Table of contents

1. Table of contents 1 Background and Objectives 2 Summary 3 Approach and Methodology 4 Motivation and Introduction of Improved Fuel Qualities 5 Tax Differentials and Market Drivers 6 Industry Response 7 Environmental Benefit 8 Lessons Learned A Appendices

2. 1 Background and Objectives • Transport fuels with improved qualities are being introduced throughout the European Union Gasoline Diesel Key Events • Leaded gasoline phased out by 1994 • Environmental Class MK2 introduced in 1994 • MK2 specifications tightened in 1998 • MK1 gasoline specified in 1998 to take effect in 2000 • Sulfur tax (>1000 ppm) on fuels introduced in 1991 • Environmental Classes MK1 and MK2 introduced 1991 Sweden Sweden • Oxygenated gasoline introduced in 1991 • Leaded gasoline phased out by 1994 • Reformulated gasoline (RFG) introduced in 1994 • Reformulated diesel (RFD) introduced in 1994 Finland Finland Finland • Low benzene classifications introduced in 1997 (Denmark) • Low aromatic limits mandated in 1998 (Italy) • Leaded gasoline to be phased out in 2000 (EU) • EU wide specifications to take effect in 2000, specifications tightening in 2005 • Ultralight diesel introduced in 1992 (Denmark) • EU wide 500 ppm sulfur limit introduced in 1996 • Low sulfur diesel introduced in 1997, specifications tightened in 1998 (UK) • EU wide specifications to take effect in 2000, specifications tightening in 2005 E.U.

3. Auto-Oil I1992 - 1996 Tri-Partite Approach • Oil industry • Auto industry • European commission 1 Background and Objectives • The Auto-Oil I program examined cost effective ways of improving air quality in the EU 12 group of countries • Comprehensive analysis of vehicle technology, fuel quality and other measures to reduce emissions from vehicles • Conclusions based on cost effective measures Gasoline Diesel Limit Values for Year 2000 Important 1996 Commissionproposal made for consideration byCouncil and Parliament Aromatics: 45 vol% maximum Benzene: 2 vol% maximum Oxygen: 2.3 wt% maximum Sulfur: 200 ppm maximum Cetane number: 51 minimum Polyaromatics: 11 vol% maximum T 95: 360° C maximum Sulfur: 350 ppm maximum Both the Council of Ministers and European Parliament recommended more stringent specifications for 2000 and further improvements in 2005. The final outcome was unclear in May, 1998

4. 1 Background and Objectives • Many Finnish and Swedish legislative fuel specifications exceed those from the European Commission for 2000 based on the Auto-Oil I program Gasoline Diesel Specification Sulfurppm maximumRVP Summer Kpa maximum Benzenevol% maximum Aromaticsvol% maximum Oxygen wt%- maximum - minimum Sweden MK2 100 70 3.0 * 2.0 - Finland Reformulated - 70 3.0 - - 2.0 EuropeanCommission 2000 200 70** 2.0 45.0 2.3 - Specification Sulfurppm maximumAromaticsvol% max PAH vol% max Cetane indexminimum Cetane numberminimum T95 °C max Sweden MK1 10 5 0.02* 50 285 Finland Reformulated 50 20 - 47 EuropeanCommission 2000 350 - 11** 51 360 *Aromatic index (AI) 5.5 maxAI = Aromatics vol%+ Benzene vol% 13 **Arctic climates; otherwise 60 *3 or more aromatic rings **2 or more aromatic rings

5. 1 Background and Objectives • Accordingly the Swedish and Finnish Governments wish to share their experience on how improved fuel qualities were introduced into the market and subsequently gained dominant market shares What was the motivation and drivers for introducing the fuels? How did industry respond? What were the fiscal implications, costs and environmental benefits? Arthur D. Little was appointed to construct a “Case Study” using publicly available information and discussions with Swedish and Finnish oil refiners and other relevant parties

6. Table of contents 1 Background and Objectives 2 Summary 3 Approach and Methodology 4 Motivation and Introduction of Improved Fuel Qualities 5 Tax Differentials and Market Drivers 6 Industry Response 7 Environmental Benefit 8 Lessons Learned A Appendices

