Vietnam's Trade Ministry has ordered oil product importers to sell only 0.05 percent sulphur diesel to road vehicles from July 1, but will still allow industrial use of 0.25 percent fuel, state media said on Tuesday.
The move to cleaner diesel by Asia's second largest motor fuel importer, which has trailed many Asian countries in moving towards European fuel standards, will mean extra demand for low sulphur grades in the region.
"With more countries moving to lower sulphur gas oil, this will make the environment cleaner and supplies tighter," said Gerard Rigby from Fuel First Consulting in Sydney.
All 11 state importers will have to list the sulphur contents of diesel at pump stations and only sell the 0.25 percent grade to ships, trains and other industrial users, the Thuong Mai newspaper quoted Trade Minister Truong Dinh Tuyen as saying.
He said retail prices of the 0.05 percent sulphur diesel would be 200 dong higher than the 0.25 percent sulphur grade now being retailed by dominant oil product importer Petrolimex at 8,700 dong ($0.54) per litre.
The switch could marginally raise Vietnam's import costs by 3 percent until new refineries in India and China are started within three years, analysts say. Vietnam only introduced 0.25 percent sulphur this year, instead of a proposed 0.05 percent for transport and 0.25 percent for industry from January, after state fuel importers objected to the earlier plan due to logistical difficulties in handling two different grades.
The drive to cut sulphur, a pollutant blamed for acid rain and lung problems, is part of government efforts to reduce worsening pollution, especially in cities. It leaves few countries in the region still using the 0.5 percent grade that serves as a benchmark diesel price in Asia.
Vietnamese state fuel importers are already on the hunt for cargoes of 0.05 percent sulphur content. Petrolimex, whose market share stands at around 55 percent, bought by tender 50,000 tonnes of the lower sulphur gas oil for end June to July.
Smaller rival Petec is seeking by tender 30,000 tonnes of 0.05 percent gas oil for next month, after buying its first cargo of this grade for early July ahead of the switch to cleaner fuel.
Rising demand from Vietnam, wich imported more than 8 million tonnes of diesel last year, has coincided with a surge in buying from India's Hindustan Petroleum Corp, keen to shore up supplies during the monsoon when local demand is at a lull. Regional demand is outstripping supplies in Asia as some cargoes are being shipped out to Chile and Europe due to stronger prices in those markets.
"Customers are looking for July cargoes of lower sulphur gas oil but they can't find them," said a Japanese trader who markets tighter-specification gas oil. "Many refiners capable of making those grades have already sold out their spot barrels."
Reflecting the demand strength, price premiums for 0.05 percent grades rose to nearly $2 a barrel from $1 a barrel over the past month. Vietnam could source the pricier cargoes from regular suppliers in Singapore, China and South Korea, while its economy, which grew 8.2 percent last year, as well as cuts in subsidies will help absorb the extra costs, analysts say.
The country relies almost entirely on oil product imports as it lacks major refineries despite being Southeast Asia's third-largest crude oil producer. Moves to cut state subsidies on fuel products are underway. Vietnam's retail gasoline prices will increase by up to 7 percent this year, as the country recently allowed importers to set domestic rates. It plans to free diesel prices in early 2008.