Roger Vielvoye
International Editor
Unleaded gasoline continues to expand its share of European markets, although the pace of change from leaded fuels is still uneven.
Market penetration by unleaded gasoline has a strong regional bias. Northern Europe, where unleaded was first introduced in West Germany 6 years ago, has high levels of unleaded consumption.
But in southern Europe, unleaded sales are slow, reflecting limited supply and in some cases absence of any incentive for drivers to make the change from leaded motor fuel.
Oil companies in the large West German market report that about 65% of retail sales are unleaded and still rising. At the other extreme, in Spain and Portugal, unleaded's market share is still less than 1 %.
Even less progress toward introduction of unleaded has been made in the newly opened countries of eastern Europe.
In the past, state refining and distribution companies in those countries catered almost exclusively to a small domestic market. Now, borders are open to vehicles from the West, particularly West Germany, which require unleaded gasoline. In addition, motorists in eastern Europe are starting to acquire imported automobiles that require unleaded.
East Germany is pioneering introduction of unleaded fuel through joint ventures with West German companies. Other former Soviet satellites are expected to follow.
About 66% of Europe's 135,000 gasoline stations offer unleaded gasoline. Unleaded's market share has risen from almost 27% at the end of last year to more than 30%.
At the beginning of this year Europremium 95 RON/85 RON was available at more than 81,400 stations, superpremium 98 RON at 25,580 stations, and regular 91/92 RON at a little more than 21,100 outlets.
Substantial price increases throughout Europe as a result of the Middle East crisis helped emphasize the spread between unleaded and leaded. Companies say this could boost sales of unleaded, which carries a cheaper pump price than leaded.
REFINERS' SPENDING
European refiners face big investment decisions to meet changing market trends in the 1990s. However, apart from some new reforming and isomerization units in southern Europe, capacity to meet future unleaded demand does not play a major role in investment programs.
A multiclient study by Arthur D. Little (ADL) forecasts that European refiners will have to spend $6 billion to upgrade capacity before the turn of the century.
Reducing the sulfur content of diesel fuel and positioning manufacturing to meet the lighter barrel in the 1990s will require more spending than further elimination of lead from gasoline.
The study concludes that Europe will not necessarily follow the U.S. into reformulation of gasoline. That's because:
- Europe's gasoline pool has a much lower level of olefins than that in the U.S.
- Europe generally does not suffer from severe smog problems as seen in the U.S.
- Europe is moving toward management of all evaporative emissions through large carbon canisters on vehicles.
TAX DIFFERENTIALS
Unlike the U.S., European countries introduced unleaded gasoline ahead of compulsory fitting of catalytic converters to new automobiles. Without requiring unleaded gasoline to preserve the integrity of catalytic converters, governments in Europe turned to fiscal inducements.
The tax differential between leaded and unleaded was widened, making unleaded fuel costs substantially cheaper. It is a method that has worked effectively wherever it has been introduced in conjunction with a rapid expansion of unleaded gasoline outlets by major marketing companies.
There is a direct correlation between unleaded supply, tax incentives, and sales.
In Denmark, where there is the equivalent of 10 (U.S.)/I. tax differential between unleaded and leaded, more than 51% of gasoline sales are unleaded.
The second largest differential is in Finland's small gasoline market.
Buying unleaded fuel at the equivalent of 8/I. less than leaded encouraged Finns to make the switch to unleaded. As a result, leaded's share of the market at the end of first half 1990 had dropped to less than 50% for the first time.
At the other end of the scale, Spain's lack of incentives at the beginning of this year was reflected in the lowest level of unleaded sales in Europe.
Fiscal incentives must be linked to supply of unleaded.
In Greece there is a relatively generous 7/I. differential. However, the highly regulated market has very little unleaded to offer. Only 6.4% of Greece's 6,340 stations have an unleaded pump, and the unleaded market share is less than 1%.
LEAD REDUCTION
The European Community requires all of its 13 members to make unleaded available but does not specify how many stations should stock new fuels.
Throughout most of Europe, the leaded content of gasoline has been reduced to 0.15 g/I., although France, Italy, Spain, and Portugal still have gasoline available at higher lead levels.
Portugal, where unleaded has only limited coverage, leaded is sold with 0.4 g/I., the previous European standard. In neighboring Spain, leaded also contains 0.4 g/I. until next June when the 0.15 g/I. standard will be introduced.