7. 2 Summary – Motivation for Improved Fuel Qualities • The motivation for Finland and Sweden for introducing improved fuel qualities was to reduce vehicle emissions that have a negative effect on human health and the environment Fuel type Reduction of emissions Effects primarily on human health Effects primarily on the environment Gasoline Benzene Carbon monoxide (CO) Hydrocarbons (HC) Oxides of nitrogen (NOx) Hydrocarbons Oxides of nitrogen Ozone Sulfur* Diesel Particulate Matter (PM) PolyaromaticHydrocarbons (PAH) Odor Oxides of nitrogen Oxides of nitrogen Ozone Sulfur *Lower levels of sulfur improve the performance of 3-way catalytic converters.

8. 2 Summary – Motivation for Tax Differentials • Market drivers were created by differentiating taxes on gasoline and diesel grades - more polluting fuels were given higher taxes Reasons for differentiating taxes on fuel qualities: The majority of consumers would not switch to cleaner grades if they carried a higher price To eliminate the cost advantage of lower quality fuelin consumer pricing Without anticipated demand the refining industry would not invest in quality beyond mandatory legal requirements To catalyze refinery investments in order that the fuels could be produced Improved fuels cost more to produce than normal ungraded fuels To offset increased refinery costs associated with improved fuel grades

9. 2 Summary – Market Drivers for the Introduction of Improved Fuel Qualities • While tax differentiation of fuel grades was the main market driver for introducing improved fuel qualities - how the fuels were brought into the market differed... Finland Sweden • Deregulation of markets made refineries more responsive to environmental challenges and higher value added products - this resulted in the introduction of improved fuels before tax differences were in place (e.g. oxygenated gasoline) • Finnish refineries responded not only to the Swedish differentials, but also in anticipation of tax differentials signaled by their Government • Oil companies in general did not take the lead in introducing improved fuel qualities before tax differentials were in place • Following the introduction and further widening of tax differentials the refiners invested to manufacture improved quality fuels

10. 2 Summary – Chronology for the Introduction of Improved Fuel Qualities • ... along with the timing of their introduction Diesel - Sweden Diesel & Gasoline - Finland Gasoline - Sweden • January 1, 1991Swedish legislation included specifications for improved diesel qualities • MK1 diesel • MK2 diesel • Finnish legislation included specifications for improved: • gasoline quality - Reformulated gasoline (January 1, 1993) • diesel quality - Reformulated diesel (July 1, 1993) • December 1, 1994 Swedish legislation included specifications for improved gasoline qualities • MK2a gasoline • MK2b gasoline • MK2c gasoline 1990 1991 1992 1993 1994 1995 1996 1989 Neste introduced oxygenated gasoline in Finland Preem (formally OK Petroleum) introduced MK2 gasoline in Sweden Swedish oil companies voluntarily agree to sell only MK2 gasoline

11. 2 Summary – Result of Tax Differentials • The tax differentiation of gasoline and diesel qualities has been robust enough to ensure a rapid change of the market Finland Sweden 1996 market share of improved fuels Reformulated gasoline:99%* MK2 gasoline:100%** January 1, 1993 Tax differentials on gasoline introduced by the Finnish Government December 1, 1994 Tax differentials on gasoline introduced by the Swedish Government Reformulated diesel:85% MK1 diesel:85% July 1, 1993 Tax differentials on diesel introduced by the Finnish Government January 1, 1991 Tax differentials on diesel introduced by the Swedish Government *Includes oxygenated gasoline (approximately 13% market share). **After June 1995, Swedish petroleum companies voluntarily agreed to only sell MK2 gasoline.

12. 2 Summary – Size of the Tax Differential • In most instances the tax differential is a fraction of the normal annual price fluctuations caused by world markets E X A M P L ESwedish Gasoline Price variation during 1996 was 0.07 ECU/liter • Tax differential of0.007 ECU/liter for gasoline • the difference in taxes between improved and poorer fuel qualities • the tax differential ensures at least price neutrality for MK2 with respect to standard gasoline (MK3) for the consumer* *For diesel the improved quality (MK1) is sold at at lower price than the poorest quality (MK3).

