Fuelling the debate

David Letterman is famous for his ‘top 10’ lists, which he reads out on his nightly talk show. Chinese financial news website Eastmoney recently put together an unusual top 10 list of its own, this time ranking Sinopec’s 10 worst scandals.

Regular readers of WiC will recall many of these transgressions: the Rmb12 million ($1.92 million) chandelier purchased for corporate HQ, the Guangdong general manager’s $396,400 bill for Chateau Lafite and Moutai, and the strange discovery that the firm had built a luxury hotel for its top staff (see issues 26, 104 and 109 respectively). In the biggest scandal of all, the firm’s former boss, Chen Tonghai, was jailed for corruption in 2009.

We imagine the PR folk at the oil giant don’t have too many dull days at work. Indeed, it’s hard to think of a firm in China that attracts more flak than Sinopec.

And so it was a case of ‘once more into the breach’, when its current chairman spoke to China National Radio recently. Fu Chengyu went on air after netizens had blamed Sinopec’s fuel for the recent smogs which blanketed many of the country’s cities (see WiC178).

Don’t blame our product, Fu hit back. Blame the low fuel standards.

The side-stepping didn’t win over too many of Sinopec’s critics, although Fu wasn’t alone in taking this line. CNPC, parent company of PetroChina and another major oil refiner, also defended itself in the press by saying that its own fuel meets existing emission standards.

But the remarks have rekindled debate about the uneven application of fuel quality rules around the country – and the vested interest of the oil firms in delaying a more uniform standard.

Currently only Beijing uses national emission standard 5 (equivalent to the European cap, which bars sulphur content above 10 parts per million). Shanghai, Jiangsu and Zhejiang have all adopted national standard 4 (50 ppm or below) but the remainder of the country still gets by with standard 3, which allows sulphur content to be as high as 150 ppm.

As the domestic media has been highlighting, this means that many vehicles in China are emitting sulphurous fumes 15 times more dangerous than those in Europe.

Fu’s line of defence roused an indignant response online, especially when it became clearer that Sinopec has an influential say in how the fuel standards are defined. Yue Xin, a member of the committee that sets the rules, posted on his weibo that the large majority of the committee’s members work for oil companies, while the secretariat’s offices are located at Sinopec’s headquarters, according to Xinhua.

Reuters says that the oil firms have been locked in a struggle with the environment ministry over fuel content for years, culminating in a fractious meeting in late 2011 in which the majors were told that they could no longer delay the implementation of cleaner fuel for trucks and buses.

Trucks account for almost one quarter of China’s vehicles but are said to spew out almost 80% of vehicle particulate matter.

Just over a year ago the two firms reportedly agreed to introduce cleaner fuel. But spot checks in Beijing showed that older, dirtier fuel was still being sold long after the promised deadline, according to Tang Dagang, a director of the Vehicle Emission Control Centre, which is linked to the ministry.

Perhaps that explains why Beijing’s air continues to be awful, despite the effort to introduce the new rules.

But planners also say that air quality isn’t improving as much as hoped because of the number of vehicles that come into Beijing from outside the city using dirtier diesel. Hence a national standard is desperately required.

Certainly, criticism of the slow progress on fuel quality does seem to be spreading to sections of the Chinese press. Under pressure, Sinopec said in a follow-up statement last weekend that it will be investing further in desulphurisation facilities in 12 refineries to produce diesel that meets national standard 4 for emissions.

But it added that it would take two years to complete this process, with the cleaner fuel not available until the end of 2014, reported China Petrochemical News.

That will be a further frustration for the environmental activists who complain that the same standard was due to be implemented two years ago but has been twice delayed. An industry source also told 21CN Business Herald that the oil companies already have the means to deliver a greater share of cleaner fuel. “At present most of the domestic large refineries have the ability to produce gasoline at the national 4 emission standard. The fundamental reason [for delay] is that the enhanced desulphurisation process will add to costs,” the insider suggested.

Cleaner fuel will also cost motorists more, and prices at the pump went up in Beijing and Shanghai when the two cities switched to higher standards previously.

Experts also say that CNPC and Sinopec both need to be given more incentive to bear the cost of making cleaner fuel, primarily through the approval of higher retail margins by the central government.

“I’m an environmentalist and I also hate the actions of CNPC and Sinopec,” Jiang Kejun, research professor at the NDRC’s Energy Research Institute, told Reuters. “But we have to tell the public: energy prices will rise significantly. Low energy prices and fresh air, there’s no way you can have both.”

On Wednesday the central government also weighed in on the issue. The message: we’re going to solve the problem, but not immediately. The State Council says it has ordered Sinopec and CNPC to upgrade their refineries to produce standard 4 diesel nationwide by the end of next year. By 2017 there will be a further national upgrade to standard 5, i.e. putting China on a par with the Europeans.

For shareholders at the oil majors this presages a period of uncertainty. The upgrade costs will hit short-term profits. Meanwhile the timing and scale of any offsetting fuel price hikes are yet to be announced.

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