LONDON – Half of the worlds base oil production units are within hot spots that for various reasons are susceptible to a level of conflict or instability that could cause supply disruptions with global implications similar to those in 2017, an expert warned at an industry event here last month.
A market that was in theory long suddenly became short last year, Geeta Agashe of United States-based consultancy Geeta Agashe & Associates LLC, told the ICIS World Base Oils and Lubricants Conference on Feb. 21. An estimated 1 metric million tons or more of base oil capacity was out of commission due to a combination of reasons in 2017, in what Agashe called a perfect storm.
Several scheduled and unscheduled maintenance and turnaround-related closures took place last year, she continued. For instance, Shell Qatar declared force majeure, leaving Shell traders scrambling to secure base oils in the open market. Then there were natural disasters, such as Hurricane Harvey, which devastated much of the U.S. Gulf Coast and inflicted flooding and power outages on base oil plants in the region. Not to mention fires that led to closures of refineries, including TonenGeneral Sekiyu K.K.s API Group I plant in Wakayama, Japan.
Global warming and severe weather incidents will continue to abound, but beyond such unpredictable incidents as the ones that rocked 2017, plenty of base oil plants are located in zones of perceptible volatility, or what Agashe referred to as geopolitical hotspots. South Korea, China and India all fall into that category.
Escalation of unease in North Korea could impact South Korea and the United States, she explained. Aggression in the South China Sea would prove disastrous to trade flows from major producers in that region. Nationalism tones in India threaten to alter supply routes as well. The Middle East comes with its own host of political rivalries in Saudi Arabia, Qatar, Iran, Egypt and Bahrain, which collectively supply much of the worlds base oil exports.
In fact, the Middle East, South Korea and China alone account for 71 percent of global Group III supply and over 46 percent of Group II supply, the industry veteran said. Those two grades are particularly exposed to far-reaching disruptions, she explained, noting that the worlds 10 largest plants account for around 30 percent of all base oil capacity and 80 percent of Group II and III. Three of those top 10 are in South Korea, and another is in Qatar, which is embroiled in crisis. Other than one in Singapore, the rest are in the U.S., which is also dangling ideas of nationalism in the face of export markets.
Buyers need to take a hard look at their supply chain continuity to be sure where it begins and ends, and should ask how they can build resilience in their logistics processes in the face of a crisis, Agashe concluded.
Base oil providers with a global slate go a long way in ensuring continued supply despite regional uncertainties, she said. ExxonMobil, SK and Motiva/Aramco are examples of suppliers that produce similar cuts throughout the globe.