Re: Stuck with dirty diesel

The following is a response to an article "Stuck with dirty diesel," published by The Star.

The article is lacking in proper research and ignored many obvious reasons behind the non-availability of Euro 4 emission standard compliant diesel locally.

So, if we look at it from world standards, there is actually not much to shout about in terms of the introduction of the two Euro 2M standard fuels.

To make matters even worse, we are at least two generations behind immediate neighbours Singapore and Thailand where Euro 4 diesel is widely available.

Fact : Euro 4 diesel is not widely available in Thailand, at least not officially as fuel companies don't publicly announce the emission standard of their fuel other than it complies with the government regulation, which at the moment for Thailand is still EU3, sometimes known as Step-3. Step-4 or EU4 diesel will only be legislated by 2012 and at the moment, major refinery facilities in Thailand are gradually being upgraded to produce EU4 compliant high speed diesel fuels.

EU4 diesel is easily available in Singapore, since 2006. Singapore is one of the largest oil refinery and distribution centre in the world. Surprisingly, ExxonMobil's largest refinery facility in the world is not in US or Middle East but in Jurong, Singapore. As such, Singapore's oil refinery facilities would need to comply with the latest standards and adoption of Euro 4 diesel in Singapore makes a lot of obvious logistical and economic benefit. When you think about it further, is rather surprising considering Singapore does not have any oil resources but it is still a major exporter of processed petroleum products back to other oil producing South East Asian countries including Thailand and Malaysia (both of whom are have abundant oil resources) as well as Ocenia region Australia and New Zealand. Talk about selling ice to eskimos!

Each of those countries mentioned have their own domestic refinery facilities, but it's a question about capacity and also technical expertise. I don't have the figure for Thailand and Malaysia but Australia imports 40% of its diesel fuel from Singapore. The Aussie government is quite transparent and it is very easy to dig up stats and figure from Australian government ministries.

But fuel adoption policies for countries like Singapore and Hong Kong, due to overly metropolitian nature is not a good comparison for large developing markets like Malaysia. Thailand and to a certain extent India is a much better example. Diesel fuel is not used just used for cars, but farming, and other industrial machineries. These have to be taken into account when considering a country's overall fossil fuel energy consumption.

Many may be surprised that Singapore, a tiny country with almost no natural resources of its own, let alone oil wells is a major exporter of processed petrochemical products. History has shown that a country blessed with abundant natural resources is more likely to sit back, be complacent and do the minimal to extract wealth from the ground - which is just to simply approve / partner with foreign oil companies to do oil exploration. Worse, their politicians will squabble over control of oil wealth. Singaporeans on the other hand, had nothing for them to fight over but instead had to worked a lot harder to remain relevant since. They invested in hi-tech oil processing facilities, attracted the most brilliant engineering minds, made its sea ports hyper efficient to export processed petroleum products.

A ship captain once told me that he could dock in Port of Singapore, do the necessary clearance to unload the goods, have them loaded to lorries, drive across the Causeway with time to spare while an equivalent ship in the same circumstances that is docked in Port Klang will still be waiting there. Discovery Channel did a documentary on the workings of Singapore sea ports, said to be among the busiest in the world.

Anyway back to diesel talk.
Asked why Petronas was not introducing Euro 4 diesel, he replied: “The Government does not allow us to do so.

“We are ready to do so and were about to convert our refineries to produce Euro 4 diesel four years ago when the Government changed its mind.”

The government here practises fuel subsidy and price control. Clean diesel require a lot more complex refining processes and the most obvious impact from this is cost. So who is going to pay for the difference? Oil companies? One can't accept statements from Petronas staffs as the universal truth. Petronas is pushing the difficult decision back to the government as it is not willing to invest in EU4 out of its own pocket. It cannot be a reason as simple as "the government does not allow" EU4 to be implemented. Didn't anybody asked why? With Petronas being the government's cash cow, I am sure decisions such as these were made in the interest of Petronas more than any other company. The underlying reason is that the government is not willing to subsidize EU4 diesel any further and neither is Petronas willing to invest in upgrading its facilities using its own money. What would you expect from a government linked company that is so used to having the governemnt negotiating in their interest and protecting them and has never been subjected to an independent external audit?

It seems that while Petronas was willing to forgo some profits to sell high quality diesel – they make a premium of RM2 per litre exporting Euro 4 – the foreign oil giants are not willing to do so. It will cost about US$30mil (RM105mil) to convert a refinery to produce Euro 4.

There is a world of difference between converting a refinery to produce EU4 diesel and forgoing some profits. The former involves capital expenditure and facility downtime while the other is simply reduced earning margins. How can one lump the two together and make a conclusion that Petronas is willing to introduce EU4 voluntarily just because somebody said they are willing to forgo some profits? Converting a refinery is a very complex task, generally guided in the oil and gas industry with something called a Nelson complexity index. It is not as simple as "we are willing to forgo some profits though others are not willing."

