A source close to the negotiations, who asked not to be identified, told Lube Report that Shell Trading offers Bapco a substantial distribution and logistics network as well as a fleet of tankers, but will not provide any support for obtaining finished lubricant approvals. Denis Varaksin, director of base oils and waxes at Berlin-based DYM Resources GmbH, said the deal makes sense because scaling up international distribution is both complicated and costly. It is very expensive to build new supply-chain systems, so for [a] refiner it is more efficient [and] cheaper to cooperate with trading firms.

The deal is met with skepticism in some quarters.

Shell already has access to a huge amount of internally produced Group III+ out of their gas-to-liquids plant, Joe Rousmaniere, of United States-based base oil trader Chemlube said, referring to Shells Ras Laffan, Qatar, joint venture with Qatar Petroleum. So it seems odd that Shell has now taken on the distribution of another Group III out of Bapco. The base oil plant at the GTL refinery is one of the biggest in the world, with capacity of 1.4 million metric tons per year, but Shell uses all of the base oil output internally.

Base oil traders told Lube Report the Bahrainian refiner is currently discounting prices in an effort to get market share.

Neither Shell nor Bapco have disclosed details such as the volumes Shell will be distributing. Some observers speculated that the agreement has a 12-month span with options to renew.

The deal comes at a time of intensifying competition between Group III suppliers, including established marketers that hold full slates of North American and European approvals and newcomers that are trying to obtain them.

By my count there are now eight large suppliers vying for market share in both Europe and North America, Rousmaniere said. Relationships between base oil and additive companies are shifting. Lubricant additive package suppliers have played key roles in helping base oil companies navigate the testing needed to obtain approvals, which can cost millions of dollars, but now additive companies are increasingly seeking financial contribution towards those expenses. Newer base oil suppliers have encountered difficulties obtaining approvals, leading to a two-tier market where approved Group IIIs sell at a premium over unapproved grades.

The two-tier structure appears to have some stamina as the uptake of unapproved oils appears to be rising, even as some advisers recommend finished lubricant blenders to be cautious. Not all Group IIIs are the same, and you need to be wary about base oil interchange, Kevin Ferrick, APIs director of product programs, told the ICIS Middle Eastern Base oils and Lubricants Conference in Dubai last week. Industry organizations set interchange rules defining the extent to which blenders may substitute one base oil for another without having to gain a new approval. There are far fewer Group IIIs with interchange guidelines – you cant just swap them around.

Bapco launched Bapbase in January 2018 after dissolving a marketing agreement with Finnish base oil refiner Neste, its joint venture partner in the Sitra base oil plant. Originally Neste had rights to market all of the plants output, but the partnership devolved into a bitter legal dispute that concluded earlier this year through arbitration. Neste continues to hold a 45 percent stake in the eight-year-old joint venture. Bapco and Bahrains National Oil & Gas Holding Co. each hold 27.5 percent.

National oil companies including Adnoc and Saudi Aramco have recently made strong commitments to their base oils business as they seek to diversify increasingly commoditized upstream revenues.