Fuel traders win major battle

  • 2005-11-23
  • By Kairi Kurm
TALLINN - Foreign fuel retailers were beside themselves after the Ministry of Environment decided to postpone a regulation that would ban the sale of sulfur-gasoline and allow domestic competitors to continue importing lower quality Russian and Belarusian fuel.
The government, alarmed at the rapid rise in inflation, fears that the exodus of smaller fuel distributors will further exacerbate prices and harm the country's ambition to join the eurozone at the earliest possible date in 2007.

The ministry originally passed the sulfur-free fuel regulation this year, with the aim to have it go into effect Jan. 1, 2006.

Foreign retailers Neste, Statoil and Hydro Texaco protested the move. "Some companies adhere to the law and are ready to sell sulfur-free diesel and meet Ministry of the Environment regulations as foreseen in the act of May 19, 2005," said Helle Kirs, managing director of Eesti Statoil.

"It is regrettable that other companies refuse to follow the legislation and put pressure upon changes in law on the assumption of their business interests," said Kirs.

The amendment postponing the ban was prepared by 10 fuel retailers who buy gasoline containing up to 50 milligrams of sulfur per kilogram. It is estimated that half of Estonia's gasoline is purchased from these suppliers, who import from Russia and Belarus. They control approximately half of the retail fuel market.

Currently, fuel suppliers in Russia and Belarus are unable to sell sulfur-free fuel (actually containing up to 10 milligrams of sulfur per kilogram) due to market demands. However, they are preparing to increase output capabilities by Jan.1, 2009, when, in accordance to EU regulations, only sulfur-free fuel can be sold in member states.

Estonian importers also claim that pushing gasoline with sulfur out of the market will lead to a "monopoly" on behalf of Finland's Porvoo refinery and Lithuania's Mazeikiu Nafta.

Ando Raud, head of Mokter, a company engaged in fuel wholesale, said purchasing sulfur-free diesel from Mazeikiu Nafta would be expensive since retailers could not buy directly from the refinery but through its trading arm in Estonia, Mazeikiu Nafta Trading House.

Shipping fuel from Finland, Sweden and Norway is even more expensive, he added. "This may lead to a number of bankruptcies of fuel retailers," he said.

Lembit Eespaev, head of Jetoil, a fuel wholesale company, said that Russian fuel would always be cheaper than that of competitors, since Russian companies are vertically integrated and control the whole production chain starting from well to pump.

Villem Tori, director of the Union of Estonian Automobile Enterprises, said that Lithuanian and Latvian transportation companies would have received a competitive advantage on the transit market if the amendment had not gone through since the sale of sulfur-gasoline will not be banned in the neighboring countries next year.

Finally, a ban would also have led to an increase of illegal trading with Estonians trekking to Russia to fill up their tanks with cheaper gas. One truck can take 1,000 liters of fuel and with 200 trucks passing the Ikla customs point daily, the state may lose significant tax revenues, said Katri Laanela, head of fuel wholesale company Saurix Petroleum.

According to Tori, fuel prices have increased about 80 percent since Estonia joined the EU in May 2004, and automobile enterprises can not survive another price hike. He couldn't say how high the price might have increased had the amendment not gone through.

"Estonia has moved toward environmental friendly production too fast, from 350 mg just a few years ago to 50 mg and now 10 mg, outracing EU norms. That is not wise," said Tori.

Tonu Aaro, manager of Mazeikiu Nafta Trading House, said that the price of sulfur-free diesel was only 0.04 kroon more expensive per liter on average in a yearly basis, and not some 0.40 kroons as claimed by those supporting gas with a high sulfur content. The company currently sells both products for the same price.

He did admit that there could be a price-hike in the logistics chain now that the ban has been postponed. "It will be most difficult for small retailers who have to invest in new containers and tanks," he said. "They have not perceived that the sales of sulfur-free diesel is still compulsory even if the sales of higher-sulfur content diesel is allowed."

Aaro said the Ministry of the Environment should have proceeded from the environmental aspect.

Kirs agreed. "By arguing around the business we forget the main aim of the act 's to create a cleaner living environment. Why postpone the amendment another three years?" she said, adding that in Tallinn alone busses consume 30,000 liters of gasoline per day.

The initial law to ban high-sulfur diesel in January 2006, three years before the date set by the EU, was suggested by fuel retailers themselves, said Viktor Grigorjev, adviser of the environmental management and technology department at the Environment Ministry.

"Due to changes in the world economy and the situation on the fuel market, it is necessary to avoid a price-hike that may occur with the change of sulfur content by postponing the distribution of diesel containing up to 50 milligrams of sulfur per kilogram until the deadline given in the directive," he said.