Group I Plants Closing, Groups II and III Growing


Group I Plants Closing, Groups II and III Growing
Stacks of intermediate bulk containers, commonly used for storage and shipment of base oils, in a warehouse. © Marco Torelli Fotografia

SINGAPORE – The base oil supply and demand landscape has changed significantly in recent years, with global capacity for API Group I base stocks decreasing significantly and new Group II and Group III production coming online mostly in Asia, an ICIS analyst explained during a presentation at the ICIS Asian Base Oils and Lubricants Conference held here last week.

The transition towards increased use of lighter viscosity Group II and III base oils in automotive applications, particularly in passenger car motor oils to meet more stringent emissions and fuel efficiency goals and a reduction in Group I capacity was only accelerated by the COVID-19 pandemic, saidMichael Connolly, ICIS principal analyst for refining.

“We’ve seen a lot of Group I closures in the last two years in particular, and we haven’t seen a wave of closures like this since 2015, when we saw a huge wave of closures due to [motor oil] specification changes at that time,” he noted.

The demand destruction brought about by pandemic-related lockdowns and a reduction in manufacturing output resulted in the closure of 1.4 million tons of global Group I capacity over the past three years.

At the same time, Group II and Group III base oils demand has increased significantly. To meet the growing consumption levels, several Group II and Group III base oil plants were built or expanded, and most new capacity has come onstream in Asia.

“The overall demand growth that we see in Asia and that we expect to continue to see there is because of the rising population, the rising [economic output] and the growth of the middle class,” Connolly noted. “We also expect consumption to go up in the region in the near future.”

Aside from a drop in Group I consumption levels, the coronavirus pandemic also brought about a slump in fuel demand and fuel margins falling below break-even levels in some regions. At the same time, Group I margins escalated because of tighter supplies. Nevertheless, Group I closures continued because of refinery economics. 

“The base oils plant is integrated with the refinery, and they are very difficult to operate stand-alone,” Connolly said. “So what we saw was a take-down of Group I capacity, not because of poor Group I economics, but because of poor refining economics.” The rate of closures overtook the rate of demand decline, and this led to Group I shortages over the past two years.

Connolly listed six refinery closures that occurred in the 2021-2023 period: the Petrogal unit in Porto, Portugal; the TotalEnergies plant in Gonfreville, France; an Eneos unit in Negishi and a second one in Wakayama, Japan; and the Sapref and Engen units in Durban, South Africa.

Another important factor that affected the base oils market was the Russia-Ukraine war, which started in February 2022, because it created feedstock shortages, with gasoil and base oils becoming more closely linked.

Following the Russian invasion of Ukraine, the European Union imposed restrictions on crude oil and refined products exports from Russia. Russia is one of the key global exporters of gasoil, exporting over one million barrels a day, predominantly into Europe.

“What happened after this conflict and the reduction of supply coming from Russia was that refiners shifted their production towards gasoil to make more and compensate for [the lack of] Russian supply,” Connolly emphasized. “But this requires vacuum gas oil as a feedstock, the same feedstock that we need for base oils.”

A shift in refining operations occurred during the early part of 2022 amid strong fluctuations in gasoil prices, encouraging different operating decisions from refiners. Gasoil prices skyrocketed in the second quarter of 2022, and then eased up in the third and fourth quarter, as gasoil supply gradually recovered.

While refiners focused on producing more gasoil, Group I output suffered, leading to tightening supplies and high prices. “Then, in the third quarter of 2022, we see prices come down, and this was not just because supply was picking up – what we are starting to see is the macroeconomic effects having an impact on base oil demand in the market.”

The gasoil tightness was also expected to ease this year, as over 3 million barrels per day (or 2.4 million bbl/day net) of refinery capacity is slated to start up or ramp up, and this could help boost base oil supply.

Connolly noted that so far this year, global base oil demand has been softer than expected, and he attributed the dampened demand to poor macroeconomics. However, he predicted these macroeconomic issues to be “relatively short and shallow, so we expect recovery in the second half of the year, and this will result in a demand pick-up.” He said that the main question was whether that demand uptick would exceed supply.

The same question was addressed in connection to the situation in Asia and more specifically, China, by Matthew Chong, senior editor, Asia Base Oils, ICIS, during the presentation.

China is a key base oils market not only in Asia, but on a global scale, accounting for approximately 22% of the world’s base stock consumption.

Chong maintained that China’s recovery was on track post-pandemic, but that a full recovery might take time. The Chinese government’s gross domestic product growth target for 2023 is 5.0%, down from 5.5% in the previous year – despite the fact that it actually reached around 3%. But the government has not yet implemented major stimulus measures this year.

In terms of base oils, overall demand is expected to improve as lubricants consumption will likely be boosted by a recovery in the automotive sector. “China’s demand for Group II light grade 150N will be stronger on an expected passenger car usage pickup,” Chong elaborated.

Several new Group II and Group III base oil plants came on stream in China in 2019, just before the pandemic started. During the pandemic, the new production led to overcapacity given a slump in demand triggered by strict pandemic-related lockdowns, curtailed manufacturing rates and reduced mobility. Group II run rates are expected to remain low amid overcapacity in the short term, but Group II and III demand growth are expected to outpace Group I in the next three years. This would likely lead to more Group I units being phased out, Chong said.

At the same time, there is growing interest amont Chinese base oil suppliers to sell into foreign markets. Traditionally the country has exported very little base oil, due in part to unfavorable tax regimes that put private companies at a particular disadvantage.

While China is currently a net importer of most base oil grades, its import volumes are likely to shrink given local Group II and III capacity expansions, including Hainan Handi Sunshine Petrochemical’s recent Group II and III expansion.

“China is largely self-sufficient on Group I supply, except for bright stock,” Chong noted. “There has been a sharp drop in imports from South Korea, Singapore and Taiwan in the period between 2018 and 2022. Mainly, Group II imports have been affected by the falling demand; Qatari Group III grades buck the trend.”

He also commented that there are a number of new base oil plants scheduled to be completed in Asia and the Middle East after 2025, but some of these projects are likely to be delayed or cancelled.

There are three new base oil plants slated to come onstream in India in 2025, “but it will depend on the economic situation and what happens in the 2025 elections in India,” he said.

Several other projects are also in the pipeline in Asia, according to ICIS. ExxonMobil plans to expand its plant in Singapore to produce an additional 1 million metric tons per year of Group II base oils, beginning in 2025. In Malaysia, Petronas expects to debottleneck its Melaka unit in 2023-2024 to reach 240,000-250,000 tons per year and add additional Group II+ capacity of 220,000 tons/year in 2029. In Indonesia, Pertamina has awarded a technology contract to Chevron Lummus Global for a new Group II and III plant with 260,000 tons/year capacity, but the start-up date is yet to be confirmed.

In Saudi Arabia, Luberef announced in early March that it will build a 300,000 t/y Group II and Group III plant in Yanbu’ al Bahr, expected to come onstream in 2025.

Connolly and Chong agreed that geopolitical tensions and economic issues were likely to play a role in the base oil market behavior in Asia in coming years but that China will be closer to being self-sufficient, reducing its exposure to some of the risks involved in being highly dependent on other countries for base oil supplies.