Success in the Gasohol Business: Case Study from the Bangchak Petroleum Public Co. Ltd.

Transcription

1 Asia-Pacific Environmental Innovation Strategies (APEIS) Research on Innovative and Strategic Policy Options (RISPO) Good Practices Inventory Success in the Gasohol Business: Case Study from the Bangchak Petroleum Public Co. Ltd. Summary of the Practice Keywords: Gasohol, Bangchak, ethanol, cassava Strategy: Promotion of biomass energy Environmental areas: Climate change, urban environment, air pollution Critical instruments: Awareness/capacity building, Economic instruments, Self-regulation, Partnerships, Technologies Country: Thailand Location: Bangkok, Nonthaburi, Prathumtanee, and Samutprakarn Participants: Pornwilai International Group Company Limited and Thai Ethanol Company Limited Duration: 2001 present Funding: Self-funded Background: A gasohol project in Thailand began in 1985, after His Majesty King Bhumibol expressed concern over the country s dependence on imported fuel, while local agricultural products were unfavourably priced. His Majesty initiated a royal project at the Chitralada Palace to study the use of sugarcane as a raw material for ethanol production. The ethanol is then mixed with gasoline to produce gasohol. Experiments have been conducted with vehicles as part of the project since Experiments in both light and heavy engines yielded good results in the laboratory and in road tests. Unfortunately, during that period, the production cost of gasohol was still higher than market prices for gasoline. Thus, the gasohol project was not commercially viable at the time. Since 2000, however, the grim fact became apparent that the world s petroleum reserves are limited, while, at the same time, petroleum consumption continues to rise. In Thailand, gasoline retail prices have risen sharply and unexpectedly. Accordingly, with concern about this situation, the Thai government has begun to pay more attention to alternative fuels to replace imports, as shown below. 1. The Thai government, led by the Cabinet and the Ministry of Industry, agreed to establish the Office of the National Ethanol Committee (ONEC) in 2000 as an official centre for ethanol studies and production. ONEC has since played a critical role in the establishment of a longterm strategic plan and ethanol fund, setting up regulations and amendments according to the governmental policy, as well as carrying out the strategies. 2. According to a governmental agreement in December 26, 2000, many related agencies were assigned to take action in supporting the use of ethanol: (1) The Ministry of Finance was assigned to prepare a tax exemption to improve the competitiveness of ethanol. (2) The

2 Department of Business Development was assigned to set up specifications on gasohol quality. (3) The Ministry of Agriculture was assigned to study the availability of agricultural products or ethanol source materials in Thailand. (4) The Ministry of Industry was assigned to establish experimental studies and work on the ethanol mixture proportion in gasohol. (5) The Petroleum Authority of Thailand (PTT) was assigned to lead the drive to promote gasohol production and distribution. (6) Finally, general governmental agencies were assigned to help promoting the use of gasohol by using it in their own vehicles. 3. Ethanol and gasohol market development has been facilitated through various supporting measures, including regulatory development and creating a favourable market environment. At the beginning, however, even though these critical measures were established, their effectiveness was not obvious and gasohol production seemed not to be commercially viable. Figure 1: BCP logo Source: The Bangchak Petroleum Public Co. Ltd. (BCP), known as the first Thai oil refinery established by the Ministry of Defence in 1964 with the aim of maintaining energy security for the Thai people, is really the only oil refinery that has been interested in gasohol since the beginning. With strong motivation and vision, the BCP first realised the significant market potential of gasohol and initiated a study of large-scale production and distribution, which benefits farmers as well as maintains energy security for the country. Finally, the BCP officially decided to produce gasohol. This marked the first milestone of Gasohol 95 market development in Thailand. Objectives: Procure ethanol from various sources to produce enough gasohol in order to secure a supply. Sustain gasohol security for Thailand and nearby countries. Lead the energy market in sustainable business along with environmental concerns. Add value to local agricultural products. Description of the activity: Gasohol 95 is a mixture of gasoline and ethanol. The virgin alcohol (99.5 percent concentration) has characteristics generally equal to 95 percent octane gasoline, but the price is cheaper by 50 satang per litre (100 satang=1 baht). 1 At the beginning of the Gasohol 95 project in 2001, the BCP started testing consumer response at four gasohol stations in Bangkok with the campaign Quality 95 but saving by Price 91 to distribute the first lots of Gasohol 95 and to study consumer behaviour. Consequently, the BCP found that people are very interested in the product, but the production cost of gasohol at the time was still higher than conventional gasoline, due to a lack of supportive policy, no tax exemption, and a shortage in ethanol supply. Therefore, the BCP had to stop distribution and wait for the next step of commercial gasohol production and distribution. 1. Conversion: baht=1 U.S. dollar (31 July 2004)

