Known unknowns in the German road fuel market

Author Charlotte Blum, Analysis Editor

Integrated oil companies may be better equipped than their smaller competitors to meet the rising cost of compliance with Germany’s greenhouse gas (GHG) emission reduction targets for road fuels.

Some quirks of Europe’s largest oil products market, Germany, are handing the majors a unique advantage there next year, including knowledge not accessible to other market participants. This is likely to help accelerate the consolidation of the inland road fuel market as many companies struggle to deal with a 50pc hike in Germany’s greenhouse gas (GHG) reduction mandate next year.

I have not found a single participant in the inland market who thinks it will be possible for Germany to meet its 2020 GHG savings mandate — except for majors. They are more relaxed, and they have reason to be.

Road fuel suppliers have to blend biofuels into their diesel or gasoline to meet GHG emissions reduction quotas, or buy certificates from someone who has over-blended. The market price of German GHG quota certificates for next year has been inching up towards the penalty of €470/t CO2, showing that the market expects compliance costs to rise so high that they might as well pay the penalty instead. These cost are, of course, passed down the trading chain to the consumer and will affect fuel prices at the pump.

Now imagine that you have access to an additional source of quota credits to meet compliance that others have not. One that can cover up to 60pc of your extra requirement next year — when the targeted GHG saving rises to 6pc from this year’s 4pc. This is the wonderful position that majors find themselves in. Any road fuel supplier can in theory use so-called upstream emissions reductions (UERs) but only companies that happen to have upstream operations can produce these. 

The German Federal Environment Office is keeping secret how many UER approval applications it may have received, or any details about them. But whoever made an application knows. So perhaps there is someone out there who knows that they will bring into the market a large number of UERs. If that’s the case, they can keep their road fuel prices lower and gain market share, while around them fuel sellers are hiking their prices to prepare for the non-compliance penalty. 

The other quirk is Germany’s idiosyncratic dislike of E10. The 10pc ethanol content in this type of gasoline helps reduce GHG emissions, but E5 retains more than 85pc of the inland gasoline market share. Increasing the E10 share could be crucial in allowing suppliers to meet their tough GHG mandates next year. 

But here is the problem — drivers will only fill up with E10 if it’s cheaper than E5, while the E10 blendstocks are more expensive. To square this circle, E10 is being traded and sold at a discount, and the loss is recouped by pushing up the E5 price. Widening the E10 discount to increase its market share would make it easier for many suppliers to comply with their GHG mandates. But only the largest companies have the resources to take such an initiative and not instantly lose out to competitors. Many market participants are waiting to see if this will happen. While they wait, they have to take a punt on whether they will be able to comply, or whether to start charging their customers the penalty fee — risking losing market share.

Those large enough to be able to increase Germany’s E10 usage have perhaps already made up their minds. But they are not saying. German cartel law, by the way, discourages transparency of this kind of information. For the largest suppliers of road fuel, this is coming in rather handy. 


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