A new feedstock agreement with state-owned Saudi Aramco ensures operations at Luberef’s API Group I base oil unit in Jeddah, western Saudi Arabia, until 2030, the company said in a statement to the Saudi stock exchange. The agreement underscores Saudi Arabia’s role as a long-term supplier of Group I base oils, even as the global lubricants industry shifts toward Group II and III grades.
The new supply contract strengthens Group I base oil supply in the Middle East at a time when older plants in Europe and Asia are shutting down. European Group I capacity has fall by 55% over the past decade, outpacing the decline in demand.
The future of the Jeddah facility had been uncertain. Luberef, Saudi Arabia’s listed base oil producer, said in its 2022 initial public offering prospectus that the plant could close in 2026, when the current feedstock contract is due to expire. Earlier this year, however, the company indicated that improving market conditions could allow the facility to stay open.
Under the new agreement, Luberef will receive 24,500 barrels per day of feedstock. The Jeddah plant will continue operating at its maximum production capacity of 275,000 metric tons per year.
Luberef is working on a second expansion project at its Group II and III plant in the Yanbu industrial complex on Saudi Arabia’s Red Sea coast. Once finished, the company’s total production capacity is expected to increase to 1.53 million metric tons per year.
“The Jeddah extension creates a structural advantage in a tightening Group I market,” said Gulya Toth, a downstream market intelligence consultant, in comments to Lube Report. “It’s a classic survivor’s premium – capacity is exiting faster than demand erodes.”
The new feedstock agreement includes optionality provisions, allowing Aramco and Luberef to disengage if demand continues to decline. However, if refining margins remain favorable, the Jeddah plant could deliver strong profitability, Toth explained.