Colas Group intends to cease making base oils at its plant in Dunkerque, France, around the end of March, a company source confirmed to LubesnGreases last month. The plant has capacity to produce 5,200 barrels per day (270,000 metric tons per year) of API Group I, plus another 500 b/d of Group III base stocks.

That makes the road-paving company the latest in a parade of Europeans leaving the Group I arena in the face of slackened demand and heated competition from hydrotreated Group II and III base oils. Also making for the exits are:

Total, which in November told workers it planned to modernize its 9,600 b/d Group I plant in Gonfreville, France. It reportedly would decrease its overall capacity by about half and then upgrade the remainder to make higher-value stocks. The plant already can make some Group III, roughly 800 b/d.

Shells Group I plant in Pernis, Netherlands, with 7,100 b/d of capacity. It expects to switch off one lube train by the end of this year, and to shut down entirely in early 2016.

Nynas will end Group I production (3,300 b/d) in favor of making naphthenic specialty oils at its plant in Harburg, Germany, which it acquired from Shell in 2013.

All told, this latest round of closures will remove 1.2 million metric tons of Group I capacity from the global stage.

In the case of Colas, it marks the end of a short-lived foray into Group I which dates back only to June 2010, when it paid a reported Euro 20.5 million ($26.6 million) to acquire the French bitumen and base oil plant.

In its mid-November 2014 quarterly earnings statement, Colas revealed preliminary plans for Dunkerque. At the end of October 2014, the executive management of Societe de la Raffinerie de Dunkerque (SRD), a 100 percent wholly owned Colas company, provided notification to the works council at SRD regarding an employment preservation plan relating to job losses associated with the closure of base oil production units, Colas stated in its news release.

The company, which is headquartered in Boulogne-Billancourt, France, said that it held an information meeting Nov. 6, followed by a negotiation phase. These measures aim to refocus SRDs business solely on bitumen production, in order to recover economic equilibrium in due course and ensure sustainability for the production site in Dunkerque, the Colas release stated.

Before Colas bought it, the Dunkerque plant had been a joint venture of ExxonMobil, Total and BP, which owned stakes of 50 percent, 40 percent and 10 percent, respectively. At the time of the sale, BP sold its shares to ExxonMobil to prepare for the plants acquisition by Colas. An industry source told LubesnGreases that the majors are generally no longer taking base oils from Dunkerque.

Stephen B. Ames of SBA Consulting, Pepper Pike, Ohio, reflected that the purchase of SRD was driven principally by the refinerys approximately 300,000 t/y capacity for making bitumen. The base oils, extracts and waxes held little interest to Colas, Ames said.

He went on to observe that for Colas to continue bitumen production at the plant after closure of the base oil operations is relatively simple. They [would] shut all of the base oil units – solvent extraction, solvent dewaxing and hydrofinishing – other than the propane deasphalting plant, he explained. At the same time, they switch from atmospheric residue to vacuum residue as plant feed. Other than the bitumen product, the only byproduct is the deasphalted oil that can be disposed of in the merchant market as heavy vacuum gas oil.

Amy Claxton, principal of consultancy My Energy in Hummelstown, Pa., also confirmed that the key reason for Colas Groups acquisition of the Dunkerque facility in 2010 was to have more bitumen/asphaltic material to support its road-building infrastructure. At the time of the acquisition, Colas said the location would supply 25 percent of the bitumen for their operations in France. Colas is a global producer of materials for construction and maintenance of road, air, rail and maritime transport infrastructure. Claxton said its primary products are asphalt mixes and aggregates, ready-mix concrete, liquid asphalt and polymer modified binders and emulsions for road construction.

I expected Colas to exit Group I stocks in July of 2013 because they had a three-year agreement with ExxonMobil to provide technical support from the date of acquisition, Claxton remarked last month. In addition, Colas had an off-take agreement whereby Total bought 40 percent of their base oil for the first two years of operation.

Technically, she explained, the Colas facility is a small specialty plant, not a refinery. She noted they bring in reduced crude – atmospheric distillation bottoms, also called atmospheric residuum – from another refinery as feedstock to produce Group I base oils, which is much more costly than operating a base oil plant that is part of a large refinery.

