Caltex has chosen a benzene saturation process as the best technical and commercial solution, instead of the addition of ethanol. This is being seen as a significant blow to the fledgling fuel ethanol industry.

The scope of the project has also been expanded to meet future fuel standards that are expected to take effect late this decade.

The investment will occur over the next two years in and takes the estimated total project cost (2002-2005) to $295 million, including $43 million expenditure to date. The cost of the project will be met from operating cash flows.

"Sydney and Brisbane will have cleaner air from 2006 as a result of this major investment in our Kurnell and Lytton refineries," said Caltex managing director and CEO Dave Reeves. "All other communities where Caltex-refined fuel is sold will also benefit.

"Air pollution from motor vehicles is a problem in Australia's urban areas and fuel refiners and marketers have a responsibility to help provide a solution."

Reeves said Caltex plans to move well ahead of Government regulation.

"Caltex will leapfrog the next round of fuel standards required from 2006 and will instead produce petrol and diesel to the standards expected to be required by law late this decade, provided the Government's cleaner fuels incentives make this economic.

"This will be dependent on passage through Parliament of enabling legislation and supporting regulation to provide incentives to produce cleaner petrol and diesel. These incentives for producers were committed by the Government in last year's Budget.

"While the upgraded refineries will have the capability to produce 10 parts per million (ppm) sulfur diesel and 50 ppm sulfur premium unleaded petrol, these fuels will cost more to produce and production will only be economic with the incentives in place.

"Caltex would also like the Government to consider extending the diesel incentive forward by one year, so it can produce 10 ppm sulfur diesel from January 2006 rather than January 2007.