"Essentially the change in fuel quality standards is going to be a catalyst for change in the industry. The refineries have had a pretty poor financial performance over the last decade," said Ian McKenzie, general manager of external affairs at Shell Company of Australia Ltd (SHEL.L: Quote, Profile, Research) (RD.AS: Quote, Profile, Research) .

"Each company is going to have to decide in the next six-to-12 months whether they want to stay in the game or not, and to meet these new quality standards is going to require a substantial investment," Melbourne-based McKenzie said.

Tired of smog-choked streets, many governments in Asia, like those in India and the Philippines, are getting tougher on fuel standards and emissions to raise air quality in some of the world's most populous cities.

The Australian Institute of Petroleum (AIP) estimates Australia's new specifications being phased in over the next two years will cost refiners A$1 billion and says three of the four oil majors dominating the sector have "indicated" they are willing to spend the money.

"Companies accept that the world is moving to cleaner fuel requirements and if you want to remain in business in Australia then you have to invest to meet those standards," said AIP Assistant Director Paul Barrett.

More stringent specifications targeted for implementation by 2010 are under debate by the industry, which the AIP says will require additional expenditure of A$1 billion.

Shell, BP (BP.L: Quote, Profile, Research) , Caltex (CTX.AX: Quote, Profile, Research) and ExxonMobil (XOM.N: Quote, Profile, Research) comprise Australia's more than 800,000 barrels per day (bpd) refining industry.

Barrett said ExxonMobil, which mothballed its 80,000-bpd Port Stanvac refinery in South Australia in July because the plant was unable to compete in the tough Asia-Pacific market, was the only firm that had not indicated whether it would make the investment.

ExxonMobil spokeswoman Anne Rix said the company was still assessing how it would supply fuel with the new specifications.

MAKING THE GRADE Australia typically imports six to seven percent of the 327,400 bpd of petrol it consumes and some foreign suppliers may not be willing to meet the new requirements.

"Theoretically we could produce such specifications, but it would have to be tailor-made and of course this is subject to a reference basket of refinery economics," said a Hong Kong-based source at China's biggest refiner, Sinopec (0386.HK: Quote, Profile, Research) .

China exported a little over 180,000 bpd of gasoline in the first nine months of the year.

Chinese refiners supplying Australia face a one percent cap on the additive methyl tertiary butyl ether (MTBE) from January 1 next year in addition to a limit on olefins, which contribute to smog.

Australian refiners do not use MTBE - a chemical added to gasoline to boost its octane count and cut down on smog but also a suspected carcinogen that can contaminate water supplies - but there is currently no limit on the additive in China.

China's largest oil and gas producer, PetroChina (0857.HK: Quote, Profile, Research) (PTR.N: Quote, Profile, Research) , said it had no plans to change gasoline specifications.

Barrett said exporters like Singapore, Taiwan and South Korea were likely to step in to replace China's supplies.