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VW scandals contribute to changing perception of diesel

Faulty tests and emissions scandals could prove yet another headache for Europe’s refiners

Following German car manufacturer VW’s admission of cheating on diesel NOX and particulate emissions in October, November saw a second scandal hit the company, when it acknowledged that CO2 emissions and fuel economy figures were incorrect for 800,000 vehicles.

Employees claimed that 2012 emissions goals to reduce 2006 vehicle CO2 emissions by 30% in 2015 were too hard to achieve – opening up further questions over the ability of manufacturers to achieve required environmental standards using conventional combustion engines. 

Approaching limits

While attention has been focused on the impact of the scandals on the automotive industry, there could be implications for the energy sector. With VW the leading diesel car manufacturer globally, the scandal has already impacted the fuel’s demand prospects in Europe, with a number of countries reviewing gasoline incentives. But the situation could be far worse than acknowledged: the scandal has shone a light on the testing procedures, and found them sorely wanting.

According to a recent report by Transport & Environment, a think tank, most car manufacturers have a far worse record than VW under normal conditions. This suggests testing regimes fail to measure diesel NOX emissions correctly, raising questions over diesel’s ability to meet standards generally.

The situation emphasises the trade-off between fuel economy, performance and particulate emissions.

If Transport & Environment is right and tests are improved, fuel economy and performance may fall for many manufacturers, unless cost rises. Add to this VW’s November CO2 scandal, and the situation suggests it may be approaching the limits to further improvement in combustion engines.

If emissions cannot be reduced by higher fossil fuel efficiency, then it is more urgent that alternatives are found to both diesel and gasoline. Several leading car makers have already said they are switching research and investment to electric and hybrid engines in the wake of the scandal –including VW itself – in their efforts to reduce emissions from the transport sector and improve performance.

Alternatives

VW said in early October that it would channel investment to electric and hybrid cars in Europe. “We are becoming more efficient, we are giving our product range and our core technologies a new focus, and we are creating room for forward-looking technologies by speeding up the efficiency programme,” said VW’s Dr Herbert Diess.

The company also revealed that its flagship Phaeton model would in the future be purely electric, and capable of driving longer distances on a single charge.

Regulators and consumers too may follow suit. In the UK, the Institute of the Motor Industry (IMI) has found 53% of drivers planning to buy or lease a car in the next two years are looking at electric or hybrid vehicles as their next car. That figure compares with the 56,000 electric and hybrid cars sold in 2015 (as of November), which represents only 3% of all new car registrations.

Diesel doldrums

For the moment the biggest impact is limited to diesel, with regulators reviewing its preferable treatment relative to gasoline – put in place in an effort to take advantage of its higher fuel economy to cut CO2 emissions.

Much of the excise and taxation designed to favour diesel in Europe could well be reversed, which – in the short term at least – may encourage the use of gasoline in transportation, as well as natural gas (CNG and LNG), electric and hybrid vehicles.

Clamour is already growing for favourable diesel taxes to be removed. In the UK, a former advisor to Tony Blair’s Labour government, Stephen Tindale, acknowledged in early October that the policy that the government had introduced was possibly “responsible for many deaths.”

The additional mileage made possible by using diesel engines may have cut the carbon dioxide per mile, but it produced a whole host of additional pollutants.

Speaking recently on the BBC, ex-BP chief executive, John Browne, said: “This crisis has opened up questions about diesel itself, which will create a very difficult situation for the oil industry… If they have to produce more gasoline they will be able to, but it could create some interesting pricing problems.” He added that a switch to gasoline would take time and would be likely to increase refining costs.

“Gasoline prices would certainly be likely to rise relative to diesel,” he said. This could alter refinery economics and undermine the investment that had been made to produce clean European diesel grades.

Good intentions

Europe had been moving towards cleaner emissions using standards applied both to diesel quality and engine performance, with the two progressing in tandem. The purification of diesel fuel to the low sulphur levels required (Euro 5, or 0.01%) has already cost the refining industry billions to install desulphurisation equipment.

A fall in European demand could undermine this investment, and require an expensive reconfiguration of capacity to favour a lighter gasoline-focused yield.

Similarly, billions of dollars have been spent on refineries designed to export Euro grade diesel to Europe from the Middle East and elsewhere. In the last year or two, more than 1.2m b/d of refining capacity has been put into operation in the Middle East, with a further 2.2m b/d by 2020, according to Enerdata. Most of this will be up to Euro-5 standard, targeting Europe as part of an attempt to add value to oil exports. US supply too had been expected to continue to cross the Atlantic in greater quantities – pushed out of its home market by LNG and rising unconventional crude production and refining.

The fall-out could be significant for Europe’s refining sector, which has already seen multiple closures over recent years as demand has slowed. Before the scandal broke, surging imports and falling demand had already led analysts to forecast the closure of at least ten more European refineries by 2018, on top of the 1.2m b/d that closed recently.

Europe’s largest refiners, including Shell, Total and Eni, have already been looking to sell or adapt plants to lower petroleum product demand, which has declined by more than 18% since 2006, according to Enerdata. Fall-out from the VW diesel scandal could accelerate the long term downward trend, leading to the wind-up of many refineries positioned across the continent.

However, as Transport & Environment also points out in its report, lower diesel demand would actually benefit Europe by improving its refined product imbalance and making it less reliant on foreign imports.

The continent currently has to import diesel, while it has a gasoline surplus which is often exported for the US driving season, and to other Atlantic basin countries.

Transport & Environment also suggests that the impact on diesel demand is likely to be restricted to Europe. With only 7% of global demand, this means the overall impact is likely to be limited to the Atlantic Basin and possibly Mideast Gulf markets.

The bulk of anticipated diesel demand growth – mostly in Asia heavy transport markets – is unlikely to be affected much, in the short to medium term at least.

Transport & Environment concludes by suggesting that if this is the case, other factors such as new marine fuel regulations, or cheaper gas as a result of fracking, will prove far more important for diesel demand than the VW scandal.

However, it has been suggested that the report may be underestimating the impact. Early signs are that regulators may be looking for innovative ways to make VW pay for its emissions cheating.

Penalties could, for example, be directed to expanding electric vehicle access – including power points, finance and incentives.

Volkswagen reportedly set aside billions of dollars for this purpose as it prepared to propose a reparations plan to the California Air Resources Board.

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