VW scandal to impact diesel market

Media coverage is rife regarding the millions of VW diesel vehicles worldwide that may have been fitted with software that allows the engines to ‘cheat’ emissions tests. The scandal potentially involves some 8mn VW, Audi, Seat and Skoda branded vehicles globally, 1.2mn of which are thought to be on UK roads. Authorities in numerous countries, including the UK, US, Germany, France and Italy have opened investigations into the emissions rigging. In the US alone, the company is reportedly facing fines of up to $18bn (£11.8bn). VW Chief Executive Martin Winterkorn has resigned in the wake of the crisis and a number of other employees across the group have been suspended. An internal inquiry is underway and it seems likely more heads will roll.

Diesel vehicles emit three main pollutants – carbon dioxide (CO₂), particulate matter (PM) and nitrous oxides (NO_x). While CO₂ emissions are relatively low and there is filter technology to deal with PM, the automotive sector has struggled to combat NO_x emissions in particular. From September this year all new diesel cars sold in Europe must be fitted with the latest Euro 6 engines, designed to significantly reduce the levels of pollutants emitted. However, EU rules also allow manufacturers to continue to sell cars with older, more polluting, Euro 5 engines in order to clear stock, which means such models could continue to be sold on the market for some time. VW initially reported that 11mn of its vehicles had Euro 5 engines fitted with the so-called ‘defeat device’; later reducing that number to 8mn. Owners will be asked to take their cars in to dealerships for a service procedure that some experts have warned could affect fuel economy and performance.

The implications of the scandal go beyond these 8mn or so vehicles, however. As Platts’ Andy Allan, Associate Director, Petrochemicals EMEA, told Petroleum Review: ‘While a political u-turn on diesel across Europe has been on the cards for a while, the VW scandal will have a policy impact on diesel usage in three ways – by either nudging governments to accelerate a phase-out of diesel cars, as is slated to happen in Paris by 2020; encouraging greater enforcement of existing tailpipe emission regulations through more rigorous testing; or encouraging new tougher policies on NO_X emissions. But perhaps a greater impact will be from the negative press coverage around buying diesel vehicles, which were once labelled as clean, but emit three times the level of NO_X as gasoline engines and have been linked by researchers to as many as 60,000 deaths a year in the UK alone.’

So, what does this mean for Europe’s refiners? ‘One would think it would be positive news should consumers move away from diesel and back to gasoline,’ says Allan. ‘Because of the massive growth in diesel cars in Europe – growing from around 10% in the 1990s to over 50% today – Europe’s refining industry has a gasoline surplus and a diesel shortage. So any uptick in gasoline demand would benefit Europe’s refiners by strengthening light end cracks, such as naphtha and LPG. Added to this would be greater demand for gasoline blending components, such as butane, aromatics and MTBE, many of which are derived from naphtha.’

The big question is how long will it take to have an impact? ‘That’s hard to say,’ continues Allan, ‘but it will be quicker now than it was several years ago. Fuelled by cheap finance, new vehicle registrations in Europe are up 11% year-on-year, meaning more of us Europeans are changing our cars more often. All this points to the fact that there is a structural change in road transport fuel on the horizon and Europe’s refineries are set to benefit.’

Potential litigation angles     
On a closing note, Colleen Hanley, Barrister at 20 Essex St Chambers, explains that in the wake of the emissions scandal, VW ‘faces an ever-growing range of potential legal claims in Europe’. She says: ‘The most obvious claim is for breach of contract on the basis of misrepresentation, most probably a fraudulent one. A European environmental law claim seems likely given what appears to be a clear breach of the EU Emissions Regulations. Given the implication of Skoda, Audi and/or SEAT as well, a potential Article 101 (EU) competition law infringement could arise if prices or trading conditions were indirectly fixed. A potential shareholder legal action is also on the horizon as the scandal has caused the share-price to plummet 30%. If Volkswagen concealed important information it may have infringed the German Wertpapierhandelsgesetz (WpHG) or the “Securities Trading Act” leaving itself open to sizeable claims from both institutional and private investors.’

VW may not be the only automotive manufacturer that may face accusations of cheating on emissions.

Petroleum Review will be reviewing early in 2016 the likely changes to future EU and US emissions standards for diesel vehicles.