Kim, vice president of the base oil business at GS Caltex, started his current job in January, after working directly for GS Caltex Chairman and CEO Dong Soo Hur for eight years. In June, Kim welcomed LubesnGreases to his office in Seouls GS Tower to talk about the companys base oil business with him and members of his base oil team, and then to meet members of the companys finished lubricants team.

In the Beginning

GS Caltex Corp., South Koreas second largest base oil refiner, was founded in 1967 as a joint venture between Caltex Petroleum and Lucky Ltd. Its principal activities are petroleum refining and marketing, petrochemical production and lubricant blending, although it is expanding into liquefied natural gas, electric power, exploration and production, and new and renewable energy businesses.

Today, 50 percent of the companys shares are owned by Koreas GS Holdings Corp. and 50 percent by U.S.-based Chevron Corp. (Caltex is Chevrons retail and marketing brand in Asia and parts of the Middle East and Africa.)

In 2005 GS Caltex invested 1.5 trillion Korean won (U.S. $1.24 billion at todays exchange rates) in the Number Two Heavy Oil Upgrading facility at its refinery complex in Yeosu, in southern Korea, to produce gasoline, kerosene, diesel fuel and lubricant base oils.

The 2005 decision to invest in the hydrocracker, said Kim, was made at a time when the global economy was strong and the crack spread was huge. Jointly designed with Chevron Lummus Global, the base oil plant used that companys latest Isodewaxing technology and offered production flexibility to initially produce up to 13,000 barrels per day of Group II and 3,000 b/d of Group III base stocks.

Construction was completed in August 2007 and commercial production began two months later, in October.

But then a global recession hit. The following year, 2008, saw peak crude prices, Kim continued, presenting an internal challenge. Middle distillates were more profitable, but customers wanted base oils. We controlled inventory and limited production to reduce risks and maximize margins.

Since 2009, he added with relief, business is more normal.

GS Caltex financial statements underscore the recessions impact. In 2008 the corporation reported an after-tax loss of 290 billion won ($240 million at todays exchange rate) on total sales of 34.4 trillion won ($28.5 billion today). In 2009, the company recovered and reported after-tax earnings of 653 billion won. Neither base oil nor lubricant operating figures are broken out, but company sources say they both turned profitable.

The base oil plant produces 150N, 220N and 600N Group II base oils. Its 2 centiStoke stock with viscosity index of 94 also falls in the Group II category. The Group III slate includes 4 cSt, 6 cSt and 8 cSt products.

Base Oil Markets

South Koreas base oil market is about 19,000 b/d; about 14,000 b/d is supplied domestically by GS Caltex and competitors SK Lubricants and S-Oil, and some 5,000 b/d is imported. Koreas technical requirements are very high, GS Caltex notes, resulting from the demand for high-quality lubricants by the countrys automobile and heavy equipment manufacturers.

Following a 2009 upgrade that increased its total base oil capacity to 23,000 b/d, GS Caltex lists its Group II capacity at 20,000 b/d and Group III at 3,000 b/d. But, Kim noted, we can control production ratios. The Group III output, he noted, goes primarily to the companys internal finished lube production, while Group II goes into the merchant market for domestic sales and exports.

The company has targeted the Group II market in Asia-Pacific. In December 2007 it opened a sales office in Beijing, and by 2009 exports to China accounted for half of GS Caltexs total base oil exports. China, India, the Middle East and Southeast Asia are our important customers, said Kim. The major oil companies, including Sinopec, PetroChina and Shell-Tongyi, are GS Caltexs customers there.

In 2009, more than 95 percent of base oil revenues, excluding internal supply, came from exports to the Asia-Pacific market. The remainder was domestic sales.

Although Chinese specifications are relatively low, added Y.B. Choi, base oil team leader, were replacing Group I. After using Group II, they dont want to change back.

Competition will change in the coming year with Shells production of gas-to-liquids base oils in Qatar, Kim noted. Because of GTL, competition will increase in lighter-grade base oils. Today is profitable, but the future may be less profitable.