13. 2 Summary – Tax Differentials vs. Tax Revenues • A tax differential needs to be large enough to motivate the industry to invest without increasing the price to the consumer... • ...extra costs and investments are covered by higher sales volumes of improved fuels with increased price per liter for the refiner E X A M P L ESwedish Diesel Value of tax differentials Swedish diesel tax revenues and value of differentials (excluding VAT) for the years 1990 to 1996 Value of differentials due to the use of improved fuel qualities(tax reductions) Value of differentials due to the use of poorer fuel qualities (tax revenues) Tax revenues excluding differentials Total tax revenues(excluding VAT)

14. 1 ECU 6 FIM 8.5 SEK 1.1 USD 2 Summary – Tax Differentials vs. Tax Revenues • The value of tax differentials has been small compared to tax revenues from transport fuels Finland (ECU)1993-1996 Sweden (ECU)1991-1996 Value of tax differentials Value of differentials due to the use of improved fuel qualities(tax reductions) 0.15 billion 3% 3% 0.6 billion Value of differentials due to the use of poorer fuel qualities (tax revenues) 0.10 billion 0.5 billion 2% 3% 5.1 billion 18.5 billion Tax revenues excluding differentials Total tax revenues (excluding VAT)

15. Tax differentials (ECU/m3) Gasoline Diesel 1990 - - 1991 - - 1992 - - 1993 4.2* 25 1994 8.3 25 1995 8.3 25 1996 8.3 25 *The tax incentive on diesel was introduced July 1, 1993; 8.3/2=4.2 2 Summary – Tax Differential Finland • For Finland the value of tax differentials due to the use of improved fuel qualities has been 152 million ECU for the period 1993 to 1996 Value of differentials due to the use of improved fuel qualities(tax reductions) (1993 to 1996) = 152 million ECU Value of differentials due to the use of poorer fuel qualities (tax revenues) (1993 to 1996) = 97 million ECU

16. 2 Summary – Tax Differential Sweden • For Sweden the value of tax differentials due to the use of improved fuel qualities has been 589 million ECU for the period 1991 to 1996 Value of differentials due to the use of improved fuel qualities(tax reductions) (1991 to 1996) = 589 million ECU Tax differentials (ECU/m3) Diesel compared to MK1 Gasoline MK2 MK3 MK3 1990 - - - 1991 24 41 Value of differentials due to the use of poorer fuel qualities (tax revenues) (1993 to 1996) = 97 million ECU 1992 24 53 1993 24 53 1994 29 60 0.6* 1995 24 55 7.1 1996 25 57 7.1 *The tax incentive on gasoline was introduced December 1, 1994; 7.1/12=0.6

17. 2 Summary – Industry Response • Industry response to the tax differentiating policies was to invest approximately 540 million ECU over the period 1990 to 1996 1991 1996 Typical refinery configuration, as compared to the rest of the EU, but with higher distillate hydrodesulfurization(HDS) capabilities • Increased desulfurization capabilities • Installed de-aromatization capabilities • Increased use of oxygenates • Remove benzene precursors from reformers Total capital investment patterns in study refineries: 1990-96

18. 2 Summary – Industry Response • Net incremental annual operating expenditure to meet the new specifications was approximately 54 million ECU in 1996 Incremental annual operating expenditure in study refineries 1996 Breakdown of incremental annual operating expenditure Cooling Water Labor Cat & 4% 4% Chem 5% Fuel 37% Power 12% Steam 14% Maintenance * 23% *Includes associated yield benefits which result directly from investment made for improved fuel qualities. Excludesany capacity creep benefits associated with incremental ongoing investments (excluded in investment estimates).

