Market Segmentation Approach a ‘ Win Win’ proposal for The Oil Industry & Fuel Consumers Reliance Industries Ltd. New Delhi, Nov 20, 2006 N.S. Murthy, A. Dhar, R.V.Desai Petrofed - Workshop Auto Oil Policy – Way Forward

The Rationale  ‘Right Fuel’ for given end use application……No quality overkill.  Air quality & per capita use of oil..……….Not the same thru out.  Point source emission control...….Relatively easy to administer.  Adulteration – a deterrent….not unique to India...can be curbed. Market selective approach to supply ‘right fuel’ will result in highest benefit to Indian consumers. This approach has been followed by advanced countries too.

Facts & Paradoxes -1  India consumes ~ 40mill.mt HSD and ~ 8 mill. mt Gasoline per annum.  Indian Refineries are configured to maximize middle distillates.  Sulphur in Diesel & Gasoline is being lowered through out the globe.  Same grade of Diesel is used in both on-road vehicles & off-road applications.  Market segmentation enables optimal utilization of available blend streams without compromising on emissions  Market segmentation enables optimal utilization of available blend streams without compromising on emissions. We need to take a long term view on reducing Green House Gases by taking necessary steps in this direction. We also need to take cues from Japan on Fuel quality.

Facts & Paradoxes - 2  Availability of ‘Clean fuels’ can facilitate durability of Onboard Diagnostic & After treatment devices in vehicles.  Though Indian Gasoline vehicles scene is dominated by Japanese technology,India adopted European emission norms. Test methods / cycles to evaluate tail pipe emissions are not the same.  Though Auto & Oil industry are geared up to meet the ‘Technology Upgradation’ & ‘Stringent Fuel specs’ respectively, no headway has been made on  Mandating Fuel efficiency standards for Auto industry,  Retirement policy for in use vehicles,  Inspection & Maintenance standards with Engine retrofit for in use vehicles. We need to take a long term view on reducing Green House Gases by taking necessary steps in this direction. We also need to take cues from Japan on Fuel quality.

Issues Concerning Air Quality - 1  The Oil Industry has invested over Rs. 25,000 crores till date in Refinery & infrastructure to produce clean fuels. Another, Rs 20,000 crores will be needed to take Auto fuel quality to 50ppm Sulphur and lower by  Improvement in fuel quality is not matched by other factors of the system contributing to air pollution.  Improvement in traffic conditions - In central area of main cities, peak hour vehicle speed is as low as 5-10kmph,  Constructing Better Roads - Bus speed on most of the National and State highways is about 40kmph  The Inspection & Maintenance programs for “In Use” vehicles is not put in place. This defeats the purpose of supplying “Clean Fuels” to a large fleet of Antique vehicles. A report published by world bank states that enforcement of PUC in India is virtually non-existent.

Issues Concerning Air Quality - 2  Recent studies on source apportionment by IIT Chennai and NEERI as part of ICAP, point out that vehicular pollution is not the main contributor to PM10, as thought earlier.  Most of the 3 rd world countries are skipping Euro III emission stage.  Tail Pipe devices will be pre-requisites in coming years to combat exhaust emissions from new generation vehicles.

Source - ARAI Vehicle Technology plays a dominating role in abating vehicular emission. LCV – PM vs Diesel Grade vs Technology

Source - ARAI HCV – PM Vs Diesel grades Vs Technology Vehicle Technology plays a key role in abating vehicular emission..

Effects of Diesel properties on Emissions - Summary 0 / implies conflicting results (dependent on engine technology) T95% has no impact on PM. Fuel ChangeCO HCNOxPM Reduce Density Reduce Poly-aromatics Reduce T90/95 Reduce Sulphur 0/ Source - Shell Heavy Duty (Euro-II/III)

CI in diesel fraction Higher Cetane material in diesel is in the tail, which gets rejected to fuel oil pool if distillation of Diesel is curtailed by way of T95 reduction. The loss to Refineries will be 2 to 3% distillate diversion to Fuel Oil.

Vehicle technology impact is substantial than fuel quality. Lessons Learnt - Factors on AAQ Future Scenario Modeling - NZ IPIECA study % reduction in mobile emissions VEHICLES ONLY FUELS ONLY TRAFFIC MANAGEMENT VEHICLES & FUELS PMNOxCOVOC 0

Gasoline vehicles (2W) Emission test -HC Technology plays a vital role in pollution abatement rather than fuel quality.

Lessons Learnt - Gasoline Deposit Control Right MFA and not base gasoline quality helps to reduce deposits study by Shell

Gasoline Effects on Emission - Summary catalyst carsnon catalyst cars Fuel Change HC Exhaust. Evapn CONOxBenzene Add oxygenate Reduce aromatics Reduce Olefins ReduceSulphur Reduce RVP Source: Shell Olefins reduction will not reduce the harmful Benzene emissions.