Thus their Group I economics were not as robust as a fully integrated Group I plant in a large refinery, Claxton said. Also, Dunkerque, while it was owned by ExxonMobil/Total/BP, began a small Group III production operation by purchasing fuels hydrocracker bottoms from a third-party refinery as feedstock to produce Group III base oils – again, a very high-cost operation relative to their competition, who produce Group III base oils as part of a large, integrated refinery operation.

For all of these reasons, it comes as no surprise that Colas is working to streamline their specialty plant operation to focus on asphalt, not base oils.

And what does the future hold for the worlds surviving Group I plants? How will Group I producers adapt to the changing market conditions? Those are some of the questions that Blake Eskew, vice president of IHS Energys downstream industry consulting practice, addressed in a presentation last November.

At the AFPM International Lubricants and Waxes Meeting in Houston, Eskew confirmed that while base oil demand is growing at a steady but not very robust rate, capacity is growing much faster, thanks to the addition of significant Group II and III volumes to the global supply system.

Announced projects total almost 10 million tons through 2020 – a volume equal to roughly 20 percent of current capacity worldwide – and these oil additions are fairly balanced between Group II and III, Eskew explained.

To illustrate the large shift in production among the different base oil groups, Eskew pointed out that, based on announced base oil projects and changes, Group I will only represent about 40 percent of global capacity by 2020, down from 75 percent in 2005.

One of the main downstream markets for base oils is the automotive segment, and on a global basis demand from this sector is growing only slowly, while requirements from the industrial, process and marine segments are flat. Both sectors however are actually slowing in mature markets such as North America, Europe, Russia and some Northeast Asian countries, Eskew said.

By contrast, the automotive lubricants sector is expanding in the developing regions such as China, South Asia, Latin America, Middle East, Africa and the CIS countries, driven by vehicle population growth. Even in these markets though, Group I producers are likely to see strong competition for the remaining automotive market, Eskew said, adding that as the automotive sector increases its use of Group II and III oils, Group I producers will need to retain industrial markets to maintain their momentum.

While Group I production is not likely to completely disappear any time soon, operating factors such as location advantages, feedstock advantages, operating cost control, production of specialty products and forward/backward integration will determine which Group I facilities will be able to survive the tsunami of new base oil capacity coming to the market.

Eskew explained that U.S producers are well positioned relative to those in Europe and Asia because of size and configuration advantages, coupled with the benefit of lower energy and operating costs. The U.S. generally enjoys more advantageous natural gas, hydrogen and power prices.

Nevertheless, most existing Group I capacity is concentrated in Europe and Asia. Europe has only 15 percent of the worlds total base oil capacity, Eskew said, but 25 percent of the Group I capacity. Asia has 39 percent of global capacity and 27 percent of Group I capacity.

The Group I plant profile also differs widely across the globe. Small Group I plants – those with less than 3,000 b/d capacity – are commonplace in the Middle East, Africa, Latin America and Asia, according to Eskew, while North America boasts the most large plants (with over 6,000 b/d). He stressed that even if the worlds 34 smallest plants were rationalized, it would be insufficient to rebalance the market.

How can Group I operators stay in the game? Base oil price relationships have changed dramatically in the last 10 years, Eskew explained, and there may be some opportunities for producers if they can concentrate on the more profitable products. For example, light neutral margins have remained unchanged in the past decade, while heavy neutrals and bright stock margins have increased by almost 50 percent.

Group I byproduct values have also risen sharply, creating opportunity to enhance margins. Margins for byproducts sold as feedstocks/intermediates were largely unchanged in the past decade, while wax and specialties margins jumped by 200 to 300 percent, emphasized Eskew.

Bright stock, waxes, extracts and asphalts – all are necessary to survival, he noted. Integration within a larger operation can help, but each facilitys performance ultimately will be measured relative to transparent markets: Integration will not disguise uneconomic operations.

Group I producers are likely to try all strategies in the quest to survive, and while some will be successful, others will not, Eskew concluded.