3 Since 2003 the retail price of gasoline has been rising rapidly. This allowed the BCP to proceed to the second step, which is to reach for appropriate economies of scale in gasohol distribution. With full support from the Thai government, the BCP decided to expand gasohol consumption by producing and officially distributing Gasohol 95 at 99 BCP gas stations in December For the ethanol supply to serve the commercial production of Gasohol 95, the BCP negotiated with the Pornwilai International Group Co. Ltd. known as the first manufacturer in Thailand, producing 99.5 percent ethanol from cassavato purchase 15,000 litres of ethanol per day. This meant that the BCP could produce 150,000 litres of gasohol to serve daily fuel consumption as well as play a role in securing ethanol demand. There are now 146 gasohol stations established in Bangkok, Nonthaburi, Prathumtanee, and Samutprakarn. With excellent provision and good consumer acceptance, Gasohol 95 sales are growing by approximately 15 percent per month. Figure 2: Gasohol storage tank at BCP Photograph by Pataitat Indradat Even though Gasohol 95 distribution from the BCP was very popular among the public, it had to realise that the major obstacle was to have the automotive industry acknowledge the quality of the product. In order to get this approval and acceptance, the BCP had to work hard to improve gasohol quality and identify the specific requirements of automotive producers, especially in improving vapour pressure and lowering corrosiveness, as well as to certify its product. Recently, these improvements have just been acknowledged by an official statement from many automotive manufacturers in support of gasohol as an alternative fuel. Accordingly, due to the supportive government policy, the ethanol supply from a number of new ethanol producers will be increasing. Thus, in the fourth quarter of 2004, the BCP was planning to purchase more ethanol from new producers such as the Thai Ethanol Co. Ltd., a subsidiary of the Sang-Som Group, for a daily supply of 70,000 litres of ethanol. Moreover, in 2005, with a secured ethanol supply, the BCP plans to be the market leader in gasohol distribution and officially produce 91 percent octane gasohol, Gasohol 91, to serve consumers as well as to retain the major part of the supply share before the phase-out of carcinogenic methyl tertiary-butyl ether (MTBE) in Critical Instr uments Overview Recently, gasohol has become popular as an alternative fuel in Thailand. The success of promoting gasohol in the domestic market is largely due to a combination of critical instruments, namely, awareness/capacity building, economic instruments, self-regulation, partnerships, and technologies, as detailed below.

4 Awar eness/capacity building Initiating experimental testing and promoting the wide-ranging benefits of gasohol The BCP had been interested in exploring the market opportunities of gasohol. Thus, knowledge has been developed within the organisation, including technical market aspects. The BCP conducted research studies with emphasis on not only gasohol properties or availability of agricultural residues but also on commercial distribution, market trends, and environmental impact. As a result, the BCP has been recognized as the gasohol guru, the so-called Mr. Gasohol. Consequently, the Thai government assigned the BCP to be the information provider to inform customers about the benefits of gasohol. Fortunately, because of unstable retail gasoline prices and governmental policy that supports renewable energy, gasohol has become more attractive to consumers. Moreover, the general public has paid more attention to this new alternative. Thus, it has resulted in an increasing growth of Gasohol 95 consumption and a more secure national energy supply. Economic instruments Waiving of contr ibution and ethanol tax exemption Table 1: Price structure of petroleum products as of 31 July 2004 (baht per litre) Index Gasoline 95 Gasoline 91 Gasohol 95 Ex-refinery price Excise tax * Municipal tax (10% of excise tax) * Oil fund * Energy conservation fund Price fixation Wholesale price Marketing margin Value added (7%) Retail price Related Web site: * Due to the Government s scheme to promote the use of Gasohol, tax differentiation has been applied. The retail price of Gasohol 95 was reduced in order to provide a competitive advantage price. The Ministry of Finance was considering an exemption on the excise tax and municipal tax of 10 percent ( baht/litre). Moreover, the Committee on National Energy Policy had already reviewed waiving the contribution to the Oil Fund requirement, affecting a 10 percent reduction in the retail price ( baht/litre).

