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In Europe, the more ambitious targets in the reduction of greenhouse gas emissions are bound to boost demand for biofuels. Globally, a shift to lower sulfur road fuels is seeing more and more countries adopt the European specifications for diesel and gasoline. This is on top of an industry transformation toward cleaner bunker fuels set to impact the balance of refined products across the world.

In 2020, each European Union member will need to meet specific national renewable energy targets set by the European Commission's directive 2009/28/EC, taking into account each country's starting point and overall potential for renewables. These targets range from a low of 10% in Malta to a high of 49% in Sweden. However, each country has remained free to set out how it plans to meet these 2020 targets.

One way to meet these 2020 targets is by blending more biofuels into road fuels, with an increasing number of countries adopting E10 gasoline, which contains up to 10% ethanol, twice as much as the current E5 standard.

In 2019, the Netherlands became the latest European country to introduce E10 gasoline, following Finland, Belgium, France and Germany.

In France, E10 sales have now overtaken E5 deliveries. Growth of the E10 ethanol blend have been hindered in Germany by consumer belief that it could harm car performance. Meanwhile, the UK has yet to introduce E10 despite a very ambitious clean energy target, because most fuel stations do not have enough tanks to offer both E5 and E10 simultaneously.

BIOFUEL HURDLES

Looking at automotive diesel -- officially called B7 in the EU as it comprises up to 7% of FAME biofuel (fatty acid methyl ester) -- different countries will face different challenges in 2020.

In Germany, greenhouse gas emissions will need to be cut by 6% from 2010 levels, versus a previous target of 4%. In France, any biofuel made from palm oil -- coming notably from Total's La Mede bio-refinery -- are no longer able to count towards the reduction in greenhouse gas emissions. Many traders expect a squeeze on biodiesel and consequent price rise this year with Neste and Total being the only major producers for Europe.

Traditionally, stringent jet fuel specifications, for example a flashpoint of 38 degrees C and maximum freeze point of -47 degrees C, have been a hurdle to achieving greener jet fuel. Still, biojet fuel is likely to be a growing topic of conversation this year.

The final quarter of 2019 saw KLM agreeing a deal to purchase sustainable aviation fuel produced by Neste. Meanwhile, the International Air Transport Association requested that the EU's Green New Deal launched on December 11 promote sustainable aviation fuel. However, airlines fear that any new mandate not implemented across a level playing field globally would hit their competitiveness since biojet is currently much more costly than traditional jet A1.

LOWER SULFUR FUELS

This year, three heavyweights gasoline consumers are set to switch to a specification of similar to that of the Euro 5 standard used in Europe, with a sulfur limit of 10ppm, 35% aromatics and 1% benzene.

The US adopted tier 3 standards on 1 Jan 2020, which means less sulfur in the fuel and lower exhaust emissions of nitrogen oxides.

India will move to BS VI specifications which limit the sulfur levels for road fuels to max 10ppm from April 2020.

China is implementing Euro 6 equivalent fuel standards and favoring higher levels of ethanol and biodiesel in the blend. The move has been phased in from 2019 and should be completed country-wide by 2022.

Similarly, Russia is seeing its own shift. Gasoline demand has remained fairly constant, but domestic diesel demand has been growing as Euro 5 diesel has been gradually replacing counterfeit distillates. In 2019, domestic shipments of 10 ppm diesel rose by 8.3% and the trend is likely to be maintained in 2020 as authorities have tightened the control. But with Russia consuming only around half of its diesel output, exports are not expected to suffer.

So far, little if any incremental demand for 0.1% sulfur marine fuels has been seen as the new International Maritime Organization rules came into force at the start of the year. IMO 2020 lowers the sulfur cap of bunker fuels to 0.5% from 3.5%. According to market participants, the shippers' transition to 0.5% very low sulfur fuel oil has been smooth, although there could be a flight to 0.1% marine gasoil if stability issues arise or VLSFO stocks run dry. Some traders don't expect to see a significant increase in demand for 0.1% marine gasoil before the spring when refinery maintenance season starts and production of VSFO becomes insufficient.