S-Oil Eyes Expansion

S-Oil has not been immune to sinking world demand for lubricants. Throughput slipped significantly in 2009 at its massive 31,000 barrel-per-day base oil plant in Onsan, South Korea (the second largest in the world). But by the years third quarter, revenues and profits were picking up. Although both revenue and operating profits were more than 40 percent lower than the year-earlier period, the base oil business segments third-quarter 2009 revenues rose more than 30 percent from the second quarter, and its operating profit jumped more than 300 percent.

S-Oils strengths set it apart from its competitors, Lube Sales Division Vice President H. Shin told LubesnGreases in an exclusive interview late last year. These include S-Oils strong global marketing presence, its full line of base oils, including Groups I, II and III, and stable supply.

Strong marketing advantages make us different, said Shin. Markets are changing, and we will adapt as needed. Flexibility is one of S-Oils strongest points.

The company, headquartered in Seoul, was founded in 1976, opened its first 3,320 b/d base oil train in 1981, and increased capacity of high viscosity index base oils to 8,000 b/d a decade later. In 1991 the company entered a joint venture and crude supply agreement with Aramco Overseas Co., a wholly-owned subsidiary of Saudi Aramco, which today is the largest shareholder with 35 percent of S-Oils common stock. (Korean transportation and logistics company Hanjin Energy now owns another 28 percent.)

In 2000, the company name was changed from Ssangyong Oil Refining Co. to S-Oil, and in December 2002, it started commercial production of its Ultra-S brand Group III base oils.

S-Oil was the first base oil refinery in Korea, and has been market leader since then, declared Shin, noting that S-Oils domestic market share exceeds 60 percent. With completion of the hydrotreating facility for Group III in 2002, we expanded our market to the whole world. S-Oil has a full line of base oil products, from Group I to III.

The company started in the finished lubricants business at the same time it opened the first base oil plant, Shin continued, but in March 2008 we spun off the finished lubricants business into a 50-50 joint venture with Total, in order to focus on our major business of base oils. The young j.v., named S-Oil Total Lubricants Co. or STLC, was capitalized with 35 billion won (almost U.S. $35 million at the time) and had a blending capacity of about 140,000 metric tons per year.

Thanks to S-Oils supply relationship with Saudi Aramco, we can manufacture in a very stable way, Shin said. Other refiners have many kinds of crude and quality is less stable. Our base oil is based on one source of crude oil. We maintain stable quality and consistency, and our yield rate is also consistent.

Arabian crude is the best feedstock for base oils, added S.H. Seok, manager of the lube base oil export team. Its very important for us.

Big, Bigger, Biggest?

S-Oils base oil plant consists of two trains, continued Shin. The first produces Group I and II base oils using Gulfs hydrotreating and Texacos MEK (methyl-ethyl-ketone) dewaxing technologies to make the companys Premium series oils, and ExxonMobils MSDW-2 catalytic dewaxing and hydrofinishing, combined with the Gulf hydrotreating process to produce the Super series.

Train two, like train one, starts with vacuum gas oil as the main feedstock, which is severely hydrocracked to remove impurities. The resulting waxy oil is then subjected to ExxonMobils MSDW-2 hydroisomerization dewaxing and hydrofinishing, producing S-Oils highest quality Ultra-S series of Group III oils.

Capacity is nearly 31,000 barrels per day, said Shin, 500 b/d of Group I, 20,000-plus b/d of Group II and 10,000 b/d of Group III. In early 2010, these proportions will change and total volume will increase, he added, through internal modifications and bolt-on additions. Group III capacity will increase significantly in the first half.

Shin declined to say what the new Group III capacity will be, but he called it a considerable volume increase, suggesting that the plants Group III capacity might almost double.

We have economies of scale and room to produce more, added Seok. This expansion is just the beginning, just phase one. We dont need to purchase any third-party feedstocks to meet our customers needs.

We are not just focusing on capacity expansion, continued Shin. We are taking a long-term view and customer-centered approach.

Quality-wise, we are not so different at the moment from competing Group III suppliers, Shin went on, but in the future, there will be differences. Quality-wise, were reviewing several projects, but there is nothing to say now.

In 2009 S-Oil added a 6 centiStoke grade to its Group III offerings. Customer demand was the key factor, Shin explained. Customers previously could combine S-Oils 4 cSt and 8 cSt oils to attain that viscosity, but now OEM [original equipment manufacturer] demands are more rigorous, so the 6 cSt was necessary. We see the 6 cSt demand increasing in the future.

In the United States, S-Oils base stocks are sold through a marketing agreement with ConocoPhillips, which also distributes them through supply-chain partners such as J.A.M. Specialty Products. Although U.S. prices are posted for Ultra-S 2, 3, 4 and 8 cSt grades, no posting has yet appeared for the 6 cSt product. The launch of Ultra-S 6 in the U.S. market is now under consideration, said Shin.

Target Markets

In its global base oil strategy, S-Oil identifies three markets, Shin said. First is the domestic Korean market, where S-Oil claims market leadership. Second is the premium markets – the United States, [Western] Europe and Japan; markets that have substantial Group III demands. Third is emerging markets, including China, India and Eastern Europe. We are now focusing at the same time on all three, because we have a full line of base oils, and because we cannot ignore any of these markets for our growth, said Shin.

Shin said that S-Oil has been marketing base oils in China for a long time, and that country, with its fast-growing economy despite the recession, currently produces no Group III base oils.

North America also has very little Group III production as the continents refiners have focused on producing Group I and II base stocks. To satisfy its growing Group III needs, the market instead has turned to imports, the bulk of them from Korea.

S-Oils marketing partnership with ConocoPhillips covers the United States, Canada and Mexico, Shin explained. They made a big contribution, introducing S-Oils Group III to the U.S. market. Houston-based ConocoPhillips also controls and markets half of the 21,900 b/d Group II production of the Excel Paralubes refinery in Westlake, La. (Flint Hills Resources handles the other half), so the deal with S-Oil gave it entree to the Group III market without need to slacken its Group II output.

Elsewhere, S-Oil has few salespeople handling global marketing, Shin said, so we have to have suitable strategies for each and every market, including direct sales and distributors. With storage facilities in Antwerp, Belgium, the company is well positioned to serve customers in Europe. To augment Ultra-S Group III demand, S-Oil has developed engine oil formulations for global automakers in Europe, the United States and Korea.

Last year was one of the worst periods for the premium base oil market, Shin commented, but S-Oil has market diversification and many strengths. We have developed demand in emerging markets where gross domestic product showed positive growth.

Total recovery of lubricant base oils will come in two to three years. Thats what is forecast, Shin stated. The forecasts are likely valid, he continued, but markets move psychologically as well as physically. If everyone thinks were bottoming out, recovery will be faster.

Its a psychological game, he suggested, and its clearly a game that S-Oil intends to win.