19. 2 A decline in Soviet oil production encouraged Finnish refiners to switch from Soviet sour to North Sea sweet crudes resulting in lower than anticipated costs for desulfurization* Summary – Industry Response • The industry response coincided with changes in oil supplies and also effected product output % Sweet crude oil E X A M P L E Finnish and Swedish refinery jet fuel production (1990-1995) The light distillation characteristics of Swedish MK1 diesel require the use of typical jet fuel components, this initially reduced the production of jet fuel *Increased hydrotreating capacity was brought on-line during 1997 - reducing the amount of % sweet crude to 60%.

20. 2 Summary – Industry Response vs. Tax Differentials • Industry investments and increased operating costs for Finnish and Swedish refiners are about equal to the value of tax differentials provided from the use of improved fuels 709 million ECU(Finnish and Swedish refineries are aggregated) 741 million ECU

21. Finland Sweden Reformulatedgasoline(unleaded) Reformulateddiesel MK2gasoline(unleaded) MK1Diesel MK2Diesel CO -25% to -12% -6% to 2% CO -1% to 4% -6 to 8% 9% HC -8% to -5% -20% to 12% HC -3% to 1% 2% to 18% -10% to 24% NOX -12% to -3% -12% to -5% NOX -4% to -1% -11% to -5% -9% to -4% PM -15% -25% to -10% PM -15% -30% to -10% -12% to -4% PAH -57% -54% PAH -27% -75% -36% SO2 -58% -96% SO2 -59% -99% -95% 2 Summary – Environmental Benefit • Emissions from vehicles in most cases have been reduced due to improved fuels Estimated range of changes in emissions (in %) relative to normal ungraded fuels (see Appendix A.3) • Uncertainties regarding the extent of emission changes for CO and HC from diesel vehicles is judged to be higher than for NOx, PM, PAH, and SO2. • A direct comparison of changes in emissions due to improved fuels for Finland and Sweden is not possible since the initial and subsequent fuel qualities and test cycles for estimating emissions are different.

22. 2 Summary – Environmental Benefit • Using the ExternE* methodology it is estimated that reduced environmental costs are in the order of 170 to 230 million ECU Estimated reduction in environmental costs (million ECU) 1992 1993 1994 1995 1996 8 to 16 9 to 17 9 to 17 Finland Sweden 21 to 22 34 to 35 34 44 to 46 51 to 52 34 to 35 42 to 50 53 to 63 60 to 69 Total 21 to 22 NOx PM SO2 CO** HC** reduced environmental costs are primarily due to reduced emissions of NOx and sulfur 12 to 34 3 to 4 10 Finland (1994 - 1996) 0.8 to 1.4 0.07 to 0.25 -0.08 to 0.05 Sweden (1992 - 1996) -0.7to 0.03 150 to 154 3 to 4 32 • Environmental cost calculations are intensely debated, for example Swedish national models give significantly larger reductions in environmental costs than the ExternE methodology. • The ExternE methodology does not include for instance reductions in PAH or benzene. * A European Union project for estimating the external costs of different fuel cycles; see http://externe.jrc.es **Negative numbers are due to an increase in estimated emissions.

23. Table of contents 1 Background and Objectives 2 Summary 3 Approach and Methodology 4 Motivation and Introduction of Improved Fuel Qualities 5 Tax Differentials and Market Drivers 6 Industry Response 7 Environmental Benefit 8 Lessons Learned A Appendices

24. 3 Approach and Methodology Four separate analyses were carried out for the case study Case Study Establish Sponsors Objectives BackgroundResearch Preliminary Analysis Review Preliminary Findings Final Analysis • Kick-off meetingFebruary 27, 1998 • Interviews • Document review • Sponsors meetingApril 15, 1998 • Final Presentation Motivation and Introduction of Improved Fuel Qualities • Swedish EPA • Swedish and Finnish Ministries of Environment and Tax Authorities • Swedish and Finnish petroleum organizations Tax Differentials and Market Drivers • Swedish Ministry of Finance; Tax Authorities and EPA • Finnish Ministries of Taxation and Transport • Swedish and Finnish Petroleum organizations Interviews and Data Sources Industry Response • Interviews with Swedish and Finnish refiners • ADL in-house databases • Environmental permit documentation and other publicly available material • ADL final judgement • Reality check with refiners Environmental Benefit • Swedish EPA and Statistical Central Bureau (SCB) • Technical Research Centre of Finland (VTT) • European Commission • Scientific literature • ACEA • Motortestcenter (Sweden) • Automotive manufacturers

