Chinese refiners have started making automotive diesel fuel with quality similar to Euro III specifications from this month to meet a government-set environmental target, but the shift will be gradual as oil companies see little incentives to rush.
China, the world's second-largest oil user, will officially launch on July 1 diesel with a sulphur content of 350 parts-per-million (ppm), to differentiate from the 2,000-ppm general diesel used by its rural, marine and industrial sectors.
But the lack of a price incentive or a mandate to switch for the costlier cleaner fuel means supplies would be slow to reach the market and any change in the import slate to lower sulphur crudes will be gradual, oil company officials said on Friday.
"The message from the government is that refiners will have to bear the higher cost of production, at least for now, as inflation were still pretty high," said a fuel sales executive with PetroChina , the country's second-largest refiner after Sinopec Corp .
Chinese cities are among the most polluted in the world, with severely polluted air and is keen to clean up its skies deemed a health risk. Sulphur dioxide, emitted from burning of coal and fuel used to power cars and truck are the main contributors of acid rain and related lung problems.
China regulates its pump fuel prices, subsiding its motorists by setting rates at a slower pace than crude costs.
"So the incentives for refineries to produce more are not there," said the PetroChina executive, who declined to give an estimate of PetroChina's target production of the cleaner diesel.
The state major, however, has introduced an internal bonus for the new diesel, a 100 yuan ($15.5) per tonne premium over lower-spec general diesel from this month, said company officials.
One significant change in diesel quality is the cap on polyaromatics, a main contributor to urban smog. That requires refiners to use costly hydrocraking and hydrotreaing units, instead of the traditional catalytic crackers.
"We were told to start making some of it but we're not equipped yet to produce much. At most, we can make one sixth of Euro III out of our total diesel production," said an official with a PetroChina refinery.
Sinopec's Zhenhai refinery, the country's largest and one of the most sophisticated, is currently churning out roughly 60,000 -70,000 tonnes of cleaner Euro IV diesel a month, or just one tenth of its total diesel output, said a plant official.
The 440,000-barrel-per-day Zhenhai refinery just started a new 3 million tonne-per-year diesel hydrotreating unit earlier this month which was aimed at eventually raising the cleaner fuel, the official added.
"We have not got a firm note yet to start pumping more."
The formal introduction of automotive diesel highlights the oil industry's focus on meeting the rapid growth in road freight traffic in an economy that is heavy on manufacturing and as China swiftly expands its highway web.
China's demand for automotive diesel, which makes up more than half of China's total diesel use of some 3.4 million bpd, overtook gasoline in absolute volumes a few years ago, and is poised for strong growth in the coming years, analysts have said.
In January 2010, China set national standards for gasoline similar to Euro III that was introduced in Europe a decade ago, with a 150-ppm sulphur content and a lower benzene composition.
Metropolises like Beijing, Shanghai and Guangzhou have moved further ahead of smaller towns by launching Euro IV standards.
($1 = 6.468 yuan) (Reporting by Chen Aizhu; Editing by Chris Lewis)