1. Swed Gov’t summary HRO/970211 1 Background and Approach Present situation EU plans to implement new specifications for petrol and diesel for the years 2000 and 2005 Complication The suggested sulphur contents for the year 2000, which are based on the results of the tri-partite programme and Arthur D. Little’s refining costs estimates, are higher than present Swedish and other European countries’ standards Questions In light of recent technological and other developments has the cost of removing sulphur from petrol and diesel changed? Are there additional benefits (i.e environmental improvement, external cost savings and fuel efficient technologies) from a further reduction in sulphur levels in petrol and diesel? 1 1

2. Swed Gov’t summary HRO/970211 2 Background and Approach We have updated and synthesised new data which may have a bearing on future EU petrol and diesel specifications Examined whether new techniques can reduce costs for sulphur reduction in petrol and diesel Update previous cost estimates by performing detailed refinery analyses for regions and a range of typical refineries Co-ordinate and synthesise information from other stakeholders Automotive industry – lifetime of catalytic converters (including consumer costs) – new engine technologies – NOx improvement Selected refineries Technology suppliers Swedish EPA – Sulphur deposition costs – Sulphur deposition environmental effects European Community – Auto/oil 1 – Community strategy to combat acidification 1 1

3. Swed Gov’t summary HRO/970211 3 Conclusions Subsequent to the Auto/Oil findings, we have identified five additional factors which may have an impact on future specifications of petrol and diesel The units costs to remove sulphur from petrol and diesel are lower than in previous estimates 17% reduction in costs for 30 ppm sulphur content in petrol 55% reduction in costs for 50 ppm sulphur content in diesel The proposed sulphur levels in petrol inhibit the introduction of new fuel efficient engines (GDI) with lean NOx catalytic converters The proposed sulphur levels in both petrol and diesel inhibit the introduction of new pollution abatement devices The external cost benefits, mainly in the form of improved human health, if sulphur is reduced to 50 ppm in both fuels, could be of the order of 400-700 million ECUs a year There will be 2-3 times larger reductions in particle emissions from heavy duty vehicles than was previously expected 2 2

4. Swed Gov’t summary HRO/970211 4 Perform refinery analysis Crude oil diet changes Summary of Results - Refinery Costs Scope of Analysis Examine costs of removing sulphur from gasoline and diesel in stepwise approach from Auto-Oil recommended levels Revisit previous analysis (which was EU 12) for EU 15 Compare new cost curves for EU 15 with old cost curves for EU 12 Gasoline from 200 ppm Diesel from 350 ppm Assess significance of updated analysis Changes in industry demand trends Technology improvements Comment on key sensitivities The scope of our refinery work was to re-examine our cost curves for sulphur removal 3 3

5. Swed Gov’t summary HRO/970211 5 Summary of Results - Refinery Costs The new cost curves indicate lower costs for sulphur removal than the previous studies 3 3 Capital Investment Million Ecu Old New 3340 2940 1750 1310 875 615 Diesel Net Present Cost Million Ecu Sulphur ppm Old New 11570 5990 9230 3520 4560 820 Gasoline Net Present Cost Million Ecu Sulphur ppm 30 Old and New Costs on a 1996 Cost Basis 3010015050100200 Sulphur ppm Both the old and new cost curves have been developed on the same basis as used in auto-oil –Assumes costs incurred from 1996 onwards –All capital and operating costs are included and a fifteen year cashflow is discounted back to 1996 at 7% per annum

6. Swed Gov’t summary HRO/970211 6 Summary of Results - Refinery Costs We have compared the current estimates of the unit costs to remove sulphur with those used in Auto/Oil 3 3

7. Swed Gov’t summary HRO/970211 7 Summary of Results - Refinery Costs Technology Improvements Crude Oil Diet Industry Trends We have reduced our estimates of capital costs for the construction of middle distillate desulphurisation units. This reduces the capital costs required for removing sulphur from diesel Availabilities of sweet (low sulphur) crude oils are now higher than previous expectations because north sea production (predominantly low sulphur crude oil) is higher. This reduces the amount of sulphur to be removed particularly for diesel components Industry demand trends indicate a greater proportion of Jet fuel and diesel and a lesser proportion of gasoline than previous expectations. This implies that the industry would need to invest in significant new hydrocracking capacity. This increases the availability of sulphur free diesel components and reduces the cost of lowering diesel sulphur levels There are three major reasons why our assessments of costs to remove sulphur are lower 3 3