GS Caltex strives to deal directly with its end users – knowing the buyers viewpoint is important, said Kim, and we want to provide technical information – but the company does use distributors to reach smaller customers. GS Caltex base oils, branded Kixx Lubo, primarily are shipped from a terminal in Yeosu.

The company has been using more than 40 kinds of crude and is currently studying their impact on base oils. GS Caltex has been accumulating data for two and a half years and plans to use the information to make the best crude selections in the future, to increase base oil productivity.

Looking Ahead

GS Caltex aims to be the main supplier of high-quality Group II base oil through capacity expansions. We will expand capacity by June or July 2011 by more than 3,000 b/d through debottlenecking, said Kim. And further expansions are on the drawing board.

The company is about to open its 2.6 trillion won Vacuum Residue Hydro-cracker in Yeosu, where it will produce gasoline and other transportation fuels. It is studying the feasibility of using hydrocracked vacuum gas oil from the new unit as base oil feedstock. We are considering an additional [base oil] train, said Kim, but there is no decision yet. Management needs to review.

While demand will decline in other regions, base oil demand in Asia-Pacific will continue to grow, Kim said. Economic development in China, India, Vietnam [and elsewhere in Asia] will demand higher-grade lubricants. We want to expand our current facility accordingly.

GS Caltex is now primarily in the merchant Group II market, he noted, but we may become a Group III supplier. GS is flexible, and our hydrocracked feedstock is an advantage.

Maybe in 10 years China will produce its own high-quality base oils, Kim concluded, but today their demand is huge. Our base oil team and others are always studying the market, analyzing the data. Base oil is customer oriented. We must take care of our customers. If we dont, we cannot survive. Our market share is dependent on that.

Here Comes Kixx

I.H. Ha is Charles Kims counterpart as head of the companys finished lubricants business – a segment that dates back to 1969, just three years after GS Caltexs formation. By 1986, it had built modern blending and grease-making facilities in Incheon, and it was then but a short leap to the introduction of the Kixx brand in the 1990s. The company now produces some 350 different lubricant products sold under the Kixx, New Golden Pearl (grease), and Rando (hydraulic fluid) brands.

Koreas domestic market for finished lubricants is about 780,000 tons per year, about 25 percent automotive and 75 percent industrial, said Seog Joo Kang, team leader for the finished lubricants business planning team. The market is valued at about U.S. $1.3 billion, and while GS Caltexs Kixx brand is number two in the automotive engine oil market (SK Lubricants is number one), its number one overall. Were very big in industrial and marine lubes, Kang told LubesnGreases.

Korea is a big Group III supplier, Kang noted. That pushes up quality beyond the technical demand, and technical demand in Korea is very high. GS Caltex uses imported polyalphaolefins for its premium Kixx PAO (pronounced kicks power!) engine oils.

While Korea has some 12,000 service stations, most oil changes are performed by the countrys 30,000 workshops. Auto Oasis is the franchised GS workshop network. GS Caltex distributes lubricants domestically through a jobber network.

When the recession hit in 2008, Kang said, demand was down and raw material prices were high. We had to increase prices, and it was very hard.

In response, continued Joon Hong Hur, team leader for the global lubricants marketing team, Korean companies went outside Korea. Business has now recovered close to 2007 levels. We can take advantage of the recession. We have quality products with better pricing, so we recover faster.

Kixx-starting Sales In February, GS Caltex announced a 3 billion won investment in the launch of GS Caltex India, a finished lubricants business based in Mumbai, to create a new export market. Were still ramping up, but sales started in April, said Hur. Supplying Korean OEMs [in India] is the first step. GS Caltex is toll blending and packaging lubricants in India, and using a jobber network for distribution.

We have major opportunities to go overseas because of our relations with Korean automakers, said Kang. India is a big market, and GS Caltex has taken over the Chevron/Caltex legacy.

India is the worlds fifth largest lubricant market behind the United States, China, Japan and Russia, and Hur estimated its value at about U.S. $4 billion. India is our first foreign sales office for finished lubricants, said Hur. Its our flag-ship. Using this expertise, we may look elsewhere.

Our goal, said Kang, is to keep expanding globally. China is a focus. Were now selling to OEMs there.

Chevron exited India, so were going in, concluded Hur. Its a good collaboration.