Fuel For Thought
January 2014

Malaysia targets to lower total subsidy spend by 15% in 2014

▪ Malaysia targets to lower total subsidy spend by 15% in 2014

The Malaysian government's subsidy expenditure is estimated to drop to RM39.4 billion (USD12.1 billion) in 2014, about 15% lower than the RM46.7 billion (USD14.3 billion) spent in 2013.

According to the Malaysian government's Economic Report 2013/2014, subsidies comprised the second largest component of operating expenditure (21.6%) and are expected to remain high despite the resumption of fuel and sugar subsidy rationalization.

Apart from various subsidies, incentives amounted to RM874 million (USD268.7 million) and social assistance programs RM10.7 billion (USD3.29 billion).

The allocation for fuel subsidies, including cash transfers, will be higher at RM28.9 billion (USD8.9 billion) in 2013 (versus RM27.9 billion or USD 8.5 billion in 2012) as the prices of refined petroleum and diesel products have remained firm, averaging USD122 per barrel in the first nine months of the year.

Since the petroleum and diesel subsidy was reduced by 20 sen (USD0.06) from Sept. 3, RON 95 has retailed at RM2.10 (USD0.65) per liter and diesel fuel at RM2 (USD0.61) per liter. The estimated savings from rationalizing fuel subsidy is about RM1.1 billion (USD340 million).

The price of RON 97, the premium-grade petrol that is on a managed float, was revised upwards by 15 sen (USD0.05), from RM2.70 to RM2.85 (USD0.83-0.88) per liter effective Sept. 5, reflecting price movements in the international market.

"Enforcement has been intensified to monitor food prices and curb the rampant abuse of fuel subsidies as the prices of RON95 and diesel are still the cheapest in the region," the report said.

"Subsidies that will elevate the financial burden of the rakyat include allocations to stabilize the price of cooking oil, toll compensation, flour, provision of comprehensive rural rail and air services as well as a rebate for households consuming electricity below RM20 (USD6.15) per month," it adds.

(October 28, 2013)

▪ European oil refiners compete with U.S., Asian refiners to supply African fuel market

European oil refiners are faced with an uphill battle with U.S. and Asian competitors to supply Africa's rapidly growing appetite for fuel products as transatlantic shipping routes are redrawn.

Demand for oil products in Africa, including north of the continent, is expected to grow by more than 20% in the next seven years to 4.4 million barrels per day (bpd), according to Vienna-based consultancy JBC Energy.

Nigeria, Senegal, Togo, Kenya and South Africa are expected to see the fastest demand growth in sub-Saharan Africa, analysts say, while the continent's refining capacity is far from matching this demand and will only marginally grow by 2020 from current crude processing volumes of 1.925 million bpd.

"Most countries in the African continent prefer to import finished products rather than produce in small outdated plants. It's a question of technology and it turns out cheaper to import," said David Wech, JBC Energy managing director.

Traders including Puma Energy, the African subsidiary of Trafigura, Vitol, Gunvor and Mercuria, have invested heavily in expanding their African operations in recent years.

"We see double digit growth in most African countries, in line with the expansion of Africa's middle class," an official in a large European trading house operating in Africa said.

The continent has been a longstanding outlet for European gasoline and gasoil, with exports more than doubling over the past five years to around 600,000 bpd in 2013.

▪ Parikh panel recommends steep hike in diesel prices

An expert panel headed by Kirit Parikh, former Planning Commission member, has recommended that the Indian government raise diesel fuel prices by INR5 (USD0.08) per liter, kerosene prices by INR4 (USD0.06) per liter and LPG prices by INR250 (USD4.01) per cylinder.

The panel said these price hikes would reduce government subsidy by INR72,000 crore (USD11.5 billion).

The panel further recommended that households be limited to six LPG cylinders per year, instead of the current quota of nine.

Once the diesel price hike is implemented, oil companies should be given a fixed subsidy of only INR6 per liter on diesel fuel. It said any difference between the cost of production and the retail price should be passed on to consumers. It also recommended complete deregulation of diesel fuel prices within one year.

In its draft report, the panel said that until diesel pricing is market determined, the existing pricing mechanism based on trade parity should continue. The refinery-gate price of diesel fuel since 2006 has been based on trade parity pricing — 80% of import parity price and 20% of export parity price. Import parity price represents what importers would pay in case the product is imported, while export parity price is what oil companies would get when they export their products.

Public sector oil marketing companies have said that export parity pricing was not viable for their refineries. Private refiners such as Essar and Reliance have been seeking market-determined pricing for all fuels and providing consumers a choice by promoting competition.

It said that ONGC and Oil India do not have unlimited capacity to share the fuel subsidy burden; their contributions should be linked with crude oil prices starting with the next fiscal year, while Gail India's contribution should not exceed the gross profit made from the sale of LPG.

