Petronas recognized market uncertainty as a key factor in the decision, but company officials declined further comment. Several industry consultants, however, told Lube Report that regardless of the size of project Petronas had planned, the company was wise to defer, given the current market situation.

I am not at all surprised by the announcement, said Geeta Agashe, Kline & Co.s senior vice president of energy. Petronas have some very capable strategists and they have seen the writing on the wall.

Theres no debate that the market is in an oversupply situation for higher quality Group II and Group III base oils, Agashe noted. Kline has seen that demand for finished lubes is not growing at nearly the same pace as new base oil supply, she said, especially for lower viscosity grades. The nature of the Group III market is changing, and by 2022, Asia will be just one-third of the global supply with Europe and Middle East offering comparable amounts – hence, most of Asian Group III will have to remain in the region as the added logistical costs of shipping to Europe or North America will make them noncompetitive with local producers.

Furthermore, because of its viscosity range and viscosity index, Group III base stock cant simply be forced into Group II or Group I formulations, Stephen B. Ames of SBA Consulting said. Ames forecasts that the Group III market could be in an oversupply situation of between 1 and 2 million tons for the next five years.

Amy Claxton of My Energy concurred. Group III capacity greatly exceeds technical demand in Asia, as evidenced by the similar prices for Group I, Group II, and Group III base oils in the region, which would be reason enough to defer, she remarked. However, in addition to the oversupply situation, Claxton said that Petronas decision most likely had to do with two other independent factors as well, including an increase in corporate spending on upstream ventures, and deferral of its Melaka I crude refinery expansion.

In 2010, when Petronas originally announced the base oil plant expansion, the company also said it would expand Melaka I, which processes sweet waxy local crudes, Claxton pointed out. The company planned to improve the metallurgy of the refinery to allow handling of sour imported crudes, which would have required the base oil plant to undergo several key changes to even maintain its existing Group III yields and qualities, Claxton explained. As of 2013, it appears that the Melaka I refinery expansion and crude sour [increase] has not gone forward, and the base oil operation remains unchanged.

Instead, Petronas is currently focusing on massive upstream investments, which Claxton believes is an effort to replace its declining domestic crude reserves. In the last 12 months, Petronas acquired Canadian oil and gas assets via its $5.1 billion purchase of Progress Energy and invested $850 million in Brazilian offshore crude assets, Claxton continued. Like all major oil companies, Petronas studies a variety of options to secure long term stable growth. For now, upstream investments…appear to be a higher priority than downstream investments.

Petronas will continue to grow its lubes business, however, according to a representative at the company who noted that its base oil capacity and capability are considered to be essential factors in that process, and asserted that the plan will not be entirely nixed, but likely delayed until a more suitable time.

Agashe remarked that Asian growth will pick up, but it will not achieve pre-recession high growth in the near future. Once China and India get back on the strong growth path, and the U.S. economy stabilizes, and Europe gets back on a growth track, there will be opportunities for expansion.

Wholly owned by the government of Malaysia, Petronas is vested with all of the states oil and gas resources. In 2012, Fortune magazine ranked Petronas as the most profitable company in Asia and the 12th most globally.