1. Reducing Diesel Sulfur: An LP Model Analysis of Adopting EURO Standards in China Nancy Yamaguchi Trans-Energy Research Associates, Inc. Seattle, Washington Better Air Quality 2002, Hong Kong 16-18 December 2002

2. Objective zSummarize diesel sulfur reduction findings from larger Energy Foundation study on gasoline and diesel quality in China zAssess impacts of diesel sulfur reductions yMethodology yData and Assumptions yScenarios zResults of the Scenarios 2005, 2008, 2010 zCosts of Reducing Diesel Sulfur

3. Background to Project zRecognition that Chinese oil demand is growing, and the economy is modernizing zRecognition that better fuel quality is key to reducing emissions, and new vehicles will require cleaner burning fuels zRecognition that reducing diesel sulfur levels also reduces emissions of PM10 and NO x (US move to 15-ppm mid-2006 est. to cut PM 90% and NO x 95% from 2001 levels) zRecognition that China is becoming increasingly reliant on foreign oil imports, including higher-sulfur Mideast crudes zNeed for a rigorous, quantitative analysis of new fuel standards zNeed to quantify capital investment costs required to reduce diesel sulfur and apportion to costs/gallon of fuel

4. Study Definition zDetermine the technical impact on China’s refineries of achieving Euro II-V product specifications, 2005, 2008, 2010 yQuantify equipment needs/technology types to achieve EURO standards in China yQuantify cost of capital investment and apportion to fuel on per-gallon basis

5. Methodology zCustom-Built Trans-Energy Linear Programming Model (LP) simulating: yCrude purchase, transport yRefinery processing yProduct blending to specification yProduct sales and trade yRefinery capital expansion by technology type yLP finds optimal solutions for scenarios

6. Data Used in the Study z1999/2000 actual data as base year for model calibration zTrans-Energy crude assays and technology descriptions zSinopec demand assessment to 2010 zTrans-Energy forecast of international oil prices and transport costs zDomestic costs for capital equipment, amortized at 10% over 10 years

7. Scenarios in the Study

8. Key Diesel-related Sulfur Removal Technologies in the Model zRefinery sulfur removal typically uses H 2 +catalyst to remove unwanted elements (sulfur, nitrogen, oxygen, trace metals) and stabilize fuel zHDS=Hydrodesulfurization of middle distillates zHDF=Hydrofining feeds for cracking units zRDS=Residual oil desulfurization, for all conversion units and finished fuel oil blend. zHDC=Hydrocracking, converts VGO and resid to light and middle distillates zHDA=Hydrodearomatization zH2=Hydrogen

9. Sulfur Maxima by Fuel Type

10. Results of the Scenarios zScenarios varied by spec (combinations of EURO 2, 3, 4 and 5) zCapital investments were quantified by unit type and capacity for each scenario zCapital costs per Sinopec and Trans-Energy, amortized over 10 years at 10% interest zCapital costs were allocated to gasoline and diesel according to technology type

11. Chinese Sulfur-Related Refinery Investment by Scenario, Model Results

12. Summary Cost Results z2005 scenario costs ranged $1.09-1.25 mn/day (0.8- 1.1 c/g [1.7-2.3 fen/l]) gasoline, 1.9-2.1 c/g [4.0-4.4 fen/l] diesel) z2008 cost $1.83 mn/day (1.4 c/g [3 fen/l] gasoline, 2.7 c/g [5.7 fen/l] diesel) z2010 costs varied little, in $2.2 mn/day vicinity (1.52- 1.53 c/g [3.2 fen/l] gasoline, 3.16-3.17 c/g [6.7 fen/l] diesel) until EURO5, $2.4 mn/day (3.66 c/g [7.7 fen/l]) zDiesel-related costs were 1.8-2.4 times as high as gasoline costs, though ADO demand is slightly less than gasoline demand

13. Gasoline and Diesel Reformulation Costs by Scenario, Model Results

14. Conclusion: Scenarios zIn general, mixed scenarios with stricter standards in major urban areas only were somewhat cheaper to achieve than a single standard nationwide. z2005 results indicated that Euro 3/4 standards in urban areas only (35% of demand) was $50 million a year cheaper than Euro 3 nationwide. zBy 2010, however, the need for new capacity to achieve much higher product quality and to supply the additional demand reduces these differences.

15. Conclusion: Refineries zResults indicate optimal solution may be to follow the “US Gulf Coast”model of investing in significant upgrading and hydrotreating capacity zThis will allow use of cheaper, lower-quality crudes, expected to be abundant in the market. zRaising product quality while using higher-sulfur crudes will require significant investment in pretreatment units, either HDF (2005 results,) or RDS (2008-2010 results.) zPost-treatment still required

16. Conclusion: Costs zCosts ranged from 2.8 to 3.2 c/g (5.9-6.8 fen/l) inclusive in 2005, 4.04 c/g (8.5 fen/l) in 2008, 4.7 c/g (9.9 fen/l) in 2010 except for EURO5 5.2 c/g (10.9 fen/l.) zDiesel costs were roughly twice gasoline costs. zCosts are well within acceptable parameters by US and European standards, but we note that Chinese per- capita GDP is lower than in OECD countries. zAbility to pay is a policy issue. zBenefits may include emissions, fleet maintenance, fuel harmonization, ability to export