25. 3 Approach and Methodology – Establish Sponsor Objectives The kick-off meeting allowed interested parties to comment on our proposed approach and to highlight their interests and concerns • Arthur D. Little • • Presented initial approach • Sought feedback on participant’s objectives and concerns • Oil Companies • • Concern over maintaining confidentiality • Agreement to review initial findings • Automotive Manufacturers • • Interest in impact of fuel specification changes • Agreement to assist in environmental impact Kick-off meeting • Swedish and Finnish Governments • • Sponsors of the case study • Desire to pass experience on to other E.U. Countries

26. 3 Approach and Methodology – Motivation and Introduction of Improved Fuel Qualities To understand driving forces for the Swedish and Finnish governments we needed to understand the relationship between improved fuel quality and environmental benefits Improvedfuel qualities Reducedemissions Improvedair quality Environmental benefits Aspects studied: • Carbon monoxide (CO) • Hydrocarbons (HC) • Nitrogen oxides (NOX) • Particulate matter (PM) • Sulfur (SO2) • Polyaromatic hydrocarbons (PAH) • Improved human health • Reduced corrosion • Improved crop yield • Less acidification, eutrophication and forest damage • Gasoline - history and quantities • Diesel - history and quantities Input for evaluation: • Relationship between fuel quality and emissions • The relationship between improved air quality and environmental impact • External cost estimates (ECU/ton pollutant) • Changes in specifications • Volumes sold for 1990-1996

27. 3 Approach and Methodology –Tax Differentials and Market Drivers • We analyzed the taxation systems to establish how the incentives were provided... Oil Companies Refinery Wholesale Depot Distributor Retailer Consumer “Refinery gate” product prices Retail revenues Taxation Government

28. 3 Approach and Methodology –Tax Differentials and Market Drivers ...and analyzed the size of tax differences with respect to fuel supply and demand factors Fuel Supply Factors Fuel Demand Factors • Refinery configuration • Crude oil slate • Industry structure • Consumers “willing to pay for cleaner fuels” • Industry structure

29. 3 Approach and Methodology – Industry Response • Estimates of capital and operating cost were developed using publicly available information and discussions with refiners Increased Operating Costs Refinery Capital Investments • Operating and raw material cost changes were determined from in-house databases and environmental permits for each refinery configuration • Allocation of costs to the improved quality fuels was made • Refinery configuration changes have been established using public information and environmental permits • A judgement was made of which investments were made directly as a result of fuel specification changes Crude/Feed Slate/Cost Product Mix Utility/Intermediate Costs In-house databases Energy Increases Emissions Changes Product Costs (by grade)

30. 3 Approach and Methodology – Industry Response • Operating cost changes were assessed from in-house databases, press and government sources Feedstocks and Products Product Specifications • Crude oil, condensate, atmospheric residues and other intermediate feedstock usage was drawn primarily from OECD sourcesFindings were combined with information in environmental permits and annual operating reports from refineries • Product specifications were established from in-house databases Preliminary Incremental Operating Cost Assessment Yields and costs • Process unit yields and costs was taken from ADL databases for similar refineries • Findings were combined with historical cost information from industry reports and environmental permits Refinery Unit Capacity • Unit capacity was established from environmental permits and industry journals

31. 150 100 Million ECU 50 0 1990 1991 1992 1993 1994 1995 1996 Gasoline Diesel 3 Approach and Methodology – Industry Response • Key messages are presented on an aggregate basis for Finland and Sweden Individual refinery estimates are aggregated... ... and segmented by investments, operating costs and fuel types Investments: Preem Neste 100 Operating Costs: 80 60 Shell 40 Million ECU 20 0 1990 1991 1992 1993 1994 1995 1996 Gasoline Opex Diesel Opex Sweet Crude costs