The much larger Italian and French markets are also in the process of reducing the lead content of leaded gasoline. In March 1988, the lead content in French gasoline was reduced to 0.25 g/I. from 0.4 g/I - The 0.15 g/I. standard will be compulsory starting June 1, 1991.
Italy is going through a similar process. The 0.4 g/I. standard has been reduced to 0.3 g/I., and the European 0.15 g/I. standard will become compulsory June 1, 1991.
A number of countries also have phased out leaded regular grade. It is no longer available in West Germany, Holland, Belgium, Luxembourg, Britain, and Denmark.
The biggest boost to unleaded sales could come from increased sales of vehicles equipped with catalytic converters, which will become compulsory on all new cars sold in the EC from the start of 1993.
Outside the community, other countries are taking a tougher line on catalytic converters. All new vehicles sold in Norway, Sweden, Switzerland, and Austria now must have three-way converters, which again will help boost unleaded sales.
MORE ON SPENDING
The study by ADL said the major problem facing European refiners is meeting the lighter structure of the barrel in the latter part of the 1990s.
Refiners will have to spend $2 million to meet new diesel fuel specifications on sulfur. Most of the remaining $4 billion investment projection will go to prepare for the lighter barrel and further phasing out of fuel oil.
Refiners should already have embarked on a round of construction, probably centering on hydroprocessing, ADL said. But so far parent companies of all the international groups are holding out against approving the new investments.
To ensure that required necessary octanes are available, Europe also will need more methyl tertiary butyl ether, ADL said. But its study suggests this is likely to be provided in oil producing countries, where feedstock is cheaper and more readily available.
ADL said it started the study believing that what the U.S. did today Europe would do tomorrow. But this was not borne out by the study. It found that Europe will not follow the U.S. in reformulating gasoline before 2000--if at all.
One or two companies might seek a competitive edge in the market by reformulation, but the general view is that no one wants to spend large sums for a marginal commercial gain.
Almost no public pressure has been exerted in Europe for reformulation mainly because locally produced gasolines contain fewer olefins than U.S. gasolines. That's a reflection of the smaller proportion of catalytic cracking capacity in Europe.
Europe does not have the same smog problems as the U.S. Large cities such as Milan and Athens that are plagued by smog are taking steps to counter the problem by restricting the use of motor vehicles.
Europe also is well behind the U.S. on evaporative emissions. European oil companies are only just tackling Stage 1 controls to eliminate emissions from products terminals.
While the market for reformulated gasoline may not emerge in Europe, local refiners will provide for production of limited volumes of reformulated fuel so exports to the U.S. can continue.
WEST GERMANY
West Germany's market has the highest penetration of unleaded in Europe, and sales are growing briskly. All 18,271 stations in West Germany have unleaded regular, and 92% have unleaded Europremium.
At the end of last year unleaded claimed about 63% of the West German market. That had grown to about 67% at the end of the first half 1990.
West Germany is not only the biggest user of unleaded gasoline, it is one of only two countries that have significant sales of three grades of unleaded fuel.
As an EC member it is obliged to provide a Europremium 95 RON. In addition, West German service stations offer a superpremium 98 RON and a regular 92 RON, which is the best selling grade with more than 35% of the market.
The only other country with the three grades on the forecourts on a significant scale is Denmark, where the regular grade accounts for only 8% of sales--less than premium and superpremium.
Belgium is just starting to introduce regular unleaded alongside premium and superpremium. Another West Germany neighbor, Austria, also has a large market for regular unleaded.
Austrian motorists buy twice as much regular as premium, but so far superpremium is not widely available.
Three grades of unleaded flies in the face of the oil industry's intention to prevent a costly multiplicity of grades. But the growth of regular unleaded stems from the West German motorists passion for leaded regular.
Before introduction of unleaded, regular leaded had a 25% share of the European market as a whole, while in West Germany regular accounted for about 40% of all sales.
British Petroleum said West German drivers were prepared to change from regular leaded to a regular unleaded because they were more rational in their approach to gasoline buying than in other parts of Europe.
When the vehicle handbook said an engine would accept low octane leaded or unleaded, West Germans filled up with the cheaper gasoline. In other parts of Europe, drivers tended to trade up and buy unneeded octanes in the belief this would provide more power.
