According to Purvin and Gertz, the Asian finished lubricant market (excluding Russia and CIS countries) will grow approximately 30 percent between 2015 and 2030, from 20 million metric tons per year to 26 million t/y. A decade ago, lubricant demand in this region amounted to only 12.5 million t/y.

Europe produces [API] Group I base oil but wont need it, said Owain Johnson, business development manager for Asia and Pacific at Argus consultancy. Asia produces Group II base oil but needs Group I. Middle East produces Group III base oils, but needs Group I. Supply and demand situations on the global level are completely mixed, and the base oil production is generally in the wrong place.

While many oil majors consider closing their Group I base oil plants in Europe, he acknowledged, India and China are all about growth and desperately need Group I base stock. Less impacted by the worldwide recession, their economies have driven the region into substantial demand growth – Chinas industrial production rate in 2009 has risen around 10.5 percent, compared to the previous year, Johnson continued.

Argus, headquartered in London, has found that Chinas base stock imports surged to 2 million tons last year, compared to 1.2 million tons in 2005.

Likewise, the steady trend of Indias base stocks market has been constantly upwards, with imports of almost 1 million tons in 2009, up from 600,000 tons in 2007, Johnson added.

The main reason for the tremendous growth in Asia is the huge expansion of the Chinese automotive market, he noted. This trend is due to the government encouraging car sales and giving subsidies to the domestic car industry through various loan programs, while modernizing and expanding the road infrastructure.

Last year China became the largest vehicle market in the world with almost 10.3 million passenger cars sold, up 53 percent from the year before. And there is still room to grow, Johnson assured. Currently, only three percent of the Chinese population are car owners, he continued. If you imagine further growth, the impact on the base oil market will be tremendous.

The Chinese vehicle population primarily consists of compact cars, with a substantial number of western cars using lubricants that call for Group III base oil.

The fact that industrial demand is booming is a huge opportunity for the Russian Group I base oil producers, Johnson also pointed out.

Singapore, South Korea and Russia are the top three suppliers to the Chinese base oil market, according to Argus. Industrial demand is very high in China and mostly supplied with Group I base oil. Russia supplies around 12 percent of Chinese base oil demand.

In Asia today there are a lot of upcoming projects for Group II and Group III base oil plants, but nobody is building Group I base oil plants, Johnson stated. Due to the fact that supply-delivery cost difference for the Russian producers is around $100 per ton, we assume that the needed base stocks in China will be primarily supplied by Russia, as a major Group I base oil producer.

John Leavans, senior consultant at Houston-based Purvin and Gertz, said that 97 percent of the base oil production in Russia is Group I, which means China and India are potentially ideal export destinations for Russian refiners.

Arguss Johnson noted that one more important market characteristic is the focus on the vacuum gas oil (VGO) feedstock. VGO is a stock for fluid catalytic crackers used to make gasoline, base oil and other byproducts.

The global base oil market has become very sophisticated, and the investors want to know about their risks, according to Johnson.

The relationship between [vacuum] gas oil and base oil is becoming very important these days, he noted. Both commodities have a similar end user market. When car demand is down, it affects both gas oil and base oil demand. Gas oil is acting as a price indicator of the base oil prices for the next five years. The base oil market is not regional anymore and is constantly watching the gas oil market. If you are a Russian base oil producer, you have to know what is happening in Dubai, India or China.

Argus claims there are real refinery economics behind the base oil production risk premium to VGO.

If you take the gas oil value and turn it into the base oil value you should project the exact profit of producing base oil as long as the cost line is $200 per ton. The profit line of producing base oil should always be around $250 per ton, Johnson suggested.