32. 3 Approach and Methodology – Environmental Benefit • Environmental benefit has been evaluated in terms of reduced environmental costs Improved fuel qualities enter the market Changes in fuel consumption patterns Reducedenvironmentalcosts Reduced emissions Tax differences Total changes in emissions External costs of emissions • European Union ExternE Study National emission estimates Average change in emissions due to fuel quality • calculated by: • reviewing available literature data • EPEFE equations

33. 3 Approach and Methodology – Environmental Benefit • The external costs of air pollution has been estimated in the European Union’s ExternE* project • The purpose of the ExternE project is to develop a unified methodology for quantifying the environmental impact and social costs associated with the production and combustion of energy • Each country in the EU and Norway have calculated the external costs of emissions (CO, HC, NOx, PM and SO2) from energy production • External costs are defined as costs associated with an activity of a group or a second group which are not fully accounted for by the first group (e.g.) • health effect costs for senior citizens from truck transport in cities • crop damage from road transport ? *See http://externe.jrc.es

34. W a t e r < 0 . 1 % < 0 . 1 % a s e d o n t h e c o s t s o f l i m i n g o f S w e d i s h a k e s . 3 Approach and Methodology – Environmental Benefit • Effects on human health represent the largest proportion of unit damage costs estimates % o f % o f % o f c o m m e n t s : d a m a g e d a m a g e d a m a g e c o s t c o s t c o s t e s t i m a t e e s t i m a t e e s t i m a t e S O N O P M 2 X H e a l t h 8 7 % 9 0 % 9 7 % B a s e d o n t h e v a l u e o f s t a t i s t i c a l h u m a n l i f e ( V O S L ) , m e d i c a l e x p e n s e s , v a l u e o f w o r k d a y s l o s t a n d W i l l i n g n e s s t o P a y ( W T P ) t o a v o i d r e s p i r a t o r y s y m p t o m s . B u i l d i n g s 1 0 % 1 0 % 3 % B a s e d o n t h e c o s t o f r e p a i r a n d m a i n t e n a n c e o f d a m a g e d b u i l d i n g s a n d m a t e r i a l . H i s t o r i c a l a n d c u l t u r a l b u i l d i n g s h a v e h i g h e r c o s t s . C r o p s 3 % < 0 . 1 % B a s e d o n t h e d a m a g e c o s t d u e t o a c i d i f y i n g p o l l u t a n t s ( c r o p y i e l d l o s s a t i n t e r n a t i o n a l m a r k e t p r i c e s ) . B l

35. 3 Approach and Methodology – Environmental Benefit • Changes in emissions due to improved fuel qualities was based on review of emission studies and the Auto-Oil EPEFE equations Literature data Swedish and Finnish national data Emission Data EPEFE Equations EPEFE Programme A set of multivariate equations which relate vehicle emissions to fuel quality Auto-Oil Programme • EPEFE = European Programme on Emissions, Fuels and Engine Technologies • identified the effect of fuel quality on vehicle emissions • separated the effect that each fuel parameter had on emissions • Cooperation between the European automotive and oil industries to identify which new measures would be required to meet EU air quality objectives • cost-effective • based on scientifically sound data

36. Table of contents 1 Background and Objectives 2 Summary 3 Approach and Methodology 4 Motivation and Introduction of Improved Fuel Qualities 5 Tax Differentials and Market Drivers 6 Industry Response 7 Environmental Benefit 8 Lessons Learned A Appendices

37. PAH SO2 HC VOC PM NOx 4 Motivation and Introduction of Improved Fuel Qualities – Summary • Finnish and Swedish legislation introduced improved fuel qualities mainly to reduce the impact of vehicle emissions on human health Improved fuel qualities Improved air quality Benefits Reduction of substancesin emissions Gasoline Improved human health • benzene • hydrocarbons (HC) • carbon monoxide (CO) • volatile organic compounds (VOC) • nitrogen oxides (NOx) • sulfur oxides (SO2) • particulate matter (PM) • polycyclic hydrocarbons (PAH) • maximum benzene content • maximum and minimum oxygen content • maximum vapor pressure • Reduction of: • cancer • respiratory ailments • damages to the central neural system Reduced environmental impact Diesel • acidification • greenhouse effect • eutrophication • damages to trees and crops by ozone • maximum sulfur content • maximum aromatic content • minimum cetane number