Though it is highly unlikely that the Indian government will accept all of the panel's proposals, the Parikh panel's recommendations will reduce fuel subsidy by INR30,250 crore (USD4.8 billion) during the reminder period of the current fiscal year, from a projected INR138,435 crore (USD22.2 billion).

(October 29, 2013)

▪ NextFuels to locate pilot plant in Malaysia

U.S. biofuels producer NextFuels said it will locate a pilot demonstration plant for its bio-liquefaction technology somewhere in Malaysia.

After selecting a suitable location, it will ship the pilot facility, work on which has started in the Netherlands, to Southeast Asia in 2014. The company will operate the demonstration plant with strategic partners.

Upon completion of the demonstration run, NextFuels will also start a commercial project in Southeast Asia. It expects to launch construction of commercial-scale plants within two to three years.

According to Milton Leong, vice president of sales for Southeast Asia, its bio-liquefaction technology allows NextFuels to commercially produce bio-based petroleum at USD75-85 a barrel out of wet biomass.

"One can distill 960 barrels of GreenCrude per day (bpd) from the biomass churned out from a typical 60-tonne palm oil mill," he said.

Instead of operating in a dry environment, Nextfuels' bio-liquefaction process heats the biomass in a liquid-water slurry at high temperatures and pressure. The bio-liquefaction process expels most of the oxygen from the biomass. The final product is GreenCrude, a renewable fuel that has similar molecular structure to that of petroleum. NextFuels says there is a cost advantage in their process because it does not need to dry the biomass before processing.

NextFuels will manage its business in Southeast Asia from a newly established office in Kuala Lumpur.

(October 9, 2013)

▪ Indonesian gasoline demand rises, gives new use for surplus European gasoline

Indonesia's growing gasoline demand could help open a new trade route for the fuel in the next five years, as cargo starts heading to Asia on a regular basis from a European market facing a fuel glut.

Asia has plenty of gasoline suppliers now. Taiwan, China, South Korea, Singapore and India provide more than the region can absorb from key exporters such as Reliance Industries, SK Energy and Formosa Petrochemical Corp.

At the same time, Indonesia is set to become the world's biggest importer of gasoline by 2018, overtaking the United States and Mexico combined, offering refiners a market as Europe remains well-supplied and as the United States cuts imports due to a domestic shale oil boom.

"Even after factoring in refinery closures, Europe will still need to manage their surplus," Sushant Gupta of research and consulting firm Wood Mackenzie said.

Refinery closures in Japan and Australia due to poor local margins will decrease Asian supply, at the same time as gasoline demand in Asia is expected to grow in the 3-4% range annually between 2012 and 2015, said Victor Shum of energy information group IHS.

"Overall, we forecast the Asian gasoline surplus to vanish by around 2017, 2018, after which the region is expected to turn into a net importer," said David Wech of JBC Energy. That will keep Reliance and South Korean refiners running their units at high rates, he said.

China, the world's second-largest gasoline consumer after the United States, may also have to scale back on its exports. The country will add 3 million barrels per day (bpd) of new capacity between 2013 and 2015 to meet rising demand.

Between January and August 2013, China shipped nearly 53% of its gasoline exports of 3.3 million tons (approximately 28 million barrels) to Indonesia, Chinese official data showed. That's about 17% of Indonesia's average monthly imports of around 11 million barrels.

Indonesia's gasoline deficit is likely to grow to 420,000 bpd in 2018, compared with an estimated 360,000 bpd this year, even if state-owned oil company PT Pertamina adds a new 60,000 bpd residue fluid catalytic cracker (RFCC) in 2015 in Cilacap refinery, according to Wood Mackenzie.

Europe, which will have between 400,000 and 500,000 bpd of excess gasoline for the next five year, seems the most logical supplier for Asia, while U.S. gasoline imports continue to fall.

U.S. gasoline import demand fell to 650,000 bpd of gasoline in 2012, about half of the 2008 levels, although the descent is now likely to slow, so European refiners will need to find alternative markets.

(October 7, 2013)

▪ India fails to institute subsidy cuts to lower fuel demand

Failing to introduce a comprehensive energy subsidy cut program, India's oil minister instead called on his countrymen to embrace carpooling, public transport and cycling as well as staggered working hours in a bid to curb fuel consumption in the country.

The struggling Asian economy — the world's fourth-largest user of energy — is battling against a weak rupee that has increased the price of oil products while economic growth has halved to 4.4%, down from the 8-9% during the boom years.

Delhi is also seeking to rein in a record current account deficit that is in part fueled by energy imports.

Minister of Petroleum and Gas M. Veerappa Moily said he hoped to save USD5 billion from fuel conservation measures while he failed to entertain notions such as raising diesel and other fuel prices before the election slated for May 2014.

