Historically, said Eskew, global base oil capacity and demand have followed parallel paths. For example, 2011 capacity grew by 7 percent over 2002, while demand grew 8 percent in the same period.

But looking forward, new capacity is being added at an unprecedented pace, he said, predicting that total capacity will jump 16 percent from 2011 to 2017.

While the projects have a wide variety of drivers, Eskew sees three primary factors: demand growth, quality improvement and production economics. These in turn create distinct categories of projects: growth driven, quality driven and opportunistic.

The primary driver for growth driven projects is the need to satisfy demand for more base oil in the companys main markets. Of the 20 total projects projected to come on-stream in the next five years, Eskew said six are growth driven, accounting for 18 percent of projected new volume. Petrobras expansion plans are an example of a growth-driven project, Eskew told Lube Report, although the project has quality benefits as well.

Quality driven projects are developed to meet changes in quality requirements for base oil in the companys main markets. Eskew sees another six announced projects falling in this category; they will contribute about 34 percent of projected new volume. Chevrons Pascagoula project and the Luberef Yanbu project are examples of quality driven expansions.

But opportunistic projects dominate the coming capacity wave, Eskew continued. Their primary driver is to take advantage of favorable feedstock or processing investments to capture additional value. Eight announced projects, with average capacity of 500,000 tons per year, fall in this category; together, they will supply nearly half of projected new base oil volume. An example is the Neste/Bapco project in Bahrain.

Opportunistic projects generally target API Group III base oils, including gas-to-liquids, and the Middle East and Asia dominate in capacity growth, compared to other regions. Capacity additions in North America are generally quality driven, Eskew noted, while in Europe theyre either growth or quality driven. In the Middle East and Asia, where the largest growth is anticipated, opportunistic projects dominate.

While base oil demand will continue to grow east of Suez, expansion volumes globally will outpace demand growth. Demand in the mature markets of North America and Europe will continue to decline through 2020, Eskew said.

The trend toward higher quality base oils is continuing, with rapid adoption of Group II and Group III for automotive lubricants driving growth. North America, Europe and the Middle East have surplus base oil supply, while the Asia Pacific region will continue to be a net importer of base oils through 2020.

The Middle East is emerging as a new global supply hub, Eskew said, and Europe faces a wrenching transition to become a net importer. Half of all base oil is traded internationally, and Group III trade will expand rapidly over the next decade, while Group I volumes erode.

Existing suppliers face significant challenges, Eskew concluded. New projects, such as the Group III projects in Korea and the Middle East, have strong drivers to operate at high rates and they enjoy production cost advantages. Some, like the Shell-Qatar Petroleum Pearl project, have integration advantages – that is, they are strengthened by meeting growth, quality and opportunistic needs.

The transition to higher quality base oils is accelerating, and Group I rationalization pressures will continue. Europe will be under greatest pressure, Eskew said. North America and South America will also feel the heat, and even Asian producers will be at risk.