China Refiners Must Upgrade for Fuel Standards, Government Says

Oil refiners in China, the world’s biggest emitter of greenhouse gases, should accelerate plans to produce cleaner fuel, according to the State Council, the nation’s cabinet.

The government will publish new standards for diesel in June and gasoline in December, capping sulfur content at 10 parts per million, with the rules being implemented nationwide by 2017, the State Council said in a statement yesterday. The cost and quality of the fuel will be taken into account when setting oil-product prices, it said, without elaborating.

“Domestic refiners should facilitate upgrades in order to supply qualified fuel on schedule,” the State Council said in the statement, naming China National Petroleum Corp., China Petroleum & Chemical Corp. and China National Offshore Oil Corp., the country’s biggest oil companies.

China’s government plans to mandate the use of cleaner fuel after worsening pollution led to record-low air quality in Beijing last month. The capital tightened emissions criteria for new cars from Feb. 1, becoming the only city to adopt the China V standard that caps sulfur content at 10 ppm.

Plans by China Petrochemical Corp., the nation’s biggest refiner known as Sinopec Group, to sell fuel that meets higher environmental standards is negative for the company’s credit outlook because of the higher investment needed to upgrade its plants, Moody’s Investors Service said today.

Desulfurization Units

Sinopec will supply fuel that meets the China IV standard, which caps sulfur content at 50 ppm, from next year, the state-run China Central Television reported Feb. 1. The company will spend about 30 billion yuan ($4.8 billion) a year to upgrade its plants to produce the fuel, Chairman Fu Chengyu said in an interview with CCTV. The company will install upgraded desulfurization units at 12 refineries by the end of this year, he said.

“The increased capital spending of around 30 billion to 40 billion yuan will most likely be funded with debt,” Moody’s said in a report today. “We expect the company’s internally generated operating cash flow will be insufficient to cover its capex in 2013-14.”

Crude processors such as Sinopec, which accounts for half of the nation’s refining capacity, will struggle to pass on the cost to consumers, Tian Miao, an energy policy analyst at North Square Blue Oak, a London-based researcher, said by phone today. Sinopec’s refining cost may rise by 3 percent, she estimated.

China’s gasoline and diesel prices are set by the National Development and Reform Commission, the nation’s economic planner, under a system that tracks the 22-day moving average of a basket of crudes comprising Brent, Dubai and Indonesia’s Cinta. The government may adjust fuel rates when the measure changes more than 4 percent from the last adjustment.