5 Figure 3: Ethanol Storage Tank at BCP Photograph by Pataitat Indradat Self-regulation Business cultur e and environmental concerns According to the business strategy pursued by the BCP, The sustainable development of business, the environment and society, it has long been interested in gasohol. In fact, it can be said that the major force driving the BCP to play a significant role in the gasohol market is the company s ethic of a green business culture and social responsibility. Furthermore, the strong social and environmental awareness within the organisation, especially at the executive level, is the real force contributing to the development, as the company has looked beyond business success to the social and environmental benefits for the country. Partnerships Negotiating with newcomer ethanol producers to ensure public gasohol secur ity According to the limited availability of the ethanol supply, the BCP is not producing Gasohol 95 at full capacity. At the beginning, even though there was only one ethanol producer in Thailand, the BCP was still interested in gasohol and did not hesitate to make a contract with the Pornwilai International Group Co. Ltd. for a purchase of a 15,000 litre per day ethanol supply. Hence, it can be said that the BCP has had a good business relationship with the Pornwilai International Group Co. Ltd., the major ethanol supplier, since the start. Consequently, because of the good credit gained from Gasohol 95 distribution, the BCP is now the first priority customer of new ethanol producers. Currently, the BCP is negotiating with the Thai Ethanol Co. Ltd. to purchase 70,000 litres of ethanol to increase the gasohol supply in the fuel market and finally hold the major market share. Furthermore, in 2005, the BCP is planning to purchase more ethanol from other ethanol producers. Accordingly, it seems that the BCP still plays a supportive role in environmental concerns and gains high credit from many ethanol producers along with the strengthened loyalty of customers, investors, and the public to secure the supply chain of gasohol, both upstream and downstream. Technologies Adjusting gasohol specifications to meet the octane 95 fuel standard According to the substitution of gasoline with gasohol for use as a conventional octane 95 fuel, it was necessary to adjust some specific properties that would be harmful to engines and not meet vehicle specifications. Generally, the two most significant problems are vapour pressure and corrosiveness. Known as a volatile and highly corrosive substance, ethanol can adversely affect engines, causing vapour lock in the combustion chamber and corrosiveness in certain parts of the engine. Thus, in the mixing procedure, the BCP solved this problem by preparing a low vapour pressure petroleum base before mixing, and then installing a blending machine for mixing additives, such as an anti-corrosive, to lessen corrosiveness. Accordingly, Gasohol 95 produced by BCP has been approved by the Department of Business Development and the EURO 2 standard. Thus, it can be used in most vehicles. However, the BCP does not guarantee that Gasohol 95 can be used effectively in the carburetor type of engine.

6 Impacts The substitution of gasoline with ethanol contributes to environmental protection. Combustion of Gasohol 95 produces lower amounts of hydrocarbons, carbon monoxide, and carbon dioxide than general octane 95 gasoline, and it also reduces levels of black smoke, aromatic hydrocarbons, and dust emissions in exhaust gases. Utilising agricultural products as the raw material for ethanol production has brought about a reduction of imported MTBE, lessened the balance sheet deficits of the country by about 3,000 million bath, helped spread local investment, and provided jobs in rural areas, especially for farmers, so that they can sell their products at higher prices. At the global level, it will conserve limited gasoline supplies. Using ethanol mixed with gasoline will reduce gasoline consumption by 10 percent, or million litres per month. 2 The development of the gasohol market has attracted other gasohol producers to get involved. Consequently, this competitive situation will provide more of a market initiative for ethanol producers and, thus, raise the supply security of gasohol and satisfy the demand for gasohol in the future, while drawing public interest to the greener alternative. Lessons Learned Being the first player in the new market brought about business risks in terms of technical and marketing issues. The BCP had to carefully focus its activities on the performance of gasohol, while market research was also carried out to study the issues of concern, such as customer behaviour, demand and supply balance, and price forecasting. Making the first move, however, gave the company an enhanced competitive advantage and brought it to a strategic position in the fuel market. The BCP won high recognition and a good image from the stakeholders point of view, not only among related governmental agencies but also among ethanol producers, customers, and the general public. Technology modification is one of the major factors to consider in product innovation. In producing gasohol, the BCP needed to modify its production process. Employing a simple refinery technology, not a complex one like other large refineries, gave the company more flexible to become a pioneer in gasohol distribution from both the environmental and business aspects. 2. In 2003, consumption of Gasoline 95 and 91 was, respectively, 255 and 375 million litres per month on average, or 8.5 and 12.5 million litres per day (based on a summary report from the Department of Energy Business).

7 Potential for Application Even though the actions of the private sector played a critical role in initiating the gasohol market, it cannot be denied that the supporting measures of the government have been the most crucial factor in the success of wide-spread gasohol distribution, including the restructuring of ethanol taxes and the national agenda to ban the use of MTBE in 2006, as well as an emergence of ethanol producers and related agencies. Accordingly, the Gasohol 95 project will enhance rural economics and the nation s power supply security in the face of the oil crisis. Generally, it can be emphasized that this project is suitable for any agricultural country that has a significant availability of appropriate agricultural products, because more agricultural supply leads to more ethanol producers, which can then supply ethanol for gasohol production as well. Moreover, a supporting framework from the government, as indicated in environmental policy, energy policy, and economic policy, is also considered necessary. Lack of government support, however, will lead to the confusion in gasohol supply planning and potential for application. Contact Dr. Anusorn Sangnimnuan Acting Senior Executive Vice President Bangchak Petroleum Public Company Limited 210 Sukhumvit 64, Phrakanong, Bangchak, Bangkok Tel: Fax: Services Center: Ph: Web site: info@bangchak.co.th References Standing Committee on Energy, the House of Representatives ( Office of the National Ethanol Committee of Thailand ( Ethanol Thailand Project ( Case reviewer: Pataitat Indradat, Research Assistant, Thailand Environment Institute (TEI) pataitat@tei.or.th Information date: 30 July 2004