But Ames sees Group III supply expanding by two thirds – by nearly 3 million t/y – by 2018, and 1.3 million t/y of that new capacity will stream by the fourth quarter of this year. This leaves the market oversupplied by as much as 2 million t/y, and a lack of alternative applications will pressure some Group III facilities to operate at lower utilization levels, he said.

None are expected to close, said Ames of the new Group III capacity. All remain viable even at reduced levels. Importantly, their output will be needed in the future. But until that day, the market will see significant pressure.

Looking at the overall base oil outlook, Ames said that 10 million tons of new additions and retrofits of all API Groups have been announced to stream between 2014 and 2018, equal to 30 percent of existing demand. Under a scenario of little to no demand growth, said Ames, there will be difficult conditions ahead for base oil refiners.

Today, some 90 percent of Group III base oils are used in automotive lubricants, primarily fuel-efficient passenger car engine oils, but also some heavy-duty engine oils, transmission fluids and gear oils. Industrial formulations consume about 8 percent, and other applications such as white oils, agricultural sprays and process oils make up the remainder.

Factors that will move nations and economies towards more fuel efficiency are the key drivers that could spur growth in Group III demand. A boost is likely to come as demand grows for more fuel-efficient heavy-duty diesel engine oils. The spread of emissions legislation in Asia and Latin America and the reduction or removal of fuel subsidies in developing countries will make consumers more fuel-economy conscious.

Todays surplus of high quality base oils could prompt automakers and advantaged marketers to raise the bar on specifications, Ames noted. And an oil price shock would prompt a move to more fuel-efficient lubricants in all regions.

Despite the oversupply, Group III capacity is not really at risk. Ames pointed out that Group III plants are all relatively new, using the most modern technology with the lowest capital and operating expenses of all base oil types. Continued advancements in catalysis have further improved yields and costs.

Group III operations are located at the producers flagship refineries where integration benefits add to the overall profitability, Ames continued. There is little vulnerability of the mother-ship fuels refinery to closure.

And operating a Group III plant at reduced levels does not reduce the overall hydrocracker yield, so there is no major cost penalty to the refinery. Additional low-sulfur diesel can be produced in lieu of Group III base oil, at comparable operating costs.

In 2013, there were 11 locations producing Group III, of which nine produced greater than 50,000 t/y. By 2018, there could be as many as 17 locations, each with capacity greater than 100,000 t/y. Concluded Ames, the tsunami has come on shore.