Market Segmentation of Diesel  On-Road Application  Retail sector – Light Commercial & Heavy Vehicles,  Off-Road Applications  Industrial sector – DG sets, Heating oil, Fuels, etc.  Railways – Railway locomotives  Agriculture – Tractors and Agriculture pumps  Marine – Bunker and or as main fuel.  Defence services – Different applications.  About 34% of Diesel is consumed by Off-Road segment (Farm Sector-18%.)  The Oil Industry can save 50 MM$ per annum if separate grades of ‘On Road Diesel’ and ‘Off Road Diesel’ grades are produced. The hydrogen saving to the refineries would be over 150,000 Tonnes per year. This could mean over a Million zero emission “Hydrogen vehicles” on Indian metros or GHG reduction is 1MMTPA.

Market Segmentation of Diesel ….contd.  Requirement of Diesel properties differ with applications.  City/ Highway vehicle engines call for better fuel quality.  City Vehicles will get the true value out of the Clean Fuels with the use of ‘Exhaust after treatment devices’, for reducing tail pipe emissions, and not otherwise.  OEM recommendation for ‘Off-road Application Diesel’ is different from ‘On-road Diesel’ specification. Owing to the development of new generation engines, vehicles demand stringent Diesel fuel specification in the retail segment.

Market Segmentation of Diesel - Industrial Segment  The uses of Diesel in this segment comprises of;  Stationary DG sets (Largest user)  Construction & Mining Equipment.  Industrial Gas Turbines  Boilers and Furnaces  Diesel quality considerations for applications like Gas turbines are H/C ratio, CCAI, etc. rather than Cetane number,density and distillation.  Fuels for these segments can be customized taking into account the environmental norms and benefit to end users.  CPCB specifies emission norms for each user in this segment. The choice of fuel should however be left to consumers. Refiners can get the flexibilty to process crude with low Cetane No. and yet meet the customers min need in this segment. CPCB needs to relook into its mandate on use of Diesel grade in DG sets.

Market Segmentation of Diesel -Railway Locomotives  Diesel locomotives of Indian Railways are of high engine capacity with large compression ratio and bore size.  At present, Indian Railways are using commercially available Diesel grade which is a luxury compared to the OEM recommendation.  The Diesel specification for Railway locomotives must be designed taking into consideration the product performance, environmental efficacy and price.  Oil Industry is capable of creating infrastructure to supply two different grades of Diesel in a given time frame. To have true value of money spent on fuel, there is a need for a specialty fuel that offers necessary features suitable for Railway locomotives.

Market Segmentation of Diesel - Agriculture Sector  Agricultural pump-sets do not require commercial Auto grade Diesel.  Tractor engine design differs from ‘On Road Auto engines’.  Agriculture sector is not governed by same roadmap for emission norms as applicable to On-road vehicles and hence do not require the same fuel.  ‘Fit-for-purpose fuel’ can be supported by state and central incentives by way of lowering the levies, to reduce cost of input, to the Farmers.  Indian Tractors when shipped to US market use 40 CN Diesel. Discussion with a leading tractor manufacturer has revealed that Bharat-III (TREM) emission can be met by slightly relaxed specs of Diesel.

Diesel (Off Road) Quality Recommendations by OEM

Auto Diesel Quality in Europe / India & Japan Emission norms in Japan are tighter than European yet Diesel quality used in Japanese vehicles differ from the EU specs. Aligning with Japanese Diesel quality will save $1billion per annum by avoiding the Diesel downgrading to the residual pool.

Gasoline Quality – Europe, India, Japan Taiwan follows emission models to allow refiners to choose limits on Olefins and Aromatics. Japan does not have Olefins or Aromatics spec. and intends to meet emission norms with tail pipe & technology combination Variance in approach to fuel quality is a reality and but countries are unanimous in sulphur reduction. Attributes Europe / India JapanTaiwan Euro II / Bharat IIEuro III / Bharat IIIEuro IV / Bharat IV RON, number min9191 / / 9692 / 95 / 98 Sulfur,ppm min / 120 / 180 Aromatics % vol max Olefins % vol max-21/ RVP KPA / 70 max.60 / 60 max / 59 / 61

QA & QC measure at Japan Quality standards items for gasoline and diesel oil mandatory Source: METI

Benefits to Stake Holders  Refinery  Reduced Hydro-treating cost.  Control on downgrading higher ends to residual pool.  Flexibility in blending operations.  Flexibility in processing more crudes.  End User  Appropriate fuel at the right price.  Fuel tailored to give optimal benefit for air quality improvement.

Forward Path – Automotive Fuels  Follow the Japanese Specifications for BS II, III & IV grades of Gasoline & Diesel. Deviations in specifications required  Gasoline:-  No restriction on Olefins & Aromatics  Diesel:-  Density of 860 kg/m3 max  T – 90 of 360 Deg C  Cetane No of 45  Sulfur content to remain at 50 ppm for the 13 cities  Follow the ATF example as implemented by BIS to introduce two separate grades of ATF for Defence & Civil Aviation.

Recommendations 1) There is a need to introduce one more grade of Diesel for ‘Off-road applications’ with appropriate specifications. 2) We need to align the Gasoline & Diesel specs with the Japanese specs. This will result in substantial relief to the Refineries in India without compromising on exhaust emissions.

Questions?

Japanese Emission Norms………stricter than Euro..