Compared to the Giant Coaster at Paragon Park in Nantasket Beach, or The Cyclone at Coney Island (the worlds scariest roller coaster), what the lubricants business is about to experience might not be as thrilling, but it will definitely get your attention. So pull down your lap-bar and hold onto your shoulder harness for what could be the ride of your life in our industry.
The first jolt you feel in this ride will be the G-force impact of base stock overcapacity. While there always have been ups and downs in base stock supply and demand, we are now looking at a market where supply will significantly swamp demand in North America. In the words of Joe Rousmaniere, a base oil guru at Chemlube in Harrison, N.Y., we are about to experience a biblical flood of base oil supply.
The first and largest wave of this deluge comes from Chevrons new Pascagoula, Miss., plant, which this summer will unleash 25,000 barrels a day of API Group II capacity. That will be followed rapidly by gushers from Hyundai Oilbank-Shell in South Korea, SK-Repsol in Spain, and Adnoc in the U.A.E. Collectively these companies will disgorge upwards of 40,000 b/d of Group II and Group III, on top of Chevrons new volumes. Some of these producers are already knocking on doors in the United States.
The last time we saw anything like the oncoming crest in base oil supply was in the mid-to-late 1990s, when Excel Paralubes, Petro-Canada and others in North America flooded the market with nearly 15 percent more Group II than was needed to meet U.S. demand. We were awash in base oil, and as a result prices tumbled and high-cost producers were forced to exit the business.
If history is any indication, we will likely see similar shudders in the days ahead. One difference, however, is that oversupply this time will be a global event that will likely erase some Group I suppliers from the maps of Europe, Asia, South America and possibly the United States. There may even be some Group II merchant suppliers among the casualties.
Adding to the noisy thrill of the ride will be the rattling new rail of gas-to-liquid base oils. Although we have been hearing about GTL base oil for over a decade, it is a fact now on the shelves in the shape of Shells trademarked PurePlus technology, used in making Pennzoil Platinum and Ultra Platinum synthetic engine oils. In addition, partners Calumet Specialty Products and Juniper GTL are staking out ground in Lake Charles, La., for a small-scale GTL plant to make refined products, and Sasol has picked a site in Westlake, La., for a GTL project that could stream base oil by 2020.
So GTL is here, but is it an absolute step change in our industry, as Shell Lubricants Americas Istvan Kapitany put it in a March statement? It could be. The impact of GTL may be similar to what we saw when large volumes of API Group II and III hit the market in the late 1990s. The ready availability of these high quality, hydrocracked products did in fact represent a step change in base oil supply. As a result, they garnered a significant premium over other base oils and set into motion what was nearly a Permian-Triassic event (a great dying) for Group I.
Not everyone, however, agrees that GTL will do the same. Thats because although GTL is clearly a marketing event that has some riders whooping it up with their hands in the air, it has yet to prove itself as more than an incremental change in base oil quality – let alone a step change worthy of a premium. It will be interesting to see how this one plays out.
But aside from the steep inclines and plunges of base oil supply, there are other twists, turns and loops ahead that will make the ride over the next few years one to remember. These include the sticking and slipping of finished lubricant price increases. The past few months have already given us a taste of what that feels like, as raw material costs rose and lube suppliers struggled to push those costs along, over the loud objections of marketers and customers.
In addition, we are looking at a future that will further challenge the equity of the big name brands, synthetic lubricant prices, and lubricant quality. Further, we will likely see the battle intensify between major brands and private labels, and the emergence of a much more complicated marketplace with the entry of two distinct passenger car motor oil upgrades, ILSAC GF-6A and GF-6B.
Adding to the excitement will be the rapidly growing size and strength of lubricant marketers and independent lubricant manufacturers; geographic shifts in demand; new rerefining capacity; and more government regulations. And of course there will be other surprises lurking just around the corner.
So like it or not, if you are in the lubricants business, the next few years will be ones to remember. And while some of us will be strapped in for the ride, screaming with the ups and downs, others will be less frightened, more in control. Thats because they were watching closely as these tracks unfolded, and prepared themselves for whats ahead. And they will likely be the ones smiling when the ride comes back to earth.
Tom Glenn is president of the consulting firm Petroleum Trends International, and of the Petroleum Quality Institute of America. He currently is updating the multi-client study Lubricant Supplier-Distributor Relations. Phone: (732) 494-0405. E-mail: tom_glenn@petroleumtrends.com