38. 4 Motivation and Introduction of Improved Fuel Qualities – Gasoline • Finland and Sweden introduced improved gasoline qualities in order to reduce emission of benzene, hydrocarbons, CO and NOx Substance mainly reduced in car exhaust Fuel parameter specified HC CO VOC SO2 NOx PM PAH Benzene content(max) O2 content(min/max) Sulfur content(max) Aromatic content(max) Final Boiling Point (FBP)(max) Reid Vapor Pressure (RVP)(max) E100(min) Common parameters limited in Swedish and Finnish improved gasoline qualities.

39. 4 Motivation and Introduction of Improved Fuel Qualities – Diesel • Changes in diesel quality were designed to reduce sulfur, NOx, PM and polyaromatic hydrocarbons and thereby improve urban air qualities Substance mainly reduced in car exhaust Fuel parameter specified HC CO VOC SO2 NOx PM PAH Max sulfur content Max aromatic content Fuel parameter specified Impact on air quality Distillation range, max spread • A narrow and well defined distillation range improves engine operation and thereby leads to reduced emissions in general Cetane number • Emissions of NOx decrease with a higher cetane number - a high cetane number does not guarantee lower emissions of other substances Density • Too high density leads to increased emissions • Too low density results in poorer engine output Common parameters limited in Swedish and Finnish enhanced quality fuels.

40. 4 Motivation and Introduction of Improved Fuel Qualities – Benefits • The main benefit of improved fuels is expected to be improved health Benefit to society Reduced substance in air Health Environment Other • Reduced cancer HC • Reduced respiratory illness • Reduced cancer • Reduced damage to plants and crops by ozone* CO • Improved ability of blood to transport oxygen to the brain • Reduced greenhouse effect VOC • Reduced respiratory illness • Reduced cancer • Reduced damage to plants and crops by ozone* SO2 • Reduced respiratory illness • Reduced acidification • Reduced damage to buildings and stone materials NOx • Reduced respiratory illness • Reduced cancer • Reduced acidification and eutrophication • Reduced damage to plants and crops by ozone* • Reduced damage to buildings and stone materials PM • Reduced respiratory illness • Reduced cancer • Improved visibility PAH • Reduced cancer * NOx, HC and VOC are sources to photochemical oxidation substances that produce ozone.

41. 4 Motivation and Introduction of Improved Fuel Qualities – Chronology • While the purpose for enhanced fuel qualities was the same in both Finland and Sweden the timing of their introduction was different Diesel - Sweden Diesel & Gasoline - Finland Gasoline - Sweden • January 1, 1991Swedish legislation included specifications for improved diesel qualities • MK1 diesel • MK2 diesel • Finnish legislation included specifications for improved: • gasoline quality - Reformulated gasoline (January 1, 1993) • diesel quality - Reformulated diesel (July 1, 1993) • December 1, 1994 Swedish legislation included specifications for improved gasoline qualities • MK2a gasoline • MK2b gasoline • MK2c gasoline 1990 1991 1992 1993 1994 1995 1996 1989 Neste introduced oxygenated gasoline in Finland Preem (formally OK Petroleum) introduced MK2 gasoline in Sweden Swedish oil companies voluntarily agree to sell only MK2 gasoline

42. 4 Motivation and Introduction of Improved Fuel Qualities – Gasoline Finland • Since 1993 Finland classifies gasoline according to limits on benzene, oxygen content and vapor pressure Jan. 1, 1993 Gasoline specifications Gasoline specifications • Finland follows EN 228 standards • Reformulated gasoline • maximum benzene content of 3 vol% • oxygen content minimum of2 wt% • maximum vapor pressure • summer quality: 70 kPa • winter quality: 90 kPa • Lower qualities carry a 0.008 ECU/liter higher excise tax • EN 228 mandatory minimum requirement (standard quality)