The same trend is starting to be seen with superpremium unleaded, introduced to meet the needs of some high performance engines and allow drivers of some models to use unleaded without costly engine conversions.
In Denmark, superpremium accounts for more than 13% of the market. In France, where unleaded is a relative newcomer, performance conscious drivers are buying six times as much superpremium as premium.
At the moment, refiners say they can handle growing demand for 98 RON superpremium, but if the trend of trading up took off there could be a shortage of octanes.
One development that has worried refiners has come from West German auto manufacturer, Volkswagen, where a new high performance engine has been produced specially designed for superunleaded. Until now, refiners has assumed new models would be designed to use the 95 RON premium.
EASTERN EUROPE
West German oil companies are now looking at the twin problems of expanding into East Germany and providing the same level of service there.
East Germany has only 1,300 gasoline outlets, and West German companies estimate about 3,000 will be required when full effects of unification are apparent.
At present, West German motorists can find unleaded hard to buy in East Germany. Only 50-60 stations have unleaded pumps, and sometimes these run dry because of distribution problems.
However, the aim of all West German companies planning to enter the East German market is to make the three grades of unleaded available, along with convenience stores and other facilities West German drivers have come to expect.
DEA, formerly Deutsche Texaco until the U.S. company sold its West German interests to local utility RWE, has taken the first steps into East Germany through a partnership with state owned Minol.
DEA says existing stations in East Germany are so old fashioned they will need complete reconstruction. Through the new partnership, it will open its first new site at Halle to be followed by two autobahn sites before yearend.
Ultimately, DEA wants to have about 200 stations in East Germany so its share of the unified market will not be less than its share of sales in West Germany.
The investment will be considerable. DEA estimates it will have to spend about 2 million marks on each station.
East Germany is expected to make the change to western style gasoline marketing much faster than any of the other former Soviet satellites that previously relied largely on the U.S.S.R. for crude and products.
State marketing organizations in East Germany know that 1950s style stations and product qualities are no longer acceptable.
They are looking for western partners to provide cash and expertise to modernize entire networks.
DEA is preparing to expand beyond East Germany through a deal with Castrol from the U.K. to set up marketing operations in Poland and Czechoslovakia. In Hungary, Royal Dutch/Shell and Total CFP are involved in the downstream business.
U.K. EXPERIENCE
Unleaded gasoline sales in Britain are close to a plateau after rapid advances in the wake of several tax changes that have widened the leaded-unleaded differential.
Market penetration by unleaded gasoline could level off at about 35% unless there are further tax incentives.
BP expects unleaded's U.K. penetration to increase from about 35% this year to 60% by 1992 on the assumption of new price differentials and regulations that require all new vehicles to be compatible with unleaded fuel.
In Britain, about 2 million new automobiles are sold each year. A similar number is scrapped, most of which used leaded fuel. With that sort of turnover in the vehicle population, most automobiles requiring leaded fuel will disappear by the end of the century. Britain is fairly typical of European countries that have made the initial breakthrough into large scale unleaded sales but have not yet seen the high levels recorded in West Germany, Switzerland, Sweden, Denmark, and Austria.
Most service stations in the U.K., even in rural areas, have at least one pump for unleaded. In urban areas, stations are approaching the time when more pumps and storage must switch to unleaded to meet demand.
In Britain, as in other countries at this midway stage, retailers find it hard to persuade some drivers of older autos the switch to unleaded can be made without an expensive engine conversion or possible engine damage.
Similar problems have been experienced in Norway, seen by other Europeans as an environmentally conscious nation. Oil companies are disappointed with the 30% share of the Norwegian market held by unleaded.
New imported cars must be fitted with catalytic converters, which ensures demand for unleaded from this sector. To get a better response from drivers whose vehicles can take unleaded without engine conversion, foreign companies operating in Norway have widened the differential between leaded and unleaded. Esso Norway is trying to solve customer uncertainty over unleaded by offering guarantees against engine damage for a range of existing models.
In Britain, introduction of 98 RON superunleaded was pioneered by BP to service the high performance end of the market, where engines have hardened valve seats but timing could not be retarded to accommodate premium 95 RON unleaded without loss of performance.
BP estimates superunleaded accounts for 8-10% of total British sales. Of the company's 1,750 U.K. retail outlets, 800 offer superunleaded. The company expects superunleaded's penetration of the market to stay at about the present level.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.