"As of now there is no proposal to raise prices," Moily said, referring to diesel fuel subsidy changes.

India, where energy consumption per person is among the lowest in the world, has little room to cut fuel use as it tries to power exports and agriculture.

Diesel accounts for more than 40% of fuel demand, or around 1.4 million barrels per day, the bulk of which is used by trucks, farmers and industry.

The USD5 billion savings is part of a campaign outlined earlier in September to save up to USD25 billion in 2013, although the weak Indian currency and rising global oil prices already mean that rupee price hikes for diesel have failed to match the dollar price gains for oil.

The government realistically aims to save about USD12-15 billion, a source familiar with the plans said, after Moily's press conference.

Despite the energy conservation measures, Kumar said he expected Indian diesel fuel consumption growth for the 2013-14 fiscal year to be "somewhere between 3.5 and 4%" from a year earlier.

▪ 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 2018, 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.

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.

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 in 2013, 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.

▪ Bangchak Petroleum shares concerns with producing B7

Thailand's oil firms and automakers are ready for the 2014 switch to B7, from the current B5.

Yodphot Wongrukmit, senior executive vice president for marketing at Bangchak Petroleum, said that the company's refinery, oil depot and service stations were ready to switch to provide B7, beginning January 1, 2014.

However, Yodphot said he was concerned that there might not be an adequate supply of palm oil to be mixed with diesel fuel to produce the B7 blend.

In the past, shortages of palm oil have driven up the market price, thus pushing up the cost of biodiesel production. Yodphot felt the government should ensure that the parties involved can provide a sufficient supply of palm oil, the feedstock being used to produce biodiesel, for both consumers and the energy sector.

"Personally I think the energy ministry should introduce the biodiesel standard step-by-step. For example, next year it should first upgrade to B6. If there is no problem with palm oil shortages after six months, it can then upgrade to B7," he said.

He believes this method should also be applied to the B10 upgrade, which would give automakers and palm oil producers time to make adjustments.

Surapong Paisitpatanapong, spokesman for the Federation of Thailand Industries' auto-industry club, said that currently diesel-fueled vehicles could accommodate the B7 diesel, but if there were an upgrade to B10 in 2019, the government would first need to negotiate with the parties involved, as automakers would have to invest in upgrading their engine designs.

To date, no country has yet adopted B10.

▪ ICCT report calls for strengthening of fuel quality and emissions standards in developing markets

The impact of poor air quality on human health could be dramatically reduced by extending the vehicle emissions and fuel-quality standards already in force in the world's biggest vehicle markets to all other markets, according to a new report from the International Council on Clean Transportation (ICCT).

Exposure to outdoor air pollution is a leading cause of premature mortality and was associated with 3.2 million early deaths globally in 2010, according to a comprehensive report. Vehicles are a major contributor to outdoor air pollution, especially in urban areas where the world's population is also projected to grow most rapidly.

The ICCT says that extending stringent fuel quality and emissions standards could cut by 75% the number of premature deaths caused annually by fine particle emissions in 2030.

The report entitled "The impact of vehicle and fuel standards on premature mortality and emissions," was commissioned by the ICCT to provide a "global policy roadmap".

It highlights the need for regulators to consider both vehicle emissions as well as the quality of the fuel being used in those vehicles. It estimates global pollution expected to arise from vehicles to 2030 and the premature deaths associated with exposure to direct emissions of fine particles from vehicles in urban areas.

Without new actions to limit vehicle emissions, the health impacts of road transport will increase significantly from present-day levels in many countries around the world. However, the imposition of stringent standards could force the introduction of technologies that will cut emissions of local air pollutants by more than 99% compared with uncontrolled vehicles.

Washington, D.C.-based ICCT is an independent non-profit organization founded to provide unbiased research and technical and scientific analysis to environmental regulators. Principal funding for ICCT comes from the ClimateWorks Foundation, the William and Flora Hewlett Foundation, the Energy Foundation and the David and Lucile Packard Foundation.

(November 4, 2013)

▪ China to spend RMB1.75 trillion to fight air pollution by 2017

China will spend around RMB1.75 trillion (USD286 billion) on its anti-air pollution drive by 2017, Wang Jinnan, vice president of the Chinese Academy for Environmental Planning under the Ministry of Environmental Protection (MEP), said.

The investment will increase China's GDP by around RMB2 trillion (USD327 billion) and create more than 2 million non-agricultural jobs, said Wang.

"Around RMB640.8 billion (USD104 billion), or 36.7% of the investment, will be spent in tackling pollution from industrial enterprises. RMB493 billion (USD80 billion), or 28.2% of the investment, will be used to replace traditional energy with cleaner energy. And another RMB21 billion (USD3 billion) will be spent in reducing pollution caused by vehicles, accounting for 12% of the total investment," said Wang.