8. Swed Gov’t summary HRO/970211 8 Based on additional analyses and interpolation we identified the following sensitivities Summary of Results - Refinery Costs Technical Thresholds Results are fairly insensitive to the level of oil prices. The major portion of the costs are capital investment related Availability of low sulphur crude oils Synergies by reducing both gasoline and diesel sulphur sulphur Range of costs to individual refiners Level of oil prices Although we have assessed aggregated costs for all EU refineries the variation by individual refinery is significant. The worst placed refiner could face costs up to four times the average and the best placed face costs as low as one quarter of the average At the very low sulphur levels there are synergies if the sulphur level of both products are reduced simultaneously which would reduce total costs by around 15% If North Sea crude oil availability declines to previous expectations the costs will increase by around 20%. If North Sea crude oil availability is the same in 2000 and 2005 the costs will be lower by around 15% Gasoline sulphur levels down to 30 ppm are achievable Sour refiners may not be able to produce diesel below 70 ppm without reprocessing (and therefore additional desulphurisation capacity and capital investment) 3 3

9. Swed Gov’t summary HRO/970211 9 Summary - Benefits The proposed levels of sulphur in EU petrol for 2000 will make it difficult to further reduce automobile emissions with currently available technologies Sulphur has a negative effect on the performance of 3-way catalytic converters and thereby increases the emissions of CO, HC (hydrocarbons) and NOx from petrol driven automobiles - however, the catalytic converter returns to full efficiency if sulphur content is subsequently reduced The proposed standard of 200 ppm sulphur in petrol will: inhibit the introduction of currently available gasoline direct injection (GDI) engines with systems for lean NOx reduction – it has been reported that GDI engines can reduce petrol consumption by up to 35% – GDI engines have already been introduced in Japan because current market levels of sulphur in petrol are less than 50 ppm significantly increase the emissions from vehicles which can meet California low and ultra low emission standards (LEV and ULEV) and which are currently available in Europe 4 4

10. Swed Gov’t summary HRO/970211 10 Summary - Benefits The proposed standard of 350 ppm sulphur in diesel will inhibit the introduction of technologies to reduce emissions from diesel driven road transport The retro-fit of trucks/automobiles with currently available oxidation catalysts and filters can reduce CO and HC emissions by around 50-70% and Particle Matter (PM) emissions by over 90% - however, diesel with a sulphur content less than 75 ppm is required The introduction of DeNOx catalysts under current development, which have the potential of reducing NOx emissions by at least 30%, presently require a diesel with a sulphur content less than 50ppm 4 4

11. Swed Gov’t summary HRO/970211 11 Summary - Benefits On the short term, there are environmental and human health benefits which can be gained if there is a further reduction of sulphur levels in road transport fuels Reducing sulphur limits in petrol from 200 to 50 ppm will further reduce CO, HC and NOx emissions by around 3-5% Reducing sulphur limits in diesel from 350 to 50 ppm will further reduce PM emissions by 5-8 %from Heavy Duty Vehicles (HDV) 4 4 According to estimates of unit economic damage(ECU per tonne emitted) derived in other EU studies, the cost benefit in terms of improved human health and reduced building damage are estimated between 400 -700 million ECUs a year

12. Swed Gov’t summary HRO/970211 12 Sulphur in Transport Fuels - Executive Summary Table of contents 1 1 Background and Approach 2 2 Conclusions 3 3 Summary of Results - Refinery Costs 4 4 Summary of Results - Benefits

13. Swed Gov’t summary HRO/970211 13 Sulphur in Transport Fuels - Executive Summary Table of contents 1 1 Background and Approach 2 2 Conclusions 3 3 Summary of Results - Refinery Costs 4 4 Summary of Results - Benefits

14. Swed Gov’t summary HRO/970211 14 Sulphur in Transport Fuels - Executive Summary Table of contents 1 1 Background and Approach 2 2 Conclusion 3 3 Summary of Results - Refinery Costs 4 4 Summary of Results - Benefits

15. Swed Gov’t summary HRO/970211 15 Sulphur in Transport Fuels - Executive Summary Table of contents 1 1 Background and Approach 2 2 Conclusion 3 3 Summary of Results - Refinery Costs 4 4 Summary of Results - Benefits

16. Swed Gov’t summary HRO/970211 16 Sulphur in Transport Fuels - Executive Summary Final Report February 12, 1997 Swedish and Finnish Governments Arthur D. Little AB Box 70434 107 25 Stockholm Telephone +46 8 698 30 00 Telefax +46 8 698 30 02