demand in 2021 recovered year-on-year by more than 10%, totalling 27.5m MT and growing to 30.6m MT in 2022. It is now set to reach 33.0m MT this year, a new-record high. For 2030, analysts predict that gasoline demand will reach 44.0m MT.

Among the options considered to achieve above mentioned emission reduction and fuel efficiency targets as well as renewable, alternative energy developments are biofuels. In June 2021 the Indian government announced a change to the National Biofuel Policy Act, which targets to bring the roll-out of E20 gasoline forward, from 2030 to 2025. Till date, the existing requirement is to blend 10% bio-Ethanol into gasoline, with actual nationwide implementation results estimated at around 8%. In fact, oil companies and fuel retailers are encouraged to start selling the new E20 fuel type as from April 2023.

While the country is short of domestic biofuel supply, the clean fuels industry together with government-advisory bodies in India proposing the idea of a coexistence between fuel-Ethanol and fuel ethers, particularly advanced fuel ethers, in the gasoline pool, following the positive leads, seen in Europe and some Asian countries. This also finds support from the local oil industry, which is already producing ethers, as this step would produce numerous benefits in terms of fuel quality and emission savings. Beyond this, the coexistence would also directly contribute to India’s intension to increase its energy security and import substitution goals.

Europe -  Compromise agreement on e-fuels and ICEs

Focus in the European climate change programme has shifted to electrofuels, or e-fuels. Shortly before the EU commission intended to submit a proposed law for final voting in early March, Germany declared last-minute opposition to a landmark European Union law to end sales of CO2-emitting cars in 2035, demanding that sales be allowed for new cars with internal combustion engines after that date if they run on e-fuels.

The EU rule would require all new cars sold from 2035 to have zero CO2 emissions, making it effectively impossible to sell new fossil fuel-powered cars. The law, which Germany, alongside a majority of EU countries and lawmakers, previously supported, would not ban internal combustion engines (ICEs). Germany and Italy are now seeking clearer assurances from the EU that sales of new ICE cars can continue beyond 2035, if they run on CO2-neutral fuels.

E-fuels are typically made by synthesizing captured CO2 emissions and hydrogen produced using renewable or CO2-free electricity. While the fuels release CO2 into the atmosphere when used in an engine, the idea is that those emissions are equal to the amount taken out of the atmosphere to produce the fuel, making it CO2-neutral overall.

E-fuels can be used in today's ICE vehicles and transported via existing fossil fuel logistics networks. Supporters say e-fuels offer a route to cut the CO2 emissions of our existing passenger car fleet, without replacing every vehicle with an electric one.

Germany’s veto ignited a heated discussion as it puts one of Europe's core climate change policies on hold, albeit EU countries and lawmakers had already agreed the law last year. Alongside Germany and Italy, countries including the Czech Republic and Poland have expressed concerns about the law, raising the possibility of enough support to block it.

The European Commission and the German government claim that they agreed on a compromise proposal to allow carmakers to register new cars in the EU that can run on climate neutral e-fuels only. That could be a first step towards allowing their sale after 2035. The draft proposal states that vehicles must use technology that would prevent the cars from starting if they used non-carbon-neutral fuels.

The International Council on Clean Transportation said it was doubtful technologies would be able to sense whether a vehicle is operating on pure e-fuels or a blend with fossil fuels, since e-fuels have very similar properties to the fossil fuels they are designed to replace. An EU official told Reuters any new proposal would be made only after countries approve the combustion engine phase-out. Germany's Transport Ministry said it was examining the draft proposal.

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