Earlier this year, the Chinese government announced sweeping measures to reduce air pollution, aiming to achieve significant improvement in air quality in key regions by 2017. As a major measure to fight air pollution, coal use will be cut substantially, while the use of natural gas will greatly increase.

Across China, tens of thousands of small coal-fired boilers will be shut down and construction of new coal boilers will be strictly restricted, replaced by boilers fired by natural gas and renewable energy. According to the plan, coal consumption in the country's total energy mix will fall below 65% in 2017.

(December 19, 2013)

▪ ASEAN must phase out fuel subsidies: WEF report


The World Economic Forum and Accenture recently issued the Global Energy Architecture Performance Index Report 2014, which looks at energy systems across countries and the obstacles and opportunities towards a future of sustainable energy.

The 104-page document, called "The Global Energy Architecture Performance Index Report 2014", assesses the economic growth, environmental sustainability and energy security of 124 countries to determine effective energy systems for a sustainable future.

Thailand came in highest among the ASEAN countries at the 55th landing spot, with Singapore, Indonesia and the Philippines next at 62 to 64, respectively.

These Southeast Asian countries were not able to grab any of the higher ranks since they mainly relied on fossil fuels for most of their energy systems. In fact, Singapore, Brunei Darussalam and Malaysia acquire less than 10% of their total primary energy supply from renewable energy sources, including nuclear, said the report. This energy mix will be stretched to its limits as demand for energy continues to rise in the region.

According to the report, the ASEAN integration by 2015 is seen as a big factor that will address this challenge. Part of the integration includes a plan for an ASEAN Power Grid and the development of the Trans-ASEAN Gas Pipeline, which will be a boost to the energy security in the region, the report highlighted.

However, to truly achieve a balanced energy system, the solution lies in eradicating fossil fuel dependence, such as the subsidies in Brunei and Malaysia and the use of solid fuels for cooking by over half of the population in Cambodia, Indonesia, the Philippines and Vietnam, noted the Index.

It explained that subsidies result in reduced incentives for renewable energy investments and other energy-efficient technologies. It also leads to the inefficient use of energy.

In 2012, subsidies in the ASEAN were about USD51 billion, based on the estimates of the International Energy Agency (IEA). As such, the phase-out of fossil fuels is getting more traction.

"In June 2013, Indonesia continued its subsidy reform process by increasing gasoline and diesel prices," the report cited.

Brunei, Malaysia, Myanmar, Thailand and Vietnam are also enforcing policies that will better align domestic fuel and energy prices to the global markets.

Still, aside from lessening fossil fuel reliance, another challenge the Energy Architecture report specifically paid attention to is increased vehicle ownership, as part of the rapid urbanization trend happening in the region.

This necessitates even higher energy demand, stressed the report, straining the already problematic and poor energy supply infrastructure. It also contributes to city congestion and urban pollution, due to inefficient combustion of fossil fuels.

Technology and policy solutions are needed to mitigate these challenges, it said. It outlined four such solutions: smart grids, maximizing economies of scale, smart traffic control and collecting big data.

In maximizing economies of scale, the report noted how "urban environments can offer energy-saving opportunities enabled by the higher population density and economies of scale". One example is to enhance public transport to replace energy-wasteful personal vehicles.

And with smart traffic control, data from in-vehicle telematics or road sensors can assist city government agencies to understand and manage the traffic flow in real time, enabling ways to reduce emissions and fuel consumption by redirecting traffic through less congested roads.

These solutions allow urban centers to better their environmental and energy performance "by adopting efficiency measures and emissions standards and by leveraging opportunities for economies of scale in sectors like public transportation," the report said.

The right policies will also help especially with phasing out fossil fuel subsidies, it added.

Arthur Hanna, managing director, energy industry, of Accenture, stressed, however, that "there is no single way forward".

"Each country must work with its own resources and constraints, making difficult choices and trade-offs."

For example, both China and India, considered under the BRICS group of countries (Brazil, Russia, India, China and South Africa), landed even lower in the list.

"Resource wealth or economic development alone do not guarantee high performance on the Index," said Roberto Bocca, WEF senior director, head of energy industries.

"For an effective energy system, countries need to focus on all three sides of the energy triangle – environmental sustainability, security of supply and affordability," he said.

The countries that were able to manage this balance placed tops on the list, such as Norway, which came in first, followed by New Zealand – the only country from the Asia Pacific in the top 10 – and France. Sweden came in fourth, along with Switzerland, Denmark, Colombia, Spain, Costa Rica and Latvia rounding out the highest performers.

These ten countries depend on low-carbon energy sources for 41% of their energy supply, compared to the global average of 28%.

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