I accept that it may cost the Government more in subsidy to bring in Euro 4 diesel and just as there are two grades of petrol petrol, why not similarly for diesel?

Euro 4 diesel can be sold in the country as premium diesel just like RON97 petrol. Why not?

As it is right now, companies like Shell which now offer 3 grades of petrol (regular 95, regular 97, premium V-Power) have outlets that are having a difficult time managing the pumps. How are these outlets going to manage 2 grades of diesel? Different grades of fuel need to be stored in different underground storage tank.

Like many businesses, retail outlet ownership is split between principal owned branches (company owned) and dealer owned outlets. The larger and newer principal owned outlets might have no problem adapting. But what about the smaller dealer owned outlets, run by the neighbourhood chinaman or Pak Abu in Gua Musang? Who will finance the renovation and facilities upgrade to store two grades of diesel? Does this mean that that EU4 diesel will only be available in certain locations?

And let's not forget about logistics of transporting the many different grades of fuel, all while keeping in mind that this is in a price controlled market. Contrary to common perception, oil companies actually make very little profit in the actual act of retailing fuel, even less in a market like Malaysia where prices are fixed and the only way to differentiate oneself is via branding. The ones who make the most money are the middle men energy traders selling crude oil contracts. Oil companies compensate their earnings from, amongst others - selling refined crude to other oil companies, premium products, non-fuel lubricant products for industrial use.

Keep in mind that I am not making a blanket statement that multi-grade diesels are not viable. In Thailand, Shell even sells V-Power diesel along with regular diesel. I can't even keep up with the many different grades of fuel sold there - multi grade ULG, gasohol, E5, E10, E20, B5 biodiesel and the assorted CNG and LPG etc etc. The point is that Thailand had a National Energy Policy in place since 1991 and the recommendations were made known to energy companies for their future investment planning very early on. We on the other hand, have not even started talking about having a national energy policy.

Also, the author makes a lot of references to EU4 diesel in Thailand and Singapore. The Thais pay an equivalent RM2.60 per litre of diesel, while Singaporeans pay an equivalent RM3.10 per litre (depending on global prices as fuel prices in these countries are floated on a free market). The last time petrol price went up to RM2.70 per litre, the people went hopping mad, after many decades of being insulated from world prices and molly cuddled by government subsidies. Does anyone really think the people will be willing to pay for EU4 diesel?

Of course this is an overly simplistic comparison as in economic terms, cross border price comparisons need to be adjusted to the purchasing power parity (PPP) factor of the local economy. In lay man terms - it's what's the price of Big Mac in Malaysia vs Thailand vs Singapore. But in any case, EU4 diesel prices will be A LOT higher than that RM 1.70 per litre in Malaysia. You can't have things both ways - first world quality and third world prices. Of course the bigger issue is also about wages, why are our local people's wages being pressed down so low relative to other countries?

Probe further, you eventually come to the realisation that the root cause of the problem is the government subsidy and price control, something I am personally against. There has been very little evidence that any form of subsidy is ever effective in bringing the desired result. Subsidy promotes wastage, complacency and removes whatever little incentive there is to adopt newer energy efficient friendly technologies (i.e. hybrids, EVs, CNG, etc etc) and prudent resource / wealth management. Look at Venezuela, Saudi Arabia, Iran, Kuwai, Russia. All major oil producing nations and their people pay very little for fuel. But all of them are constantly at the bottom half of UN Human Development Index.


Europe imposes very high taxes on transport fuel, and the tax earnings is used to built and maintain efficient public transport network. Norway is a good example of prudent resource management. Norway is the world's third largest oil exporter (after Saudi Arabia and Russia), but Norway does not squander its oil wealth into giving subsidy to its people. All Norwegian oil profits are reinvested into improving social welfare and education. Norwegians pay market prices for their fuel but they have some of the best education system among OECD nations, better than USA and Western Europe. In 2007 Norway was 2nd in the UN Human Development Index, after Ireland. The Norwegian government created a Norwegian Government Petroleum Fund to invest its oil profits. As of December 2007, the fund is estimated to be in excess of USD 388 billion. The fund is created to finance future government projects and development once petroleum reserves are exhausted. The Norwegian government is also aggressively pushing for a policy to ensure oil production in Norway remains viable for another 50 years by gradually reducing oil production. I can't confirm this but I understand that in many Scandinavian states including Norway, the government provides welfare aid to the unemployed under the condition that they must not have any criminal record. So if you are poor and out of job, go to the government and plead your case, don't go rob an old grandmother. This effectively removes a major motivation in crime. But if you have a single criminal record, you will be barred from the welfare system for life.

Why talk about spoon feeding the people with subsidy on a daily basis? Time and time again, independent studies have proven that the only socio-economic affirmative action that works are those that are focused on education, not any ethnic / racial based assistance or subsidy in any form.

If anybody wants clean EU4 compliant diesels, remove the subsidy AND clean up the government and everything else will follow like clockwork. Asking the very same government that is squandering oil wealth to promote clean diesels? Fat chance.