43. 4 Motivation and Introduction of Improved Fuel Qualities – Gasoline Finland • Two years after Finnish legislation, reformulated gasoline had a market share of about 90% Fuel mix of gasoline sold in Finland 1989-1996 Finnish legislation on reformulated gasoline

44. 4 Motivation and Introduction of Improved Fuel Qualities – Gasoline Sweden • Since 1994 Sweden classifies gasoline according to limits regarding a wide range of parameters Dec. 1, 1994 Gasoline specifications* Gasoline specifications • Sweden follows EN228 standards • MK2 gasoline • maximum benzene content of 3 vol% • Maximum oxygen content of 2 wt% • maximum vapor pressure • summer quality: 70 kPa • winter quality: 95 kPa • MK2 gasoline is considered a transitional class which will eventually be replaced by an MK1 gasoline grade • Lower qualities carry a 0.007 ECU/liter higher tax • EN228 mandatory minimum requirement (MK3)

45. 4 Motivation and Introduction of Improved Fuel Qualities – Gasoline Sweden • Less than one year after legislation, MK2 gasoline had a 100% market share Fuel mix of gasoline sold in Sweden 1989-1996 Swedish oil companies only sell MK2 gasoline after June, 1995 Swedish legislation on MK2 gasoline

46. 4 Motivation and Introduction of Improved Fuel Qualities – Diesel Finland • Since 1993 Finland classifies diesel by setting limits on sulfur content, aromatic concentration and cetane index July 1, 1993 Diesel specifications Diesel specifications • Finland follows European standard • Maximum sulfur content of 2000 ppm (wt.) regulated by Finnish legislation • Reformulated diesel • maximum sulfur content of50 ppm • maximum aromatic content of 20 vol% • minimum cetane index of 47 • Lower qualities carry a 0.025 ECU/liter higher tax • EN 590 as mandatory minimum requirement (standard diesel)

47. 4 Motivation and Introduction of Improved Fuel Qualities – Diesel Finland • Reformulated diesel was introduced and in one year had over half of the Finnish diesel market Fuel mix of diesel sold in Finland 1989-1996 Finnish legislation on reformulated diesel

48. 4 Motivation and Introduction of Improved Fuel Qualities – Diesel Sweden • In 1991 Sweden first classified diesel into three classes by setting limits on sulfur content, aromatic concentration and distillation range Diesel specifications Diesel specifications Jan. 1, 1991 • Swedish standard • MK1 diesel • maximum S content of 10 ppm • maximum aromatic content of5 vol% • distillation range: 180-285 oC • MK2 diesel • maximum S content of 200 ppm • maximum aromatic content of 20 vol% • distillation range of 180-295 oC • 0.024 ECU/l higher tax than MK1 • EN 590 as mandatory minimum requirement (MK3) has 0.041 ECU/liter higher tax than MK1 • Sulfur tax on fuels exceeding 1000 ppm ensured that MK3 has a sulfur content <1000 ppm

49. 4 Motivation and Introduction of Improved Fuel Qualities – Diesel Sweden • In 1992 the specifications of MK1 and MK2 were revised Diesel specifications as from Jan. 1, 1992 MK1 MK2 MK3 Sulfur, ppm 10 50* 2000 • The oil industry and the environmental organizations requested the specifications on diesel MK1 and MK2 be revised Aromatics, vol% 5 20 - PAH (3 rings and more), vol% 0.02 0.1 - Cetane index, min 50 47 46 Density, g/liter 800-820 800-820 820-860 Distillation** (T95) oC 285 295 - Revised specifications per Jan. 1, 1992 * Sulfur changed from 200 to 50 ppm. **Distillation was changed from a range to Initial Boiling Point to T95.

50. 4 Motivation and Introduction of Improved Fuel Qualities – Diesel Sweden • While MK1 was intended to be a ”city diesel” it has taken over 80% of the market Fuel mix of diesel sold in Sweden 1989-1996